MARCH 03, 2011

Budget' 2011 – Sweeping changes in Service tax!

By CA Pritam Mahure

AFTER perusing the ‘sweeping' changes proposed in the Service tax legislation in this Budget, everyone would believe that Mr. Finance Minister has taken the slogan of Cricket World Cup 2011 “ De ghuma ke ” a bit seriously. The proposed changes are introduction of 2 new services, amendment in 7 existing services, drastic amendments in Cenvat credit provisions, Service Tax Rules, penal provisions etc. In the following paras the author has made an attempt to capture these proposed changes:.

A. Proposed new services (effective from a date to be notified later)

Service tax is proposed to be introduced on two new services as under:

++ Service tax is proposed to be introduced on restaurants having the facility of air-condition ( in any part of establishment at any time during the financial year) and having the licence to serve alcoholic beverages . Service tax would be applicable in cases where the food /liquor is serviced in the premises of the said restaurant (pick up/ home delivery of food would not attract Service tax). Further, as the intention is to tax the ‘services', abatement of 70% would be provided later by way of notification. Consequently, the effective service tax rate on this service would be 3.09% (100*30%*10.30%)

++ Service tax is proposed to be introduced on accommodation in hotels, guest houses etc. if the continuous stay is less than 3 months. Further, the scope of the service would be restricted, by introducing a notification later, to accommodation with declared tariff Rs 1,000 per day or more. From the TRU letter No. DOF 334/3/2011-TRU it appears that the Service tax would be applicable if the declared tariff for accommodation is Rs 1,000 or more even though the actual collection from a particular customer is less than Rs 1,000 for such accommodation. It may be relevant to note that currently the scope of ‘Renting of Immovable Property services' specifically excludes stay in residential accommodation such as hotels , hostels, boarding houses, holiday accommodation, tents, camping facilities .

B. Proposed changes in the existing services (effective from a date to be notified later)

Scope of the following services is proposed to be amended as under:

++ Authorised service station services – At present, Service tax is applicable on the services provided by a ‘ authorised service station' in relation to any service, repair, reconditioning or restoration of motor cars, light motor vehicles or two wheeled motor vehicles. Now, it is proposed that services provided by all persons (whether authorised or not) and in relation to all vehicles (other than three wheeler rickshaw and vehicles meant for goods carriage) would attract service tax.

++ Business Support Services – At present, Service tax is applicable on the ‘Business Support Services' which covers under its ambit services in relation to business or commerce and certain illustrative services. Now, the scope of this service is proposed to be widened further by including ‘operational or administrative assistance in any manner' under its ambit.

++ Club or association services – At present, Service tax is applicable on the services provided by club or association ‘ to its member s'. Now, scope of service is proposed to be widened to include services to ‘any person' (ie members or non-members).

++ Commercial training or coaching services (‘CTC') – At present, unrecognised education imparted by any institute or establishment which issues any certificate or diploma or degree or any educational qualification recognised by law for the time being in force is not liable to Service tax (whereas unrecognised education imparted by institute not issuing certificate /diploma /degree / educational qualification recognised by law attracts Service tax). Now, Service tax is proposed to be levied on unrecognised education imparted by all institutes or establishments (irrespective whether they are recognised or unrecognised). Further, at present pre-school coaching/ training and coaching /training related to educational qualifications recognised by law is excluded from the ambit of CTC services. This exclusion would now be provided by way of a notification (which will be introduced later).

++ Services by legal professionals – At present, Service tax is leviable only on the services provided by a business entity (the term ‘business entity' is defined under section 65 (19b) of the Finance Act, 1994 to include an association of persons, body of individuals, company or firm but does not include an individual) to other business entity in relation to advice, consultancy or assistance in any branch of law, Further, service tax is not applicable on appearance before any court, tribunal or authority.

Now, it is proposed that the applicability of the Service tax would as under:

It may relevant to note that CA, CS and CWA would continue to enjoy exemption from Service Tax in respect of the representational services before any statutory authority as Not. No. 25/2006- ST is not withdrawn.

++ Services by clinical establishments – At present, Service tax is applicable under the category of ‘Health services' on the following services provided by hospital, nursing home or multispecialty clinic :

++ ‘ Check-up or preventive care' in case where the payments are directly made by business entity

++ ‘Health check-up or treatment' in cases where the payments are directly made by insurance company

Now, the aforesaid existing levy is proposed to be replaced with an intention to levy service tax on:

++ ‘Any service' provided by a clinical establishment

++ ‘Diagnosis services' by a clinical establishment

The term ‘Clinical establishment' is defined to mean:

++ Any hospital, nursing home, maternity home etc having facility of central A/c in any part and having more than 25 beds for in patient treatment at any time during the year

++ An entity carrying out diagnosis of diseases with aid of laboratory or other equipment

However, establishment owned or controlled by a government or local authority would not be liable for service tax (this appears to be a candid admission from Mr FM that the Government hospitals do not provide any ‘service'!!!). Further, the idea to levy service tax on A/c hospitals (having more than 25 beds) seems to be based on wrong notion as no major surgery can legally be performed without the facility of A/c.

++ Life insurance services – Currently, service tax is applicable under ‘Life Insurance service' on the service provided in relation to the ‘risk cover' in life insurance. Now, the scope of this service is proposed to be expanded to cover all services including in relation to management of insurance.

