Service Tax changes

7/30/2019 Service Tax changes

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PROJECT REPORT

Change in services Tax by Finance Act, 2012

Introduction of Negative List - Changes in Service Tax law effective 01.07.2012

INTRODUCTION

The Finance Minister announced implementation of a new system for taxation of services

popularly known as the Negative List while presenting the Budget on 16 March 2012 for the

fiscal year 2012-2013. The Govt. of India by clause No.143 to 145 of the Finance Bills 2012, had

proposed constitutional amendment relating to the service tax law and accordingly said Bills has

been received the assent of the president and as a result of which many changes has been taken

place in the Finance Act, 1994 and related Service Tax Rules effective 1st day of July, 2012.

After the enactment of the Finance Bill 2012 on 28 May 2012, Notification was issued on 06

June 2012 notifying 01 July 2012 as the date for implementation of Negative List. This would

mark a paradigm shift from the way in which the services would be taxed w.e.f., 01 July 2012.

That is to say, all services would be subject to service tax unless specified in the Negative List or

are specifically exempted from the levy of service tax.

To implement such a significant change, series of notifications have been issued on 20 June

2012, inter alia, superseding old exemption notifications, introducing new exemptions, amending

the manner of valuing services and to determine the import or export of services etc.


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The Central Government has issued a total of sixteen new notifications numbering from

25/2012-ST to 40/2012-ST on 20th June, 2012. These notifications along with two further

important notification issued on 29th Jun12 will assist in implementation of new regime of

Service Tax based on negative list of services.

All these notifications (dated. 20.06.2012 in particular) shall come into force on the 1st day of

July, 2012.

1) 25/2012-ST 20.06.2012 Mega exemption notification

2) 26/2012-ST 20.06.2012 Abatement Notification to be suitably read with 30/2012 ST

20.06.2012 for reverse charge mechanism

3) 27/2012-ST 20.06.2012 Exemption to services for the official use of foreign Diplomatic

Mission

4) 28/2012-ST 20.06.2012 Place of Provision of Services Rules,2012

5) 29/2012-ST 20.06.2012 Exemption on property tax paid on immovable property

6) 30/2012-ST 20.06.2012 REVERSE CHARGE MECHANISM under sub-section (2) of

Section 68 of Finance Act to be suitably read with 26/2012 ST 20.06.2012

7) 31/2012-ST 20.06.2012 Exemption to specified services received by exporter of goods

8) 32/2012-ST 20.06.2012 Exemption of services provided by TBI/ST 20.06.2012EP

9) 33/2012-ST 20.06.2012 Exemption to Small Service Providers

10) 34/2012-ST 20.06.2012 Rescinding of certain notifications


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11) 35/2012-ST 20.06.2012 Rescinding of notification 32/2007-ST 20.06.2012

12) 36/2012-ST 20.06.2012 Amendment in Service Tax Rules, 1994

13) 37/2012-ST 20.06.2012 Seeks to amend Point of Taxation Rules, 2011

14) 38/2012-ST 20.06.2012 Amendment of Notification 28/2011-ST 20.06.2012

15) 39/2012-ST 20.06.2012 Notification under Rule 6A of Service Tax Rules

16) 40/2012-ST 20.06.2012 Special Economic Zones

17) 41/2012-ST dated. 29.06.2012 grants rebate of service tax paid on the taxable services

which are received by an exporter of goods and used for export of goods

18) 42/2012-ST dated. 29.06.2012 exempts Service provided by the Foreign Commission Agent

to Indian Exporters for procuring order subject to fulfillment of certain conditions specified

therein

19) 43/2012-ST dated. 02.07.2012 exempts the taxable services provided by the Indian Railways

from the whole of service tax levi-able thereon, w.e.f. 02.07.2012 up to and including the 30th

day of Sep 2012 i.e., for 3 months (July12 to Sep12)

Through this document we have made an effort to encapsulate all the relevant and key

amendments that would impact the business and transactions. All implications mentioned in this

note would be applicable w.e.f., 01 July 2012.

These Negative list services as prescribed in new section 66D are:-


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a) Services by Government or Local Authority excluding the following services means these

are taxable:-

(i) Speed Post, Express Parcel post, Life Insurance provided to other than Government.

