MARCH 3, 2010

Union Budget 2010: Service tax proposals – Less said, widely impacted

By Pritesh Chhajed and Meghna Bhavsar, CA

EVEN though, India survived the global economic slow down remarkably and has withered the influence of such global economic crisis much better than the economies of the west, India is still facing the hanging swords of growing fiscal deficit, increase in essential commodities and declining tax collections. With the backdrop of these deadly weapons, the Finance Minister presented the Union Budget 2010.

As expected, in order to maintain the balance between the increasing fiscal deficit and declining tax collections, the Finance Minister has announced various major tax changes. To meet up the estimated revenue loss of Rs. 26 thousand crores from direct tax, key Indirect tax changes have been announced to increase indirect tax revenue by 47 thousand crores. The major area which drew the attention is the service tax wherein the massive restructuring has been proposed.

Despite of the expectations for complete roll back of stimulus package to maintain the balance between the tax collection and inflation, there has been a marginal rate hike of 2 percent in Excise duty has been proposed and prevailing service tax rate of 10 percent has not altered. Further, to enable systematic, smooth and successful transformation of the current indirect tax system into the proposed GST model, GST implementation has been postponed to 1 April, 2011.

In order to align with the GST regime where majority of the services are intended to be brought under the tax net, eight new services have been introduced in the service tax basket:

Promotion, marketing or organizing of games of chances;

Health check up schemes undertaken by medical establishments for employees of the corporate entities and medical treatment charges paid by Insurance companies under Health insurance schemes;

Outsourcing of the maintenance of medical record of the employees by the corporate entities;

Promotion of ‘Brand' associated with the goods, services, events, business entity etc.;

Services of permitting the commercial use or exploitation of any event organized by a person or an organization;

Services provided by Electricity Exchanges;

Services related to copyright for cinematographic film and sound recording;

Special services provided by builders such as preferential location or external or internal development of complexes for additional charges.

In addition to above, various existing services' scope have been modified / clarified for expanding the service tax net. Following major service categories have been considered for the amendment.

Information Technology Software Services

Currently, IT software service is taxable only in cases where the service is provided to a person to be used further in business or commerce. However, with the proposed amendment, such service would be taxable even when it is not intended for commercial purpose. Further, the Notification has been issued to notify that packaged IT software would be exempt provided that applicable customs duty or excise duty as the case may be has been paid for. However, despite of this amendment, the basic anamoly existing in current with respect to the dual levy of services tax as well as VAT on software remains unattended.

Commercial Training or Coaching Service:

Presently various disputes were pending requiring the clarification in respect of the term ‘commercial training'. In this regard, it has been clarified that irrespective of profit motive, if these services have been provided for a consideration, service tax would be applicable.

Construction of Complex Service and Commercial or Industrial Construction Services:

On account of the different patterns of execution, terms of payment and legal formalities included in the construction related agreements and various judgments giving the diverse of opinions, huge amount of confusion, disputes and discrimination in terms of service tax payments was built in. In this regard, the definition has been amended to cover deemed taxable service in a situation where the whole or part of the consideration is paid before completion of construction i.e. issuance of completion certificate by competent authorities. What this means is, in case of booking of a residential flat or a commercial block during its construction and part or whole of the payment is made before completion, service tax would have to be charged on the consideration received for such transaction. This will have wide impact as it treats the construction activity as a taxable service on the part of the builder provided to the buyer.

Oil and Gas Sector:

The extension of jurisdiction for the purpose of service tax was a matter of confusion after the 2009 amendment made in the notification no. 1/2002 relating to Continental Shelf and Exclusive Economic Zone of India. Due to this confusion, there was no consensus amongst the service providers and the recipient of services relating to applicability of service tax on oil exploration activities from installation, structures and vessels in Continental Shelf of India (CSI) and Exclusive Economic Zone (EEZ). A new notification has been issued specifying the area in the CSI and EEZ and the corresponding activities to which the service tax jurisdiction extends. Accordingly, services provided by or to the installations, structures or vessels constructed for prospecting / extraction / production activities are covered. Furthermore, services provided for all the activities in relation to construction of installation, structures and vessels in the entire CSI and EEZ have been covered in the notification. With this, there is very less possibility of any confusion as regards coverage of any particular service provided in CS and EEZ under the tax ambit.

Renting of immovable property:

In April 2009, the Delhi High Court had pronounced its judgment with regard to the writ petitions filed by retailers' association on the subject matter of applicability of service tax on renting. The High Court, based on the wordings of the definition as existed, held that applicability of service tax can only extend to services provided in relation to renting of immovable property and not on the renting activity per se. As expected, the Government has now amended the definition to explicitly cover the renting activity, that too retrospectively. The definition has been now amended to cover any service provided by renting out the immovable property. The amendment is proposed to be made effective retrospectively i.e. from the introduction of levy of service tax on renting. Once the Finance Bill 2010 is enacted this amendment would be in effect and would have wide implications, as based on the order passed by the Delhi High Court, the industry have discontinued payment of service tax on renting of immovable property from April 2009.

Transport of goods by rail:

The exemption on services provided by Government railways in relation to transport of goods by rail has now been withdrawn. Hence, service tax would not be applicable on the freight charged for transport of goods by rail, thereby increasing the transportation cost, unless the service recipient is in a position to avail set off of applicable service tax. An abatement of 70% is however available on the freight amount.

Furthermore, government has also aligned the terms used in the refund notification in line with the CENVAT Credit Rules in order to avoid any interpretation issues being raised by refund sanctioning authorities while granting of refund to the service exporters.

The Finance Minister avoided mentioning the detail of service tax proposals during his Budget speech to save precious time of the House, which appears to be negative and impacting number of industries.