JULY 11, 2014

By Dr Nilesh V Suchak, M. Com., LL. B., F. C. A., Ph. D.

FINANCE (No. 2) Bill, 2014 as presented in Parliament on 10-07-2014 along with various notifications have proposed many changes in service tax law. Some of these changes have come into force with immediate effect and many others will have impact at a future date. This compilation aims at informing the readers about various changes many of which will have far reaching effects. Hon. Finance Minister has kept budget estimate of service tax revenue for financial year 2014-15 at Rs. 215973 crores which is 30.95% higher than the revise estimate of such revenue of Rs. 164927 crores for the year 2013-14. This quantum jump in the projected revenue from service tax even without increasing the rate of service tax itself is an indication that the proposed amendments will have far reaching effects. It is important to invest time and energy in studying these changes carefully to save oneself from the huge burden of interest and penalties.

Changes with Retrospective Effect

Service provided by Employees State Insurance Corporation (ESIC) during the period prior to 1.7.2012 is proposed to be exempted from service tax. This exemption for services by ESIC would come into effect from the date the Finance (No.2) Bill, receives the assent of the President. It may be noted that any service provided by ESIC to persons governed under the Employees Insurance Act, 1948 is already exempt for the period commencing from 1.7.2012 under Sl. No. 36 in Noti. 25/2012-ST.

Changes effective from 11-07-2014

1. Services provided by operators of the Common Bio-medical Waste Treatment Facility to a clinical establishment by way of treatment or disposal of bio-medical waste or the processes incidental thereto shall be fully exempt. (Noti. 6/2014-ST, dated 11-7-14)

2. Service tax exemption for services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants by a clinical research organisation approved to conduct clinical trials by the Drug Controller General of India is withdrawn . (Noti. 6/2014-ST, dated 11-7-14)

3. Following services provided,-

(a) by an educational institution to its students, faculty and staff;

(b) to an educational institution, by way of,-

(i) transportation of students, faculty and staff;

(ii) catering, including any mid-day meals scheme sponsored by the Government;

(iii) security or cleaning or house-keeping services performed in such educational institution;

(iv) services relating to admission to, or conduct of examination by, such institute on shall be exempt from service tax.

However,it should be carefully noted that exemption in respect of other ‘auxiliary education services' and renting of immovable property service provided to an educational institution as was available upto 10-07-2014 will not be available from 11-7-2014 and as a result, many services like renting of immovable property, imparting any skill, knowledge, education or development of course content or any other knowledge – enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person will not be available from 11-7-14. In short, apart from all the services provided by educational institution to persons other than students, faculty and staff will attract service tax. Further, all the services provided to an educational institution except four services specified under (b) above, will attract service tax.For the purpose of this exemption, “educational institution” means an institution providing services specified in clause (l) of section 66D of the Finance Act,1994. (Noti. 6/2014-ST, dated 11-7-14)

4. Services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a unit of accommodation below rupees one thousand per day or equivalent will continue to be exempt but where the amount charged per day or equivalent is Rs. 1000 or more, even dharmashalas, ashram or any such entity which offer accommodation would be liable to pay service tax as the reference to words ‘other commercial places' is omitted now with effect from 11-7-2014 in entry relating to this exemption. (Noti. 6/2014-ST, dated 11-7-14)

5. Services by way of transportation by rail or a vessel from one place in India to another of the organic manure and cotton, ginned or baled will be exempt. (Noti. 6/2014-ST, dated 11-7-14)

6. Exemption in respect of service of passenger transportation by an air-conditioned contract carriage is withdrawn . As a result, any service provided for transport of passenger by air-conditioned contract carriage including which are used for point to point travel, will attract service tax, with immediate effect. It may be noted that service tax will be charged at an abated value of 40% of the amount charged and therefore, effective tax will be 4.944% of amount charged. Services by non-air conditioned contract carriages for purposes other than tourism, conducted tour, charter or hire continue to be exempted. (Noti. 6/2014-ST, dated 11-7-14)

