Amendments in Service Tax

AMENDMENTS IN SERVICE TAX – AN OVERVIEW
CA.PRADEEP JAIN

Residential Refresher Course on Tax reforms and SMP’s: Issues, Suggestions & Solutions Aranya Hill Resort , Mount Abu , Rajasthan

AMENDMENTS IN SERVICE TAX – AN OVERVIEW

CA.PRADEEP JAIN

The Finance Act, 2011 has made major changes in the field of indirect taxation, the summary of major changes and analysis of the amendments in SERVICE TAX are as follows

Ø     Introduction of New Services
Ø     Change in   Scope of Existing Services
Ø     Introduction of Point of Taxation Rules
Ø     Change in Cenvat Credit Rules,2004
Ø     Penalty & other procedural changes
Ø     Miscellaneous Changes

Introduction of New Services

Following new services has been introduced vide Finance Act, 2011 and service tax on the same was effective from 1^st May 2011.

Nature of Service		Applicability and Rate of tax
Restaurant Service (sec (65)(105)(zzzzv)	Fully or partially Air conditioned Restaurant having license to serve alcoholic beverages will be required to charge service tax on food/beverages including alcoholic beverages served in the premises. Abatement of 70% is available, thus effective rate of tax will be 3.09%
Hotel, inn, guest house, club or campsite etc. (sec (65)(105)(zzzzw)	Providing accommodation having tariff rate in excess of INR 1000 per day or higher for a continuous period not exceeding three months. Abatement of 50% is available, thus effective rate of tax will be 5.15%

è When the abatement is taken no credit has to be taken of input, input services and capital goods
è An assessee also has option to pay service tax @ full rate and take Cenvat Credit

There were many issues regarding the applicability of service tax which were duly clarified by board as follows

1)             If Restaurant has separate bar for serving liquor and the regular functioning of restaurant is done in adjoining place whether service tax is applicable?

Service tax will be applicable only if restaurant can be demarcated and has a separate name, service tax will applicable only to the one which fulfills both the condition

2)             If a Air – Conditioned Restaurant also has adjoining garden, pool area whether food served there would be liable for service tax or not ?

Yes, since they are the extension of restaurant

3)                If hotel changes its tariff in season, where by the tariff rates are more than Rs.1000/- and for the rest part of the year it is less than Rs.1000/- what would be the applicability of service tax on the same?

When the declared tariff is revised as per tourist season, the liability to pay service tax shall be only on the declared tariff for accommodation where the published tariff is more than Rs.1000/-

4)                If declared tariff is more than Rs.1000/- however customer pay less than Rs.1000/- whether service tax shall be chargeable or not?

Service tax has to be charged on actual amount charged and not on declared amount. The declared tariff is relevant only for determining chargeability.

However there are certain pending issues which are yet to be clarified by the department, which are as follows :-

·        What is to be included in tariff value? Even discounts given, meal given along with breakfast and/or lunch/and or dinner is included in tariff then it will not be separated for the purpose of determination of tariff value. Even though the discounts are not separated for determination of tariff but the service tax, if applicable, will be levied on total amount.

·        No service tax if the food is served in the room. It is applicable only on restaurants. But there will be objection of the department in this regard. It has to be documentary proof for the same.

·        Further, the hotel industry is paying sales tax on sale of food and beverages then whether the service tax is payable once again on the same. Whether it is service or sale? This will point of litigation once again. Even the litigation has started in this regard.

·        Similarly, the luxury tax is charged on rooms. Now, the centre is encroaching on state area. This type of anamolies will be settled when the GST will come.

