Trade Notice No. 03/2011 - Service Tax/SH
Dated Shillong, the 02nd March ’2011
Trade and all concerned are informed that the Finance Minister has introduced the Finance Bill 2011 in the Lok Sabha on 28th February 2011. Clauses 71 and 72 of the Bill cover the legislative changes relating to Service Tax. Barring a few retrospective amendments, all other changes will take effect from a date that will be notified after the Bill is enacted.
1.2 Besides the legislative changes, a number of other changes have been made in rules and will become effective on the dates mentioned in the respective notifications. Point of Taxation Rules, 2011 have also been introduced by notification 18/2011-ST and made effective from 01.04.11. Fresh exemptions have been granted while a few existing exemptions have been modified. These changes are contained in Notifications No. 1/2011- ST to 17/2011-ST and will take effect on the dates mentioned in the respective notifications.
1.3 A number of changes have also been made in the Cenvat Credit Rules, 2004 vide notification 3/2011-CE (NT) and these changes will take effect on 01.04.2011, barring a few that are being given effect on 01.03.2011.
The highlights of all these changes are indicated below. For full details, relevant provisions of the Finance Bills and above Notifications should be referred to, which are available in the following websites :
2. New Services
2.1 The following two new services have been proposed:
(i) Services by air-conditioned restaurants having license to serve liquor; and
(ii) Short-term accommodation in hotels/inns/clubs/guest houses etc.
2.2 The scope of the above services and other relevant details is discussed in Annexure-A of the D.O.F. No. 334/3/2011-TRU (II) Dated 28th February 2011 which may be referred to.
3. Alteration or expansion in the scope of existing services
A number of existing services are being modified or substituted as follows:
3.1 Authorized Service Station’s Services [section 65 (105) (zo)]: The existing service is being replaced with a new definition to cover all persons and all motor vehicles other than those meant for goods carriage or three wheeler auto rickshaw.
3.2 Life Insurance Service [section 65 (105) (zx)]: The scope of this service is proposed to be expanded to cover all services, including in relation to management of investments.
3.3 Commercial Training or Coaching Service [section 65 (105) (zzc)]: The scope of the service is proposed to be expanded to include all coaching and training that is not recognized by law irrespective of whether the institute is providing any other course(s) recognized by law.
3.4 Club or Association Service [section 65 (105) (zzze)]: The scope of the service is proposed to be expanded to include service provided to non-members as well.
3.5 Business Support Service [section 65 (105) (zzzq)]: The scope of the service is being expanded to include operational or administrative assistance of any kind.
3.6 Services by legal professionals [section 65 (105) (zzzzm)]: The scope of the existing service is being expanded to include:
(i) Services of advice, consultancy or assistance provided by a business entity to individuals as well;
(ii) Representational services provided by any person to a business entity; and
(iii) Services provided by arbitrators to business entities.
Services provided by individuals to other individual will remain outside the levy.
3.7 Services provided by clinical establishments [section 65 (105) (zzzzo)]: The existing levy on health services is proposed to be replaced as follows:
(i) Any service provided by a clinical establishment having the facility of central airconditioning in any part of the establishment and more than 25 beds for in-patient treatment at any time of the year;
(ii) Diagnostic services provided by a clinical establishment with the aid of laboratory or medical equipment; and
(iii) Health-related services provided by doctors, not being employees, providing health-related services from the premises of a clinical establishment.
3.8 The scope of the changes and other relevant details of the above mentioned existing Services are discussed in Annexure-B (point 1 to 6) of the D.O.F. No. 334/3/2011-TRU (II) Dated 28th February 2011 which may be referred to.
4. Compliance Mechanism:
4.1 The existing scheme relating to compliance has been proposed for a revamp with a view to strike a healthy balance between the interests of revenue and legitimate business and to promote voluntary compliance.
4.2 As a result a number of changes have been proposed with the following philosophy:
(i) Improve voluntary compliance by encouraging self-correction, wherever the deviations are unintentional omissions;
(ii) Reduced penalties may be imposed if the transactions are captured fully and truthfully in records and further abated if timely admission and payment is made;
(iii) Intentional and unrecorded violations should be dealt with severely with no concession whatsoever.
4.3 Thus the undue advantage obtained by carrying on surreptious activities at the cost of law-abiding business is sought to be neutralized. The revised system also encourages informed decision-making by the taxpayers at the early stages of investigation or verification by the Department. Changes proposed in the compliance mechanism are given in the following paragraphs.
4.4 The maximum penalty for delay in filing of return under section 70 is proposed to be increased from ` 2,000/- to ` 20,000/-. However, the existing rate of penalty is being retained under rule 7C of the Service Tax Rules, 1994. The maximum penalty is presently reached after a delay of 40 days. The new limit will impact only those who delay filing of return for longer durations.
