Trade Notice No. 3/2012 – Service Tax
Dated 28 .03.2012
Trade and all concerned are informed that The Finance Minister has introduced the Finance Bill 2012 on 16TH March 2012. Clauses 143 to 145 of the Finance Bill, 2012 cover the legislative changes relating to Service Tax. Changes have also been made in the rules as well as exemptions. A number of other changes are slated to be introduced in subordinate legislation at the time the legislative provisions are operationalized.
The highlights of all these changes are indicated below. For full details, relevant provisions of the Finance Bills should be referred to, which are available in the following websites:
A. Rate changes:
1. The rate of Service tax is being changed to 12%
2. Consequent changes have also been made in composition rates as follows:
i For life insurance: 3% for the first year premiums while retaining the rate @1.5% for the subsequent years(simultaneously restoring full Cenvat credit);
ii Money changing: raising the existing rates proportionately by 20%;
iii Distributor or selling agent of lotteries: Raising the specified amounts proportionately and suitably rounded off to Rs 7,000 and 11,000;
iv For works contracts from 4% to 4.8%.
3. The rate for Cenvat reversal for exempt services has been revised likewise from 5% to 6% in Rule 6(3) of Cenvat Credit Rules (CCR), 2004.
4. The dual tax structure for air transportation: partly specific, partly ad valorem - is being replaced with a uniform ad-valorem levy at standard rate with an abatement of 60% on all sectors and all classes.
5. All this changes will be effective from 1st April 2012
B. Taxation of services:
B.1. Negative List:
1. There is shift in the way services are proposed to be taxed in future. Taxation will be based on what popularly known as “Negative List of Services”.
2. It means that if an activity meets the characteristics of a “service” it is taxable unless specified in the Negative list, comprising 17 heads listed in proposed new section 66D, or otherwise exempted by a notification issued under section 93 of the Act. Most of the 88 exemptions at present will be either rescinded, being no more needed, or modified in some manner, or merged in a mega notification, leaving the final tally of exemptions to just 10.
3. The word “service” is defined in clause (44) of the new section 65B. This will also include certain activities that have been specified as declared services in section 66E. Most of these declared services are presently taxed as positive list.
4. The new charging section is contained in section 66B and levies taxes on all services, other than those in the negative list, provided or agreed to be provided in the taxable territory by one person to another.
5. The entire concept, including the key to understanding the various dimensions of the new taxation, together with answers to possible questions, is contained in a detailed draft Guidance Paper: A (GPA for short). The negative list, the mega-exemption notification and list of other exemptions, being retained,
6. On the coming into force of the new provisions, the earlier provisions contained in sections 65, 65A, 66, 66A will cease to apply but will remain relevant in respect of services provided prior to the coming into force of the new provisions.
Place of Provision of Services Rules, 2012:
7. An important component of the proposed changes is the introduction of the Place of Provision of Services Rules, 2012, which have been released for comments and feedback for the time being. Another draft Guidance Paper-B, or GPB for short, has also been issued explaining all the various aspects relating to these rules ( detailed can be seen in draft guidance para)
8. The new rules will replace the existing Export of Services Rules, 2005 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. Rule 5 of the export rules will be incorporated in Service Tax Rules.
B.3. Other related changes:
9. The transition to Negative List will require a number of other changes, in particular, movement away from service-specific provisions in rules and notifications. Many other changes are also being timed with the introduction of negative list, including most of the new exemptions. These changes are as follows:
B. 3(I). Service Tax Rules
10. Besides complying with some revised drafting needs due to negative list, the rules will need changes in respect of person liable to pay tax: to provide for recipient persons relating to services provided to business entities by government, advocates or arbitrators, change in services provided from non-taxable territory, some changes to services provided
by GTA and the deletion of all those services that are now exempt e.g. mutual funds agents and distributors.
11. Since the Export Rules will cease to apply, the required provisions will be incorporated in Service Tax Rules. A transaction will qualify as export when it meets following requirements:
i The service provider is located in Taxable territory;
ii Service recipient is located outside India;
iii Service provided is a service other than in the negative list.
iv The Place of Provision of the service is outside India; and
v The payment is received in convertible foreign exchange
B. 3(II). Valuation Rules
12. Negative list will require movement away from service-specific provisions. As such, the abatements under Notification 1/2006-ST and composition rate under the Works Contract Rules, 2007 will need some reformulations.
