Finance Act, 1994

SERVICE TAX

HIGHLIGHTS

Key amendments in Finance Act,1994 ( known as Service Tax) through Finance Bill,

2012 and its implications

2012

1) General Amendments(effective from 1st April,2012)

(i) Service tax rate is increased from 10% to 12% plus

cess @3%. Effective rate is 12.36%.

(ii) Changes in the composition rate as follows

(a) Life insurance: 3 percent for the first year’s premium and 1.5 percent for the subsequent years’ premium (earlier the rate was a flat 1.5)

(b)Money changing: existing rate proportionately increased by 20 percent

(c)Distributors or selling agents of lotteries: increased from INR 6000/ 9000 to INR 7000/ 11000; and

(d)Works contracts rate: increased from 4 to 4.8

percent

2) Negative List Approach (Applicable from the

Date to be notified after the enactment of

Finance Bill, 2012) has been introduced vide new

sections, namely 65B, 66B, 66C, 66D, 66E & 66F.

Services specified in the negative list as well as

Proposed Exempted List shall remain outside the

purview of the Service tax. All other services except

those specifically exempted would be chargeable

to service tax.

(i) Negative List - Section 66D

(a) Services by Government or Local authority excluding the

following services to the extent they are not covered

elsewhere –

• Services by the department of Posts by way of speed

post, express parcel post, life insurance and agency

services provided to a person other than Government

• Services in relation to an aircraft or a vessel, inside or

outside the precincts of a port or an airport

• Transport of goods or passengers; or

• Support services, other than services covered under

above mentioned clauses, provided to business entities

(b) Services by the Reserve Bank of India

(c) Services by the foreign Diplomatic mission located in India

(d) Services relating to agriculture by way of –

• Agriculture operations directly related to production of

any agriculture produce including cultivation, harvesting,

threshing, plant protection or seed testing

• Supply of farm labour

• Processes carried out an agriculture farm including

tending, pruning, cutting, harvesting, drying, cleaning,

trimming, sun drying, fumigating, curing, sorting, grading,

cooling or bulk packaging and such like characteristics of

agricultural produce but make it only marketable for the

primary market

• Renting or leasing of agro machinery or vacant land with

or without a structure incidental to its use

• Loading, unloading, packing, storing or warehousing of

agriculture produce

• Agriculture extension services

• Services by any Agricultural Produce marketing

Committee or Board or services provided by a

commission agent for sale or purchase of agriculture

produce

(e) Trading of goods

(f) Any process amounting to manufacture or production of

goods

(g) Selling of space or time slots for advertisements broadcast

by radio or television

(h) Services by way of access to a road or a bridge on payment

of toll charges

(i) Betting, gambling or lottery

(j) Admission to entertainment events or access to amusement

facilities

(k) Transmission or distribution of electricity by an electricity

transmission or distribution utility

(l) Services by way of-

• Pre-school education and education up to higher

secondary school or equivalent

• Education as a part of a curriculum for obtaining a

qualification recognized by any law for the time being in force

• Education as a part of an approved education course

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

residence

(n) Services by way of –

• Extending deposits, loans or advances in so far as the

consideration is represented by way of interest or discount

• Inter se sale or purchase of foreign currency amongst

banks or authorized dealers of foreign exchange or amongst

banks and such dealers

(o) Services of transportation of passengers, with or without

accompanied belongings, by -

• A stage carriage

• Railways in a class other than –

o First class; or

o An air conditioned coach;

• Metro, monorail or tramway

• Inland waterways

• Public transport, other than predominantly for tourism

purpose, in a vessel of less than fifteen tonne net; and

• Metered cabs, radio taxis or auto rickshaw

(p) Services by way of transportation of goods -

• By road except the services of-

o A goods transportation agency; or

o A courier agency

• By an aircraft or a vessel from a place outside India to the

first customs station of landing in India; or

• By inland waterways

(q) Funeral, burial, crematorium or mortuary services including

transportation of the deceased.

3) Changes in Valuation Rules (effective after the

enactment of Finance Bill,2012)

(I) Works Contract (Composition Scheme for payment of

Service Tax) Rules, 2007

Specific Valuation Rules to be introduced to determine

the valuation of services in specific cases.

Furthermore, certain specific inclusions/exclusions in

the value of taxable services also to be introduced

under such rules.

