Service Tax

6/13/12 Service Tax

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Thursday, March 22, 2012

Budget 2012 Analysis - Service Tax

GIST OF AMENDMENTS IN EXISTING LAW

TAX RATES

1. Rate of service tax increased to 12.36%. It shall be effective from

1.04.2012. It is important to note that only following will be eligible for

tax rate of 10.30%:

a. Where invoice or payment is received before 31.03.2012

b. Where service has already been provided before 31.03.2012 – Invoice

must be issued within 30 days of completion of services.

c. Where advances are being received – the same must be PHYSICALLY

credited in the bank account on or before 31.03.2012. Mere

accounting entry in the books will not suffice. Further if the

instrument is presented in bank on 31.03.2012, the same should be

credited in the bank on or before 4.04.2012.

2. Effective from 1.04.2012 Tax Rate for airl ine companies have been

increased drastically. The same has been made ad valorem in place of

fixed rates. They will be required to pay tax at the rate of 4.944% on the

value of the tickets, differential treatment for domestic and

international sectors is being discontinued. A ticket from Mumbai to

London which costs around Rs. 40000/- will be costlier by Rs. 1977 (Less

Rs. 750 – tax which was charged earlier). The Indian aviation industry is

facing one of the biggest challenges and some companies are fighting

for their survival, this step will be considered as unnecessary and

avoidable.

It must be noted that tax rates for Air Travel agents have not changed.

3. Tax rate for Foreign exchange dealers has also been increased

proportionately by 20% as under w.e.f. 1.04.2012:

Transaction Earlier Proposed

For Gross amount of currency exchanged upto

the value of Rs. 1 lac.

0.10% or Rs. 25

whichever is higher

0.12% or Rs. 30

whichever is higher

For Gross amount of currency exchanged

exceeding Rs. 1 lac to 10 lacs

Rs. 100 + 0.05% Rs. 120 + 0.06%

For Gross amount of currency exchanged Rs. 550 + 0.10% Rs. 660 + 0.12%

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How about knowing me

Nitesh Jain

Ahmedabad, Gujarat, India

I am a young Chartered Accountant

practising exclusively in the evolving feild

of Service Tax.

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My main aim to write this blog is to part with my knowledge to people who are in need of it.....Service tax

is my forte and i intend to discuss the same in a fruitful manner. I am open to queries of any sort and u

can expect an honest and legally sound answer.

6/13/12 Service Tax


exceeding Rs. 10 lacs Max Rs. 5,000/- Max Rs. 6,000/-

4. Tax rates for distributors and sell ing agents of lotteries have also been

increased proportionately by 20% from the existing tax rates.

NEW SERVICES BROUGHT IN THE TAX NET

CONCEPT OF NEGATIVE LIST

5. Since 1994 (year when Service tax was introduced) ti l l date – for 18 long

years, Service tax has been administered on the basis of a positive l ist

of taxable services whereby taxable service for different sets of

transactions was defined in the law and if a given transaction fulfi l led

the conditions as specified in any of the defined services, than the same

became taxable. Each Finance Minister kept on adding services in the

same from one budget to the other and thereby casting the tax net wide

enough to cover the almost the entire gamut of services. It was felt in the

trade as well as revenue circles that this approach is fraught with

intrinsic risk of friction where each person will interpret the provisions

in his own dynamic ways thereby giving rise to classification based

litigations. At the last count the taxable services as defined was more

than 115. To stop these interpretational headaches and to make life

easy for all stake holders the Finance Minister and his team has taken a

step to introduce a Negative l ist based taxation concept.

Under this concept ALL SERVICES shall become taxable if they fulfi l 3

basic criteria as laid down:

a. It has to be a service or declared service

b. It is not exempted under the prescribed negative l ist

c. It is not exempted by way of any exemption notification.