(ii) Services relating to an Aircraft or a vessel

(iii) Transport of goods or passengers

(iv) Support services other than (i) to (iii) above.

b) Services by RBI

c) Services by Foreign Diplomatic Mission located in India

d) Services relating to agriculture

e) Trading of goods

f) Any process amounting to manufacture or production of goods.

g) Selling of space or time slots for advertisement other than advertisements broadcast by

radio or television.

h) Service by way of access to a road or a bridge in payment of toll charges.

i) Batting, Gambling or lottery

j) Admission to entertainment events or access to amusement facilities


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k) Transmission or distribution of electricity by an electricity transmission or Distribution

agency

l) Services by way of-

(i) Pre-school education and education upto higher secondary school or equivalent

(ii) Education as a part of a curriculum for obtaining a qualification recognized by law

(iii) Education as a part of an approved vocational education course.

m) Services by way of renting of residential dwelling for use as residence

n) Services by way of-

(i) Extending deposits, loans or advances for interest or discount.

(ii) Inter sale or purchase of foreign currency

o) Services of transportation of passengers

(i) By a stage carrier or by railway other than First class or an air conditioned coach

(ii) Metro/Mono Rail or tramway

(iii) Inland waterways

(iv) Public transport in a vessel of less than 15 tonne net (other than for tourism purpose)

(v) Metered cabs, radio taxi or auto rickshaws

p) Services by way of transportation of goods-

(i) By Road except GTA and a courier agency


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(ii) By an aircraft or a vessel from a place outside India to the first customs station of

landing in India

(iii) By Inland waterways

q) Funeral, burial, crematorium or mortuary services including the transportation of the

deceased

DEFINITION OF SERVICE

For the first time since the introduction of service tax law, term service has been defined under

the Negative list regime to mean any activity carried out by a person for another for

consideration, and includes a declared service. Taxable service provided only in the Taxable

Territory shall be taxed. Such determination is to be done in terms of Provision of Services

Rules, 2012. In this context, Taxable Territory has been defined to mean whole of India

excluding state of J&K.

The term activity has not been defined but a very wide and broad interpretation has sought to be

provided. It has been clarified that activity could be active or passive and would also include

forbearance to act. In this context, agreeing to the obligation to refrain from an act or to

tolerate an act or a situation has been declared to be a service. Therefore, it seems that there is a

possibility that following could fall within the scope of service tax net w.e.f., 01 July 2012:

o Assignment or novation of a contract for a considerationo Transfer of right to use all types of Intellectual Property (including software)o Agreeing to perform/non-perform in a certain way or manner i.e., to say non-

compete agreements etc.


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o Payment of fees to non-executive directorHowever, following have been clarified to be out of the ambit of term service

o Any transaction in money or actionable claimo Transfer of title in goods or immovable property (i.e. sale, gift etc.) or deemed

sale as per article 366(29A). However, a dichotomy with regard to dual taxability

of software seems to continue.

o Services provided under an employer-employee relationshipIn view of the above, an undertaking may like to do an analysis of all revenue/expenses of its

companies to ascertain the risk or exposure, if any, of certain transactions or activities falling

under tax net on account of the introduction of Negative List.

VALUATION OF SERVICE

Certain significant amendments have also been introduced in the valuation principles of services.

Key amendments have been highlighted below:

Inclusions:

Amount realized as demurrage (or by any other name called) for provision of service beyond the

period originally contracted or in any manner relatable to the provision of service.

Exclusions:

Interest charged or paid on delayed payments, Accidental damages due to unforeseen actions not

relatable to provision of service

Key Exemptions


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Following key exemptions have been provided from levy of service tax:

o Services by way of transfer of a going concern as a whole or an independent part thereofo Services received and provided between persons located in a non-taxable territory. For

instance, design services provided by SAG to another foreign entity in respect of an

Indian project, there should be no service tax implication on SAG. This is in line with

current provisions.

o Sub-contractor providing works contract services to main contractor in respect ofexempt works contract services. For instance, benefits of exemption for service

provided to railway should also be available to sub-contractor - Please refer Para 9 for

detailed analysis.

o Benefits available to railways have also been clarified to be available to metro or monorail - Please refers to Para 9 for detailed analysis.

o Services by way of sponsorship of sporting events organized by specified organizationslike national sports federation, association of Indian Universities etc.

WORKS CONTRACT

Composition scheme which permitted payment of service tax @4.94% on total value of contract

has been dispensed with. Deduction of specified proportion of contract value, depending upon

nature of works contract, has been prescribed to discharge service tax. Scope of works contract

has been extended to even include repair, maintenance, renovation and alteration etc of any

moveable or immovable property.

o Following schemes of taxation would now exist as regards taxability of works contract:


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o Where actual value of property in goods transferred and services provided are determinedthen respective taxes would apply on the respective values of goods and service.

o Where values are not determined as above, then following method should be followed:In this connection original works would mean

All new constructions All types of additions and alterations to abandoned or damaged structures

on land those are required to make them workable

Erection, commissioning or installation of plant, machinery or equipmentor structures, whether pre-fabricated or otherwise

From, above discussion, it seems that there would be double taxation on certain proportion of

contract value of works contract wherein both VAT as well as service tax would be levied. One

of the significant impacts seems to be in case of CAMCs or AMCs wherein a comprehensive

price is quoted for replacement of parts and spares as well as for provision of services. Further, it

is understood that in most cases, it is practically not possible to ascertain the quantum of goods

and items supplied.