Googly!!! –No service tax of Restaurant service will be applicable in Gujarat since it is a “dry” state and both the conditions of liquor license and air conditioned restaurant are to be fulfilled simultaneously

Change in scope of existing services

Nature of Service	Previous			Now
Authorised service station service		Only service provided by service station authorized by manufacturers were covered	Service provided by any person are now covered Covers all motor vehicles other than those meant for goods carriage and three wheeler scooter auto rick shaw.Even decoration services are also included.
Business support service		Services in relation operation assistance for marketing	Services provided by way of operational or administrative assistance in any manner.
Club or Association services		Only services to members were covered	Services to Non – Members also included.
Commercial training & coaching services		Institute providing recognized certificates were excluded	Unrecognized courses provided by an institute also providing recognized services @
Life Insurance services		Only services in relation to risk cover were covered In case of policy with investment the insurer had option to allocate 1% of total premium towards insurance and pay service tax on it	Scope has been widened to cover all services provided to any policy holder or any other person by an insurer & re-insurer When the break up is available, tax shall be chargeable on portion of premium other than what is allocated for investment The Composite rate has been increased from 1% to 1.5%
Legal Consultancy services		Advisory services, consultancy services or any other assistance to a business entity by a any other business entity	Advisory, consulting or any other assistance provided by a business entity to an individual Representation services provided by any person to business entity Service of arbitration provided by an arbitral tribunal to any business entity. But the litigation has already started on this score and it has been challenged in many courts and stay has been granted on the same. But the litigation has its cost and if the writ petition is struck down then the real beneficiary will be client and the legal consultants have to pay from their pocket along with interest and even with penalty also. So, beware of litigation in indirect taxation.

@ Exemption is granted to

1. Any pre-school coaching & training
2. Any coaching or training leading to grant of a certificate or diploma or degree or any other educational qualification which is recognized by law.

Main Exemptions and amendment to exemptions

è    Exemption for levy of service tax provided to services provided by a Practicing Chartered Accountant/Cost Accountant/Company secretary to clients, relating to representation before statutory authority in the course of proceedings under any law, has been withdrawn with effect from 1^st May,2011. They were brought to at par with legal consultants.

è    Full exemption is provided to the services provided by any hospital, nursing home or multi specialty clinic to any person for any health check – up or preventive care.

è    Service tax in respect of services provided by hospitals as well as by way of diagnostic test have been withdrawn in entirety

è    Money changing services [section 65 (105) (zm and zzk)] through a new rule (2B) which has been introduced in the Service tax (Determination of Value) Rules, 2006 to levy service tax on a value of difference between the exchange price and rate prescribed by RBI. In case RBI referred rate is not available, then 1% of value of Indian currency provided or received. In case RBI reference rate is also not available as the currency exchange in not INR, then 1% of lowest of the currency, if exchanged in INR.

(Notification No. 02/2011-ST read with Notification No. 03/2011-ST effective from 01.04.2011)

Point of Taxation Rules, 2011

To align with GST, the concept of accrual basis like VAT & Excise in service tax has also been introduced in the current budget with introduction of Point of taxation Rules vide Notification no.18/2011 – ST, whereby services provided will be taxed on accrual basis instead of receipt basis.

Earlier it was pointed out that the service tax will be paid when either of these three events happen i.e. invoice is raised or payment is received or service is provided. It was pointed out by us that it is very difficult to implement. Raising of invoice or receipt of payment has documentary evidence but provision of service does not have documentary proof. Further, it will be very difficult to tally the same with books of accounts. The department officer will not be able to prove the same. This demand was raised by forming a forum of indirect consultants. Even number of articles were also written on this issue also. Thereafter the government has changed these rules and also gave an option to assessee to either pay service tax from 1.4.2011 or from July 1, 2011.

The salient features of POT are as follows:

è Point of taxation (i.e. Point of time) when a service shall be deemed to have been provided would be –

If invoice is issued within prescribed period of 14 days from the date of completion of service

àDate of Invoice

àDate of Payment (including advance) whichever is earlier

If invoice is not issued within the prescribed period

àDate of completion of the provision of service or payment (including advance)

è        Service tax would be payable irrespective of method of accounting followed

è        Point of taxation in case there is change in rate of service tax

Service has been provided before change in rate

à For the services provided before change in rate, if any one of event (issue of invoice or receipt of payment) has happened before change of rate, than old rates will apply. If both the event has happened after change of rate, the new rates will apply. Whichever event out of the two, happens first, will be the point of taxation

Service has been provided after change in rate

à  For the services provided after change in rate, old rates will apply only if both the events (issue of invoice and receipt of payment) have occurred before the change of rate. If any of these events occur after the change, only the new rates will apply.

