Service Tax – Recent Budget Amendments

By:

A.Saiprasad

B.Com,LLB,ACA,DISA,AMIMA

Advocate

Presentation Outline - I

Meaning, Net Effect & How Amendments made

What the FM said & didn‘t say

New Service & Expansion of Scope of Existing Services

Adjudication & Prosecution Provisions

Presentation Outline - II

Point of Taxation Rules, 2011

Cenvat Credit Rules, 2004

Service Tax Rules, 1994

Works Contract (Composition) Rules, 2007

Service Tax Valuation Rules, 2006

Export Rules, 2005 & Import Rules, 2006

SEZ Notification

Meaning of Budget

Derived from the French word, bougette,

Diminutive of bouge, meaning a Leather Bag.

Net Effect of Service Tax Amendments

NET REVENUE GAIN - Rs.4,000/- Crores.

How Amendments are Made ?

Parent Act – Orphan – A rich Orphan

Budget Amendments:

Finance Act, 2011 – S.71(A) to 71(P) & S.72

Notification No.1/11-ST to 18/11-ST

Post Budget Amendments:

Notification No.18/11-ST to 37/11-ST

What the Finance Minister Said..I

Retained the standard rate @ 10%

Closer fit between present service tax regime and its successor GST

ST on 2 new services

Short Term Accommodation Service

Restaurant Service

Scope Expanded for 7 existing services

What the Finance Minister Said.. II

Cenvat Credit provisions rationalized

Cenvat Credit vis-à-vis exempt goods & services

Audit Formalities & Reduced Interest for Turn over < Rs.60 lakhs

What the Finance Minister Said..III

Demand Provisions revisited

Penal Provisions Rationalized

What the Finance Minister Didn‘t Say…I

A CA‘s perspective- Representation services taxable

What the Finance Minister Didn‘t Say…II

Exempted Services

Provision related to prosecution reintroduced

Budget Amendments

Finance Act, 2011

Notification No.1/11-ST & 37/11-ST

Circulars & Explanatory Notes

New Services I - Restaurant Service

Air Conditioning Facility

Alcoholic Beverage

Notification No.34/11-ST - Abatement 70%

Circular No.139/8/2011 dt.10.5.11

New Services II - Short Term Accommodation Service

< 3 Months, Continuous Period

Declared Tariff Meaning

Notification No.31/11-ST – Declared Tariff < Rs.1,000/-

Notification No.34/11-ST – Abatement 50%

Declared Tariff & Discount

Circular No.139/8/2011 dt.10.5.11

Expansion of Scope I– Commercial

Training and Coaching Service

Deleted Exclusionary Clause in earlier definition

Effect – Now taxable service course based – Before institution based

Exclusion category now exempted vide notification no.33/11-ST

Expansion of Scope II– Club or

Association Service

means any person or body of persons providing services, facilities or advantages, primarily to its members, for a subscription or any other amount, but does not include—

(i) any body established or constituted by or under any law for the time being in force; or

(ii) any person or body of persons engaged in the activities of trade unions, promotion of agriculture, horticulture or animal husbandry; or

(iii) any person or body of persons engaged in any activity having objectives which are in the nature of public service and are of a charitable, religious or political nature; or

(iv) any person or body of persons associated with press or media;‘;

Expansion of Scope III – Authorised Service Station

Service Provider: Previously – Authorised

Service Station, Now - Any persons

Vehicle: Previously – Car, LMV,

Motor Cycle. Now – Any Motor

Vehicle except Three Wheeler & Motor Vehicle for Goods Carriage

Expansion of Scope IV – Life Insurance Service

Previously - Risk Cover, Now – All Service including Management of Investment

Valuation Mechanism – R.7A, STR, 94

Taxable Value = (Gross Premium – Amount Allocated for investment), if bifurcation provided in policy

1.5% of Gross Premium, if no bifurcation provided

Entire policy towards Risk – Above option not available

Expansion of Scope V – Legal Services

Scope Increased Business Entity – Any

Person Arbitration Services Advice, Consultancy &

Assistance Individual to Individual

not taxable Scope increased –

Representation Parity – CA, CWA, CS

exemption withdrawn

Expansion of Scope VI – Health Services

Clinical Establishment – S.25(a): Hospital, clinic, sanatorium, by whatever name called

Diagnostic Centres Whether incorporated or

not Centralised A/c – Whole

or part > 25 Beds Excludes establishment

by Govt or Local Authority

Expansion of Scope VI – Health Services

Taxable Service – S.65(105)(zzzzo) by:

Clinical Establishment

Doctor who is not an employee of CE, who provides service from CE

Exempted – Notification No.30/11-ST dt.25.4.11.

