Budget 2017 - Key Service Tax changes in chronological order

FEBRUARY 02, 2017

By Pritam Mahure, CA

IN the Budget Speech itself the Finance Minister stated that, 'I have preferred not to make many changes in current regime of Excise & Service Tax because the same are to be replaced by GST soon'. Thus, Government has maintained generic rate of service tax (of 15%). Some of the key changes in Service Tax are discussed in the following paras in chronological order as:

-  Changes applicable from 2nd February 2017

-  Changes applicable from 1st April 2017

-  Changes applicable from the date of enactment /assent to Finance Bill, 2017

New exemptions and amendment in the Not. No. 25/2012-ST [vide Not. No. 7/2017-ST ]

a. Exemption to the Services of life insurance provided by Army, Naval and Air Force Group Insurance Funds

Services by way of life insurance provided by the Army, Naval and Air Force Group Insurance Funds to the members of the Army, Navy and Air Force under the Group Insurance Schemes of the Central Government provided or agreed to be is being exempted from service tax.

Also, vide clause 127 in the Finance Bill the aforesaid exemption has been given a retrospective effect from 10.09.2004 i.e. date on which when the services of life insurance became taxable.

[Refer Sr. No.26 D of Not. No. 25/2012-ST]

b. Exemption of Services of transport of passengers by air to the selected airline operator

Regional Connectivity Scheme (RCS) Airport is launched by the government with objective to make flying experience affordable for the masses and promote balanced regional growth. To help such objective, exemption is granted to the services provided to the Government by way of transport of passengers, with or without accompanied belongings, by air, embarking from or terminating at a Regional Connectivity Scheme Airport, against consideration in the form of Viability Gap Funding (VGF).

However, aforesaid exemption is available only for the period of one year from the date of commencement of operations of RCS.

[Refer Sr. No.23 A of Not. No. 25/2012-ST]

c. Services by way of two year full time Post Graduate program is exempt

At present, an exemption is available to the services provided by an Indian Institutes of Management (IIMs) by way of two-year full time residential Post Graduate Programme (PGP) in Management for the Post Graduate Diploma in Management (PGDM), to which admissions are made on the basis of the Common Admission Test (CAT), conducted by IIM.

Now the word 'residential' is being omitted from the aforesaid exemption, accordingly now services provided by the IIMs in relation to any of the two year full time PGP course would be exempt.

[Refer Sr. No.9B of Not. No. 25/2012-ST]

Amendments in CENVAT Credit Rule, 2004

a. Value of providing services by way of extending deposits, loans or advances included for certain institution

As per explanation to Rule 6 of the CENVAT Credit Rules, 2004 (CCR)the value of services by way of extending deposits, loans or advances against consideration in the form of interest or discount shall not be included while computing the value for reversal of common input tax credit taken on inputs and input services used in providing taxable and exempted services.

Now, a proviso is inserted to the aforesaid explanation that "this clause shall not apply to a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances." Accordingly, the interest value will be includible for aforesaid entities opting for Rule 3/3A of CCR .

[ Refer Not. No. 4/2017-CE]

b. Period of limitation inserted for the transfer of CENVAT Credit

A manufacturer and a provider of output service can transfer CENVAT credit balance in one factory or business to another factory or business after satisfying certain condition as given in the rule 10 of CCR.

Now, this transfer of CENVAT credit will be required to be approved within a period of three months from the date of receipt of application by the Deputy Commissioner / Assistant Commissioner.

Research and Development Cess abolished

Research and Development Cess Act, 1986(32 of 1986) is proposed to be repealed. As per notification No. 14/2012-ST the service tax leviable on the value of taxable service involving import of technology shall be exempt from so much of amount as is equivalent up to the amount of Research and Development Cess paid on the said import of technology and only the deferential amount is payable as service tax.

However, now the exemption from service tax under notification No. 14/2012-ST would be not available. Accordingly, service tax (including cess) would be applicable to such taxable service.

a. Exemption under Notification No. 41/2016-ST is extended

Typically, the State Government industrial development corporations (IDC) charge one time premium to the person to whom land is transferred on long term lease (mostly more than 30 years). In this regard, notices were issued to IDCs demanding service tax on treating such amounts as rental income.

Now, to clarify non-applicability of service tax, exemption from service tax is provided vide Notification No.41/2016-ST in respect of one time upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable for grant of long-term lease of industrial plots, 30 years or more, by IDC to industrial units.

Also, vide clause 127 of the Finance Bill the benefit of above notification has been made applicable with effect from 01.06.2007 i.e. the date when services of renting of immovable property became taxable.

b. Value of service to not include land value

Delhi High Court in the case of Suresh Kumar Bansal - 2016-TIOL-1077-HC-DEL-ST observed that "The abatement to the extent of 75% by a notification or a circular cannot substitute the lack of statutory machinery provisions to ascertain the value of services involved in a composite contract."

Now, Rule 2A of Service Tax (Determination of Value) Rules, 2006 is amended with effect from 01.07.2010, to provide that value of service portion in execution of works contract involving transfer of goods and land or undivided share of land, as the case may be, shall not include value of property in such land or undivided share of land.

c. Certain changes in Advance Ruling provisions

Authority for Advance Ruling for excise, service tax and customs is merged with Income Tax Advance Ruling Authority.

Also, the existing time limit by which the Authority shall pronounce its ruling has been extended from ninety days to six months on the lines of the Income Tax Act.

d. Process amounting to manufacture shifted to exemption from Negative List

Presently, ' services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption' is covered under negative list and hence not liable to Service Tax.

Now, this exemption is omitted from the Negative List and covered under sr. no. 30 of Notification No.25/2012-ST. Given this, the service tax will not apply, however, this exemption would be optional and not mandatory particularly for job work.

[Refer Not. No. 7/2017-ST]

Way forward

It can be observed that there are very few changes are made in the Service Tax provisions. Most of the amendments are made to clarify certain issues or to make applicable the benefit retrospectively.

Certainly, the Budget 2017 had eye towards proposed GST. It goes without saying that the Government and industry will have to work on war footing as only 150 days are left for introduction of GST (considering 1 July 2017 as the date of introduction of GST).

(CA Vaishali Kharde shared her inputs for this article)

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