è           No tax on new services is payable where

àInvoice has been issued and payment has been received before services   became taxable,

àIf payment has been received before the services becomes taxable and invoice has been issued within 14 days of receipt of payment.

Thus tax will be levied in the following situations
àIf payment is received before the services becomes taxable, however invoice is not issued within 14 days

àService has been provided before it becomes taxable, however invoice is issued and payment is received after the service becomes taxable.

è           Continuous supply of service

Continuous supply of service is a service which is provided or to be provided continuously under the contract for a period exceeding 3 months, which are specified by the government namely Telecommunication service, Commercial or Industrial construction service, Construction of residential complex, Internet telecommunication service and Works contract service. The point of taxation shall be earlier of the following 1. Date of raising of invoice 2. Date of completion of service where invoice is not issued within 14 days of completion of service 3.Date of Payment

Date of completion shall be date of achieving of specified mile stone which obligates payment in part or whole for the contract

è        Exception to Point of taxation Rules

1)      Export of services (If payment is received in within period specified by RBI)

2)      Taxation of services under reverse charge mechanism

3) Individuals or proprietary firms / partnership firms providing following services – Consulting engineering, Architect services, Interior decorator services , Chartered Accountant services , Cost Accountant services, Company secretary services, Scientific & technical consultancy services and legal service

The corresponding amendments regarding point of taxation have also been made in Service tax rules, 1994 and Cenvat Credit Rules,2004

à   Rule – 3 of STR, 1994 has been amended providing that assessee may take credit of such excess service tax paid (up to Rs.200, 000/-) on the services which is not provided wholly or partially for any reason or where amount of invoice is renegotiated due to deficiency in provision of service, or any terms of contract where service provider has issued invoice or received payment provided –

1)      Issues credit note for the value of service not so provided to the person to whom invoice was issued.

2)      Refunded the payment or part there of so received for the service provided to the receiver of service, in the same, words “along with service tax payable” have been dropped.

à Rule 4(7) of the CCR,2004 has been amended providing that Credit of Service tax is to be taken on receipt of invoice, however if no payment of supplier invoice is made within three months, then such Cenvat Credit will have to be reversed and will be allowed only after making its payment.

Issues in Point of Taxation Rules, 2011

·        In POT though provision has been in case the services are renegotiated or not provided, the assessee can take excess credit paid if the amount is refunded, however there is no provision either in POT Rules 2011 or CCR’04 whereby if there is bad debt i.e assessee on issue of invoice has duly paid service tax but he has not been able to recover the same from the other party. Whether we can take such credit is not known or not provided?

·        There will be a situation in which the service provider paying service tax on receipt basis will take credit on accrual basis (i.e before payment) and vice – a –versa that credit on bill provided by service provider paying service tax on receipt basis will pay tax only on receipt however if he issues invoice beforehand, recipient will be able to take credit on accrual basis.

·        For companies providing or maintaining AMCs which are usually for period of year or two years, there will be a peculiar situation since in the same, if invoice is issued in the beginning of year, service tax liability will arise, however the payment of the same may be received on quarterly basis and the service is also provided in case a specific situation arises, thus the agreements will have to be drafted carefully in order to avoid early payment of service tax.

·        For realty players, service provider engaged in turnkey projects, work contract it would be necessary that agreements are drafted properly so as to avoid blockage of amount in taxes.

·        Necessary checks are also to be maintained, since if credit of service tax is taken on accrual basis, it has to be ensured that payment of the same has been made within 3 months, otherwise unnecessary interest will arise.

