Budget Analysis - 2011 Service tax

Highlight of this budget:

A. Service tax will be payable on accrual basis from 1.04.2011. So the moment a service provider will book any invoice in his books the tax will become payable.

B. Service tax is being levied on all services provided by a medium sized hospital (having more than 25 beds) irrespective of whether the patient has insurance or not.

C. Service tax on Hotels have been introduced in a big way:

a. Room rentals above a declared rate of Rs. 1000 will be chargeable to service tax – with an optional abatement of 50%.

b. Services provided by air-conditioned restaurants having a license to serve alcoholic beverages – this service will get optional 70% abatement.

D. Penal provisions are made harsher with introduction of penalties even when tax is being paid under audit.

E. Introduction of prosecution provisions wherein the assessees evading tax payments for more than 6 months may face imprisonment of upto 3 years.

Gist of Amendments in existing law

1. No change in the rate of service tax – it remains at 10.30 %

NEW SERVICES BROUGHT IN THE TAX NET

2. Two new services are being brought under the tax net:

a. RESTAURANTS

Services provided by air-conditioned restaurants having a license to serve alcoholic beverages – this service will get optional 70% abatement.

b. HOTELS

Hotels and guesthouses giving rooms for accommodation for a continuous period less than 3 months – this service brings into the tax net only rooms having a declared (Rack) rate of more than Rs. 1000 (chargeable rate may be less). This service will get an optional 50% abatement.

CHANGE IN SCOPE OF EXISTING SERVICES

3. Scope of certain existing services is being changed and in almost all cases the changes are drastic :

a. Club or association Services

EARLIER:

Services provided by a club or association to ITS MEMBERS were only taxable NOW:

Services provided to NON MEMBERS will also become taxable

b. Authorised service station

EARLIER:

Services provided by AUTHORISED SERVICE STATION were only taxable

NOW

Services provided by ANY PERSON will be taxable so all small mechanics provided services for more than 10 lacs in a year will become taxable.

c. Lawyers

EARLIER:

Services provided by a firm of lawyers to any individual were not taxable. Secondly legal representational services like appearing in court of law for a client were also not taxable

NOW

Services provided by a firm of lawyers to any person shall become taxable and legal representation services provided by any person (including individuals) to any business entity shall also become taxable. Similar change is expected to come for chartered accountants and company secretaries.

Arbitration services are also brought into the tax net but still if the same are provided to individuals the same shall not be taxable.

d. COMMERCIAL TRAINING OR COACHING SERVICE

The memorandum issued along-with the Budget says that

“The definition of commercial or training service is being amended to bring all unrecognised courses within the tax net, irrespective of the fact that such courses are conducted by an institute.”

But the consequent change in the section does not reflect the said change – on the contrary – the amended section says that all courses offered by a coaching centre WITH OR WITHOUT ISSUANCE of certificate will be taxable

This anomaly needs to be looked into an corrected before enactment of the Finance Act.

e. Hospital Services

Major change has been made in this entry

EARLIER:

2 Services provided by a hospital were ONLY taxable:

· Services provided to patients wherein the payment was to be paid by the insurance company

· Services of health check up or preventive care provided to an employee of a company wherein the company paid the charges to the hospital

NOW:

The whole section is changed and the new entry provides that

· ALL services provided by a CENTRALLY AIR-CONDITIONED (wholly or partially) hospital having more than 25 beds for in-patient treatment during any part of the year. (The insurance company is completely brought out from the picture)

· If an independent doctor (not being an employee of the hospital) provides his services using the premises of the said hospital will also now become taxable – so now all visiting doctors of a hospital will be taxable.

· Diagnostic services provided by the said hospital with the aid of a laboratory or other medical equipments.

4. Full exemption is being provided under the works contract service for providing construction or finishing of new residential complex under JNNURM and Rajiv Awaas Yojana and within a port or airport. (Earlier this exemption was provided only under the category of Construction of residential complex and commercial construction service.

