FEBRUARY 27, 2010

Service tax - A peep into key changes in Finance Bill 2010

By Ankur Jain & Anubhav Aggarwal

USUAL trend of budgetary exercise insofar as ‘Service Tax' is concerned continues: inclusion of some new services in taxable domain and expanding scope of certain existing taxable services. However, maintaining current rate service tax rate at 10% is a welcome step. The Finance Minister's microscope did not miss any opportunity and brought under service tax a number of new services and expanded scope of many existing services. Further, some rational changes in the Export of Service Rules, 2005 (‘the Export Rules') have also been brought in.

Eight 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 enactment of the Finance Bill, 2010 (‘the Finance Bill'). Adding of eight new services and expansion of some of existing services will result in an increase of service tax base and most importantly total receipts from service tax during F.Y. 2010-11as compared to the last year.

Services of promoting brand of goods, events, etc have been proposed to be brought under the tax net. Similarly, permitting commercial use or exploitation of any event organised by a person or organisation has been made taxable. Further services provided for maintenance of medical records of employees of a business entity and electricity exchanges would also be taxable.

From a real estate perspective, service-tax is now proposed to be levied on value of (i) additional services provided by the builder such as offering preferential location, etc (ii) lease of vacant land, if construction is undertaken thereon.

Besides, promotion, marketing or organising games of chance, including lottery, is being introduced as a separate service which was earlier included under ‘Business Auxiliary Service'. One of the other key steps is inclusion of health services provided under insurance schemes offered by insurers and health check up undertaken by hospitals or medical establishments for the employees of business entities under the tax net. Health services provided under insurance schemes offered by insurers and health check up undertaken by hospitals or medical establishments for employees of business entities have been brought under tax net.

To bring lucidity, it has been clarified with retrospective effect that renting of immovable property per se is a taxable service. This amendment is obviously intended to overcome the impact arising out of decision of the Delhi High Court, in the Home Solutions case. Further, service tax has also been imposed on renting of vacant land where there is an agreement/ contract between lessor and lessee for undertaking construction of buildings/ structures on such land for furtherance of business or commerce during tenure of lease.

As a setback to already suffering aviation sector, scope of air passenger transport service is being expanded to include domestic journeys and international journeys in any class. In what could be bad news for air passengers, the fares of air travel on all classes in both domestic and international sectors will possibly go up, post the Government's decision to expand scope of air transport services to attract service tax specifically on domestic sector.

Copyrights on cinematographic films and sound recording have been brought under ambit of service tax. However, copyright on original literacy, dramatic, musical and artistic work would continue to remain outside the scope of service tax.

Various exemptions have also been proposed such as accredited news agencies that meet certain criteria for providing news feed online, taxes levied by any Government under Air passenger transport service if shown separately on air ticket or invoice for such ticket issued to passenger, pre-packaged I.T. software with license for right to use the same subject to specified conditions, transmission of electricity, etc.

The Finance Minister has proposed in the Finance Bill to withdraw exemption from service tax, introduced last year, on service provided in relation to transport of goods by rail to be with effect from April 1, 2010.

In a major relief to service exporters, Rule 3(2)(i) of the Export Rules is being deleted. This would mean that requirement for service to be ‘provided from India and used outside India' , is no longer valid. Hence, key requirement for services to be exempted from levy of service tax, under the Export Rules is that, payment should be received in convertible foreign exchange. In effect, all services which are paid for in convertible foreign exchange will now be exempt under the Export Rules. This is a welcome provision, which will go a long way in reducing litigation surrounding export of services and help the cause of exporting community.

In order to boost exports, there are some provisions related to facilitation of refund of accumulated cenvat credit for exporters which is good to hear, in terms of amendment to Notification 5/2006-CE (NT) dated March 14, 2006, which had been issued under Rule 5 of the Cenvat Credit Rules, 2004. Only time will tell whether exporter of services will actually benefit out of this, in terms of the ground realities.

In cases where service tax has been paid before issuance of show cause notice, no penalty can be imposed in lieu of amendment made under Section 73 of the Finance Act, 1994 (‘the Finance Act') by inserting an explanation thereunder. A well conceived and timely amendment which will bring relief to agitated assessees and worried officers.

Thus while 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 the Finance Act. 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.

(The authors are associated with J. Sagar Associates)