Changes in CENVAT Credit Rules,2004

Change in the definition of Input service

The definition of Input service has been changed substantially in the current budget, the major changes in the definition are as follows:-

·        The definition of input service has been narrowed down since phrase “activities relating to business such as” has been deleted and a specific list of services has been provided only on which credit will be available to nullify the decision of the CCE, Nagpur v/s Ultra Tech Cement Ltd [2010-TIOL-745-HC-MUM-ST] and Coca Cola India (P) Ltd v/s CCE, Pune-III {[2009] 22 STT 130 (BOM.)} . However it is still inclusive definition, since the definition includes the word “includes” and complete list of services are still to be covered in input services.

·        The following services have been excluded, Port and other port services, architect services , construction of complex , commercial construction services, work contract services,when the services are used for laying of foundation or for making structures for support of capital goods. Nobody knows how the port and other port services are related with laying of foundation or making of supporting structure.

·        Exclusion clause also excludes services of Use of Tangible assets, repair and maintenance service, Rent-a-cab scheme operator service, and general insurance services from the scope of input services when they relate to a motor vehicle. However, it has been specified that when these services are used for providing taxable services for which credit on motor vehicle is available as capital goods, then these services will be treated as input services.

·        The Legal services and Business exhibition services have been included in the inclusive part of the definition.

·        In the third part of the exclusion clause, the services which are primarily used for personal use of consumption of any employee have been excluded. The services specified to fall under his category are services provided in relation to outdoor catering service, beauty treatment service, health services, cosmetic and plastic surgery service, membership ofa club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession.

The clause (C) excludes services “used primarily for personal use or consumption of any employee” from the scope of input services. The use of the words “primarily” and “personal” are open to interpretation as they have not been defined anywherein the Rules. However an explanation is given in TRU letter dated 28.02.11 and by reading clause (C) and TRU letter position is that,in case services are provided which are “primarily” used for personal consumption/use of employees then the said services and which constitute a part of cost-to-company will not fall under the purview of input services. Such expenditure is borne by the employer-company. However, the opposite of “personal use” is business expenditure. Hence, the input service relating to business is still allowed although the word “relating to business” is deleted from the definition. But it is point of interpretation and litigation will be seen on this point also in future.

·        Services used for setting up of a factory or an office relating to the factory or the provider of output services have been excluded from the scope of input services.However controversy still remains that in case in a factory, if a manufacturer undertakes renovation by constructing a new structure in place of the old structure will such a new structure be considered as setting up of a factory or renovation of a factory or setting up of factory.

Change in the definition of Input

The definition of Input has also been changed;new definition is wider in scope and is more specific as it has more clearly provided as to what will be included and what will not be included under input.The major amendments in the definition of input are as follows:-

·        The expression “used in or in relation to the manufacture of final products whether directly or indirectly and whether contained in the final product or not” has been deleted. In its place, the words“all goods used in the factory” has been added. This has enlarged as well as narrowed the definition. Ithas widened the definition in the sense that the anything used in factory will be termed as input. EvenBoard Circular No. 943/04/2011-CX, dated 29.04.2011 has also said that the credit on stationary as wellfurniture will be allowed. But in the last part of the definition, it was said that the credit will not be allowed if it is not used in the manufacturing process.It has narrowed the definition as credit was allowed by Apex Court on Explosives used in mines which were away from mines. But it will not be allowed by this new definition.

·        Items expressly included namely “lubricating oils, greases, cutting oils, coolants” have been deleted.

·        The accessories of the final products which were also included in the old definition when cleared along with the final product have been retained but it is now provided that the accessories will be input if its value is also included in the final product.

·        Also, the goods used for providing free warranty for final products have been included. And a new Explanation is added giving meaning of free warranty. It is provided that for the purpose of input, free warranty will mean a warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer.

·        Items like paint, fuel and packing material has been removed from the definition.

·        In new Definition, it is provided that “capital goods except when used as parts or components in the manufacture of a final product” have been excluded from the definition of inputs. It has now been specifically provided that any goods used for construction of building/civil structure/ a part thereof and for laying of foundation/making of structures for capital goods will not be covered under inputs.

However, the items used for construction of building etc or for laying of foundation/structure of capital goods if used for providing the following service will be inputs:
“Port Services (zn), Other Port Services (zzl), Airport services (zzm), Commercial or Industrial Construction service (zzq), Construction of Complex Service (zzzh), works contract (zzzza);”

·        Motor Vehicles have been excluded from the scope of Inputs.

