Impact of Certain Amendments in Finance Act, 2010

Introduction

In the recently notified Finance Act all services provided within the airport will w.e.f. 1.07.2010 be classified as ‘Airport Services’ – hence all services including Commercial Construction Services (CCS) and Works Contract Services (WCS) will be now classified as airport services.

In the individual sections of CCS and WCS – providing services to airport is not taxable but due to the amendment all these services will now fall in airport services category and in that section there is no such provision for exemption to these services.

For this notification 42/2010 dated 28.06.2010 was issued which has given an exemption to CCS services but WCS services have not been considered for such an exemption due to which all WCS service providers which were till now exempt will have to now start paying tax – which I deem is not the intention of the Board.

Legislative Background

The Civil Aviation sector and more specifically the Airports in India is one of the areas where the Government of India has made certain special efforts to create a better and robust infrastructure. For this one part was to exempt the airport builders in various sub-sectors like roads, airports from the levy of Service Tax.

The Finance Act, 1994 has 2 sections which cover the whole gamut of construction activity which are:

A. Commercial or Industrial Construction Service [Section 65 (105) (zzq) read with section 65 (25b)] which is reproduced as under:

Section 65 (105) (zzq)

Taxable service means any service provided or to be provided —

(zzq) to any person, by any other person, in relation to commercial or industrial construction service;

Section 65 (25b)

(25b) “commercial or industrial construction service” means—

(a) construction of a new building or a civil structure or a part thereof; or

(b) construction of pipeline or conduit; or

(c) completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing, construction of swimming pools, acoustic applications or fittings and other similar services, in relation to building or civil structure; or

(d) repair, alteration, renovation or restoration of, or similar services in relation to, building or civil structure, pipeline or conduit,

which is—

(i) used, or to be used, primarily for; or

(ii) occupied, or to be occupied, primarily with; or

(iii) engaged, or to be engaged, primarily in,

commerce or industry, or work intended for commerce or industry, but does not include such services provided in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams;]

B. Works Contract Service – Section 65 (105) (zzzza)

Taxable service means any service provided or to be provided —

(zzzza) to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.

Explanation.—For the purposes of this sub-clause, “works contract” means a contract wherein,—

(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods, and

(ii) such contract is for the purposes of carrying out,—

(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or

(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or

(c) construction of a new residential complex or a part thereof; or

(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or

(e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;

As can be seen the infrastructure sector is broadly out of the ambit of the definition of these two levies including the airports.

In case of Ports the Board had issued a blanket exemption notification no. 25/2007 dated 22.05.2007 which came into effect on 1.06.2007. This notification exempted CCS as well as WCS services provided to ports and other ports.

So it can be concluded that till 30.06.2010 all CCS or WCS services provided to or within the airport or port or other ports was not taxable under the service tax law.

Amendment made:

Finance Act, 2010 was amended and one such amendment relates to Airport and port services – the relevant text of the amendment is as under:

Old Section:

65 (82)

“port service” means any service rendered by a port or other port or any person authorised by such port or other port, in any manner, in relation to a vessel or goods;

65 (105) (zzl)

to any person, by other port or any person authorised by that port in relation to port services, in any manner;

65 (105) (zzm)

to any person, by airports authority or any person authorised by it, in an airport or a civil enclave;

After amendment w.e.f. 1.07.2010

65 (82)

“port service” means any service rendered within a port or other port, in any manner;’;

65 (105) (zzl)

“(zzl) to any person, by any other person, in relation to port services in other port, in any manner:

Provided that the provisions of section 65A shall not apply to any service when the

same is rendered wholly within other port;’’;

65 (105) (zzm)

(zzm) to any person, by airports authority or by any other person, in any airport or a civil enclave:

Provided that the provisions of section 65A shall not apply to any service when the

same is rendered wholly within the airport or civil enclave;”;

Above amendment was brought about in the recent budget 2010. These amendments were meant to minimise the classification issues that were arising because the old sections were general in nature. In other words all services provided by persons who were authorised by port or airport were termed as ‘Port Services’ or ‘Airport Services’. So if a Warehousing service provider who was authorised to provide warehousing inside the port was falling under both ‘Storage & warehousing services’ as well as Port services.

These amendments are two fold:

a. All persons providing services within the port or airport services to any other person shall now become taxable.

b. All these persons shall now be classified under ‘Port Services’ or ‘Airport Services’.

In the logical corollary of the above interpretation all persons who were providing CCS or WCS services to the airports or ports shall now loose their core classification and fall into either of the 2 categories as enumerated above and consequently also loose the exemption of non taxability of providing services to airports and ports which was available to them hitherto.

To correct this anomaly the government issued notification no. 38/2010 and 42/2010 dated 28.06.2010 which provide exemption to CCS services provided within the port or airport respectively.

The point of representation lies herein.

The exemption which was previously available to both CCS as well as WCS is now only extended to CCS providers and WCS providers are w.e.f. 1.07.2010 made taxable if they provide services to these 2 categories of customers.

This cannot be the intention of the legislature or for that matter of the Board.

All people who follow the Service Tax law will understand the anomaly and its impact if not corrected on time.