C. Proposed amendments in Cenvat Credit Rules, 2004 (effective from 1 st April 2011)

As regards Cenvat Credit Rules, 2004 drastic changes are proposed in the definitions of ‘input' and ‘input services' ‘exempt services'. Also, changes are proposed in the existing Rule 6 which provided option for availment of cenvat credit provider /manufacturer of taxable and exempt goods/services. These changes and their implications for a service provider are discussed in the following paras:

++ Definition of ‘Inputs': ‘ Inputs' is proposed to mean all goods used for providing output services. Goods that do not constitute ‘inputs' have been specifically mentioned as petroleum products, any goods for construction of civil structure (except when they are used in provision of ‘Port services', ‘Other Port services', ‘Commercial or Industrial Construction services', ‘Residential Complex Construction services' and Works Contract services'). Further, goods (including food items) used in guest house, residential colony, club or facility or clinical establishment which are primarily meant for personal use or consumption of employee are excluded.

++ Definition of ‘Input services' – In the new definition, most part of the earlier definition will be retained except the term ‘setting up', ‘activities relating to business such as' which are proposed to be omitted from the definition. Further, services relating to construction of civil structure will not constitute ‘input service' (unless it is provided by a sub-contractor to the main contractor). Further, credit will not be available on the services such as services relating to motor vehicle (insurance, repairs, supply t tangible goods, rent a cab), outdoor catering, beauty parlour services, health services, health and fitness, cosmetic or plastic surgery, club or association, life insurance, health insurance, travel benefits (on vacation) if the services are for personal use or consumption of employee. The backdrop for some of these changes seem to be certain judgments on the term ‘input services' such as Coca Cola India -   ( 2009-TIOL-449-HC-MUM-ST ), GTC Industries - ( 2008-TIOL-1634-CESTAT-MUM-LB ).

++ Definition of ‘Exempted service' – ‘ Exempted service' will include ‘trading' and services which are partially exempt (ie services on which abatement is available). Further, value of exempted services in case of ‘trading' is the difference between sale price and purchase price of the goods traded. The reason for this proposed amendment seems to be the certain judgments on implications of ‘trading activity' on cenvat credit such as Orion Appliances – (2010-TIOL-752-CESTAT-AHM), Faber Heatcraft (2008 (12) STR 252), Metro Shoes – (2008-TIOL-417-CESTAT-MUM).

++ Option available to provider of taxable and exempt services: The following four options are proposed to be made available to a service provider having taxable and exempt activity:

The service provider can opt any one of the aforesaid four options.

++ Deletion of Rule 6 (5) services: 16 specified services in respect of which full cenvat credit was available to the assessee irrespective of his taxable and exempt activities is proposed to be deleted.

++ Services to SEZ: Cenvat credit reversal will not be applicable to a service provider providing services to SEZ without charging service tax (Effective from 1 st March 2011).

D. Proposed amendments in Service tax procedures (effective from 1 st April 2011)

Amendments are proposed in Service tax Rules, 1994 in view of the proposed Point of Taxation Rules, 2011 (‘POTR') which would come in effect from 1 April 2011. POTR defines the point in time when services shall be deemed to have been provided. The point of taxing services is proposed to be changed from ‘receipt basis' to ‘receipt or accrual basis whichever earlier basis'. The rules also clarify the taxable event and applicable rates when service tax is introduced on a new service. POTR also lays down criteria to determine the applicable rate of Service tax in case of change in rate of Service tax.

Further, changes have been proposed in import and export of services in relation to certain services as under:

E. Proposed amendment in interest and penal provisions (effective from 1 st April 2011)

Rate of interest is proposed to be increased to 18% pa from the current rate of 13% pa. However, concession of 3% would be available to assessee having turnover of less Rs 60 lakhs in preceding financial year.

Penalty leviable under section 76 and 78 is proposed to be reduced. Generic penalty leviable under section 77 is proposed to be increased from Rs 5,000 to Rs 10,000. Further, the maximum penalty leviable for delay in filling of service tax return is increased from Rs 2,000 to Rs 20,000 (However, it may be noted that the amount of penalty of Rs 20,000 is the maximum penalty so penalty for delay will continue to be calculated in accordance with Rule 7C of the Service Tax Rules, 1994) . Further, prosecution provisions are introduced for certain specified offenses.

F. Refund of service tax to SEZ unit and developers (effective from 1 st March 2011)

At present, Special Economic Zone (‘SEZ') developers and SEZ units claim refund under Not. No. 9/2009-ST (as amended by 15/2009-ST). The erstwhile Not. No. 9/2009-ST is now superseded by Not. No. 17/2011 dated 1 st March 2011. The new notification has the following features:

++ Exemption : Henceforth, Service tax need not be paid (even under ‘Reverse Charge Mechanism' under section 66A) on the services which are “wholly consumed” within SEZ. It has also been provided that in case an entity in SEZ does not provide any DTA services then all services received by it will constitute “wholly consumed” services. Also, criteria for determination of “wholly consumed” service has been laid down in line with the Export of Services Rules, 2005.

++ Exemption by way of Refund : Refund route will be applicable for services which are not “wholly consumed” within the SEZ. The refund would be available on the pro-rata basis (ie ratio of SEZ turnover to total turnover).

++ Services to SEZ: Cenvat credit reversal will not be applicable to a service provider providing services to SEZ without charging service tax.

G. Other changes (effective from 1 st March 2011)

CENVAT credit of tax paid on taxable services Erection, Commissioning and Installation services, Commercial or Industrial Construction services and Construction of Residential Complex would be available only to the extent of 40% of the service tax paid when such tax has been paid on the full value

of the service after availing CENVAT credit on inputs .

H. Conclusion/ Restart (?)

Recently, the dust was settling on the ambiguities in the Service tax legislation and now Budget 2011 has proposed aforesaid mammoth changes. These changes are bound to add confusion in the minds of the assessee and consultants as well. Further, some of the changes are introduced to align the current legislation in line with proposed ‘Goods and Service Tax' (‘GST') regime. If that is the case then the GST regime seems anything but uncomplicated.