February 17, 2014

By Pritam Mahure, CA

INTERIM Budget 2014 has proposed few changes with respect to Service Tax. These changes are discussed in the following paragraphs.

A. The curious case of 'rice' and service tax

The Finance Act 1994 exempts storage or warehousing of 'agricultural produce'. In this context, question had arisen as to whether 'rice' is an 'agricultural produce' or not?

In this regard, the Hon'ble Finance Minister had vide letter dated 9 November 2013 [See DDT 2275 ] clarified that 'paddy' is an 'agricultural produce' but 'rice' is not since it is subject to processing (de-husking etc.) and it will not qualify as 'agricultural produce' and thus its storage, warehousing etc. will be liable to service tax.

Now, as a relief, vide Notification No. 4/2014-ST dated 17 February 2014, the Finance Ministry has exempted storage or warehousing, loading, unloading, packing of 'rice' from service tax.

However, this Notification is half-hearted as the exemption provided will be applicable for period from 17 February 2014 onwards (i.e. prospective), thus implying that the Government considers this service was taxable prior to 17 February 2014.

This leads to a paradox as the Government thinks the storage, warehousing etc. of 'rice' as exempt with effect from 17 February 2014 onwards but taxable prior to 17 February 2014.

Though the interpretation of the Finance Ministry that 'rice' is not an 'agricultural produce' is itself doubtful still the warehousing industry may face notices asking them to pay service tax for the period prior to 17 February 2014.

In our view, it is of utmost importance that the aforesaid services are exempted retrospectively by a section 11C notification.

B. Rice is 'foodstuff'

The TRU vide Circular 177/3/2014 dated 17 February 2014 has clarified that transportation of rice by rail, vessel or Goods Transport Agency will be exempted as 'rice' qualifies as a 'foodstuff'.

It is also clarified by TRU that 'milling of paddy into rice' is already exempt as it is covered as sr. no. 30 (a) of Notification No. 25/2012-ST.

This being a clarificatory circular should have retrospective effect.

C. Exemption from service tax to Cord blood banks

Umbilical cord blood banking is practice of preserving for future use the blood that remains in the umbilical cord at the time of birth. Herein, the cord blood is collected, preserved and used (by child or his relative). Accordingly the patient is charged for collection, preservation, processing etc. of the cord blood.

In this context, there was ambiguity regarding applicability of service tax on the charges collected by such cord blood banks i.e. whether these services should be treated as 'healthcare services' (and thus exempt from service tax) or storage services (and thus liable to service tax)

The Ministry of Health and Family Welfare also had requested the Finance Ministry that services provided by cord blood banks are also 'healthcare services' and should be thus exempt from service tax.

Now, as a relief, vide Notification No. 4/2014-ST dated 17 February 2014, the Finance Ministry has proposed to exempted services provided by cord blood banks pertaining to of collection, preservation, processing, testing etc. from service tax. However, this notification is also prospective i.e. applicable for period from 17 February 2014 onwards.

Thus, the ambiguity/litigation regarding period prior to 17 February 2014 will continue to be pain for the Cord Blood Bank industry unless the benevolent government extends retrospective benefits.