Further, no CENVAT credit of specified duties paid in respect of Inputs used in or in relation to

works contract would be available. There is no restriction in availing credit on capital goods and

input service by the service provider and hence the service provider of the works contract can

take credit on capital goods and input service.

REVERSE CHARGE


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Provisions of Section 68(2) are proposed to be amended to empower the Government to also

notify the extent and proportion of service tax that needs to be discharged by the person made

liable to pay service tax. Below are relevant service transactions towards which service tax needs

to be paid under reverse charge basis:

o Service tax needs to be paid only on 25% of the invoice Value subject to specifiedconditions being fulfilled

o Services should be provided by an individual, HUF, partnership firm (whether registeredor not) including association of persons to a company registered under the Companies

Act, 1956 or a business entity registered as a body corporate.

For the purpose of works contract service, where both service provider and service recipient are

liable to pay tax, then each of the persons has the option to choose such method of valuation

which might be independent of the other

PLACE OF PROVISION OF SERVICES RULES, 2012 (PPSR)

These Rules will determine the place of provision of service and will supersede Export and

Import Rules w.e.f., 1 July 2012. As a thumb rule, PPSR provides that place of provision of

service shall be the location of the service recipient. However, where location of service

recipient is not available in the ordinary course of business, it shall be the location of the service

provider.

Certain exceptions have been carved out to the above general principle and the relevant ones

have been outlined below:


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Sl.

No.

Scenario/ Situation Place of provision of Service

1 Where services are provided in

respect of goods that are

required to be made physically

available by the service receiver

to the service provider (in order

to provide service)

It will be the place where services are actually

performed. Relevant for CAMCs, installation

& Commissioning services.

2 Services relating to immovable

property

Place where immovable property is located or

intended to be located. Relevant for civil

works contract.

3 Services relating to events Place where the event is actually held

4 Services where both provider

and recipient of services are

located in the taxable territory

Place of location of the service provider

5 Intermediary services Location of the service provider

With regard to Sl. No 1 above, please note that said rule shall not apply in case of goods which

are temporarily imported into India for repairs, reconditioning or re-engineering for re-export.

That is to say, in such a scenario, place of supply should be the location of recipient and should


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therefore qualify as export if the consideration is received in FE. With regard to S No 5 above,

please note that Intermediary; has been defined as a broker, agent etc who arranges or facilitates

a provision of a service between two persons. Therefore this could impact transactions where SL

acts as an intermediary for SAG to canvass certain service business and earns a service fee or

any other consideration.

EXPORT & SEZ

The definition of export has been re-defined whereby it states that provision of any service

provided or agreed to be provided shall be treated as export when the following five conditions

are satisfied:

o Provider of service is located in the taxable territoryo Recipient of service is located outside Indiao Place of provision of service is outside India in terms of PPSRo Payment for such service is received in convertible FEo Rebate of service tax or duty paid on input services or inputs on providing such services

is still available.

The procedures for claiming service tax refund/exemption for any services provided to an SEZ,

has remained unchanged, the benefit of refund of CENVAT credit on input and input services

should be claimed by the service provider. Exemption to services provided to SEZ shall continue

(subject to the condition that Form A-1 is provided by the SEZ customer). In addition, service

provider shall be entitled to avail full credit of CENVAT credit in respect of inputs or input

services used for providing services to SEZ.

PROCEDURAL TIPS (W.E.F., 01.07.2012)


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Earlier, all taxable services whenever provided or proposed to provide first time, needs to be

endorsed in the registration certificate for the reasons all services were having different

classification numbers (more than 120 in numbers), but now there in only one head /

classification i.e. 65B(44) of the Finance Act, 1994. Since w.e.f., 01/07/2012, the definition of

Service has been changed there is therefore absolute need to amend the existing service tax

registration certificate with new service tax code i.e., Service as defined by Section 65B(44)

read with Section 65B(51) of the Finance Act, 1944.