4.5 The provisions of section 73 (1A) and both the Provisos of section 73 (2) are proposed for deletion. As a result, the benefit of reduced penalty shall not be available in cases of fraud, mis-statement, suppression, collusion etc. in the ordinary course. However, revised benefit will be available under the new sub-section 4A of section 73 in situations where the true and complete account of transactions is otherwise available in the specified records and the assessee during the course of audit, verification or investigation pays the tax dues, together with interest and the reduced penalty. It is clarified that the assessee can also avail this benefit on his own also. The extent of penalty is being further reduced to 1% per month of the tax amount for the duration of default, with an upper ceiling of 25% of the tax amount.
4.6 Interest rate for delayed payment of service tax is being increased to 18% per annum, effective 01.04.2011 (Notification 15/2011-ST). A concession of 3% has been proposed in the Bill for tax-payers whose turnover during any of the years covered in the notice or the preceding financial year is below Rs 60 lakh.
4.7 Penalty for failure to pay tax under section 76 is being halved.
4.8 The maximum penalty under section 77 for contravention of various provisions is proposed to be increased from ` 5000/- to ` 10000/-. However, the daily rate of penalty, wherever applicable, is being retained.
4.9 Penalty under Section 78 is being altered from upto twice the amount of tax to an amount equal to the tax. Moreover, in situations where the taxpayer has captured the true and complete information in the specified records, penalty shall be 50% of the tax amount. The latter penalty (only) shall be further reduced to 25% if the tax dues are paid within a period of one month together with interest and reduced penalty. For assessees with turnover upto ` 60 lakh the period of one month shall be increased to ninety days.
4.10 Section 80 is being amended by substituting section 78 with the words “proviso to section 78” and thus the power to waive penalty shall be available only in cases where the information is captured properly in the specified records.
4.11 The revised position relating to penalties and their mitigation or waiver is summed up in the following table (portion in italics being the changes):
4.12 Power to issue search warrant under section 82 is proposed at the level of Joint Commissioner and the execution of search warrant at the level of Superintendent.
4.13 Provisions relating to prosecution are proposed to be re-introduced and shall apply in the following situations:
(i) Provision of service without issue of invoice;
(ii) Availment and utilization of Cenvat credit without actual receipt of inputs or input services;
(iii) Maintaining false books of accounts or failure to supply any information or submitting false information;
(iv) Non-payment of amount collected as service tax for a period of more than six months.
4.14 There shall be no power of arrest and the prosecution can be launched only with the approval of Chief Commissioner.
5. Service Tax Rules, 1994
5.1 A number of changes have been made in the Service Tax Rules to align the provisions consequent to the introduction of Point of Taxation Rules, 2011. A new rule 5B has been introduced to provide that the applicable rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided.
5.2 It has also been provided that when an invoice has been issued or a payment received for a service which is not subsequently provided, the assessee may take the credit of the service tax earlier paid when the amount has been refunded by him to the recipient or by the issue of credit note, as the case may be.
5.3 The amount stated in rule 6(4B)(iii) for adjustment of excess amount paid by an assessee is being enhanced to ` 2 lakhs.
5.4 A new sub-rule 6A has been introduced in rule 6 to provide that if an amount of service tax has been self-assessed but not paid, the same shall be recoverable alongwith interest under section 87 of the Act. Thus, there shall be no need to resort to the requirements of section 73 for the recovery of such self-assessed amounts.
5.5 The composition rate in sub-rule 7B of rule 6 applicable to in relation to purchase or sale of foreign currency, including money changing, has been reduced from 0.25% to 0.1% and the Proviso has been deleted. Thus, in the case of these services, option of paying service tax on billed charges will not be available.
5.6 All these changes will come into effect from 01.04.2011.
6. Point of Taxation Rules, 2011
6.1 Point of Taxation Rules, 2011 have been framed vide notification 18/2011-ST and made effective from 01.04.2011. These rules determine the point in time when the services shall be deemed to be provided. The general rule will be that the time of provision of service will be the earliest of the following dates:
i. Date on which service is provided or to be provided
ii. Date of invoice
iii. Date of payment
6.2 Consequential changes have also been made in the Service Tax Rules, 1994 to alter the payment of service tax from receipt of payment to provision of service and also to permit adjustment of tax when service is not finally provided.
7. Amendments to Export of Services Rules, 2005
7.1 Globally the taxation of services across different taxing jurisdictions is increasingly moving towards destination-based levy in respect of B2B services while origin-based levy is largely applicable to B2C services. In tune with this practice, certain services are being rearranged as follows:
(i) 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.
(ii) 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 to compliance with other conditions, when they are performed outside India; and
(iii) 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 of goods 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.
8. Amendments to Taxation of Services (Provided from Outside India and Received in India) Rules, 2006
8.1 Corresponding changes, as indicated in respect of Export of Services Rules, 2005, have been carried out by way of rearrangement of the stated services under respective subclauses of rule 3 of the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.
8.2 The changes will, inter-alia, make certain services taxable if the recipient of the service is located in India even when the service is performed outside India. In order to avoid inconvenience in respect of certain services, exemption has been granted vide notification 8/2011-ST to services of transportation of goods by air or road or rail provided to a person located in India when the goods are transported from a place outside India to a destination outside India. Exemption has also been given vide notification 9/2011-ST to the transportation of goods by air service to the extent air freight is included in the customs value of goods in order to avoid taxing this service twice.
