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GOVERNMENT OF INDIA Dated : July 10, 2014 M. Vinod Kumar Dear Madam/Sir, Sub.: Union Budget, 2014-15: Changes in Service Tax - reg. The hon'ble Finance Minister has, while presenting the Union Budget 2014-15, introduced the Finance (No.2) Bill, 2014 [hereinafter, the Bill] in the Lok Sabha on the 10th of July, 2014. Clause 106 appearing in Chapter V of the Bill covers the amendments made to Chapter V of the Finance Act, 1994. In addition, a set of notifications are also under issue. 1.2 After the introduction of the Negative List based tax regime in the services sector in July, 2012, the emphasis has been to ensure stability and continuity. To carry this further, this year, only a limited number of changes have been made in service tax. The main focus in service tax at the present juncture is to widen the tax base and enhance compliance. 1.3 The changes being made by amendments in notifications and rules can be categorized into two broad categories based on when they would come into effect: (i) changes which will have immediate effect; and (ii) changes which are proposed to be given effect to only from 1st October, so as to coincide with the Service Tax Return cycle. As far as statutory amendments are concerned, they would come into effect only from the date on which the Bill receives the assent of the President. Regarding certain amendments proposed for widening the tax base, they would come into effect on a date to be notified after the Bill receives the assent of the President. Entries in the Bill and the notifications may be carefully read, for this purpose. 1.4 The changes being made are discussed below under three broad categories:
2. Measures to widen the tax base: Broadening the tax base is a fiscal objective justified in itself. Primary objective of the negative list approach which came into effect from 1st July, 2012 was also to broaden the tax base. Keeping this in view, the negative list and exemptions have been reviewed. 2.1 Review of the Negative List of services: 2.1.1 Service tax leviable currently on sale of space or time for advertisements in broadcast media, namely radio or television [section 66D (g) read with section 66B], is proposed to be extended to cover such sales on other segments like online and mobile advertising. The new levy would further extend to advertisements in internet websites, out-of-home media, on film screen in theatres, bill boards, conveyances, buildings, cell phones, Automated Teller Machines, tickets, commercial publications, aerial advertising, etc. Sale of space for advertisements in print media, however, would continue to be in the negative list and hence remain excluded from service tax. Print media is being defined in service tax law for the purpose. This change will come into effect from a date to be notified later, after the Finance (No.2) Bill, 2014 receives the assent of the President. 2.1.2 Service tax is proposed to be levied on services provided by radio taxis or radio cabs, whether or not air-conditioned [section 66D (o)(vi)]. The abatement presently available to rent-a-cab service would also be made available to radio taxi service, to bring them on par. A definition of radio taxi is being included in the exemption notification No.25/2012-ST. Service tax on radio taxi services will come into effect from a date to be notified later, after the Finance (No.2) Bill, 2014 receives the assent of the President. 2.2 Review of General Exemptions: The following changes are being made as a result of the review of exemptions. 2.2.1: Exemptions being withdrawn [Notification 25/2012-ST]:
2.2.2 Rationalization of Exemptions: (i) Education: At present, all services provided by educational institutions [providing educational services specified in the negative list] to their students, faculty and staff are exempted [section 66 D (l) of the Finance Act, 1994]; this will continue. However, in respect of services received by such educational institutions, presently, exemption is being operated through the concept of 'auxiliary educational services' [Sl.No.9]. Doubts have been raised and clarifications have been sought regarding the scope and meaning of "auxiliary educational services'. To bring clarity, it is proposed to omit the concept of 'auxiliary educational services' and specify in the notification, the services which will be exempt when received by the eligible educational institutions. Accordingly, the following services received by eligible educational institutions are exempted from service tax: (i) transportation of students, faculty and staff of the eligible educational institution; (ii) catering service including any mid-day meals scheme sponsored by the Government; (iii) security or cleaning or house-keeping services in such educational institution; (iv) services relating to admission to such institution or conduct of examination. Further, for the purposes of this exemption, 'educational institution' is being defined in the exemption notification 25/2012-ST as institutions providing educational services specified in the negative list. It may be noted that the scope of exemption remains the same as earlier in the case of services provided by eligible educational institutions; in the case of services received by the eligible educational institutions, exemption will be available only in respect of the services specified as above. Further as a rationalization measure, the exemption hitherto available to services provided by way of renting of immovable property to educational institutions stands withdrawn, with immediate effect. (ii) Services ordinarily provided by a Municipality:
(iii) Services by a Hotel, Inn or Guest House:
2.3 Service tax on service portion in Works Contracts: In Rule 2A of the Service Tax (Determination of Value) Rules, 2006, category 'B' and 'C' of works contracts are proposed to be merged into one single category, with percentage of service portion as 70%; this change will come into effect from 1st October, 2014. This rationalization by way of merger of categories has been made to avoid disputes of classification between these two categories. [Notification No.11/2014-ST]. 3. Measures for compliance enhancement: 3.1 Variable rates of Interest: To encourage prompt payment of service tax, it is being proposed to introduce interest rates which would vary on the extent of delay [Notification No.12/2014-ST]. Simple interest rates per annum payable on delayed payments under section 75, are prescribed as follows:
This new interest rate regime will become operational only on 1st October 2014. In other words, upto 1st October, 2014, the rate of interest of 18%, presently applicable, will continue to apply. The variable interest rates will apply only on or after 1st October, 2014. As an illustration, assume a case where service tax became due, say, on the 6th of July, 2012 and the assessee pays the dues on 6th of December, 2014. In such a case, the interest to be charged would be as below:
As specified in the proviso to section 75, three per cent concession on the applicable rate of interest will continue to be available to the small service providers. 3.2 E-payment: E-payment of service tax is being made mandatory with effect from the 1st Oct 2014. Relaxation from e-payment may be allowed by the Deputy Commissioner/Asst. Commissioner on case to case basis [Notification 09/2014-ST]. 4. Facilitation measures: 4.1.1 Section 67A in the Finance Act, 1994: The Explanation to Section 67A is being amended to enable the Government to prescribe rules for determination of rate of exchange for calculation of taxable value in respect of certain services. Rules will be prescribed in due course, after the Bill receives the assent. This amendment has been proposed in view of requests from the trade andindustry to delink the conversion from the notified Customs rates of exchange as at present. Any suggestions would be welcome before the Rules are notified. 4.1.2 Service Tax Rules: [changes to have immediate effect]: Service provided by a Director to a body corporate is being brought under the reverse charge mechanism; service receiver, who is a body corporate will be the person liable to pay service tax. This is in view of requests by body corporates such as the Reserve Bank of India.Services provided by Recovery Agents to Banks, Financial Institutions and NBFC is being brought under the reverse charge mechanism; service receiver will be the person liable to pay service tax. [Notification 9/2014 -ST and 10/2014-ST] 4.1.3 Place of Provision of Services Rules: [changes to take effect from 1st October, 2014].
4.1.4 Point of Taxation Rules: [Notification No.13/2014-ST] The first Proviso to rule 7 of the Point of Taxation Rules (POTR) is being amended to provide that point of taxation in respect of reverse charge will be the payment date or the first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier. This amendment will apply only to invoices issued after 1st October, 2014. A transition rule is being prescribed (new rule 10 of POTR). 4.1.5 CENVAT Credit Rules: [Notification No.21/2014-CE (N.T.)]
4.1.6 Notification 26/2012- ST prescribing Taxable Portion: [Notification No. 8/2014-ST]
4.1.7 Simplification of Partial Reverse Charge mechanism: [Notification No.10/2014-ST] In renting of motor vehicle, where the service provider does not take abatement the portion of service tax payable by the service provider and service receiver will be modified as 50% each. This change will come into effect from 1st of October 2014. 4.1.8 Advance Ruling: The resident private limited company is being included as a class of persons eligible to make an application for Advance Ruling in service tax [Notification No.15/2014-ST]. This change will come into effect immediately. 4.1.9 SEZ – procedural simplification: [changes to have immediate effect] Certain changes are being made in Notification No 12/2013-ST dated 1st July 2013 [vide amending Notification No.07/2014-ST] as follows:
4.1.10 Input Service Distributor: Rule 7 of the CENVAT Credit Rules, 2004, provides for the manner of distribution of common input service credit by the Input Service Distributor. This was amended vide notification No. 05/2014-CE (N.T.) amending, inter-alia, rule 7(d), to provide for distribution of common input service credit among all units in their turnover ratio of the relevant period. Some interpretational issues were raised regarding the amendment such as: (i) due to the use of the term 'such unit' in rule 7(d), the distribution of the credit would be restricted to only those units where the services are used, and (ii) the credit available for distribution would also get reduced by the proportion of the turnover of those units where the services are not used. These issues are being clarified vide Circular No. 178/04/2014-ST, dated 10.7.2014 illustrating the effect of the amendment carried out vide notification No. 05/2014-CE (N.T.). It clarifies that the amended rule 7 allows distribution of input service credit to all units (which are operational in the current year) in the ratio of their turnover of the previous year/previous quarter as the case may be. 4.2 Exemptions to the social sector: [changes to have immediate effect] 4.2.1 All life micro-insurance schemes approved by the Insurance Regulatory Development Authority (IRDA), where sum assured does not exceed Fifty Thousand Rupees are being exempted from service tax [entry at Sl. No.26A of Notification 25/2012-ST amended by Notification No.06/2014-ST]. 