13. A new valuation rule is being introduced to substitute the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The value of the Works Contract is proposed to be redefined, as follows:
i As at present, first determination will be the value of service being the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose;
ii If value of goods is not intimated to State VAT, the assessees can still calculate the actual value of goods and the same will be relevant to deduce the value of the service involved in the works contract;
iii If the value is not so deduced, and not merely as an option, the value shall be specified percentage of the total value as follows:
a. for original works: 40% of the total amount;
b. other contracts: 60% of the total amount;
c. for contracts involving construction of complex or building for sale where any part of the consideration is received before the completion of the building: 25% of the total amount
14. Original works will include all new constructions and all types of additions and alterations to abandoned or damaged structures to make them workable.
15. The total amount will be gross amount plus the value of any material supplied under the same contract or any other contract.
16. The input tax credit on goods forming part of the property on which VAT is payable shall not be available as they are not used in the provision of service, which is totally independent of the deemed sale. However taxes paid on capital goods and input services will be available including in respect of iii.c of para 13 above.
17. Likewise a new Rule 2C is being introduced, for determination of value of taxable service involved in supply of food and drinks in a restaurant or as outdoor catering. The value is being adjusted such that the industry is able to utilize credit on capital goods, specified inputs (other than chapter 1 to 22 i.e. foods and beverages) and input services. Thus the taxable portion is being raised but the move is expected to be business-friendly.
18. The revised taxable portion shall be as follows:
19. Further, it is proposed to amend Rule 3 of valuation rules to provide that ‘prescribed manner’ in Rule 3 will be applicable only in the cases where valuation is not ascertainable.
20. Rule 6 of Valuation Rules prescribes inclusions and exclusions to the taxable value. Following changes are being made here:
i Sub-rule (1) to include “any amount realized as demurrage, or by any other name, for the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service”. This change will become relevant in the context of negative list where such amounts may be collected in the name of demurrage but will actually be in all respects a service.
ii In sub-rule (2) clause (iv) regarding exclusion of ‘interest on loans’ is proposed for substitution with “interest on (a) deposits; and (b) delayed payment of any consideration for the provisions made (services/goods)”.
iii Under the list of exclusions in sub-rule (2) from taxable value “accidental damages due to unforeseen actions not relatable to the provision of service” is being added. This again is in view of the negative list approach to taxation of services and to confine inclusions of demurrages to those under category I above and not beyond.
21. In the Negative List approach, Rule 7 may not be required; therefore it is proposed to omit the same.
B.3 (III). Abatements:
22. Certain changes are proposed to be introduced in the abatements along with negative list.
23. The existing and new abatements shall be as follows:
B.3 (IV) Cenvat Rules:
24. Cenvat rules will require some changes in the light of negative list. First of all the service-specific references in the rules by clauses will be replaced by broad descriptions retaining the essence of the existing provisions.
25. Due to the fact that exports will cease to be a taxable service per se, changes are being made to incorporate the concept by changing the definition of output service such that it includes exports of service and that too without payment being received until the period available under the RBI requirements. This will allow continuation of the benefit of not reversing the input tax credits for exports without treating them exempt until the period specified for realizing export proceeds.
26. Interest on loans, advances will now be an exempt service. For the banking and financial sector, provisions are available to reverse credits up to 50% in rule 6(3D). It is being proposed to change this formula to actual basis, the value of service being net interest i.e. interest earned less interest paid on deposits, subject to a minimum of 50% 0f interest paid on deposits. For the non-financial sector it is being proposed that they may reverse credits on gross interest basis.
B. 3(V). Rebate of service tax on export of goods:
27. The scheme for electronic refund of service tax paid on taxable services (eighteen different taxable services) used for export of goods at the post-manufacture /post-removal stage has been made operational since 3rd January, 2012,
28. The scheme is operated at present as a general exemption under section 93(1) of the Finance Act, 1994. To strengthen the electronic refund further, it is proposed to amend section 93A of Finance Act, 1994. After its enactment, Notification 52 /2011-ST dated 30/12/2011 concerning refund service tax paid on export of goods at the post-manufacture/ removal stage, will be placed under this section.
29. This means that in future, service tax refunded will be recoverable, without any time bar from the exporter, against whose shipping bill, sale proceeds have not been received from abroad. Moreover the service-specific exemption will be revisited and suitably altered.
B.3 (VI) SEZ changes:
30. There are no changes at present. However service-specific criterion for determination of services provided exclusively within the SEZ shall be taken care at the time of introducing negative list.
C. Other legislative changes:
C.1. General Changes
1. In Explanation to section 67, definition of money, in clause (b), is proposed for omission as nearly the same definition shall be available in section 65A for capturing the meaning of ‘service’.