6. For the first time since 1994, the word SERVICE has been defined, that too

in a negative sense. The statute says that,

Service means any activity carried out by any person for another person

for consideration BUT SHALL NOT INCLUDE:

a. an activity which constitutes merely,––

i. a transfer of title in

- Goods / immovable property,

- by way of sale / gift / in any other manner

ii. a transaction in money / actionable claim;

b. a provision of service by an employee to the employer

c. fees taken in any Court or tribunal established

d. Functions performed by Members of parliament, legislative

assemblies, and other local authorities

e. Persons who perform constitutional duties l ike The

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President of India or Judges of courts etc.

In other words the definition says what is not a service and then

leads us to understand what service is.

7. As now there would be no positive l ist of taxable services, provisions for

classification of services are being deleted, instead a concept of

bundled services is being introduced to tax the composite services by

introduction of section 66F. This provision is drafted in such a manner

so as to give rise to l itigation of unlimited proportions due to concept of

unnaturally bundled services where if more than 1 service is being

provided and the department feels that the same is unnaturally bundled

to decrease the tax l iabil ity than he has been given power to tax the

entire service at the highest rate of service tax leviable on any of the

service so bundled. Judicial pronouncements in the cases of Daelim and

thereafter BSBK and so on and so forth will now be unbundled so to

speak and new round of l itigations will start to interpret what is

‘NATURAL’ and ‘NOT NATURAL’

8. Settlement commission provisions have been proposed to be made

applicable to service tax sector as well, some salient features of this are

as under:

a. The application for approaching the commission for settlement of

case can be done only prior to the issuance of adjudication order

(OIO).

b. The applicant will have to declare an amount of tax and interest out

of the total disputed demand which he agrees to pay and shall be

required to pay the same before fi l ing of application.

c. The entire process of settlement will have to be completed by the

commission within 9 months of the date of application which may

be extended by further 3 months.

d. If the applicant doesn’t agree with the settlement order awarded to

him, he can re-instate the adjudicating process without any

prejudice to his admission before the commission.

e. For Ahmedabad jurisdiction the Settlement Commission bench sits

in Mumbai.

In my view this is a welcome step for cases in which the assesses want a

way out of l itigation.

9. Many of the services proposed to be kept out of the tax net are similar to

the services which are exempt at present. Following is a gist of the

services kept in the negative l ist

SERVICE EXEMPT BY WAY OF NEGATIVE LIST – SECTION 66 D

1. Services by Government or a local authority.

2. Services by the Reserve Bank of India

3. Services by a foreign diplomatic mission located in India

4. Services relating to agriculture

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5. Trading of goods

6. Any process amounting to manufacture or production of goods

7. Selling of space or time slots for advertisements other than advertisements

broadcast by radio or television;

8. Service by way of access to a road or a bridge on payment of toll charges;

9. Betting, gambling or lottery – don’t understand why is this kept out.

10. Admission to entertainment events or access to amusement facilities

11. Transmission of electricity by an electricity transmission utility

12. Education services provided by pre-schools, schools and colleges

13. Renting of residential premises

14. Service of providing loans and inter-bank sale purchase of foreign

exchange

15. Service of transportation of passengers by railways other than air-

conditioned class, metered taxis, waterway and stage carriage

16. Services by way of transportation of goods by certain persons except by

GTA and courier agencies.

17. Funeral, burial, crematorium or mortuary services including transportation

of the deceased.

SERVICE EXEMPT BY WAY OF NOTIFICATION NO. 12/2012 – DATE TO BE

NOTIFIED

18. Services provided to the United Nations or a specified international

organization;

19. Health care services

20. Services by a veterinary clinic in relation to health care of animals or birds

21. Charitable Services by an entity registered under section 12AA of the

Income tax Act

22. Renting of religious precincts, conducting religious ceremony

23. Services provided by Individual advocate to any non commercial person

24. Services by way of technical testing or analysis on human participants

25. Training or coaching in recreational activities relating to arts, culture or

sports

26. Catering Services to mid day meals scheme sponsored by Government

27. Transport services for students or staff for educational institutes which are

exempt

28. Services in relation to admission to educational institutes which are exempt

29. Services provided to a recognised sports body by-

§ An individual as a player, referee, umpire, coach or manager for

participation in a tournament or championship organized by a

recognized sports body;