4.2.2 Transport of organic manure by vessel, rail or road (by GTA) is being exempted by amending entries at Sl.No. 20 and 21. Therefore, organic manure will be on par with fertilizer which is already exempted. 4.2.3 Services by way of loading, unloading, packing, storage or warehousing, transport by vessel, rail or road (GTA), of cotton, ginned or baled, is being exempted [amendment of entry at Sl. No. 20 & 21 and 40]. 4.2.4 Services provided by Common Bio-medical Waste Treatment Facility operators by way of treatment, disposal of bio medical waste or processes incidental to such treatment or disposal are being exempted [new entry at Sl. No.2B]. 4.2.5 Service provided by Employees' State Insurance Corporation (ESIC) during the period prior to 1.7.2012 is proposed to be exempted from service tax. This exemption for services by ESIC would come into effect from the date the Finance (No.2) Bill, receives the assent of the President. It may be noted that any service provided by ESIC to persons governed under the Employees' Insurance Act, 1948 is already exempt for the period commencing from 1.7.2012 [Sl. No. 36]. 4.3 Technical exemptions: [changes to have immediate effect] 4.3.1 Specialized financial services received by RBI from outside India, in the course of management of foreign exchange reserves, e.g. external asset management, custodial services, securities lending services, are being exempted [new entry at Sl. No. 41 of 25/2012-ST]. 4.3.2 Services provided by the Indian tour operators to foreign tourists in relation to tours wholly conducted outside India are being exempted. This exemption is available to Indian tour operators in cases where they organize tours for a foreign tourist wholly outside India, e.g., service provided to a Sri Lankan for a tour conducted in Bhutan. It may be noted that service provided by a tour operator in relation to an inbound or an outbound tours continue to be leviable to service tax [new entry at Sl. No.42]. 5. Amendments in Chapter V of the Finance Act, 1994: The amendments proposed vide the Bill in Chapter V of the Finance Act, 1994 would come into effect on the date the Bill receives the assent. In some cases, the amendments would be given effect from a date to be notified after the assent [section 65B, 66D and 67A] 5.1 Central Excise provisions made applicable to service tax: Section 83 is being amended to prescribe that the provisions of following sections of the Central Excise Act shall apply, mutatis mutandis, to service tax,-
5.2 Other Amendments: 5.2.1 Section 73 is being amended to prescribe time limits for completion of adjudication as already exists in Central Excise. This time limit would need to be followed, as far as possible. 5.2.2 Section 80 is being amended to exclude the reference of first proviso to section 78. This amendment, in effect, removes the power to waive the 50% penalty imposable in cases where service tax has not been levied, not paid or short levied or short paid on account of suppression of facts or willful misstatement but details of transactions are available in the specified record. 5.2.3 Section 82(1) is being amended, along the lines of section 12F (1) of the Central Excise Act, so that Joint Commissioner or Additional Commissioner or any other officer notified by the Board can authorize any Central Excise Officer to search and seize. 5.2.4 Sub-section (6A) of section 86 is being amended to omit the words “for grant of stay or”. 5.2.5 Section 87 is being amended to incorporate power to recover dues of a predecessor from the assets of a successor purchased from the predecessor as it is presently provided for in section 11 of the Central Excise Act, 1944. 5.2.6 Section 94 is being amended to obtain rule making powers (a) to impose upon assessees, inter alia, the duty of furnishing information, keeping records and making returns and specify the manner in which they shall be verified; (b) for withdrawal of facilities or imposition of restrictions (including restrictions on utilization of CENVAT credit) on service provider or exporter, to check evasion of duty or misuse of CENVAT credit; and (c) to issue instructions in supplemental or incidental matters. 6.1 Changes explained above are not intended to be exhaustive and the analysis of changes does not have legal validity; analysis of changes wherever provided is merely meant to highlight certain aspects of these changes. The text of the statutory provisions and the wordings of the notifications should be read carefully for interpreting the law. 6.2 Field formations are requested to go through the changes made in the Budget carefully. Any issues or doubts which may arise or any omission/error observed may kindly be brought to the notice of the undersigned, Shri J. M. Kennedy, Director, TRU at jm.kennedy@nic.in or Shri G.D.Lohani, Director, TRU, at gd.lohani@nic.in as soon as possible. I would like to express my thanks for the pre-budget suggestions and inputs which have been received from certain field formations. I would request that similar inputs be continued to be forwarded in future also. With regards, D.O.F. No. 334/15/2014-TRU (M. Vinod Kumar) |