Transport of Passengers by Air Service

Revised Rates as follows:

(a) Domestic (economy) : From Rs.100 to Rs.150

(b) International (economy) : From Rs.500 to Rs.750

(c) Domestic (other than economy) : Standard rate of 10%

Provisions Relating to Demand

S. 73(1A) & proviso to 73(2) – Deleted

Benefit u/s 73(4A) – ‗true & Complete‘ details in specified records.

Assessee to pay tax, interest and reduced penalty – during course of audit, investigation or verification.

Penalty @1% p.m. – max – 25%

Provisions Relating to Interest

Increased to 18% p.a S. 73B & S.75

amended Value of taxable

service < Rs. 60 Lakhs – Reduction of 3% p.a.

Notification No.14/11 ST – S.75 & Notification No.15/11 ST – S.73B

Provisions Relating to Penalty

U/s 76 – Normal Period of Limitation

2% to 1%

Rs.200 to Rs.100

100% amount to 50% of demand

U/s 77 – Increased to Rs.10,000/-

Provisions Relating to Penalty

U/s 78 – Extended Period Max Penalty reduced from

200% to 100% of ST

True & Complete (T & C) – 50% of ST

T & C + 30/ 60 days of OIO– 25%

Transaction not recorded – No mitigation of 50% or 25%, though paid within time period

Penalty – Summary I Situation Position

in

Records

Penalty &

Provision

Mitigation Complete

Waiver

No fraud,

suppression

etc.

Captured 1% of tax or Rs

100 per day upto

50% of tax

amount: Sec 76

Totally mitigated if tax and

interest paid before issue of

notice: Section 73(3)

On showing

reasonable

cause under

section 80

Penalty – Summary II Situation Position

in

Records

Penalty &

Provision

Mitigation Complete

Waiver

Cases of fraud, suppression etc

Captured true and correct position in records

50% of tax amount: Proviso to Section 78

(a) 1% per month; max of

25% if all dues paid before

notice: Sec 73(4A);

(b) 25% of tax if all dues

paid within 30 days (90 days

for small assesses): Provisos

to Section 78

On showing

reasonable

cause under

section 80

Penalty – Summary III

Situation Position in

Records

Penalty &

Provision

Mitigation Complete

Waiver

Cases of fraud, suppression etc

Not so

captured

Equal amount

:Section 78

No mitigation at all

Not possible

Offences & Prosecution - I

Reintroduced –S.89 Previous Sanction – Chief

Commissioner of Central Excise

Offences: (i) Provision of service

without issue of invoice; (ii) Availment and utilization

of Cenvat credit without actual receipt of inputs or input services;

Offences & Prosecution - II

Offences Contd..

(iii) Maintaining false books of accounts or failure to supply any information or submitting false information;

(iv) Non-payment of amount collected as service tax for a period of more than six months

Offences & Prosecution - III

Offence amount > Rs 50 Lakhs

Imprisonment - Min - 6 months, Max - 3 years

Any other case upto 1 year

Second & Subsequent Offence – Min – 6 months, Max – 3 years.

Offences & Prosecution - III

Following not restrictions for prosecution: First Conviction Penalty or other action

initiated Not principal offender –

Acting as an agent Age of Accused

Circular F.No.354/45/2011- TRU dt.12.5.11

Other Amendments

S. 70 - Furnishing of Returns – Late Fee – Rs.2,000 to Rs.20,000/-

Existing Rate retained in Rule 7C of STR,94

Liability to be First Charge

S.529A of Companies Act, 1956

Recovery of Debts Due to Banks & Financial Institutions Act, 1993

SRFASI Act, 2002

Point of Taxation Rules:

Notification No.18/2011-ST & 25/2011-ST

Validity ?