§ Another recognised sports body

30. Services by way of sponsorship of tournaments or championships organised

by national federation approved by the government

31. Services provided to the Government or local authority by way of Erection,

construction, maintenance, repair, alteration, renovation or restoration of

–

§ Structure meant predominantly for a non-industrial or non-commercial

use

§ a historical monument, archaeological site –

§ Structure meant for use as an educational, clinical, or cultural

establishment

§ Canal, dam or other irrigation works

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§ Pipeline, conduit or plant for drinking water supply, water treatment or

sewerage treatment or disposal

§ Residential complex predominantly meant for self-use or the use of

their employees or Member of parliament, legislative assemblies or

constitutional post holders

32. Erection, construction, maintenance, repair, alteration, renovation or

restoration of,-

§ Road, bridge, tunnel, or terminal for road transportation for use by

general public

§ building owned by an entity registered under section 12 AA of the

Income tax Act, and meant predominantly for religious use by general

public

§ Pollution control or effluent treatment plant, except located as a part of

a factory

§ Electric crematorium

33. Services by way of erection or construction of original works pertaining to,-

§ Airport, port or railways

§ Single residential unit otherwise as a part of a residential complex

§ Low- cost houses up to a carpet area of 60 square metres per house in

a housing project approved by Ministry of Housing

§ Post- harvest storage infrastructure for agricultural produce including a

cold storages for such purposes; or

§ Mechanised food grain handling system,

34. Certain services in relation to copyright relating to original literary,

dramatic, musical, artistic works or cinematograph films.

35. Services by a performing artist in folk or classical art forms of

music/dance/theatre.

36. Services of an independent journalist, Press Trust of India or United News

of India.

37. Services by way of renting of a hotel having declared tariff of a room below

rupees one thousand per day or equivalent.

38. Services provided in relation to serving of food or beverages by a

restaurant, NOT having facility of air-conditioning or central air-heating

and NOT having licence to serve alcoholic beverages.

39. Services by way of transportation by rail or a vessel from one port in India

to another for certain goods

40. Services provided by a goods transport agency by way of transportation of -

§ Fruits, vegetables, eggs, milk, food grains or pulses

§ Exempt upto Rs. 1500 if gross amount charged on a consignment

transported in a single goods carriage

§ Exempt upto Rs. 750 if gross amount charged for transportation of all

such goods for a single consignee in the goods carriage

41. Services by way of giving on hire -

§ To a state transport undertaking, a motor vehicle meant to carry more

than twelve passengers

§ To a goods transport agency, a means of transportation of goods

42. Transport of passengers, by air to North Eastern states of India

43. Transport of passengers by Stage carriage or a contract carriage excluding

tourism, conducted tour, charter or hire.

44. Services provided for parking to general public excluding leasing of space

to an entity for providing such parking facility.

45. Services provided to the Government or a local authority by way of -

§ Repair of a ship, boat or vessel

§ Effluents and sewerage treatment

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§ Waste collection or disposal

§ Storage, treatment or testing of water for drinking purposes

§ Transport of water by pipeline or conduit for drinking purposes

46. Services of general insurance business provided in certain cases

47. Services provided by an incubatee up to a total business turnover of fifty

lakh rupees in a financial year subject to certain conditions

48. Service by an unincorporated body or an entity registered as a society to

own members by way of reimbursement of charges or share of

contribution -

§ As a trade union;

§ For the provision of exempt services by the entity to third persons; or

§ Up to an amount of five thousand rupees per month per member for

sourcing of goods or services from a third person for the common use

of its members in a housing society or a residential complex;

