Volume 5, Issue 11


12th June, 2012


Tax Alert
Key Highlights – Service Tax Changes (as per Finance Act, 2012)
     

The Finance Bill, 2012 which was presented by the Hon’ble Finance Minister on 16th March, 2012 had proposed to introduce several new provisions / amend existing provisions of the law. The Bill, after discussion by the Parliament, has finally received the assent of the President of India and has now become an Act from 28th May, 2012 (hereinafter referred to as “the Act” or “Finance Act 2012”).  After the bill has received assent of the President, the Central Board of Excise and Customs (CBEC) has issued Notifications stating the effective date of various amendments in the law.

The Finance Act, 2012 has revamped the provisions relating to Service Tax (introduced by Chapter V of the Finance Act, 1994 and various amendments made thereto) and this alert throws light on some of the important amendments that may be applicable.

Key amendments under Chapter V of Finance Act, 1994:

Retrospective amendments:

  • No reversal of credits in respect of services provided to Special Economic Zones under Rule 6(6A) of Cenvat Credit Rules, 2004 given effect from 10th February, 2006.

Provisions applicable from 1st April, 2012

  • The effective rate of Service Tax increased from 10.30% to 12.36%.
  • The effect of change in rate of tax is summarized as below:

Variations

Service provided before 31st March, 2012

Services provided after 31st March, 2012

Billing done and money received before 31st March, 2012

10.30%

10.30%

Billing done before 31st March and money received after

10.30%

12.36%

Money received before 31st March and Billing done after

10.30%

12.36%

Billing done and money received after 31st March, 2012

12.36%

12.36%

  • The time limit for raising invoice as per Point of Taxation Rules, 2011 is increased from 14 days to 30 days.
  • Upper limit of Rs. 2,00,000 for self adjustment of excess Service Tax paid has been eliminated.
  • Credit of repair, hiring and insurance of motor vehicles will be allowed to specified service providers and manufacturers.

  • Credit of goods can be taken even if they are not brought to the premises of service provider subject to documentation.
  • Credit can be taken based on tax payment challan, in case tax is paid as service recipient.
  • Input service distributor can distribute credit only on pro rata basis to other units proportionate to the respective turnovers.
  • The procedure for claiming refund of inputs / inputs services is simplified under Rule 5 of Cenvat Credit Rules, 2004.

Provision applicable from 28th May, 2012

Applicable rate of exchange in case of export and import of services

  • Prior to introduction of Finance Act, 2012 there was no mechanism to determine the rate of exchange in case of import and export of services. The practice followed by the industry was to consider the rate of exchange prevailing at the time of making payment / receipt of money.
  • Finance Act, 2012 has defined a mechanism to adopt the rate of exchange prevailing at the time when service has been provided or agreed to have been provided and as per the rate mentioned in the Notification issued by the CBEC every month.
  • The Notification defines the rate of exchange for around 10 currencies and is superseded every month and is replaced with new Notification to take into account fluctuations in the currencies market.
  • Accordingly, rate of exchange as mentioned in the Notification is to be adopted for conversion from foreign currency to INR or vice-versa for the purpose of import and export transactions.

Criteria for claiming basic exemption changed:

  • Hitherto, the threshold exemption from levy of Service Tax was available if the first consecutive payments received in a year did not exceed Rs. 10 lacs, excluding the payments received towards exempt service.
  • Now, instead of considering the receipts as the base of exemption, what is to be considered are the aggregate value of invoices issued in a year.

Provisions applicable from 01st July, 2012

Meaning of the term “service” defined in the Act:

  • Hitherto, the Finance Act was silent as to what is “service” and what transactions can be considered as service in order to attract Service Tax.
  • The issue was therefore prone to litigation with regard to interpretation of the term “service” and applicability of Service Tax thereon. Several Courts have explained the meaning of the term “service” and in the case of Magus Construction Pvt. Ltd vs. Union of India 2008 (5) TMI 18 (HC) the Hon’ble High Court has defined service as “an act of helpful activity, an act of doing something useful, rendering assistance or help”.
  • The above issue is now laid to rest by the Finance Act, 2012 by defining the term “service” in the Act.
  • Accordingly, in order to attract Service Tax the transaction must satisfy / fulfil the conditions mentioned in the definition of the term “service”.

Introduction of Negative list and Exemption list:

  • The erstwhile mechanism of taxing a particular activity based on the taxable categories is being removed and is replaced with “Negative list of services”.
  • With a view to give effect to the proposed changes following Sections will not be effective / operational:
    • Section 65 (definitions)
    • Section 65A (classification of services)
    • Section 66 (charging section)
    • Section 66A (reverse charge mechanism)

      And following new Sections are introduced:
    • Section 65B (definitions)
    • Section 66B (charging section)
    • Section 66C (Place of provision of service)
    • Section 66D (Negative list of services)
    • Section 66E (Declared service)
    • Section 66F (Principles of interpretation)
  • Negative list covers 17 services on which Service Tax is not applicable.
  • Further, all the existing exemption Notifications based on specific service categories are combined and / or additional exemptions are being granted and mega exemption Notification is issued. The mega exemption Notification covers 34 services on which Service Tax is not applicable. Some of the exemptions are:
    • Services by way of erection or construction of original works pertaining to airport, port, or railways;
    • A mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of mutual fund;
    • A selling or marketing agent of lottery tickets to a distributor or a selling agent etc.
  • The purpose of introduction of negative and exemption list of services is to bring more and more services under the purview of Service Tax and reduce the hardships with regard to classification of services.
  • Accordingly, if any activity is carried out by one person to another for a consideration and the same falls within the meaning of the term “service”, it shall be subject to Service Tax, unless the activity is covered under Negative or Exemption list.
  • In order to give effect to Negative and Exemption list it is proposed that suitable amendments shall be made in Service Tax Rules 1994, Cenvat Credit Rules 2004. Further, Place of Provision of Services Rules 2012 shall be introduced.