Comments are invited.......

CA Nitesh Jain

nitesh@niteshjain.co.in

Brief Writeup on changes made in Service Tax Law by Budget 2010

Gist of Amendments in existing Service tax law

1. No change in the rate of service tax – it remains at 10.30 %
2. Service tax on the real estate sector has been introduced in a new avatar whereby from the date to be notified sale of commercial or residential property by the builder or any other person authorised by him shall be taxable if the builder or person authorised by him receives any payment before receipt of construction completion certificate from competent authority. In other words if in cases of sale of real estate (residential or commercial) where any sum of money is received by the builder from the prospective buyer before receiving the construction completion certificate then such entire transactions shall be taxable. If this becomes law the real estate Construction sector is going to witness a big shock. Further details if any are awaited.
3. The ambit of Port Services has been reduced to include only those port services provided within the precincts of the port.
4. Retrospective amendment has been introduced to tax all commercial training or coaching service providers irrespective of their constitution or whether or not they make profit. This amendment is applicable from 1st July 2003. Hence all charitable organizations providing commercial training services shall now become taxable and that too on their entire earning since 1st July, 2003. Moreover definition of vocational training institute has been changed (vide notification no. 3/2010) whereby w.e.f. 27.02.2010 only those institutes which affiliated to the National Council for Vocational Training, offering courses in designated trades as notified under the Apprentices Act, 1961(52 of 1961) shall on be tax free.Prior to this budget sponsorship services were taxed only in the hands of body corporates or firms. Now the ambit of sponsorship services has been extended to include all persons receiving such services.
5. Earlier sponsorship services in relation to sports events were exempt from tax which now would become taxable from the date to be notified.
6. Previously service provided by aircraft operators to passengers flying to international destinations on classes above economy class was taxable. Now the domestic travel as well as international travel services provided by aircraft operators shall be liable to service tax irrespective of the class chosen to travel. Now on Domestic travel will become dearer by 10.3%.
7. An explanation has been added to section 65 (105) (zzzr) (for Auctioneers Service) which declares that “auction by the Government” means the Government property being auctioned by any person acting as auctioneer.
8. Retrospective amendment has been brought in w.e.f 01.06.2007 to negate the fallout of Delhi HC decision in case of Home Solutions. The activity of 'renting itself' becomes taxable service from 01.06.2007. So all hopes of a favourable order from the Supreme Court have been negated with this retrospective amendment.
9. From the date to be notified leasing of vacant land for construction of building or temporary structure at a later stage to be used for furtherance of business or commerce shall also be taxable.
10. Earlier information technology software services were taxable only if the same were provided for use in business or commerce. This major requirement has now been done away with & now these services shall be taxable irrespective of the purpose thereof hence from now on software related services provided for use in Education or religious purposes shall also become taxable.
11. An explanation to section 73 (3) of the finance act has been added so as to declare that if service tax & interest are paid before issuance of SCN then no penalties shall be leviable. Earlier this section provided only that if the tax & interest were paid prior to issuance of SCN then in those cases no SCN shall be issued.
    

New services brought under the tax net:

1. Services provided by Hospitals, nursing homes or multispecialty clinics providing services in the following cases have now been made taxable from the date to be notified:
   a. To an employee of any business entity, in relation to health check-up or preventive care, where the payment for such check-up or preventive care is made by such business entity directly to such hospital, nursing home or multi-specialty clinic; or
   b. To a person covered by health insurance scheme, for any health check-up or treatment, where the payment for such health check-up or treatment is made by the insurance company directly to such hospital, nursing home or multi-specialty clinic;
   Hence treatments provided to any person under the cashless facility offered insurance companies would now become taxable. It would be pertinent to note that if treatments are provided where payments are not made directly to the hospitals shall not be taxable. In other words if the same are reimbursed to the insured it shall not be liable to tax.
2. Services provided to any business entity, by any other person, in relation to storing, keeping or maintaining of medical records of employees of a business entity shall now become taxable;
3. Promotion, marketing or endorsement of brand of goods, services, event, tradename, logo or housemark of a business entity shall now become taxable.
4. Services provided by way of granting the right or by permitting commercial; use or exploitation of any event including an event relating to art, entertainment, business, sports or marriage shall be made taxable from the date to be notified;
5. Services provided by an approved electricity exchange in relation to trading, processing, clearing or settlement of spot contracts, term ahead contracts, seasonal contracts, derivatives or any other electricity related contract shall become taxable;
6. Services provided by way of transferring temporarily; or permitting the use or enjoyment of, any copyright defined in the Copyright Act, 1957, except the rights covered under sub-clause (a) of clause (1) of section 13 of the said Act;” shall now become taxable;

Builders selling residential or real estate properties whereby they charge an extra amount to provide any preferential location or development of such property to any buyer, such extra charge shall now be leviable to service tax.




DISCLAIMER

The analysis/views in this booklet do not purport to be and should not be treated as legal opinion. Nothing contained herein can substitute appropriate legal opinion in fact specific situations that affect you or your enterprise.

Nitesh Jain

Chartered Accountant

http://www.niteshjain.co.in/