49. Services by the following persons in respective capacities -

§ Sub-broker or an authorised person to a stock broker

§ An authorised person to a member of a commodity exchange

§ A mutual fund agent or distributor to mutual fund

§ A selling or marketing agent of lottery tickets to a distributer or a

selling agent

§ A selling agent or a distributer of SIM cards or recharge coupon

vouchers

§ A business facilitator or a business correspondent to a banking

company or an insurance company in a rural area

50. Job work in relation to -

§ agriculture, printing or textile processing

§ cut and polished diamonds and gemstones; or plain and studded

jewellery of gold and other precious metals

§ any goods on which appropriate duty is payable by the principal

manufacturer

§ processes of electroplating, zinc plating, etc, during the course of

manufacture of parts of cycles or sewing machines upto 1.50 Crores in

a FY subject to the condition that such turnover had not exceeded 1.50

Cr during the preceding FY

51. Services by an organizer in respect of a business exhibition held outside

India

52. Services by way of making telephone calls in certain small cases

53. Services by way of slaughtering of bovine animals;

54. Services received from a service provider located in a non- taxable territory

by the Government, a local authority or an individual in relation to any

purpose other than industry, business or commerce; or An entity

registered under section 12AA of the Income tax Act, 1961 for the

purposes of providing charitable activities.

Above list is a gist of all the exemptions proposed to be given when the negative list

is implemented. Given list is just meant to give a general feel of the exemption and

in no circumstances must be relied upon to take a legal or commercial decision.

PENAL & ADJUDICATION PROVISIONS

This year there are minimal changes in the Penal and adjudication provisions –

following is the gist of them:

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Section 73 (1) has been amended. Where an

assessee has short paid the tax the department

had the power to issue a show cause notice to him

demanding tax for a period covering 12 months

backward from the relevant date, in cases where

there was no suppression, wilful

misrepresentation, fraud or collusion with an

intent to evade tax. This period of 12 months has

now been increased to 18 months. Effectively this

means that the department has now got more

time on its hands to issue SCN’s to defaulting

assessees. However the maximum period for which

an SCN can be issued remains to be 5 years in

case of suppression etc.

Once an SCN is issued to assessee the

department is bound to issue periodical SCN’s in

cases where the assessee has not started

complying with the demands alleged against him.

Such SCN’s are popularly known as periodical SCN.

The officers were required to collect the

revenue/income figures from the concerned

assessee for subsequent periods and again draft a

full SCN as was given to him earlier. This

requirement has now been done away with.

Instead the officer will now be required to serve

only a statement containing the details of the tax

so demanded, given that the grounds relied upon

for the periodical demand are the same as were

there in the earlier SCN.

Section 73 (4A) has been amended to say that it

shall not override provisions of section 73 (3). In

other words, if tax and interest are paid by the

assessee on his own or on ascertainment of the

officer than there will be no penalty as prescribed

under 4A. It may be noted that section 73 (3)

shall not apply in case the tax was not paid due to

suppression, collusion etc.

Section 80 has been amended whereby all

penalties have been abolished in cases of short

payment of taxes in service of renting of

immovable property if the assessee pays the tax

which is outstanding upto 6.03.2012 within 6

months from the date when the President signs

the Finance Bill.

Period for filing of appeal with the Commissioner

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Appeals has been reduced to 2 months from the

presently available 3 months. Further if due to

some sufficient cause the appeal was not filed

within the aforesaid 2 months, than the same can

be filed in a further period of 1 month (earlier this

also was 3 months. In other words now the appeal

will have to filed within a period of 2 months from

the date of receipt of the order with an additional

month available if reasonable cause for non filing

of appeal within normal period of 2 months is

there.

The department shall be allowed to file an

appeal with the Tribunal within a period of 4

months of the date of receipt of the order by the

committee of chief commissioners. Earlier this was

to be done in 3 months. Assessees will still get

only 3 months.

In the previous budget, prosecution provisions

were introduced to curb tax evasion. Therein

prosecution was possible in case an assessee was

found to provide services without issuance of

invoices. In the current budget this clause has

been deleted to soften the same and a new clause

is introduced which says that prosecution can

lodged in cases where an assessee knowingly

evades the payment of tax.

CHANGES IN POINT OF TAXATION RULES

‘Date of payment’ has now been defined to say

that the same shall be the earlier of the dates on

which the payment is entered in the books of

accounts or is credited in the bank account of the

assessee. This rule will be relevant on the dates

on which the change in tax rate will become

effective.