7. Services provided to Government, a local authority or a governmental authority by way of water supply, public health, sanitation conservancy, solid waste management or slum improvement and up-gradation only will continue to be exempt but the exemption will not be extendable to other services such as consultancy, designing, etc. not directly connected with these specified services. (Noti. 6/2014-ST, dated 11-7-14)

8. Services of life insurance business provided under the following scheme shall be exempt. (Noti. 6/2014-ST, dated 11-7-14)

Life micro-insurance product as approved by the Insurance Regulatory and Development Authority, having maximum amount of cover of fifty thousand rupees.

9. Services by way of loading, unloading, packing, storage or warehousing of cotton, ginned or baled shall be fully exempt. (Noti. 6/2014-ST, dated 11-7-14)

10. Services received by the Reserve Bank of India, from outside India in relation to management of foreign exchange reserves like external asset management, custodial services, securities lending services shall be exempt. (Noti. 6/2014-ST, dated 11-7-14)

11. Services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly outside India will be exempt . (Noti. 6/2014-ST, dated 11-7-14). e.g., service provided to a Sri Lankan for a tour conducted in Bhutan. It may be noted that service provided by a tour operator in relation to an inbound or an outbound tours continue to be leviable to service tax.

12. Certain changes are being made in Notification No 12/2013-ST dated 1st July 2013 [vide amending Notification No.07/2014-ST] as follows:

(i) It is being provided that the Central Excise Officer would issue authorization in Form A-2, within fifteen working days from the date of receipt of Form A-1 by the Central Excise Officer.

(ii) Authorization will have validity from the date on which Form A-1 is verified by the Specified Officer of SEZ. However, if Form A-1 is furnished after a period of 15 days from the date of its verification by the Specified Officer, the authorization shall have validity from the date of furnishing of Form A-1 to the Central Excise Officer.

(iii) SEZ Units or the Developer will, pending issuance of Form A-2, be entitled to avail upfront exemption on the basis of Form A-1. However, in such a case, the SEZ Unit/Developer would be required to furnish a copy of authorization issued by the Central Excise Officer within 3 months from the date of receipt of specified services. If a copy of authorization is not provided within the said period of three months, the service provider shall pay service tax on the service so provided availing the exemption.

(iv) As regards services covered under full reverse charge, it is being mentioned specifically in Form that there would be no requirement of furnishing service tax registration number of service provider.

(v) It is being provided that a service shall be treated as exclusively used for SEZ operations if the recipient of service is SEZ unit or developer, invoice is in the name of such unit/developer and the service is used exclusively for furtherance of authorized operations in SEZ.

(vi) Certain doubts have been raised by field formations as regards the jurisdiction for the purposes of granting refunds under notification No. 12/2013-ST to the SEZ Units and SEZ Developers. It is clarified that the jurisdictional Deputy Commissioner / Assistant Commissioner of Central Excise for all purposes under the said notification would be the authority with whom SEZ Units or the Developers are registered for taking upfront exemption or for the purposes of Chapter V of the Finance Act, 1994. In this context, attention is also invited to Circular No. 105/08/2008-ST, dated 16.9.2008. If SEZ units have obtained a centralized registration under the Service Tax Rules, it will have option to file a common service tax refund in respect of all units covered under the Centralized Registration or file a unit-wise refund at its option, to the authority having jurisdiction over centralized registration.