(II) Value of Taxable Services/ Abatement Services

S.No

Description of Services

Existing Taxable Portion

Proposed Taxable Portion

CENVAT Credit)

1 Service portion in the supply of food or any other article

30% 40% All credits, except on inputs, of chapter 1 to 22, will now be available

human consumption or drink at a restaurant

2 Service portion in the supply of food or any other article human consumption or drink from elsewhere ( Outdoor Catering)

50% 60% All credits, except on inputs, of chapter 1 to 22, will now be available

3 Convention centre or mandap with catering

60% 70% All credits, except on inputs, of chapter 1 to 22, will now be available

4 Coastal shipping

75% 50% No

5 Accomodation in hotel

50% 60% Credits on input services allowed

6 Railways: Passengers

New Levy

30% All Credits will be allowed

(III) Amendment in Rule 3

Rule 3 of Valuation rules will be applicable only in the cases

where valuation is not ascertainable. Prior to Finance Bill,

2012 it has been advertently made applicable to situation

where consideration received is not wholly or partly consisting

of money.

4) Changes in CENVAT Credit Rules ( effective from 1st

April, 2012)

a) Existing Rule 5 to be replaced with a new rule to

simplify the procedure for refund of unutilized credit

on the account of export

b) Credit is being allowed on motor vehicles (except

those of heading nos. 8702, 8703, 8704, 8711 and

their chassis). The credit of tax paid on the supply of

such vehicles on rent, insurance and repair shall also

be allowed

c) Credit of insurance and service station is being

allowed to –

i) Insurance companies in respect of motor vehicle

insured and re-insured by them; and

ii) Manufacturers in respect of motor vehicles

manufactured by them.

d) Rule 4(1) and 4 (2) are being amended to allow a

service provider to take credit of inputs or capital

goods are delivered to him, subject to specified

conditions

e) Rule 7 for input service distributors is being

amended to provide that credit of service tax

attributable to service used wholly in a unit shall be

distributed only to that unit and that the credit of

service tax attributable to service used in more than

one unit shall be distributed on pro rata basis.

f) The rate for CENVAT reversal for exempt services

has been revised likewise from 5% to 6% in Rule 6

(3) of CENVAT Credit Rules, 2004.

g) Under Rule 14 “Interest can be levied only on

CENVAT credit wrongly taken and utilized. Penalty

remains for even wrong taking.”

h) In Rule 9 (1) (e) CENVAT credit in respect of service

tax paid under reverse charge allowed on the basis

of the payment challans.

5) Retrospective Changes effective from date of

enactment of Finance Bill, 2012)

a) Rule 6(6A) of CENVAT Credit Rules, 2004 is being

given effect from February 10, 2006. This will

neutralize the investigations or demands for reversal

of credits in respect of services provided to SEZs for

the past.

b) Exemptions provided for the setting up of common

facilities for treatment and recycling of effluents and

solid wastes by Notification 42/2011-ST dated 25th

July, 2011 shall be made applicable effective June

16, 2005.

c) Repair of roads has been exempted from service tax

by Notification 24/2009-ST dated 27th July, 2009.

Exemption relating to roads is extended for the

earlier period commencing from June 16, 2005.

d) Service tax exemption has also been granted with

retrospective effect on management, maintenance or

repair service in relation to non-commercial

Government buildings from 16th June, 2005.

6) Changes in Point of Taxation Rules, 2011 (effective

from 1st April, 2012)

a) Definition of “Continuous supply of service” is

amended to capture the entire dimension of the

concept, namely, the recurrent nature of services

and the obligation for payment periodically or from

time to time.

b) Incorporate a new residual rule to ascertain point of

taxation in cases where the same cannot be

ascertained by the rules prescribed.

c) The “date of payment” has been defined. In normal

circumstances this date shall be the earlier of the

dates of entry into books of accounts or actual credit

in the bank account.

d) An option has been provided to determine the point

of taxation in respect of small advances up to Rs.

1000, in excess of the amount indicated in the

invoice, on the basis of invoice or completion of

service rather than payment.

e) In case of “Associated Enterprises”, where the

person providing the service is located outside India,

the point of taxation shall be the date of debit in the

books of accounts of the person receiving the

service or date of making payment whichever is

earlier.

f) Threshold Limit of Rs.10 Lacs will now be calculated

on the basis of first clearances up to Rs. 10 Lacs in

terms of invoices raised. Earlier it was on the basis

of receipt.