Rule 6 has been amended to provide that the

value of taxable service shall

Include demurrage or other charges taken for

provision of services after the prescribed time

limit under the contract

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Not include

a. Interest on deposits given for trade

or business

b. Interest on delayed payment of

consideration

c. Charges for accidental damages due

to unforeseen actions

Where a service is taxed for the first time, then

no tax shall be payable in the following cases

§ To the extent the invoice has been

issued and the payment received

against such invoice before such service

became taxable; or

§ No tax shall be payable if the payment

has been received before the service

becomes taxable and invoice has been

issued within fourteen days of the date

when the service is taxed for the first

time.

CHANGES IN SERVICE TAX RULES

Some changes are made which are as under:

Limited Liability Partnership (LLP) will now be

considered as partnership firms under the service

tax law.

Every assessee was required to issue an invoice

within 14 days from the date of the completion of

the service or receipt of payment. This time-limit

is increased to 30 days.

In case of continuous supply of services also the

prescribed time limit to issue an invoice has been

increased to 30 days. Henceforth service providers

falling under this category will be required to issue

an invoice within 30 days from the date of an

event prescribed by the contract which obligates

the service recipient to make a payment to the

service provider.

§ All assessees being either individuals or

Partnership firms (including LLP) as proposed

from a date to be notified will be required to

pay tax on payment basis as was the case prior

to 1.07.2011. Subject to a condition that the

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value of taxable services PROVIDED by them in

Previous Financial year is below Rs. 50 Lacs.

Consequently Rule 7 of the Point of taxation

rules (POTR) is being deleted which hitherto

provided that certain professionals like

chartered Accountants, Consulting Engineers etc

were given a exemption from the application of

POTR. This change is effective from 1.04.2012

so all CA firms having turnover more than 50

Lacs will now be required to pay tax on accrual

basis. One point which will need to be thought

of is that CA’s maintain accounts on cash basis

whereas tax will be payable on accrual basis –

strange compliance and reporting issues will

crop up.

§ In case where an assessee had paid amount in

excess of the tax required to be paid, he was

allowed to adjust the same against the tax

liability of subsequent period subject to certain

restriction and further he was also required to

intimate the department of such adjustments in

prescribed time limit. Rule 6 (4B) has now been

amended whereby now the assessees will be

eligible to make adjustment without any

monetary limits and will also not be required to

intimate the same to the department.

CHANGES IN CENVAT CREDIT RULES

There are certain minor changes in CENVAT Credit

Rules till now as the same are expected to be

amended in a big way in tune with the notifying of

negative list. Certain relevant changes are discussed:

Definition of capital goods is amended to include

certain motor vehicles like tractors, cycles etc.

Hence forth the service providers who are eligible

to take credit of capital goods will get credit of

such motor vehicles. However major Motor vehicles

like trucks, buses, cars and 2 wheelers are still

kept out of the definitions.

However certain service providers like courier

agents, rent a cab scheme operators, pandal &

shamiana will still get credit of all motor vehicles

as before.

Credit of components and spares for these motor

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vehicles will also now be considered as capital

goods.

In an event where capital goods on which credit

has been taken in the past is being removed as

such or as waste or scrap, then proportionate

credit as prescribed will have to reversed and paid.

This provision was there earlier also but the

amendment made further provides that if the duty

calculated on the scrap value or the sale value of

the capital goods is more than the prescribed

rates of reversal than the duty so calculated will

have to be paid. In my view this will raise

unnecessary hassle for the assessees as

documentation and related procedural issues will

arise.

Rule of 5 of the CCR is completely changed and as

said in the circular that refund procedures for

exporters of goods and services will be made

simpler. Related notifications and clarifications

have not been issued yet so I will refrain from

making any comments till the same are put in

public domain.

Rate of tax to be paid on exempted goods and

services in case option as prescribed in rule 6 (3)

(i) of the CCR is opted, has been increased from

5% to 6%.

A big controversy erupted when the honourable

Supreme Court in the case of Ind-Swift said that

interest in case of wrong availment of credit will

be payable from the date of availment credit and

not utilisation thereof. The relevant rule 14 of CCR

is now amended to say that interest will become

payable only from the date of utilisation. This is a

good amendment even though the ruling of the

Supreme Court was in the favour of the revenue.