·        The items which are used in - a guesthouse, residential colony, club or a recreation facility and clinical establishment – for personal use or consumption of any employee of the assessee like food items will not be included under input. The credit was not allowed earlier also as it does not have relation with manufacturing process but it has been specifically excluded.

·        In the end it is provided that goods having no relation with the manufacture of finished goods will be excluded from the scope of the definition of input. Hence, the definition has created co-relation with the manufacturing process. The credit will not be allowed if it does not have co-relation with manufacturing process. The old definition has again been brought here.

Change in CENVAT Credit Rules, 2004

Trading an exempted service

·        The definition of exempted services shall include taxable services which are partially exempted with the condition that no credit of input and input service shall be availed. Moreover it has been clarified that exempted service will include trading service. But trading activity involves payment of sales tax and it cannot termed as service at all. It will lead to litigation once again. We hope that such sort of litigation will be settled when GST will come.

·        The implication of the same is that, since now trading is an exempted service, the reversal, in case cenvat credit is used for providing both taxable and exempted services, than reversal of 5% of the value of exempted services shall have to be done.

·        Moreover as per explanation given in Rule – 6(3) and (3A) of CCR’04, value shall be the difference between the sale price and purchase price of goods traded.

·        This issue also arose before the Ahmedabad Tribunal in the case of Orion Appliances Limited Vs. CCE, Ahmedabad [2010(019) STR 0205(Trib. Ahm)] wherein it was held that trading activity is not at all a service. Thus department may also ask for reversal, prior to the amendment also, on the basis of above decision. Even the board has clarified on the same lines.

·        However, there are few pending issues which may create controversy – that whether as such removal will also be considered as trading activity? If there are goods other than input which are traded whether duty shall have to reversed on that also, because cenvat credit on same goods will have not been taken. This is due to the fact that there are always common input services for the same. You can maintain the record which telephone call is for taxable service and which is exempted service.

Other Changes

·        The amount payable under rule 6(3)(i) in respect of services has been reduced from 6% to 5%. Moreover in the case of exempted services (that are partially taxed with no facility of credits) this amount shall be 5% of the exempted value of the service.

·        Earlier certain services were listed under Rule – 6(5) where full input credit was available unless specifically used for providing exempted service. This clause has now been deleted and hence input credit on such services will now required to be taken as per rules applicable to exempt and non exempt service.

·        There have been difficulties in ascertaining the amount of credit flowing into earning these amounts. Thus a banking company or a financial institution, including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed. In case of services relating to life insurance or management of ULIPs such amount will be equal to 20% of credit availed. Other options of payment of amount under Rule 6 shall not be available for these taxpayers.

·        New sub-rule (6A) has been added to allow provision of services without payment of service tax to a unit in SEZ or to a developer in SEZ for their authorized operations, without requirement of reversal of any CENVAT credit on this account. This will help in tax-free receipt of services by units and developers in SEZs.

·        In respect of works contract, Cenvat credit of tax paid on input services relating to (i) construction of complex (ii) commercial or industrial construction or (iii) erection, commissioning or installation services shall be available only to the extent of 40% of the service tax paid when such tax has been paid on full value of service after availing CENVAT credit.

Penalty & other procedural changes

The highlights of major amendments relating to penalty & prosecution and changes made in the Chapter V of the Finance Act,1994 are as follows :

·        Benefit of reduction in penalty which was available in case of fraud, collusion etc is now withdrawn

·        Penalty @ 1% p.m. subject to 25 % of tax in cases where additional tax becomes payable on the basis of audit,verification or investigation based on Central excise officer’s notice.

·        Penalty for failure to pay service tax within due date is reduced from 2% p.m. to 1% p.m. Maximum liability reduced from 100% to 50% of tax.

·        Maximum penalty for suppressing value of taxable service is reduced from 200% to 100% of tax due.

·        New provision in cases where additional tax becomes payable on account of suppressing value of taxable service based on audit, verification or investigation.

