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Summary of important changes in service tax proposed by budget 2015-16

CA NARAYAN AGARWAL 
on 09 March 2015

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SUMMARY OF IMPORTANT CHANGES IN SERVICE TAX MADE/PROPOSED BY BUDGET 2015-16

I. Changes in Finance Act, 1994

To be effective from a date to be notified by the Central Government after the enactment of the Finance Bill, 2015:-

1. Service Tax Rate

a. The rate of Service Tax is proposed to be increased from 12% to 14% by way of an amendment in Section 66B of the Finance Act, 1994.

b. The ‘Education Cess’ and ‘Secondary and Higher Education Cess’ are proposed to be subsumed/incorporated in the revised rate of Service Tax by omitting the Sections 95 of the Finance Act, 2004 and 140 of the Finance Act, 2007, levying Education Cess and Secondary and Higher Education Cess on taxable services.

Impact/Comments: Due to increase in rate all services attracting service tax are going to be expensive. From movie outings, hotel stays, gym memberships, club memberships, salons, spas, radio cab rides, to buying a house are all set to cost more. Many of the products are also going to become expensive as there are hundreds of services involved before the goods come to the market, such as, storage, transportation, advertising and other administrative services. Since, service tax is an indirect tax, the burden is borne by the poor as well as rich sections of the society equally. Hence, this increase in rate will adversely affect the poor section.

2. Amendments in the Negative List (Section 66D)

a. Entry No. (j) - The existing entry covering “admission to entertainment event or access to amusement facility” is proposed to be omitted, making the activity taxable. Consequently, the definitions of “amusement facility” [Section 65 B (9)] and “entertainment event” [Section 65B (24)] shall also be omitted.

b. Entry No. (f)- Clause (f) of the 66 D has been amended to exclude the “services provided by way of any processes which is amounting to manufacture of alcoholic liquor for human consumption”. Accordingly the definition of the word “process amounting to manufacture” has been amended.

Impact/Comments: Alcoholic liquor for human consumption is a state subject covered under Entry 84 of List II of the Schedule VII of the Constitution liable to state excise duty. When the respective states are already collecting a tax on the same, the decision of the Central Government to collect service tax on the same activity is uncalled for. Further, how a process amounting to manufacture and liable to state excise duty can be called a service liable to service tax.

c. Entry No. (a)(iv)- In the existing clause, “support service” proposed to be substituted with “any service”. Consequently, the definition of “support service” vide Section 65B(49) is being omitted and “Government” has been defined vide proposed Section 65B(26A) to mean ‘the Departments of the Central Government, a State Government and its Departments and a Union territory and its Departments, but shall not include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with article 150 of the Constitution or the rules made thereunder’.

3. Other Amendments

(To be effective on the date of enactment of the Finance Bill, 2015)

3.1 Lottery distributor or selling agent –

a. The Explanation 2 to section 65B(44) of the Finance Act, 1994 has been proposed to be amended to bring ‘Service in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind by a lottery distributor or selling agent’ in the ambit of service tax.

b. The expressions ‘lottery distributor or selling agent’ has been defined in Section 65 B (31A) to mean ‘any person appointed or authorized by State for the purposes of promoting, marketing, selling or facilitating in organising lottery of any kind, in any manner, organised by such State in accordance with the provisions of Lotteries Regulations Act, 1998’.

3.2 Foreman of chit fund –

a. The Explanation 2 to section 65 B (44) of the Finance Act, 1994 has been proposed to be amended to bring ‘Service by a foreman of chit fund for conducting or organizing a chit in any manner’ in the ambit of service tax.

b.  The expressions ‘foreman of chit fund’ has been defined in Section 65 B (23A) as ‘foreman of chit fund shall have the same meaning as is assigned to the term “foreman” in clause (j) of section 2 of the Chit Funds Act, 1982’.

3.3 Section 66F (1) prescribes that unless otherwise specified, reference to a service shall not include reference to any input service used for providing such services. An illustration is proposed to be incorporated in this section to clarify the scope of this provision. As illustrated, agency services provided a Bank to RBI is input services used by RBI for provision of its main service. Accordingly, banks providing agency service to or in relation to services of RBI, are liable to pay Service Tax on the agency services so provided by virtue of the existing section 66F (1).

3.4 Definition of Consideration in Clause (a) of the explanation to Section 67 has been proposed to be amended to include:

a. Any reimbursable expenditure or cost incurred by the service provider and charged in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed;

b. Amount retained by the distributor or selling agent of lottery from gross sale amount of lottery ticket, or, as the case may be, the discount received, that is the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such tickets.

Impact/Comments: This amendment is mainly proposed to overcome the decision of Hon’ble Delhi High Court in case of M/s. Intercontinental Consultants where the Hon’ble Delhi High Court has ruled out that rule 5(1) of the Service Tax (Determination of Value) Rules, 2005 as ultra vires the Finance Act, 1994 which provided for inclusion of reimbursable expenses in the value of taxable service. Now the power to tax such reimbursable expenses are being provided in the Finance Act, 1994 itself.

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