IMPACT ANALYSIS FOR CERTAIN

SERVICE PROVIDERS

Now I would like to discuss certain industry specific

changes to highlight the impact of the budget on

them. It may be noted that the proposed law is still

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in liquid state and many clarifications will be issued

by the department post clearance of the budget,

hence any concrete analysis will be possible only

after all law is put completely in public domain.

Works Contract and Construction Service

providers

Earlier the law for construction industry was

construed and understood through 3 different

definitions of Works Contract, Commercial

Construction and Residential Construction. In the

negative list concept this has been brought down to

2 –

Works contract services

All construction and allied activities where

transfer of property in goods is involved in

relation to a building or structure on land shall

only be considered as a works contract. There is

a sea change in the definition and its exact

meaning will only be understood with time and

real transaction based analysis. Following

issues need to be understood:

Only the service part of the entire transaction has

been made taxable – not the entire contract.

The option for charging full rate of tax on the total

value of the contract including goods and services

will not be allowed now.

If the assessee is able to differentiate/bifurcate

the value of the goods and service in a contract

either from the records submitted to the Vat

department or independently than the value of the

service shall only be taxed at full rate. If the

above said bifurcation is NOT possible than the

following method shall be employed:

- If the contract is for construction of

new or damaged structures on land

then the taxable value of service

would be 40% of the total contract

value. It means that the effective

tax rate in such contracts would be

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4.944%

- If the contract is for works other

than construction of new or

damaged structure (like completion

finishing, electrification etc) than

the taxable value of the service

would be 60% - effective tax rate

would be 7.416%.

Value of free supply of goods will have to be

added in the total contract value.

If any works contract is undertaken in case of new

construction which is inclusive of the value of Land

+ goods + service – in that case the taxable value

of the service would be 25% - effective tax rate

would be 3.06%.

Credit of capital goods and input services shall be

allowed in all cases.

Construction of Complex

Both commercial and residential construction

services shall now be taxable as one category.

Following issues need to be understood:

§ Any construction contract which does not

include value of goods shall be taxable

under this category of declared service. In

other words labour contracts would be

taxable here.

§ Construction of residential complex having less than

13 units was not taxable till date – but as proposed

now all residential construction (having more than 1

unit) will be taxable.

§ A builder selling flats or offices etc will

also be taxable under this category. Any

property sold prior to issuance of

completion certificate shall be taxable

just as earlier (w.e.f. 1.07.2010).

§ Surprisingly no abatement rates have

been yet prescribed for this service – In

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my view this is a legislative miss and

would be corrected sooner than later. I

also believe that abatement rates

would remain the same as of now –

25% – with additional benefits of credit

availment on Capital goods and input

services. Circular issued by the

department after budget however says

that this benefit has already been given

to builders but I am unable to find the

same anywhere in the legal documents

issued so far.

Hotel and catering services

This is one more industry which will now get affected:

All services provided by them were already made taxable in the last years’

budget with appropriate abatement benefits given to them. These

abatement benefits have now been decreased by 10% across the board

with additional benefits of credit availment. The changes are tabulated as

under:

Transaction

Abatement Provisions Credit Eligibility

Existing

taxableportion

Effective

taxrates

Proposed

taxableportion

Proposed

tax rates

Capital

Goods

Input

Goods

Input

Svs

Hiring ofhotel rooms

50% 5.15% 60% 7.416% No No Yes

Restaurant 30% 3.06% 40% 4.944% Yes Yes(See

Note)

Yes

Mandap

Keeper

60% 6.18% 70% 8.652% Yes Yes(See

Note)

Yes

Pandal &Shamiana

70% 7.21% 70% 8.652% Yes Yes(See

Note)

Yes

Convention 60% 6.18% 70% 8.652% Yes Yes(See

Note)

Yes

OutdoorCaterer

50% 5.15% 60% 7.416% Yes Yes(See

Note)

Yes

Note:

Credit of Goods falling under chapter 1 to 22 – i.e. foods and beverages of

Central Excise Tariff Act, 1985 shall not be available.