à Maximum penalty of 50% of tax due

à Maximum penalty of 25% of tax due if tax due is paid within 30 days (90 days for assesses having turnover of less than Rs.60 lakhs)

·        Interest on delay in payment of service tax has been increased from 13% to 18%. Rate of interest for delay in payment of service tax is reduced by 3% for assesses having turnover of less than Rs.60 lakhs

·        Increase in maximum penalty from Rs.5,000 to Rs.10,000 for failure to obtain registration, not maintaining or retaining relevant records, failure to furnish information sought for, not paying service tax electronically where required or does not issue invoice in accordance with specified rules.

·        Increase in maximum penalty from Rs.2,000 to Rs.20,000 in cases of delay in filing of service tax returns

·        Penalty levied for suppressing value of taxable services can now be waived only in cases where transactions are captured in specified records. Earlier penalty was waived if it was proved that there was reasonable cause for said failure.

·        New provision inserted so as to create first charge on property of defaulter

·        The provisions relating to prosecution are re-introduced for offences pertaining to providing services without issue of invoices, wrong availment of input credit, failure to supply information as required by law, failure to deposit service tax beyond period of six months from the due date. The imprisonment ranges from 1 year to 3 years. However sanction will have to be granted at the level of chief commissioner.

·        Power to issue search warrant given at Joint commissioner level with execution authority to Superintendent.

Miscellaneous Changes

·          Exemptions and abatement have been granted to

1. Services provided by an organizer of business exhibitions in relation to business exhibitions held outside India

2. 25% abatement for transportation of goods through coastal and Inland Shipping

3. Construction or finishing of new residential complex under certain government scheme and services provided within port or airport in respect of works contract

4. Rashtriya Swasthya bima yojna under ‘General Insurances services’

5. The rates of service tax on travel by air are revised 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%

6.      Exemptions with retrospective effect

a.       To an association or chamber representing commerce or industry in respect of membership fee under the “Club or Association Service ” for the period from 16.06.2005to 31.03.2008; and

b.      To inter-state or intra-state transportation of passengers, in a vehicle bearing contract carriage and tourist vehicle permit for the period from 01.04.2000 to 06.07.2009

7.      Value of air freight included in the assessable value of goods for charging customs duties to be excluded from the value of taxable services under transport of goods by air.

·                Amendment to Export of service rules & taxation of services Rules ( Provided from Outside India and Received in India

1.      Service provided by builders [section 65(105)(zzzzu)] is being added to sub-rule 1(i) and will thus be considered as exported, subject to compliance with other conditions, if the immovable property is situated outside India.

2.      Rail travel agent [ 65(105)(zz)] and health check-up or preventive care [65(105)(zzzzo)] are being added to sub-rule 1(ii) and will thus be considered as exported, subject tocompliance with other conditions, when they are performed outside India;

3.      And Services of credit rating agency [65(105)(x)], market research agency [65(105)(y)], technical testing and analysis [65(105)(zzh)], transport of goods by air [65(105)(zzn)],goods transport agency [65(105)(zzp)], opinion poll [65(105)(zzs)] and transport ofgoods by rail [65(105)(zzzp)] are being deleted from sub-rule 1(ii) and thus the additional condition of performance outside India will stand removed. Thus they will be considered as exported, subject to compliance with the relevant conditions, if the recipient is located abroad.

·             Service tax rules also have been amended in respect of sale & purchase of foreign exchange – reduction of composite rate of 0.25% to 0.1% of gross amount of currency exchanged towards up to Rs.100,000 discharge of service tax liability subject to minimum of Rs.25 and other value caps have been duly provided. Thus here foreign exchange can be paid on either above basis or as per value specified in Service tax ( Determination of value ) Rules 2006

·             Assesses with turnover of less than Rs.60 lakhs not liable for audit.

·             Modification in scheme for refund of service tax paid to SEZ unit / SEZ developers. Outright exemption for services consumed wholly within SEZ and refund on proportionate basis for others.

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Amendments in Service Tax - An overview

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