2. A new section: 67A is being inserted to prescribe the relevant date for the application of rate of exchange, valuation or rate of service tax. Rule 5B of ST Rules, which covers this aspect partially will be deleted.
3. Special audit provisions, available at present by way of section 14AA of the Central Excise Act and made applicable to Service Tax by way of section 83, are being replaced by a new section: 72A, giving comprehensive powers for such audit relevant for service tax purposes.
4. The provisions of section 73 are being amended as follows:
i The period for issue of demands in normal situations is being raised from 12 months to 18 months. This is being done to take care of the shorter period available due to the periodicity of the new return EST-1 (to replace ST-3 and discussed later) being reduced to 1 month for large assessees from the existing 6 months and to have the benefit of audited accounts available for the purpose of scrutiny of returns;
ii A new sub-section (1A) is being inserted to save the botheration of retyping the same charges (and save paper) when a follow-up demand is given for a period subsequent to the previous notice(s) on same grounds;
iii Reference to sub-section (3) is being deleted in sub-section (4A) so that the latter section will not overrule the earlier;
5. Provisions relating to Settlement Commission are being brought in the Service Tax by adding sections 31, 32 and 32A to 32P of the Central Excise Act in section 83. On the date of the enactment of the Finance Bill, notification containing Service Tax (Settlement of Cases) Rules, 2007 along the lines of Central Excise (Settlement of Cases) Rules, 2007, will come into effect. This should encourage quick settlement of disputes and save the business from the worries of prosecution in certain situations.
6. The periods for filing appeals in service tax are being aligned with Central Excise. These are captured by relevant amendments in sections 85 and 86. New limitations will apply to decisions or orders passed after the date on which Finance Bill, 2012, receives the assent of the President.
7. At present in service tax, appeals against the order of commissioner (appeals) lie before the Tribunal; whereas in Central Excise, a revision mechanism is available to hear certain specified matters i.e. credit of any duty allowed to be utilized towards payment of excise duty on final products, rebate on exports. It is proposed that this revision mechanism may also be made available for service tax, to the extent applicable. Accordingly, Central Excise provisions relating to revision mechanism (section 35EE of Central Excise Act) are being made applicable to service tax by amending section 83.
8. Clause (a) of section 89 relating to prosecution for non-issue of invoice is being replaced with the words “knowingly evades payment of service tax”.
9. Powers of Advance Ruling Authority to hear cases relating to Cenvat credit will also cover cases of Central Excise duty. This was an anomaly due to the applicability of the then 2002 Cenvat rules only to service tax credits that has been corrected.
C.2. Reverse charge provisions:
10. There are a number of changes relating to reverse charge provisions. First of all, the term “taxable territory” has been defined in the Act and only services provided in taxable territory will be liable to tax.
11. Wherever the service provider is located in J&K but the service is being provided in taxable territory, in terms of the rules, the tax will be collected from the service receiver.
12. Secondly it has been noticed that a number of registrants collect the tax but do not pay the same to the Department. This is a serious loss of the revenue even though the compliant section at the recipient end is often not benefited. To ensure proper collection, while not inconveniencing small business, a new scheme is proposed to be introduced.
13. To give effect to this new reverse charge mechanism, some changes are being proposed: firstly, a proviso is being added to sub-section (2) of section 68 and both the service provider and service receiver will be considered as persons liable to pay the tax on notified taxable services and to the extent specified against each one of them.
14. The scheme is being introduced for three services where the service provider is either an individual or a firm or LLP and the recipient is a body corporate. The three services and the portion of tax payable are as follows:
15. It is clarified that the liability of the two persons is for respective amounts and is not influenced by compliance or the lack of it by the other side. Service provider is allowed Cenvat credit of tax paid by him on inputs and input services. Suitable changes will be made in Cenvat Credit Rules, to this effect
16. Even though the above scheme can be given effect on enactment, it is proposed to time it with Negative List approach as a part of the comprehensive reform.
C.3 Penalty waiver for renting of immovable property service
17. Recently, Delhi High Court while examining the issue of constitutionality of service tax on renting of immovable property service in the matter of Home Solutions Retail Vs UOI observed that ‘on the question of penalty due to non-payment of tax, it is open to the Government to examine whether any waiver or exemption can be granted’ [para 73]. Subsequently, in the matter of Retailers Assn. of India Vs Union of India, Honourable apex court, had ruled on October 14, 2011, that litigants should pay 50% of the arrears within six months in three equated instalments. For the balance, solvent surety should be furnished to the satisfaction of the jurisdictional commissioner.