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Construction of infrastructure and other facilities

Infrastructure builders were not taxable till date that position continues in the

concept of negative list as well. However there are many grey areas where the

services were not taxable earlier which will now become taxable due to lack of

legal provisions or clarity with regards to the interpretation of the proposed

exemptions. Some of the issues with regards to taxability that might arise are:

Site formation services for Roads/water bodies/ports/airport/railway

Services provided by Sub contractors to main contractors for construction

and other allied works of certain infrastructural and construction facilities

because the notification only provides for exemption of services provided

to the Government with regards to the following assets:

Non Commercial Buildings

Historical Monument

Educational, clinical or cultural structure or building

Canal, Dam or irrigation works

Pipeline works for drinking water supply, water treatment or sewerage

treatment or disposal.

Residential construction for self use

Income by way of collection of toll charges for allowing use of road and

bridge are exempt as per the proposed negative list. The Governments

across India are constructing various facilities be it Border check posts,

hospitals, schools and other such public assets other than road and bridge

under the PPP model (Public Private Partnership) whereby the developer is

given a right to collect toll/service charges from the users of these facilities

in order to recover the cost of construction. The question that will arise is

that are such toll charges being proposed to be taxable under the Negative

List concept.

CHANGES THROUGH NOTIFICATIONS

§ Threshold exemption of Rs. 10 lacs was allowed on cash basis till now

even though POTR was introduced last year. Notification no. 5/2012

has been issued to bring it on par with POTR requirements and

henceforth the limit of 10 lacs shall be construed on accrual basis only.

§ Exemption provided to services of railways for transportation of goods

which was to end on 31.03.2012 has been further extended to

30.06.2012. This has been done umpteen number times now which

reflects the political scenario of Railways.

§ As we all know that service tax in case of GTA and sponsorship services

tax is payable by the service recipient. This system is now being

extended to certain more services. Notification 15/2012 has been

issued which prescribes who will responsible to pay tax in prescribed

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services.

§ This change will be applicable only in those cases where the service

provider is an individual, HUF, Proprietary concern or partnership firm

and the service recipient is a company. The table is as under:

Sl.No.

Description of a service % age of

tax payableby the

ServicePROVIDER

% age of

taxpayable by

the ServiceRECEIVER

Did this

provisionExisted or is

it New

1 Service provided by aninsurance agent to any

person carrying oninsurance business

Nil 100% No Change

2 Services provided by a

goods transport agency

Nil 100% No Change

3 Sponsorship Services Nil 100% No Change

4 Services provided arbitraltribunal

Nil 100% New provision

5 Services provided by anindividual advocate


6 Support service provided

by Government or localauthority


7 Renting or hiring anymotor vehicle designed

to carry passenger onabated value.

Renting or hiring any

motor vehicle designedto carry passenger on

non abated value.

Nil

60%

100 %

40%

New provision

New provision

8. Supply of manpowerServices

25% 75 % New provision

9. Works Contract Services 50% 50% New provision

10. On services importedinto India

Nil 100% No Change

A new abatement notification is proposed to be issued which will be

effective only the enactment of Finance Act, 2012. It proposes to give

abatement benefits along with right to avails certain credits in certain

cases. Following is the table of abatement proposed to be given:

Sl. No. Description of taxable serviceTaxable

portion

Credit Eligibility and other

conditions

Capital

Goods

Inputs -

Goods

Input

Services

6/13/12 Service Tax


1 Financial leasing services including

equipment leasing and hire

purchase

10 Yes Yes Yes

2 Transport of goods by rail 30 Yes Yes Yes

3 Transport of passengers by rail 30 Yes Yes Yes

4 Supply of food or drink, in a

premises, including hotel,

convention center, club, Pandal,

shamiana for organizing a function

70 Yes Yes

(See Note)

Yes

5 Transport of passengers by air 40 No No Yes

6 Renting of hotels rooms 60 No No Yes

7 Transport of goods by road (GTA) 25 No No No

8 Services provided in relation to

chit

70 No No No

9 Renting of any motor vehicle

designed to carry passengers

40 No No No

10 Transport of goods in a vessel

from one port in India to another

50 No No No

11 (i) Services provided by a tour

operator in relation to a package

tour

25 No No No

(ii) The bill issued for this purpose

indicates that it is inclusive of

charges for such a tour.