13. The resident private limited company is being included as a class of persons eligible to make an application for advance ruling in service tax. (Notification No. 15/2014-ST, dated 11-7-2014)

14. In relation to service provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company, the recipient of the service is made person liable to pay service tax. (Notification No. 9/2014-ST)

15. In relation to service provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate, the recipient of such service is made person liable to pay service tax. This is in view of requests by body corporate such as the Reserve Bank of India. (Notification No. 9/2014-ST)

16. Place of removal is defined in CENVAT Credit Rules, 2004. [Noti. 21/2014-CE (NT), dated 11-07-2014]

17. In case of service tax paid under full reverse charge, the condition of payment of invoice value to the service provider for availing credit of input services is being withdrawn. However, there is no change in respect of partial reverse charge. [Refer amended proviso to rule 4(7)]

18. Re-credit of CENVAT credit reversed on account of non-receipt of export proceeds within the specified period or extended period, to be allowed, if export proceeds are received within one year from the period so specified or extended period. This can be done on the basis of documents evidencing receipt of export proceeds. [Newly inserted Rule 6(8) in CCR]

19. Rule 12A of CCR is being amended to disallow transfer of credit by a large taxpayer from one unit to another.

20. The condition for availing abatement in case of GTA service is being amended with immediate effect to clarify that the condition for non- availment of credit is required to be satisfied by the service providers only.Service recipient will not be required to establish satisfaction of this condition by the service provider. (Noti. 8/2014-ST)

21. Service of transportation of passenger by air-conditioned contract carriages is taxable with immediate effect, as stated earlier. Hence, an entry has been inserted at Sl. No. 9A in Notification No. 26/2012-ST providing that the taxable portion of such service shall be 40% with the condition that CENVAT credit of inputs or capital goods or input services has not been taken. (Noti. 8/2014-ST)

Changes effective from the date of enactment of the Finance (No. 2) Bill, 2014

1. The amendments proposed vide the Finance (No. 2) Bill, 2014 as presented in Parliament on 10-07-2014 in Chapter V of the Finance Act, 1994 would come into effect on the date the Bill receives the assent. In some cases, the amendments would be given effect from a date to be notified after the assent [section 65B, 66D and 67A]

2. Central Excise provisions made applicable to service tax: Section 83 is being amended to prescribe that the provisions of following sections of the Central Excise Act shall apply, mutatis mutandis, to service tax,-

(i) Section 5A(2):This section prescribes that any explanation inserted in a notification or special order at any time within one year of issue of notification or order, for clarifying the scope or applicability thereof, shall have effect from the date of issue of such notification or order.

(ii) Section 15 A: This new section is being inserted in the Central Excise Act to stipulate that third party sources shall furnish periodic information, as specified, in the manner as may be prescribed.

(iii) Section 15B: This new section is being inserted in the Central Excise Act to prescribe that failure to provide information under section 15A of the Act would attract penalty as specified.

(iv) Section 35F: Section 35F of the Central Excise Act has already been made applicable to Service Tax. This section is being substituted with a new section to prescribe a mandatory fixed pre-deposit of 7.5% of the duty demanded or penalty imposed or both for filing of appeal before the Commissioner(Appeal) or the Tribunal at the first stage, and 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal. The amount of pre-deposit payable would be subject to a ceiling of Rs 10 Crore. All pending appeals/stay application would be governed by the statutory provisions prevailing at the time of filing such stay applications/appeals. This new provisions would, mutatis mutandis , apply to Service Tax.

3. Other Amendments:

(i) Section 73 is being amended to prescribe time limits for completion of adjudication as already exists in Central Excise. This time limit would need to be followed, as far as possible.

(ii) Section 80 is being amended to exclude the reference of first proviso to section 78. This amendment, in effect, removes the power to waive the 50% penalty imposable in cases where service tax has not been levied, not paid or short levied or short paid on account of suppression of facts or willful misstatement but details of transactions are available in the specified record.

(iii) Section 82(1) is being amended, along the lines of section 12F (1) of the Central Excise Act, so that Joint Commissioner or Additional Commissioner or any other officer notified by the Board can authorize any Central Excise Officer to search and seize.

(iv) Sub-section (6A) of section 86 is being amended to omit the words “for grant of stay or”.

(v) Section 87 is being amended to incorporate power to recover dues of a predecessor from the assets of a successor purchased from the predecessor as it is presently provided for in section 11 of the Central Excise Act, 1944.