The following declaration is to be given by the Rent-a-cab service provider to enable the

recipient of services to pay ser-tax on reverse charge basis (w.e.f., 1.7.2012 as per point of

taxation Rules) on car hiring services by considering the 60% abatement. I.e., if the service bill

for car hire charges is Rs.100 then considering 60% abatement (subject to the declaration so

given below in the bill of the service provider), the recipient need to pay ser-tax on the 40%

i.e., 12.36% of 40%

Declaration CENVAT credit on inputs, capital goods and input services, used for providing

the taxable service, has not been taken under the provisions of the CC Rules, 2004

EXEMPTION BY MEGA NOTIFICATION

In the negative list approach to Service Tax, so long as there was a negative list, it was logical

and made sense. But apart from a long negative list of services based on Indias socio

economic-political considerations, we do have a long list of exempted services (39 in number) by

virtue of Notification No. 12/2012-ST dated 17.03.2012 and later superceded by Notification No.

25/2012-ST dated 20.6.2012, effective from 1.7.2012, which are exempt from levy of Service

Tax. This notification termed as mega exemption notification by CBEC in its Letter No.


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334/1/2012-TRU dated 17.03.2012 and Service Tax Guidance Note seeks to reduce the existing

exemption notifications from 88 to 10 in number. This appears to be misleading as Notification

No. 25/2012-ST itself contains 39 categories of exemptions which contain many sub clauses.

Besides, this list can be further enlarged whenever considered necessary as against the negative

list which can now be amended only in 2013.

It is worth noting that most of the existing exemptions available in relation various taxable

services as also the general exemptions have been retained in the mega exemption notification.

There were certain exclusions in erstwhile provisions which now find place in exempted services

or in negative list u/s 66D. From the point of view of taxation, there is no difference between a

service listed in negative list and a service finding place in mega exemption notification. The

only difference is that services in negative list are not at all taxable as they have been excluded

from the meaning of service itself which is defined in section 65B(44). As against this,

exempted services are services per se, but exempt from levy of Service Tax by way of

Notification issued by the Central Government under delegated powers in terms of section 93(1).

Also, amendments to negative list can be made only by Parliament by way of amendment to the

Finance Act, 1994 whereas exemptions could be enlarged or curtailed on the basis of

notification.

List of Exempt Services (vide Notification No. 25/2012-ST dated 20.06.2012 w.e.f. 1.07.2012)

1. Services provided to United Nations or specified International Organizations;

2. Health care services provided by a clinical establishment, an authorized medical practitioner

or para-medics;

3. Services by a veterinary clinic in relation to health care of animals or birds;


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4. Services provided by an institution registered u/s 12AA of the Income Tax Act, by way of

charitable activities;

5. Services of renting of religious place or conducting religious ceremonies;

6. Services provided by individual advocate/arbitrator to any person other than business entity;

services provided by advocate to advocate; services provided by advocates and arbitral tribunals

to business entities upto a turnover of Rs. 10 lakh in preceding financial year ; services provided

by person represented on arbitral tribunal to an arbitral tribunal .

7. Services of technical testing and analysis of newly developed drugs etc, by an approved

clinical research organization;

8. Service of training and coaching in recreational activities relating to arts, culture or sports;

9. Auxiliary education services and renting of property provided by educational institutions in

respect of education exempt from tax including catering under mid-day meals scheme of

government;

10. Services provided, to or by a specified educational institution, by way of transportation of

students or staff or services in relation to admission;

11. Service to a recognized sports body:-

(i) individual as a player, referee etc. for participation in a tournament

(ii) by another recognized sports body;


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12. Sponsorship service for tournaments and championships organized by specified bodies;

13. Services of erection, installation, commissioning, completion, fitting out, construction,

maintenance or alteration provided

(i) to government or local authority or governmental authority in relation to specified

structures like historical monuments, canal, dams etc.;

(ii) in relation to specified structures like road, bridge, tunnel, etc.;

(iii) in relation to works contract under JLNURM or Rajiv Awaas Yojana

14. Erection or Construction service in relation to original works pertaining to airport, port,

railways or single residential unit etc.;

15. Service of temporary transfer or permitting use of copyrights relating to original literary,

dramatic, musical, artistic works or cinematograph films;

16. Services by a performing artist in folk or classical art forms of (i) music, (ii) dance or (iii)

theatre, excluding when provided as a brand ambassador;

17. Service of collecting or providing news by independent journalist/specified bodies;

18. Service of renting of a hotel, inn, guest house etc. meant for residential or lodging purposes,

having declared tariff of a room below Rs. 1000 per day;

19. Restaurant services other than those having air conditioning facility and having licence to

serve alcohol;


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20. Service of transportation of specified goods by rail or vessel from one port in India to another

port;

