MAY 29, 2015

By Madhur Harlalka, B. Com., FCA, LL.B

THE Ministry of Finance vide Notification 14/2015-ST dated May 19, 2015 has notified increase in the rate of Service tax from 12.36% to 14% to be effective from June 1, 2015.Thus, with effect from June 1, 2015, education cess and secondary and higher education cess on service tax will not be applicable.

Due to increase in the rate of service tax and non-applicability of education cess from June 1, some issues which could arise are as follows:

++ What happens to the balances of education cess and secondary and higher education cess as on May 31, 2015? Will they lapse in similar way as education cess on excise duty as on March 1, 2015?

++ As per recent amendment in Cenvat Credit Rules, 2004 ("CCR") vide Notification 12/2015-CE(NT) dated 30-04-2015, Credit of Education Cess & Secondary Education Cess on inputs and capital goods and services received after 1-3-2015 can be used for payment of excise duty. Will similar issue/clarification be applicable for education cess on services/invoices received after June 1, 2015 for payment of service tax and excise duty?

++ Section 67A of the Finance Act states that the rate of Service tax to be applied is the rate in force at the time when the taxable service has been provided or agreed to be provided. Whereas, Rule 4 of Point of Taxation Rules, 2011 ("POT") takes into consideration the date of invoice, date of payment and the date of service provided while determining the rate of service tax. In view of the above, an ambiguity arises whether the applicable rate of tax shall be determined as per Section 67A or Rule 4 of POT.

++ In case of Individuals and Partnership firms, service tax is payable on a quarterly basis. For better tracking and clarity for the quarter April to June 2015, it is better that there is separate service tax computation for the months of April and May 2015 and a separate computation only for the month of June 2015. This is because education cess credit can be shown as utilized towards payment of service tax liability as on May 31. There is no clarity whether education cess credit as on May 31 can be used for payment of service tax for the month of June 2015 in case where the tax is payable on a quarterly basis.

++ Central Excise rate is 12.5% and service tax rate is 14%. This will lead to disputes between assesses and tax authorities for overlapping transactions such as software services, packaging services, etc.

++ Another issue is with respect to the utilization of credit of Cess components when an assessee issues a credit note for the value of the service not so provided on or after June 1, 2015, but service tax including Cess has already been remitted.

++ Applicability of rate of service tax in case of on-going contracts such as insurance, annual maintenance contracts entered into prior to June 1, 2015 with the old rates. For example: AMC contracts entered into in Feb 2015 with service tax rate of 12.36%. Will the new rates apply from Feb 2015 or from June 1, 2015? Will the contract and billing be spilt into periods prior to June 1 and after June 1? Similarly in the case of insurance premiums paid in February 2015 with service tax of 12.36%. Will the insurance companies ask for additional service tax for the entire period beginning February 2015?

The above are some of the contentious issues that will arise due to increase in rate of service tax. There could be more issues. It is highly advisable that the Government immediately issues clarifications on the above matters considering the impact of service tax rate increase.