(vi) Section 94 is being amended to obtain rule making powers (a) to impose upon assessees , inter alia, the duty of furnishing information, keeping records and making returns and specify the manner in which they shall be verified; (b) for withdrawal of facilities or imposition of restrictions (including restrictions on utilization of CENVAT credit) on service provider or exporter, to check evasion of duty or misuse of CENVAT credit; and (c) to issue instructions in supplemental or incidental matters

Changes effective from a date to be notified after the enactment of the Finance (No. 2) Bill, 2014

1. Following services will be taxable.

(i) Services of sale of space for advertisement on hoardings, out-of-home media,on film screen in theatres, bill boards, conveyances, buildings, cell phones, ATMs, tickets, commercial publications, aerial advertisement website etc. excluding such sale of space for advertisement in print media.

(ii) Services provided by Radio taxis or radio cabs whether air conditioned or non-air conditioned.

“radio taxi” means a taxi including a radio cab, by whatever name called, which is in two-way radio communication with a central control office and is enabled for tracking using Global Positioning System (GPS) or General Packet Radio Service (GPRS).

Abatement presently available to rent-a-cab service would also be made available to radio taxi service.

2. Government will prescribe rules for determination of rate of exchange for calculation of taxable value in respect of certain services. [Explanation to section 67A]

Change effective from 01-09-2014

1. A manufacturer or a service provider shall take credit on inputs and input services within a period of six months from the date of issue of invoice, bill or challan w.e.f. 1st September,2014 [newly inserted proviso to rule 4 (1) and fifth proviso to rule 4(7) refer] [Noti. 21/2014-CE (NT), dated 11-07-2014]

Changes effective from 01-10-2014

1. In Rule 2A of Service Tax (Determination of Value) Rules, 2006, category ‘B' and ‘C' of works contract are proposed to be merged into one single category, with percentage of service portion as 70%.

2. Variable rates of Interest : To encourage prompt payment of service tax, it is being proposed to introduce interest rates which would vary on the extent of delay. (Notification No. 12/2014-ST]. The rates of interest shall be as under.

This new interest rate regime will become operational only on 1st October 2014. In other words, upto 1st October, 2014, the rate of interest of 18%, presently applicable, will continue to apply. The variable interest rates will apply only on or after 1st October, 2014.

As an illustration, assume a case where service tax became due, say, on the 6th of July, 2012 and the assessee pays the dues on 6th of December, 2014. In such a case, the interest to be charged would be as below:

(i) 18% simple interest upto September, 30th, 2014.

(ii) For the period from 1st October, 2014 to 6th December, 2014, the rate of interest will be 30% since the period of delay is beyond one year.

As specified in the proviso to section 75, three per cent concession on the applicable rate of interest will continue to be available to the small service providers.

3. E-payment of service tax is being made mandatory for all assesses. Relaxation from e-payment may be allowed by Deputy Commissioner/Assistant Commissioner on case to case basis. (Notification No. 9/2014-ST)

4. Provision for prescribing conditions for determination of place of provision of repair service carried out on temporarily imported goods is being omitted. The second proviso to rule 4(a) is being amended to prescribe that it would suffice for the purpose of exclusion of repair service from applicability of rule 4(a) that the goods imported for repair are exported after repair without being put to any use other than that which is required for such repair. It may please be noted that this exclusion does not apply to goods that arrive in the taxable territory in the usual course of business and are subject to repair while such goods remain in the taxable territory, e.g., any repair provided in the taxable territory to containers arriving in India in the course of international trade in goods will be governed by rule 4. (Notification 14/2014-ST)

5. The definition of intermediary is being amended to include the intermediary of goods in its scope. Accordingly, with effect from 1.10.2014, an intermediary of goods, such as a commission agent or consignment agent shall be covered under rule 9(c) of the Place of Supply of Services Rules. (Notification 14/2014-ST)