5. Rates of Service tax on air travel are being increased as under

Domestic Travel - From flat Rs. 100 to 150

International Travel - From flat Rs. 500 to 750

PENAL PROVISIONS

6. Penal provisions are changed in big way in this budget – following is the gist of them:

a. Section 73 (1A) is deleted wherein benefit of reduced penalty of 25% even in case of fraud, collusion etc shall not be available.

b. Instead a new section 73 (4A) is being introduced wherein it has been provided that if during an audit, verification or investigation by the department it is found that the assessee has short paid any tax than a penalty of 1% per month upto a maximum of 25% shall be levied. If the same is paid than no show cause notice shall be issued. So now penalty will become compulsory the moment an audit party finds any short payment of tax which was not so earlier.

c. Penalty under section 76 for delayed payment of tax has been reduced from Rs. 200 per day or 2% per month to Rs. 100 or to 1% per month – whichever is higher subject to a maximum penalty of 50% of the tax amount. Earlier it was 100%.

d. Maximum penalty for non submission of records etc under section 77 has been increased from Rs. 5000 to 10000.

e. Penalty for late filing of returns has been increased from a maximum of Rs. 2000 to 20000.

f. Power to authorise a Search has now been given to a Joint commissioner (Earlier it was with Commissioner) and power to execute the search has been given to a Superintendent (earlier it was Assistant or deputy commissioner)

g. Certain section of the Central Excise Act which deal with prosecution are now made applicable to Service tax.

h. Section 89 is being introduced to bring prosecution provisions:

i. The prosecution shall apply in the following cases:

· Provision of service without invoice

· Availment and utilisation of credit without receipt of inputs or input services

· Submitting false information

· Non-Payment of collected amount of service tax for a period of more than 6 months

ii. The term of the imprisonment shall be from 6 months to a maximum of 3 years.

iii. The sanction for the prosecution will be granted at the level of chief commissioner

7. The Board has issued 18 notifications to being some more changes which are as under:

a. New Rule 2A has been introduced in Works contract Composition rules whereby Service providers availing the Composition scheme shall now be eligible to take only 40% of the credit of the following 3 input services availed by them:

· Erection commissioning and installation Services

· Commercial Construction Services

· Construction of Residential Complex Services

Please note that this restriction shall apply only if the value of the said input services is inclusive of value of goods.

b. In the earlier budget notification nos. 28/2010, 38/2010 & 42/2010 were issued wherein exemption to Construction of complex & Commercial construction service was given respectively for providing services to JNNURM and Rajiv Awaas Yojana schemes but a similar exemption was not provided to Works contract service. This anomaly has now been corrected by introducing notification no. 6/2011, 10/2011 and 11/2011.

c. Export Rules have been tweaked a bit :

i. Preferential Location services offered by builders has been shifted from customer location based criteria to immovable property criteria

ii. Following services have been shifted from the performance based criteria to location based:

· Credit Rating Agency

· Goods Transport Agency

· Market Research Agency

· Opinion Poll Agency

· Technical Testing and analysis

· Transport of Goods by air

· Transport of Goods in containers by railways

iii. Following Services have been shifted from Location based criteria to performance based:

· Rail Travel Agent

· Health/Hospital Services

d. Import Rules have also been amended. Amendments similar to the ones made in Export rules are made in import rules.

e. Interest on delayed payment which was 13% p.a. earlier has now been increased to 18% p.a. w.e.f. 1.04.2011.

f. New Notification no. 17/2011 is introduced which supersedes the earlier notification no. 9/2009 which deals with SEZ refunds. It simplifies the refund rules and procedures related to SEZ’s.

g. Point of Taxation Rules has been introduced whereby specific rules as to when a particular transaction would become taxable have been prescribed (at the time of invoicing or at the time of receipt of payment). A detailed note on the same is under process and will be mailed very soon.

