Volume 5, Issue 13

26th June, 2012

Tax Alert
Recent amendments under Service Tax to give effect to ‘Negative list based Taxation’


As the readers may be aware, there were significant changes on the Service Tax front that were made by the Finance Bill, 2012. The entire scheme of taxation of services has undergone a paradigm shift and now we have negative list based taxation which would be effective from 1st July 2012. In order to further operationalize the new scheme of taxation, there were changes expected in the Rules governing Service Tax law.  

In this regard, Notifications No. 25/ 2012 to 40/2012 under Service Tax and Notification No. 28/2012 under Central Excise are notified by the Government recently and shall be effective from 01st July 2012.

Key highlights of the changes which are effective from 01st July 2012 are as under:

Scope of the exemption Notification widened:

  • Exemption Notification no 12/2012 which was to be effective from 01st July 2012 is superseded and Notification no 25/2012 is notified.
  • The latter exemption Notification has widened the scope of exemptions available.  Few services which are now covered under the exemption are as under:
    • Services provided by firm of advocates providing legal services to any person other than business entity (earlier only individuals were covered).
    • Services provided by individual advocate or by firm of advocates providing legal services to a business entity whose turnover is upto Rs. 1 Million in the previous Financial Year (FY).
    • Services provided to recognized sports body by specified persons for participating in any sporting events (earlier only tournaments and championships were covered).
    • Services provided in airport, port or railways by way of erection or construction of original works is extended to cover commissioning, and installation activities also and the exemption is now available to cover monorail and metro projects.
    • Sub-contractor providing works contract services to another contractor who is also providing works contract services which are exempt.
    • Services by way of transfer of going concern as whole or as independent part thereof.

Place of Provision of Services (POPS) Rules, 2012  notified:

  • POPS Rules are notified which shall replace the existing Export of Services Rules, 2005 (Export Rules) and Taxation of Services (Provided from outside India and received in India) Rules, 2006 (Import Rules).
  • POPS has interalia defined the place of provision of service as under:
    • General Rule – Place of provision of service shall be location of recipient of service.
    • Performance of services – Place of provision of service shall be location where services are actually performed in relation to goods like maintenance of equipment, repairs, etc along with certain exceptions.
    • Location of property – Place of provision of service shall be location of immovable property for services provided in relation to immovable property.
    • Event based services – Place of provision of service shall be location of event for services provided in relation to organizing, admission, etc of specified events.
    • More than one location – Place of provision of service in case where services are provided at more than one location shall be location where greatest proportion of service is provided.
    • For following services the Place of provision of service shall be location of service provider:
      • Services provided by a banking company or a financial institution or a non banking financial company, to account holders.
      • Online information or database access or retrieval services.
      • Intermediary services.
      • Services consisting of hiring of means of transport, upto a period of one month.
    • Goods transportation services: Place of Provision of service for transportation of goods other than by mail or courier shall be the place of destination of goods, whereas in case of services of goods transportation agency the place of provision of service shall be location of person who pays freight, as tax is to be paid by him in such cases.

Burden to pay tax shifted from service provider to service recipient in following cases:

  • Services provided by firm of advocates by way of legal services to business entity or to a person whose turnover is not less than Rs. 1 Million in preceding FY.
  • Services provided by Government or local authority by way of support services subject to exclusions. 

Several exemptions Notifications repealed / withdrawn in lieu of Mega exemption Notification:

  • 81 exemption Notifications which exempts various services based on the specified categories of services is now withdrawn and Mega exemption Notification 25/2012 is notified.

Service Tax Rules amended to give effect to ‘negative list based taxation’. Some of the amendments are as under:

  • The time limit of receiving remittance within the period specified by RBI for services to qualify as export of services is removed.
  • A new Rule 6A specifying the conditions for claiming exemption from Service Tax on export of services is introduced. The conditions are enumerated below:
    • The provider of service is located in the taxable territory.
    • The recipient of service is located outside India.
    • The service is not a service specified in the section 66D of the Act.
    • The place of provision of service is outside India.
    • The payment of such service has been received by the provider of service in convertible foreign exchange.
    • The service provider and service recipient are not merely establishments of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of section 65B of the Act.
  • The Rule also specifies that rebate of Service Tax paid on inputs or input services shall be allowed subject to conditions, limitations, as specified in the Notification.
  • In this regard Notification no 39/2012 is issued which prescribes the conditions, limitations and procedures for claiming rebate on inputs and input services used for export of services.

Refund of Service Tax to a unit in SEZ / developer of SEZ

  • Notification no 17/2011 which prescribes the conditions for claiming exemption / refund on Service Tax for services consumed in SEZ is cancelled and new Notification 40/2012 is notified.
  • Exemption from Service Tax is available for services ‘wholly consumed’ within SEZ and meaning of the term ‘wholly consumed’ is now to be referred to POPS Rules (earlier it was referred to Export Rules).

Cenvat Credit Rules, 2004 (Cenvat Credit Rules) amended to give effect to ‘Negative list based taxation’.  Some of the amendments are as under:

  • The meaning of the term ‘exempt service’ is replaced with a new meaning, which includes services on which no Service Tax is leviable under Section 66B of the Act, exempt services, services whose part of the value is exempt subject to conditions but does not include service which is exported in terms of Rule 6A (1) of Service Tax Rules.
  • The meaning of the term ‘output service’ is replaced with new meaning, which means any service provided by a provider of service in a taxable territory but shall not include:
    • Services specified in the negative list and;
    • Services where whole of Service Tax is to be paid by recipient of service.
  • Credit of Excise duty can be taken on inputs and capital goods even if the same are not received in the premises of the provider of output service.
  • An explanation is inserted in Rule 3 (4) of Cenvat Credit Rules to clarify that Cenvat credit cannot be utilized wherein recipient of service is liable to pay Service Tax under reverse charge basis.
  • A new Rule 5B is introduced which provides refund of unutilized Cenvat credit to service providers who are providing services notified under Section 68 (2) of the Act, wherein recipient of service is liable to pay Service Tax under reverse charge basis and claim credit of such tax paid.
  • Reversal of Cenvat credit in case of transport of passengers or goods by rail to be at 2% of the value of the exempted services.
  • Value specifically defined for trading of securities to be the difference between the sale price and the purchase price of the securities traded or 1% of the purchase price whichever is more.
  • For the purpose of Cenvat Credit Rules, the services which qualify as export of services (as per new Rule 6A of Service Tax Rules) should not be treated as exempt services, if service provider is unable to receive payment within the time prescribed / extended by RBI.  

SKP Comments:

Negative list based taxation has brought most of the services under the tax net which were hitherto exempt or not treated as service.  The new regime of taxation of services is intended to take the country and the economy a step closer towards the introduction of Goods and Service Tax (GST), and in light of this CBEC has made several changes in the Service Tax Rules, Cenvat Credit Rules and withdrawn exemption Notifications, some of which are discussed above.

It is expected that there could be ambiguity within the industry with regard to taxability of services under the new regime of taxation.  In this regard, CBEC has also issued a guidance note - ‘Taxation of Services – An Education guide’ which is aimed at educating the tax payers and the tax administrators on the various aspects of the new concept in order to assist them in gaining better understanding about the new regime.

Given the said amendments, it is evident that the intention of the department to introduce the negative list taxation is from 1st July 2012.  For this purpose, it is important for each taxpayer to go through the amendments and analyze the impact on the streams of income / expense, as there is less than a week’s time for implementation of new regime.