Exemption relating to interest minimized:

  • Exemption is granted to the interest element pertaining to deposits / any other right or obligations.
  • The meaning of the term “interest” was not defined in the Act and accordingly other charges (though not in the nature of interest) were treated as interest by the tax payer and exemption was claimed.
  • Since exemption was claimed on charges which were not in the nature of interest, the Finance Act, 2012 has defined the term “interest” and the same now specifically excludes “charges in nature of service fee or other charges in respect of moneys borrowed or debt incurred or in respect of any credit facility which has not been utilized” from the meaning of the term interest.
  • Accordingly, charges falling in the exclusions such as charges for non-availment of loans, etc shall now be subject to Service Tax.

Refrain from act / tolerate an act for a consideration covered under Service Tax net:

  • Prior to introduction of Finance Act, 2012 there were no specific categories to cover transactions wherein a consideration is paid by one person to another to not to act in a particular manner / to tolerate an act.
  • Such transactions are now covered as declared service and accordingly Service Tax is applicable on such transactions.
  • Hence, non - compete fees paid by one person to another is covered under tax net.

Additional methods of valuation in case of works contract service introduced:

  • Prior to introduction of Finance Act, 2012, there was only one method prescribed for valuing a works contract.
  • Now, valuation can be determined based on service value which can be arrived after deduction of value of materials for VAT purpose.
  • Another method of valuation is introduced which determines the value for the purpose of Service Tax based on specified percentage of the gross amount of the contract. This is on similar lines as those appearing under Sales Tax laws.
  • Moreover, the effective rate of Service Tax under Composition Scheme is increased from 4.12% to 4.944% which is effective from 01st April, 2012.

Inclusion of demurrage charges or charges in similar nature to the value of taxable service:

  • Demurrage is in the nature of detention charges for ship, cargo, etc usually levied on customers if the cargo is kept for the period more than agreed.
  • Prior to introduction of Finance Act, 2012 there was no specific category of service to levy Service Tax on charges in the nature of demurrage.
  • Service Tax (Determination of value) Rules, 2006 is amended to include demurrage charges to the value of taxable service.
  • Further, all charges relating to provision of service beyond the period originally contracted or in any other manner relating to provision of service shall be added to the value of taxable service and subject to Service Tax.
  • Accordingly, demurrage charges shall be subject to Service Tax.

Responsibility to pay Service Tax in certain cases divided between service provider and service receiver:

  • Prior to introduction of Finance Act, 2012, in normal circumstances service provider was liable to Service Tax, whereas in case of taxation based on reverse charge mechanism, service receiver only was liable to Service Tax.
  • A proviso is inserted to Section 68 (2) to define that in case of reverse charge mechanism for specified services, the persons liable to pay Service Tax shall be service provider and service receiver to the extent specified in the notification issued in this regard and some of the cases are as below:

Sr. No

Service

Percentage of tax to be paid by service provider

Percentage of tax to be paid by service receiver

1.

Transport of goods by road by GTA

NIL

100%

2.

Sponsorship

NIL

100%

3.

Services provided by individual advocate

NIL

100%

4.

Supply of manpower

25%

75%

5.

Works contract

50%

50%

Abatement rates redefined for certain services:

  • Notification No. 1/2006 (as amended by various Notifications) was issued to define the abatement rates for various services. The said Notification is not applicable and new Notification is issued which specifies the abatement rates for certain services subject to conditions.
  • For few services, the abatement rates is as below (subject to conditions, if any):

Sr. No

Service

Abatement (%)

1.

Financial leasing services including equipment leasing and hire purchase

90

2.

Transport of passengers by air

60

3.

Transport of goods by road by GTA

75

4.

Transport of goods in vessel from one port to another

50

5.

Renting of motor vehicle designed to carry passengers

60

SKP's comments

Based on the above amendments and the introduction of negative and exemption list of services, which will be effective from 01st July, 2012, more and more services will be brought under Service Tax net widening  the tax base and revenue for the Tax authorities. It may be noted that the companies have less than a month’s time to align themselves with new service tax regime.
In order to give effect to negative list based Service Tax legislation, corresponding changes are awaited in Service Tax Rules, 1994, Cenvat Credit Rules, 2004, and introduction of Place of Provision of Services Rules, 2012. It is advisable that till the time new legislation kicks in the Companies have to gear up and be ready for the change. Based on our experience, following macro-level aspects are likely to be impacted by the new legislation and may need immediate attention:

  • Identifying the impact on profit and loss due to implementation of negative list regime and detailed review of all income and expense stream for analysing the tax impact.
  • Taxability of revenues from various services offerings including matters such as classification, valuation, point of taxation for revenues.
  • Need to relook at long term contracts and ensure proper tax treatment is given to billings over the transition period of first 3-6 months.
  • Scrutinizing all payouts / expenses to analyze new reverse charge obligations and hence, additional compliances, if any.
  • Estimating the new credits available/ lost.
  • Determining need for system changes to capture data requirements of the new regulations.
  • Preparedness towards new return formats and strategizing the manner of disclosures.
  • Determining need for advocacy efforts to address open issues, and assist in filing and representing.