(ii) Services provided solely of

arranging or booking

accommodation for any person in

relation to a tour

10 No No No

The invoice, bill or challan issued

indicates that it is towards the

charges for such accommodation.

This exemption shall not apply in such

cases where the invoice issued by the

tour operator only includes the

service charges for arranging or

booking hotel room and does not

include the cost of such

accommodation.

Services, other than services specified in

(i) and (i i) above, provided in relation to

a tour

40 No No No

(i i)The bil l issued indicates that the amount

charged in the bil l is the gross amount

charged for such a tour.

CONCLUSION & SUGGESTIONS

In his speech the Finance Minister said and I Quote:

“I have to be cruel in order to be kind”

The above line in some sense captures the whole impact of the proposed

changes in the budget more so in the Service tax field. All stake holders will

find it challenging and in some cases surprising to interpret certain given

transaction whether the same are taxable or not. In my view, certain corrections

to the proposed law and some clarifications will make this law prudent enough

for acceptance by the trade. Much is yet to come on the subject so final

comments will become possible only after everything is in public domain.

I would like the honourable Finance Minister to make the following

amendments before this Negative List approach is implemented.

6/13/12 Service Tax


a. All activities done in or in relation to construction and maintenance of basic

infrastructure like roads, dams, canals, port, airport and railways must be

included in the negative list.

b. Toll charges collected for any governmental awarded project must be

included in the negative list.

c. Definition of works contract as defined in section 65A (54) must be

amended to included the services provided by builders/developers or else

give suitable abatement benefits to them alongwith credit availment

benefits.

d. Roll back the amendments made vide notification 15/2012 whereby in case

of 4 new services the recipient will be responsible to make the payment of

tax either fully or partially. This will open a pandoras box for all

stakeholders.

e. Industry should be allowed to charge 10.30% on the full value of a works

contract if it wants to avail the benefit of credit on inputs, Government

should not in principle decide what scheme of tax out of all must be opted

for by a particular industry.

f. Plain reading of rule 2A of Valuation Rules as proposed to be amended by

notification no. 11/2012 gives an understanding that valuation as

prescribed vide amended clause 2A (i) is mandatory and one has to adopt

the process given there. Earlier the same was an option and the service

provider was free to choose whichever scheme he felt was best suitable for

him. This undemocratic means of tax compliance will make life miserable

for the works contract industry as a whole.

g. Last but not the least, Rule 7 of the Point of Taxation Rules (POTR) has

been deleted w.e.f. 1.04.2012 thereby making all professionals (CA, CS,

Engineers, etc) liable to pay tax on accrual basis if their taxable turnover

for previous is above Rs. 50 lacs. In the near past (on 1.07.2011) they

were given an exemption from following POTR. Income tax act however

gives them the right to follow cash basis of accounting system. So

henceforth their books shall be maintained on cash basis whereas they will

be required to pay tax on accrual basis. It would be my suggestion that

the rules must be amended providing that all persons who are allowed to

maintain books on cash basis under the Income tax act must also be

allowed to pay service tax on cash basis irrespective of their turnover

levels.

DISCLAIMER

The analysis/views in this booklet do not

purport to be and should not be treated aslegal opinion. Nothing contained herein can

substitute appropriate legal opinion in factspecific situations that affect you or your

enterprise. The stated law is yet in a liquidstate and the above comments must be

understood in that context.

At the end I regret the sheer bad formatting of the above blog as

the available blog settings are not enough to bring something as it

is from my original word file.

6/13/12 Service Tax


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Nitesh Jain

Visit us at : www.niteshjain.co.in

Blog : http://servicetaxnitesh.blogspot.com/

Posted by Nitesh Jain at 9:42 PM 3 comments

Location: Ahmedabad, Gujarat, India

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