9. Amendments to Service Tax (Determination of Value) Rules, 2006
9.1 A new rule (2B) has been inserted vide Notification 2/2011-ST to prescribe the value of service rendered in relation to money changing. The details are explained at Annexure B (point 7) of the D.O.F. No. 334/3/2011-TRU (II) Dated 28th February 2011 which may be referred to.
This amendment shall come into force on 01.04.2011.
9.2 An explanation has been added after rule 5(1) of the Service Tax (Determination of Value) Rules, 2006 clarifying that for the purpose of telecommunication service [Section 65(105)(zzzx)] the value shall be the gross amount paid by the person to whom the service is provided by the telegraph authority. Thus in case of service provided by way of recharge coupons or prepaid cards or the like,
the value shall be the gross amount charged from the subscriber or the ultimate user of the service and not the amount paid by the distributor or any such intermediary to the telegraph authority. This amendment shall come into force on 01.03.2011.
10. Amendments to Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007
10.1 A new sub-rule (2A) is being added in rule 3 in the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 vide Notification 1/2011-ST so as to restrict the Cenvat credit to 40% of the tax paid on services relating to erection, commissioning & installation; commercial or industrial construction and construction of residential complex, in case tax has been paid on full value of the service after availing Cenvat credit on inputs i.e. without availing exemption notification 1/2006-ST dated 01.03.2006. This has been done to ensure that the credit on inputs is not availed of indirectly while availing of the composition scheme.
11. Amendments to Cenvat Credit Rules, 2004
11.1 A number of changes have been brought about in Cenvat Credit Rules, 2004 (Notification 3/2011-CE (NT) dated 01.03.2011). Important changes relating to Service Tax are given at Annexure C of the D.O.F. No. 334/3/2011-TRU (II) Dated 28th February 2011 which may be referred to.
12.1 Notification 26/2010-ST dated 22-6-2010 is being amended by Notification 4/2011-ST and the service tax applicable in respect of „Transport of passengers by air service” is being revised as follows:
(a) Domestic (economy) : From ` 100 to ` 150
(b) International (economy) : From ` 500 to ` 750
(c) Domestic (other than economy) : Standard rate of 10%
12.2 Exemption is being given to services rendered to an exhibitor participating in an exhibition held outside India (Notification No. 5/ST-2011).
12.3 Exemption from service tax is being provided to „Works contract service‟ when rendered for the construction of residential complexes or completion and finishing services of a new complex under Jawaharlal Nehru Urban Renewable Mission (JNURM) and “Rajiv Awaas Yojana” (Notifications No. 6/ST-2011).
12.4 Exemption has been given to the taxable service of general insurance when provided under “Rashtriya Swashya Bima Yojna” (Notifications No. 7/ST-2011).
12.5 Exemption from service tax is being provided to works contract service rendered within a port, or other port or airport in specified areas (Notifications No. 10&11/ST-2011).
12.6 An exemption of 25% from the taxable value is being provided in respect of services rendered in relation to “transport of coastal goods” and goods transported through “national waterways” or “inland water” (Notification No.16/ST-2011).
12.7 Exemptions with retrospective effect have been given by the Finance Bill:
(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 16.06.2005 to 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
12.8 These changes will come into effect on the dates mentioned in the respective notifications or when the bill is enacted and notified, as the case may be.
13. Small scale sector
13.1 Finance minister has announced in his budget speech that individual and sole proprietor assessees with a turnover upto ` 60 lakhs shall not be subject to audit.
13.2 Interest rate for all assessees (including firms and corporate) upto a turnover of ` 60 lakhs shall be 3% less than the prescribed rate.
13.3 The period for making the payment in order to avail the benefit of reduced penalty under the second proviso to Section 78 shall be 90 days for assessees mentioned at paragraph 13.2.
14. SEZ Refunds:
14.1 Notification No. 17/2011-ST has been issued superceding notification 9/2009-ST dated 03.03.2009. The new notification has the following unique features:
(a) Criteria for the determination of “wholly consumed” services have been laid down in the notification, borrowing from the Export of Services Rules, 2005. It has also been specified that all services received by an entity in a SEZ, which does not have any other DTA operations, will constitute “wholly consumed” services.
(b) No service tax is required to be paid ab-initio if the same are meant to be “wholly consumed” within SEZ, including services liable to tax on reverse charge basis under section 66A.
(c) Refund of the remaining services i.e. which are not wholly consumed shall be available on pro rata basis i.e. ratio of SEZ turnover to total turnover.
(d) Suitable rule has been introduced in Cenvat Credit Rules, 2004 to waive the requirements of rule 6 in case of services provided, without payment of tax, to a SEZ unit for its authorized operations.
Board’s D.O.F. No. 334/3/2011-TRU-II, Dated 28th February 2011
Disclaimer: Though care has been taken to reproduce the text from the original form, in case of any inadvertent mistake, the above mentioned D.O. may be referred to.
(Anil Kr. Gupta)