JULY 14, 2014

By Sandhya Sakthivel, Deloitte Touche Tohmatsu India Private Limited

IN the Union Budget 2014, there are some unexpected changes in service tax. Introduction of period based interest i.e. 18% for first 6 months, 24% for next 6 months and 30% for the period after a year for delay in payment of service tax is one such change. This is clearly to penalize the growing number of service tax defaulters. Further, the benefit of waiver of penalty on account of reasonable cause is not available in the case of serious offences even if the details are available in the records. This provision allows the officers to levy penalty equivalent to 50% of the service tax short-paid.

Mandatory pre-deposit at 7.5% of the tax or penalty or both to be made at first appellate level and 10% of the tax or penalty or both to be paid at second appellate level. This is believed to be introduced to discourage frivolous appeal and an attempt to reduce further piling up of cases at the stay stage before the Tribunal which has had a dampening effect on regular disposal of appeals.

Withdrawal of the exemption benefit for sale of space of time for advertisement except in print media comes as a surprise. Due to this change, sale of space for advertisement in bill boards, conveyances, buildings, ATMs, online, mobile applications etc., would be liable to service tax.

The exemption benefit granted to clinical research on human participants has been withdrawn. Where the medical industry was hoping for some tax reforms in their sector, this has come as a bit of disappointment. Education sector was earlier granted exemption from service tax on renting and other auxiliary services on the input stage. Such benefit has been withdrawn now.

Microfinance industry has been seeking exemption from service tax on micro-finance and micro insurance services. Though exemption was always available for interest and discounts; service tax was levied on processing fees, penalties and other charges. A small relief is granted to the sector by way of exemption on micro life insurance products where the policy amount does not exceed Rs. 50,000. Service tax continues to be levied on other charges relating to microfinance.

For the first time, time limit is prescribed for speedy completion of adjudications in service tax cases. Where the normal period of limitation is invoked, proceedings have to be completed within 6 months and where extended period is invoked, the adjudication has to be completed within one year from the date of notice. If this is strictly followed by the authorities, it would bring relief to the industry.

There was confusion under the works contract service, if other works contracts were indeed liable to tax at 60% or 70% of the contract value. This was for the reason that maintenance and other contracts were eligible for 30% abatement whereas other works contracts were eligible for 40% abatement. It is resolved in the budget by fixing the value of service at 70% in the case of all contracts other than original works contract. This could however be viewed negatively by glazing, plastering, floor and wall tiling, electrical fittings contractors as they were enjoying abatement at 40%.

Even as the question on coverage of marketing support services under intermediary services remains unanswered, there is new addition to the definition by way of inclusion of commission agent and consignment agent. The place of provision of service for intermediary services is the location of service provider. With the amendment, intermediary services that facilitate supply of goods on behalf of the principal will be service provided in the taxable territory and there will no export benefits in respect of the same.