18. Against the above backdrop, it is proposed that penalty may be waived for those taxpayers who pay the service tax due on the renting of immovable property service (as on the sixth day of March, 2012), in full along with interest within six months. Section 80A is being introduced for this purpose. Those who fail to avail the benefit will be treated as if this section did not exist.
C.4. Retrospective changes
19. Rule 6(6A) of the Cenvat Credit rules, introduced last year vide Notification 3/2011-CE (NT), dated 01/03/2011, given effect from February 10, 2006. This will neutralize the investigations or demands for reversal of credits in respect of services provided to SEZs for the past.
20. Exemption provided for the setting up of common facilities for treatment and recycling of effluents and solid wastes by Notification 42/2011-ST dated 25th July, 2011 shall be made applicable effective June 16, 2005;
21. Repair of roads has been exempted from service tax by Notification 24/2009-ST dated 27th July, 2009. By section 97, exemption relating to roads is extended for the earlier period commencing from June 16, 2005;
22. Service tax exemption has also been granted with retrospective effect on management, maintenance or repair service in relation to non-commercial Government buildings from 16th June, 2005 till the coming into force of the negative list when such repair will be exempted by the new mega notification.
23. These changes will come into effect when the Bill receives the Presidential assent barring C.1.1 & reverse charge that will come into effect along with Negative List.
D. Point of Taxation Rules, 2011
1. The time period for issuance of invoice is being increased to 30 days ordinarily and 45 days for banks and financial institutions (to reconcile with the business practice of issuing monthly statement).
2. In case of export of services and eight specified services provided by individuals or firms, the point of taxation is the date of payment. The special dispensation is being shifted from the POT Rules to the Service Tax Rules. This would help provide certainty in the application of rate of tax while retaining the benefit of payment of tax until payment is received.
3. In case of exporters, the period extended by the Reserve Bank of India is now explicitly included in the period for which the tax is allowed to be deferred.
4. The benefit available to individuals and firms to determine POT on the basis of date of payment for eight specified services is being extended to all services in a slightly modified form. The facility will be now available to individuals and partnership firms (including limited liability partnership) up to a turnover of Rs 50 lakh in a financial year provided the taxable turnover did not exceed this limit in the previous financial year. For computing the above limits, the turnover of the whole entity is required to be summed up and not any single registration.
5. The definition of continuous supply of service is being amended to capture the concept in a more wholesome manner, namely the recurrent nature of services and the obligation for payment periodically or from time-to-time.
6. Since the essence of the rule in case of continuous supply of service is the same as the main Rule, the separate rule for continuous supply of service [Rule 6] is 11 being merged with the main rule. Moreover the provisions of rules 4 and 5 relating to changes in rates or application of tax on new services would also be applicable to continuous supply of services;
7. In case of a new levy, no tax is chargeable on services where payment has been received and invoice issued within a period of 14 days. To provide certainty, clause (b) is being amended to specify that invoice should be issued within 14 days of the date of the new levy.
8. The “date of payment” could be a subject of litigation particularly when effective rate changes. A new rule has been created: Rule 2A, keeping in view the impending change in rate effective April 1, 2012 and introduction of Negative List at a later date. In normal circumstances this date shall be the earlier of the dates of entry into books of accounts or actual credit in the bank account (when applicable). However, when there is change in effective rate of tax or a new levy between the said two dates, the date of payment shall be the date of actual credit in the bank account, if the amount is credited through a banking instrument more than four working days after the date of such change.
9. This will have no impact where invoice is the basis for point of taxation. Thus business may be advised to take steps to deposit all advances received up to March 31, 2012 in their bank accounts suitably. Any delay in this regard will lead to charging tax at higher rate.
10. As a measure of added facilitation, an option has been provided to determine the point of taxation in respect of small advances up to Rs 1000, in excess of the amount indicated in the invoice, on the basis of invoice or completion of service rather than payment. Such provision is expected to address the accounting problems faced by service providers in telecommunications, credit card businesses who regularly receive minor excess payments from their customers.
11. A residual rule has been made by way of best judgement to handle situations where the tax-payer is unable to furnish one or more of the details needed i.e. date of payment or date of invoice or both to determine POT.
12. And lastly, the small scale exemption has also been amended recognizing that the first clearances up to `10 lakhs will be in terms of invoices and not mere payments received.
13. These changes come into effect from April 1, 2012.
Authority :Board’s D.O.F.No.334/ 3/2012-TRU New Delhi, dated the 16th March, 2012.
Disclaimer: Though care has been taken to reproduce the text from the original form, in case any inadvertent mistake, the above mentioned D.O. may be referred to.
(Anil Kumar Gupta)