POT – Definition R.2(e) – Point in time when service DEEMED to have been provided

Transitional Provision

Clarification - Circular F.No.341/34/2010 dt.31.3.11

POT – R.3 – General Rule

Rule 3 has been amended to provide that the point of taxation shall be as follows:

(a) Date of invoice or payment, whichever is earlier, if the invoice is issued within the prescribed period of 14 days from the date of completion of the provision of service.

(b) Date of completion of service or payment, if the invoice is not issued within the prescribed period as above.

POT – R.3 - Illustration S. No.

Date of completion of service

Date of invoice Date on which payment recd.

Point of Taxation

Remarks

1.

April 10, 2011

April 20, 2011

April 30, 2011

April 20, 2011

Invoice issued in 14 days and before receipt of payment

2.

April 10, 2011

April 26, 2011

April 30, 2011

April 10, 2011

Invoice not issued within 14 days and payment received after completion of service

3. April 10, 2011 April 20, 2011 April 15, 2011 April 15, 2011 Invoice issued in 14 days but payment received before invoice

4.

April 10, 2011

April 26, 2011

April 5, 2011 (part) and April 25, 2011 (remaining)

April 5, 2011 and

April 10, 2011 for respective amounts

Invoice not issued in 14 days. Part payment before completion, remaining later

POT R.4 – Change in Effective Rate of Tax -I

Taxable Service Provided BEFORE change in Effective Rate of Tax

When either invoice OR payment received PRIOR to change in rate, POT = Earlier Rate i.e. Before change made.

Only When both invoice AND payment received POST change in rate, POT = Subsequent Rate i.e. Changed Rate

POT R.4 – Change in Effective Rate of Tax -II

Taxable Service Provided AFTER change in Effective Rate of Tax

When either invoice OR payment received POST to change in rate, POT = Subsequent Rate i.e. Changed Rate

Only When both invoice AND payment received PRIOR change in rate, POT = Earlier Rate i.e. Before change made.

POT – R.5 – New Services

Payment AND Invoice issued PRIOR to Service Becoming Taxable – NO Tax

Payment PRIOR AND Invoice POST Service Becoming Taxable – No Tax

Inv to be issued within 14 days of receipt of payment. – R.5(b) - POTR,11, r/w R.4A(1) - STR - 94

POT – R.6 – Continuous Supply of Services (CSS)

Continuous Supply of Service – R.2(c)

Under a Contract

Period > 3 Months

Notification No.28/2011-ST

(1)Commercial or Industrial Construction Service, (2)Telecommunication Service, (3)Internet Telephony Service, (4)Works Contract Service

POT – R.6 – Continuous Supply of Services (CSS)

Overrides R.3,4 & 8

POT = Time of issue of invoice for such CSS – (A)

When invoice not issued within 14 days of completion, POT = Date of completion of service

Payment Received before (A) above, POT = Time of receipt of payment

POT – R.6 – Continuous Supply of Services (CSS)

Where provision of service determined periodically i.e.

On Completion of event, specified in contract

Requiring payment to Service Provider

POT = Dt of Completion of each such event

POT – R.7 – Specified Services

POT = Date of Payment for the following specified services

Services specified in R.3(1) of Export of Service Rules, 2005 – services exported

Persons Liable to pay service tax – S.68(2) r/w Notification No.36/04-ST – services imported, GTA, sponsorship service etc.

POT – R.7 – Specified Services

Individuals, proprietary firm & partnership firms providing:

CA, CWA & CS Service

Architect Service

Interior Decorator Service

Scientific or Technical Consultancy Service

Legal Service

POT – R.8 – Copyrights etc.,

Whole amount not ascertainable when service performed AND

Subsequent use by person other than PROVIDER gives raise to payment

Service shall be treated as having been provided each time

Payment received or Invoice issued – which ever is earlier

POT – Transitional Provision

Service completed or Invoice issued prior to 1.4.11 – POT Not Applicable

Service completed on or before 30.6.11 OR Invoice issued upto 30.6.11

POT = Date on which Payment is received or made – Option of taxpayer

Cenvat Credit Rules, 2004

Exempted Service Definition Amended

Input Services Definition Substituted

Availment of Input Service Credit – On Receipt of Invoice

Supplementary Invoices

Common Input Services – Provider of taxable & exempted services

Exempted Service – R.2(e)

(e) ―exempted services‖ means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act [and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken.

