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/

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/