JULY 07, 2009

Service tax - key changes in Fiannce Bill

By Anubhav Aggarwal, J Sagar Associates

THE story of ever traversing footprint of Service Tax continues. In line with the annual ritual of tinkering with existing services and introduction of new services since introduction of service tax on Indian corporate horizon, this year budget proposals are no different. The budget proposes to bring 4 new services in tax net and tinkers with the definition of some more existing taxable services. However, current rate of service tax is maintained at 10.30 %, inclusive of education cesses.

The following new services are proposed to be included in the list of taxable services, which would come into effect from a date to be notified after the enactment of Finance Bill.

++ Transport of Goods through Rail

Presently, transportation of goods in containers by rail, by other than Government railways is taxable under Section 65(105)(zzzp) of the Finance Act, 1994 (‘the Finance Act') since 2006. It is now proposed to impose service tax on goods transported by railways, whether in containers or otherwise.

++ Transport of coastal goods, goods through National Waterways & Inland water

Service provided in relation to transport of coastal cargo and goods through inland water including National Waterways.

++ Advice, consultancy or technical assistance in any branch of law

Service provided in the field of law except in case where service provider or service recipient is an individual. Thus tax would be limited to services provided by a business entity to another business entity and services provided by an individual advocate either to an individual or even to a business entity and by a corporate legal firm to an individual would be outside the purview of taxable service. Further service of appearance before any court of law or any statutory authority is also outside this levy.

++ Service of cosmetic or plastic surgery

This service proposes to cover cosmetic surgery and plastic surgery undertaken to preserve or enhance physical appearance or beauty. However, any surgery undertaken to restore or reconstruct one's anatomy or bodily functions affected due to congenital defects, developmental abnormalities, degenerative diseases, injury or trauma is outside the scope of this service.

In addition modifications of definitions of the following services have been proposed:

++ Business Auxiliary Service

Exclusion clause in this service has been modified to provide that it would apply only if the activity results in manufacture of ‘excisable goods'. The impact of this change would be that even if a process of manufacture is undertaken for the customer, but the resultant product does not fall under the category of excisable goods, such as alcoholic beverages, service tax would be attracted.

++ Stock-broker service

The words ‘sub-broker' has been deleted from charging provisions of the Finance Act, which defines ‘stock broker' .  This has been necessitated as in terms of the amended provisions of SEBI Rules,
sub-broker has no independent role as he is not authorized to raise any bill on the clients.

++ Information Technology Software Service

A correction has been carried out in the definition of the taxable service by replacing the word ‘acquiring' by the word ‘providing' , considering the fact that it is the providing of ‘right to use' and not the acquiring of ‘right to use' is a taxable service. This amendment would have retrospective effect from 16 May, 2008 i.e. from the date of coming into force of this service.

Further the Work Contract (Composition Scheme for payment of Service Tax) Rules, 2007 has been amended to provide that composition scheme would be available only to such works contracts where the gross value of works contract includes the value of all goods used in or in relation to the execution of works contract whether received free of cost or for consideration under any other contract. This condition would not apply to those works contracts, where either execution of works contract has already started or any payment (whether in part or in full) has been made on or before the date of the amendment, i.e. July 7, 2009.

Provisions of the Finance Act have been extended to cover installations, structures and vessels in the entire Continental Shelf of India (‘the CSI') and the Exclusive Economic Zones of India (‘the EEZ') as against the existing provisions of designated areas only. Thus, services provided to or from CSI and EEZ of India would be covered within the ambit of taxable service w.e.f. July 7, 2009 which were hitherto applicable to only coordinates notified by the Ministry of External Affairs as designate coordinates.

In order to reduce transaction costs and to boost exports, taxable services of ‘Transport of goods through road' and ‘Commission paid to foreign agents located outside India' are exempted from service tax, if the exporter is liable to pay service tax on reverse charge basis. For other services received by exporters, service tax exemptions continue to be operated through the existing refund mechanism.

In case of assessees using common inputs for taxable and exempt services and availing full Cenvat credit on all such inputs, the amount payable on exempted services have been reduced from 8% to 6% by amending Rule 6(3) of the Cenvat Credit Rules, 2004 (‘the Credit Rules').

Thus while the service tax coverage has been expanded and scope of some services have been aligned to cover slippages, large number of difficulties faced by the industry on account of loosely worded definitions have been left unattended. Already large volume of litigation hitting the appellate authorities and Courts under service tax is adding to the transaction cost. The situation is further aggravated on account of lack of governing act of service tax, which is still administered through Chapter V of the Finance Act, 1994. Hence it is high time that the Government should draft appropriate legislative mechanism for proper administration of service tax and help in reducing transaction cost of the industry.