Explanation.- For the removal of doubts, it is hereby clarified that ―exempted services‖ includes trading;]

Input Service – R.2(l) – A Real Setup ??

(l) ―input service‖ means any service, - (i) used by a provider of taxable service for providing an output

service; or (ii) used by a manufacturer, whether directly or indirectly, in or in

relation to the manufacture

of final products and clearance of final products upto the place of removal, and includes services used in relation to modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

Input Service – Set Up – The Sequel

but excludes services,-

(A) specified in sub-clauses (p), (zn), (zzl), (zzm), (zzq), (zzzh) and (zzzza) of clause (105) of section 65 of the Finance Act (hereinafter referred as specified services), in so far as they

are used for- (a) construction of a building or a civil

structure or a part thereof; or (b) laying of foundation or making of

structures for support of capital goods,

except for the provision of one or more of the specified services; or

Input Service – Gone in Sixty Seconds

(B) specified in sub-clauses (d), (o), (zo) and (zzzzj) of clause (105) of section 65 of the Finance Act, in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; or

Input Service – Employee Related

(C) such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee;‟;

Input Service Credit

R.4(7) - Receipt of invoice – Before Payment.

Reversals Payment beyond 3 months

Partial Payment/ Credit Note

Reverse charge – On Payment

R.9(bb) - On Supplementary Invoice Except due S.71(1) proviso cases

Rule 6 – Common Input & Input Services - I

Four Options

Option I – Maintain Separate A/cs for receipt, consumption and inventory of INPUT & INPUT SERVICES – Take credit only for providing dutiable products and taxable service – R.6(2)

Rule 6 – Common Input & Input Services - II

Option II – Not Maintaining separate Books of Accounts – Three sub options

Sub Option I

Pay 5% of value of exempted goods and exempted services – R.6(3)(i)

Reversal = (Exempted value X 5%) for Partially Taxable Services -

Sub Option II

Pay amount as per formula R.6(3)(ii) r/w 6(3A).

Rule 6 – Common Input & Input Services - III

Sub Option III – Maintain separate Books of Accounts for receipt, consumption and inventory of INPUTS ONLY

Avail credit on Inputs only for dutiable goods and taxable output services.

Apply R.6(3A) formula for INPUT SERVICE only.

Provision w.e.f. 1.4.11

Rule 6 – Common Input & Input Services - IV

Banking & Other Financial Services – Reversal of 50% of Cenvat credit – R.6(3B)

Life Insurance, Investment Management Service under ULIP - Reversal of 25% of Cenvat credit – R.6(3C)

Payment U/r 3 – Deemed as Credit not taken for Exemption Notification – R.6(3D)

Rule 6(5) deleted - Contained 16 services

Rule 6 – Common Input & Input Services - V

Explanation below R.6(3D) - Value for R.6(3) & 6.(3A)

Service – S.67 of FA, 94

Excisable Goods – S.3,4 & 4A of CEA,44

Trading – (S.P. - COGS) OR 10% of COGS, which ever is HIGHER

Rule 6 – Common Input & Input Services - VI

R.6(6A) – R.6(1) to R.6(4) – not applicable for:

Provision of taxable service

Without payment of tax

Unit, Developer of SEZ

For Authorised Operations

For goods R.6(6)(i) already existed

Service Tax Rules, 1994 - I

Rule 5B – Rate when services deemed to be provided as per POT Rules, 11

R.6(1) – Payment of ST by Service Provider

Before – When payment are received towards value of taxable services

Now – When services are deemed to be provided as per POTR, 11

Service Tax Rules, 1994 - II

R.6(3) – Adjustment of Excess Service Tax

Received payment, Issued invoice for a service, which is later not provided

Such services may not have been provided either wholly or partially

Amount of invoice re-negotiated for deficient provision of service

Service Tax Rules, 1994 - III

Re credit of such excess tax paid Refunded payment

Issued credit note

Max Excess Adjustment Rs Two Lakhs from Rs. One Lakh

Tax Self Assessed but not paid Recovery u/s 87

No need to resort to demand provisions

Works Contract Composition Rules, 2007

Rule 2A – Works Contractor can avail Credit of only 40% of tax paid on:

Erection Commissioning & Installation Service

Commercial or Industrial Construction Service

Construction of Residential Complex Service

When such service providers paid ST on gross value without abatement

Service Tax Valuation Rules, 2006 - I

Foreign Exchange Broking Service & Banking & Other Financial Service

R.2B -Valuation of Sale of Foreign Currency $1,000 sold @ Rs.45/$

RBI Reference Rate Rs.45.50

Taxable Value = (Selling Rate - RBI reference Rate) X Total Units of Currency

(Rs.45.50 – Rs.45) X 1,000 = Rs.500

Service Tax Valuation Rules, 2006 - II

R.2B – Valuation of Purchase of Foreign Currency

INR 70,000 changed for GBP @ Rs.70/GBP

Hence 1,000 GBP exchanged

RBI Reference Rate – Rs.69

Taxable Value = (Rs.70 – Rs.69) X 1,000 = Rs.1,000

Service Tax Valuation Rules, 2006 - III

RBI Reference Rate not available Taxable Value = 1% of the Gross Amount

of INR PROVIDED OR RECEIVED

Neither Currency exchanged in INR Taxable Value = 1% of the LESSER of the

two amounts the person charging the money would have RECEIVED by converting any of the two currencies into INR at the reference rate provided by RBI

Export & Import Rules - I

Changed From Recipient based to Location Based – Preferential Location service – R.3(1)(iii) to R.(1)(i)

Changed from Recipient based to Performance based – Rail Travel Agent & Health Check up services – R.3(1)(iii) to R.3(1)(ii)

Export & Import Rules - II

Changed from Performance based to Recipient based Credit Rating Agency, Market Research Agency, Technical Testing & Analysis, Transport of Goods by Air & Rail, GTA, Opinion Poll – R.3(1)(ii) to R.3(1)(iii)

Corresponding Changes in Import of Service Rules

SEZ Refunds-I

Notification No.17/11-ST dt.1.3.11, rescinds Notification No.9/09-ST dt.3.3.09

Exempts services from S.66 & 66A

Exemption provided to:

Receiver i.e. Unit or a Developer of SEZ

Exemption provided for:

For ‗Specified Services‘

SEZ Refunds-II

Method of providing exemption:

Exemption by way of REFUND

Of ST paid by Unit/ Developer

On ‗specified services‘

For ‗Authorised Operations‘ in SEZ

Later refund application to be filed

SEZ Refunds-III

Abinitio Exemption – Instead of Claiming Refund

ST need not be paid initially by Unit/ Developer either as service provider (S.66) or service receiver (S.66A – Reverse Charge Mechanism)

Conditions:

Specified Services for Authorised Operations

‗Wholly consumed‘ within SEZ

SEZ Refunds-IV

Services ‗Wholly Consumed‘ means:

Taxable Services, received for Authorised Operations as listed in:

R.3(1)(i), Export of Service Rules, – when used in relation to IMP situated in SEZ

R.3(1)(ii), Export of Service Rules, – when wholly performed within the SEZ

SEZ Refunds-V

Services Wholly Consumed means:

Services other than (i) & (ii) above – when provided to a Developer/ Unit, who does not carry on any business other than operations in SEZ

Circular No.142/11/2011-ST dt.18.5.11 – Clarification – An entity carrying out business operations in SEZ & DTA

SEZ Refunds-VI

Unit/ Developer – Obtain Approval for List of services required for Authorised Operations from Approval Committee

Unit/ Developer – Not owning or carrying on business other than SEZ Operations – Declaration in Form A-1.

SEZ Refunds-VII

Services not wholly consumed in SEZ

Refund restricted to the ratio of export turn over to total turnover of Unit/ Developer

Max Refund =

(Export Turnover / Total Turnover) X (ST paid for specified services, used for Authorised Operations & DTA operations)

SEZ Refunds-VII

Total Turnover includes Output Service + exempted service,

including services exported Excisable + Non Excisable Goods +

Export Goods Bought Out Goods

ST must be paid before claiming refund

Input Service credit for specified services cannot be availed under CCR, 04

Open House

Thank You.