21. Services provided by GTA for transportation of fruits, vegetables etc. or where amount

charged for transportation is upto a given monetary limit;

22. Services of giving on hire a means of transportation to State Transport Undertaking or GTA;

23. Services of transport of passengers:-

(i) by air embarking or terminating in specified eastern States of India; or

(ii) by a contract carriage excluding conducted tour or charter on hire;

(iii) ropeway, cable car or air tramway

24. Services by way of motor vehicle parking to general public excluding leasing of space to an

entity for providing such parking facility;

25. Specified services provided to government or local authority or governmental authority

26. Services of general insurance business provided under certain specified schemes;

27. Services provided by an incubatee subject to certain conditions;

28. Services by an unincorporated body or non profit entity registered under law to own

members by way of reimbursement of charges or share of contribution subject to conditions;


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29. Services provided by person in specified capacities such as sub broker, mutual fund agent,

selling or marketing agent of lottery tickets, SIM cards, business facilitator or business

correspondent, sub contractor etc.

30. Service of carrying out job work in relation to agriculture, printing, textile,

diamonds/jewellery, cycle or sewing machines or any goods on which duty is paid by principal

manufacturer;

31. Services by an organizer in respect of business exhibition held outsideIndia;

32. Service of making telephone calls from specified places like free telephone at airport and

hospitals etc.

33. Services by way of slaughtering of bovine animals;

34. Services received from a service provider located in a non-taxable territory by any person for

non-commercial purpose or by a Charitable Institution or to person located in non taxable

territory.

35. Services of public libraries by way of lending of books, publication or any other knowledge

enhancing content or material.

36. Services by Employees State Insurance Corporation (ESIC) to eligible person.

37. Services of transfer of going concern as a whole or independent part thereof.

38. Services of public conveniences such as provision of facilities of bath room, wash room,

lavatories, urinals or toilets.


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39 Services by governmental authority in relation to any function as constitutionally entrusted

to a municipality.

DEEMED VALUE OF TAXABLE SERVICE - ABATEMENT

Value of the following taxable services for the purpose of levy of service tax would be

calculated at percentage specified in the Table subject to the relevant conditions specified

Sl.

No.

Description of taxable

service

Deemed value -

Existing %

Proposed

%

Conditions

1 Financial leasingservices including

equipment leasing andhire purchase

10

(Nft 4/2006)

10 Nil.

2 Transport of goods by

rail

30

(Nft 1/2006)

30 Nil.

3 Transport of passengers

by rail

New levy 30 Nil.

4.1 Catering in a premises,

including hotel,convention center, club,pandal, shamiana or any

place specially arrangedfor organizing a function

Convention center

or mandapcatering- 60pandal or shamiana

catering 70

(Nft 1/2006)

70 CENVAT

credit on anygoodsclassifiable

under chapter1 to 22 used

for providingthe taxable

service is notallowed

5 Transport of passengers

by air

Upto 31.03.2012

Domestic travel

maxRs. 150

International

Travel maxRs. 750

(Nft 26/2010)

40 CENVAT

credit oninputs and

capital goods,not allowed


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w.e.f. 01.04.2012

All Class

Exemption 60%

Levy of ST on40%

(Nft 6/2012)

6 Renting of hotels, inns,guest houses, clubs,

campsites or othercommercial places meant

for residential or lodgingpurposes.

50

(Nft 1/2006)

60 CENVATcredit on

inputs andcapital goods,

not allowed

7 Transport of goods by

road by Goods TransportAgency

25

(Nft 13/2008)

25 No CENVAT

credit

Exempt (i) when

gross amountcharged on

consignments notexceeding Rs.1500,or (ii) gross

amount charged on

individualconsignment notexceeding Rs.750 -

(Nft 034/04)

8 Services provided in

relation to chit

70

(Nft 1/2006)

70 No CENVAT

credit

9 Renting of any motorvehicle designed to carry

passengers

40

(Nft 1/2006)

40 No CENVATcredit

10 Transport of goods in avessel from one port in

India to another

75

(Nft 1/2006)

50 No CENVATcredit.

11 (i)Services provided by a

tour operator in relation

25 25 No Cenvat

Credit


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to a package tour (Nft 1/2006)

(ii)Services by a tour

operator in relation to atour, solely of arranging

or bookingaccommodation for any

person in relation to atour

10

(Nft 1/2006)

10 No Cenvat

Credit

(iii) Services, other than

services specified in (i)and (ii) above, provided

to any person, by a touroperator in relation to a

tour

40

(Nft 1/2006)

40 No Cenvat

Credit

Prabhakar Tiwari

Reg. No. 320409896/04/2009

Source: Internet.

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