7) Amendments in Service Tax Rules, 1994( effective

from 1st April, 2012)

a) Time limit for issuance of invoice under Rule 4A has

been increased to forty five days for banking &

financial institutions, for other thirty days.

b) Rule 6 (4A) is being amended to allow unlimited

amount of permissible adjustments

c) In case of exporters, the period extended by the

Reserve Bank of India on specific request is also

being included in the period for which the tax liability

is allowed to be deferred.

d) LLPs have been treated as partnership firms for

service tax purpose.

e) Benefit of depositing service tax on receipt of

consideration by individuals and firms (including

LLP) has been extended to all services, provided the

turnover did not exceed 50 lakh INR in the previous

financial year.

f) Where an option has been exercised by Service

provider under Point of Taxation Rules, 2011 in

respect of amount received up to Rs. 1000 in excess

of the invoice value, then no invoice is required to be

issued to such extent.

8) Service Tax Return(effective from the date to be

notified after the enactment of Finance Bill, 2012)

a) Quarterly Return–

i) Individual/Firm/LLP assessee – any amount of

tax liability in immediately preceding financial

year.

ii) Assessee other than Individual/Firm/LLP –

Tax Liability less than Rs. 25 lakhs in

immediately preceding financial year.

b) Monthly Return– Assesse other than Individual/

Firm/ LLP having Tax liability more than Rs. 25lakhs

in immediately preceding financial year.

9) Proposed Place of Supply Rules (effective from the date to be notified after the enactment of Finance Bill, 2012)

• A new Section 66C which empowers the Central Government to make rules for determination of the place of provision of service to be introduced as ‘Place of Supply Rules, 2012’

• Export of Service Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 proposed to be replaced by Place of Supply Rules

• Criteria to determine the place of provision of service proposed to be classified under the following heads:

––Location of the service receiver

––Place of performance of services (primarily involving services related to any goods)

––Location of immovable property

––Place the where event is held (in the case of event related services)

• Where both the service providers as well as the recipient are located within the taxable territory then notwithstanding any of the above criteria, the place of provision of service is to be the location of the recipient of service

• Special Rules proposed in respect of the following services:

––Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders

––Telecommunication services provided to subscribers

––Online information and database access or retrieval services

––Intermediary services

––Service consisting of hiring of means of transport, up to a period of one month

––Goods transportation service

––Passenger transportation service

––Services provided on board a conveyance

10) Reverse charge Mechanism(Applicable from

the Date to be notified after the enactment of Finance Bill, 2012)

a) The taxable territory has been defined and the

service provided in that territory only will be liable to service tax. Thus, services provided by any person from non-taxable territory to any business entity in taxable territory will be subject to service tax under reverse charge e.g. Services provided from state of Jammu & Kashmir to business entity in taxable territory will be liable for service tax subject to the provisions of The Place of Supply Rules, 2012.

b) Notification no. 15/2012-ST dated 17.3.2012 has been issued wherein the taxable services/ cases are prescribed on which reverse charge method will be applicable. i) Services provided to business entities by

Government, individual advocates and arbitral tribunal,

ii) Three services are being prescribed under notification no. 15/2012-ST in respect of which both service provider and service recipient will be considered as person liable to pay the service tax on the basis of a fixed percentage. This amendment will be applicable only where the

service provider is an individual/firm/LLP and the recipient is the body corporate. The services and portion of service tax payable by provider and recipient of services are as follows:-

Sl. No.

Description of service

Service recipient

Service provider

1.

Hiring of a motor vehicle designed to carry passengers: (a) with abatement (b) without abatement

100% 40%

NIL 60% .

2.

Supply of manpower for any purpose

75%

25%

3.

Works contract service

50%

50%

11) Other Legislative Amendment(effective from the

date to be notified after the enactment of Finance Bill, 2012)

a) Provision of Settlement Commission and Revisionary

Authority brought under the Service Tax provisions. There will an additional option to file for revision against order of Commissioner (Appeals) instead of

filing an appeal before the Tribunal (CEGAT) directly for service tax matters.

b) Show Cause Notice Period extended from one year to 18 months.

c) Time Limit for filling an appeal before the Commissioner (Appeals) reduced to 2 months, with delay condonation for one month. Time Limit for filling appeal before Tribunal, for department, enhanced from 3 to 4 months.

d) Mens Rea required for prosecution. Earlier providing taxable service without issuing an invoice was an offence. Now the clause (a) of section 89(1) is substituted as “Knowingly evades the payment of service tax under this chapter”.

S.P. NAGRATH & Co.

CHARTERED ACCOUNTANTS

A-380, Defence Colony,

New Delhi – 110024

Tel: +91-11-4980-00000

Fax: +91-11-4980-0029

Website: www.spnagrath.com