CHANGES IN CENVAT CREDIT RULES

8. CENVAT credit rules have been amended in a big way and following changes are made to it:

a. Definition of Capital goods has been amended. Now credit of capital goods used outside the factory of the manufacturer for generation of electricity for captive use within the factory will be available.

b. Major change has been brought about in the definition of exempted services. Effect of 2 changes made in the definition are as under:

· Services on which a service provider has claimed abatement will now be considered as exempted services

· Value of trading in goods shall now be treated as exempted services.

c. Definition of Inputs (goods) has been changed and now credit of goods used for construction of building or a civil structure or laying of foundation will not be available except if the goods are used for providing following services:

· Port Services

· Airport Services

· Commercial Construction Services

· Residential Construction Services

· Works Contract Services

d. Definition of Input Services has been amended and following changes are incorporated:

· Credit for setting up of an office, factory or premises of service provider shall not be available

· The words “activities relating to business” have now been deleted from the definition so now credit of ALL services procured for doing the activity of business will not be available on A-la-carte basis.

· Credit of services falling in the category of Architect, Port, Other port, Airport, Commercial Construction, Residential construction and Works Contract (Specified services) shall not be available if the same are used for construction of building or a civil structure or laying of foundation. If these services are used to provide the same specified services than the service provider can claim the credit thereof.

· Services falling in the category of General Insurance business, Cab operator, Authorised Service Station and supply of tangible goods so far as they relate to motor vehicle except when used by a service provider falling in the category of courier, Cab operator, Cargo handling, Transport of goods by road, outdoor catering and pandal and shamiana keeper.

· Credit of services falling in the category of 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 will not be available henceforth.

e. Rule 3 is being amended retrospectively w.e.f. 18.04.2006 to provide that credit of tax paid under section 66A shall be available – A long awaited amendment and thanks to him its RETROSPECTIVE.

f. Rule 4 (7) is being amended to provide for reversal of credit in case any payment made for any input service is received back

g. Rule 6 is amended to :

- Reduce tax payable on exempted services from 6% to 5%

- Provide an option to keep separate accounts for inputs alone and reverse the amount of input service credit as per the allocation formulae in Rule 6 (3A).

- Rule 6 (5) is omitted – so now credit of 16 services which was available without restrictions will not be available.

CONCLUSION AND SUGGESTIONS

In his speech the Finance Minister said and I Quote:

“The strength of a good value-added-tax lies in the free flow of the credit of the tax paid at the previous stage. Due to complexities, there have been many legal disputes on the availability of credit on a number of inputs or input services. These provisions are being rationalized by laying down clear definitions so that the scope of inputs and input services that are eligible and those that are not, is clear. Allocation of CENVAT credit to exempt and taxable goods and services is also being streamlined.”

Above changes may sound as the finance minister says ‘rationalization’ but the truth of the matter is that in the garb of rationalization the minister has changed the definition in such a way that many of the legitimate credits will now be lost and the basic principle of Value added taxes will be destroyed giving rise to many new litigations.

I hope the feedback to the finance minister’s budget proposals is strong enough to make him change his mind especially on 3 counts:

a. To scrap the levy of service tax on hotel industry when it already faces heavy taxes under state laws.

b. To give abatement option to hospitals

c. To change the definition of input and input services so as to enable the manufacturers and service providers avail credit on construction expenses incurred by them. Construction is a major expense for some of the service providers especially hotels and hospitals.

d. Trading cannot by any stretch of imagination be termed as a service leave alone it being exempted. Question may arise that if the finance minister thinks today that trading is an exempted service can he not say tomorrow that it is a taxable service and start taxing it. It is a frivolous move which will create a big anomaly for those service providers who have trading businesses as well.

e. Re-introduce rule 6(5) of the CENVAT credit rules because there are many input services which cannot be bifurcated strictly between taxable and exempted services.

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.

Formulated by:

Nitesh Jain

N.J. Jain & Associates

Fourth Floor, Dev Complex,

CG Road, Ahmedabad

+91 79 40022629

+91 98241 82629

www.niteshjain.co.in

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