6. Service consisting of hiring of Vessels (excluding yachts) and Aircraft is being excluded from rule 9(d). Accordingly, hiring of vessels, or aircraft, irrespective of whether short term or long term, will be covered by the general rule, that is, the place of location of the service receiver. Hiring of yachts would however continue to be covered by rule 9 (d). (Notification 14/2014-ST)

7. The first Proviso to rule 7 of the Point of Taxation Rules (POTR) is being amended to provide that point of taxation in respect of reverse charge will be the payment date or the first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier. This amendment will apply only to invoices issued after 1st October, 2014. A transition rule is being prescribed (new rule 10 of POTR). (Noti. 13/2014-ST)

8. The condition against entry No. 9 in Notification No. 26/2012-ST is amended with effect from 1st October 2014, to allow the credit of input service of renting of a motor cab if such services are received from a person engaged in the similar line of business i.e. a sub-contractor providing services of renting of motor cab to the main contractor. The whole of the CENVAT credit has been allowed with respect to input service of renting of any motor cab, received from a person who is paying service tax on 40% of the value of services. The CENVAT credit eligibility will be restricted to 40% of the credit of the input service of renting of any motor cab if service tax is paid or payable on full value of the services i.e. no abatement is availed.

9. Tour operator service providers are also being allowed to avail CENVAT credit on the input service of another tour operator, which are used for providing the taxable service. This is being provided to avoid cascading of taxes. (Sl. No. 11 of Noti. 26/2012-ST)

10. Taxable portion in respect of transport of goods by vessel is being reduced from 50% to 40%. Effective service tax will decrease from the present 6.18% to 4.944%.

11. In renting of motor vehicle, where the service provider does not take abatement the portion of service tax payable by the service provider and service receiver will be modified as 50% each. (Noti. 10/2014-ST)

Clarification in Relation to Input Service Distributor

Rule 7 of the CENVAT Credit Rules, 2004, provides for the manner of distribution of common input service credit by the Input Service Distributor. This was amended vide notification No. 05/2014-CE (N.T.) amending, inter-alia , rule 7(d), to provide for distribution of common input service credit among all units in their turnover ratio of the relevant period. Some interpretational issues were raised regarding the amendment such as: (i) due to the use of the term „such unit ? in rule 7(d), the distribution of the credit would be restricted to only those units where the services are used, and (ii) the credit available for distribution would also get reduced by the proportion of the turnover of those units where the services are not used.

These issues are being clarified vide Circular No. 178/04/2014-ST, dated 10.7.2014 illustrating the effect of the amendment carried out vide notification No. 05/2014-CE (N.T.). It clarifies that the amended rule 7 allows distribution of input service credit to all units (which are operational in the current year) in the ratio of their turnover of the previous year/previous quarter as the case may be.

Conclusion

Hon. Finance Minister has not increased the effective rate of service tax and has maintained the same at 12.36% including HE and SHE cesses. However, many of the genuine demands of the tax payers have gone on the deaf ears like allowing cenvat credit of all input services which are used directly or indirectly in or in relation to provision of output service and increasing the basic exemption limit from the level of Rs. 10 lakhs which is not increased for so many years despite spiralling inflation. On top of it, Hon. Finance Minister has given sudden blow to tax payers by imposing mandatory pre-deposit while filing appeal before Commissioner (Appeals) and Tribunal. It is open secret that most of the departmental officers make mockery of adjudication process by confirming wrong demands and imposing savage penalties rampantly in defiance of principle of judicial discipline and in an unjust manner. Final outcome of appellate remedies takes about 7 to 10 years and there is no provision for payment of interest from date of payment thereof and thereby the Government has proposed to enrich itself at the cost of the tax payers by asking them to deposit interest free money for 7 to 10 years. On top of it, Hon. Finance Minster has given cruel dose of interest as high as 30% on delayed payment of service tax against the demand of trade of reducing the same from 18%. It is prayed that the honest tax payers should not be made to suffer for the sins of politicians who mis-managed the finance of the country in the past that has resulted into huge debt, interest burden and fiscal deficit.