The Finance Minister’s indirect tax proposals this time are introduced with a view to prepare the economy for the smooth transition to the new levy of GST in April 2016. A brief analysis of service tax proposals may be given hereunder:

1. Goods and Services Tax (‘GST’)

The Finance Minister has reaffirmed and shown his commitment to introduce India’s most awaited tax reform, the GST, effective 1st April, 2016. The Constitutional Amendment Bill has already been introduced in the Parliament to this effect.

In fact, on the indirect taxes front, proposals are largely directed towards GST implementation like simplification of Excise duty and Service tax rates by removing Education Cess and Secondary & Higher Secondary Education Cess as well as increase in rate of Service tax to 14% and also visible thrust on e-compliances in line with GST expectations etc.

2. Rate of Service Tax

With the overall objective of preparing the economy for a smooth transition to GST, it is proposed to tax services at the increased rate of 14%. The enhanced rate shall not be subject to Education Cess. In indirect taxes, the FM has done away with the levy of education cess, which has been subsumed into the enhanced rate of 14%.

Thus, the Effective service tax rate is increased from the existing rate of 12.36% to 14%.

The change in rate of Service Tax would be effective from a date to be notified after the enactment of the Finance Bill, 2015. Till such time the levy of existing rate of Service Tax of 12.36% including ‘Education cess’ and ‘Secondary & Higher Education cess’ shall be continued to be levied.

With the objective of financing and promoting Swachh Bharat initiatives, Swachh Bharat Cess is likely to be imposed on all or any of the taxable services as may be notified at the rate of 2% of the value of taxable services.

This Cess shall be levied from a date to be notified by the Central Government in this regard, most probably this cess shall be levied on some high-end services which can support the Swachh Bharat Abhiyan of the Prime Minister.

3. Widening of tax base

a. Negative List pruned

The list of services in the Negative List is proposed to be reduced by bringing the following services within the ambit of taxation of services. The object behind it has been to widen the Service tax base and to include more services into the service tax net:

• Service provided by way of access to amusement facility providing fun or recreation by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks, theme parks or such other places.

• Service provided by way of admission to entertainment events of concerts, non-recognised sporting events, pageants, music concerts, award functions, if the amount charged is more than ` 500/- for right to admission to such an event;

• Services by way of contract manufacturing or job work production of alcoholic liquor for human consumption for a consideration;

• All services provided by the Government or local authorities to business entities.

These proposed changes shall come into effect from a date to be notified by the Central Government after the enactment of the Finance Bill, 2015.

b. Withdrawal of Exemptions

The following exemptions are proposed to be withdrawn by appropriate amendments in the Mega Exemption Notification No. 25/2012-ST, dated 20th June, 2012 effective 1st April 2015:

• Services provided to Government by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, or alteration of:

o A civil structure meant for use other than for commerce, industry, etc.

o A structure meant predominantly for use as an educational, clinical, or an art or cultural establishment.

o A residential complex predominantly meant for self-use or the use of their employees.

• Services by way of construction, erection, commissioning, or installation of original works pertaining to airports and ports;

• Services provided by performing artists in folk or classical art forms of music, dance and theatre for an amount greater than ` One lakh per performance;

• Services by way of transportation of foodstuff except milk, salt and food grain (including flour, pulses and rice);

• Services provided by mutual fund agents, distributors to mutual fund/asset management companies and marketing agents of lottery tickets;

• Services by way of making telephone calls from a public telephone (i.e. departmentally run, guaranteed public telephone and free telephone at airports and hospitals).

4. New Exemptions

The Finance Minister has proposed to provide the following new exemptions:

o Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail packing, labelling of fruits and vegetables;

o Service provided by a Common Effluent Treatment Plant operator for treatment of effluent;

o Life Insurance service provided by way of Varishtha Pension Bima Yojna (senior citizen);

o Service provided by way of exhibition of movie by the exhibitor (theatre owner) to the distributor or association of persons (consisting of such exhibitor as one of its members);

o Ambulance services provided by way of transportation of patient;

o Service provided by way of admission to a museum, zoo, national park, wild life sanctuary, and a tiger reserve;

o Exemption on GTA services provided to exporter for transportation of goods from Goods transport services for transport of organic manure by vessel, rail or road container freight station/inland container depot/from place of removal to land customs station.

All the above new exemptions shall come into effect from the 1st April, 2015.

5. Amendments in Valuation related aspects

a. The definition of the term ‘consideration’ amended to include

(i) Any reimbursable expenditure/cost incurred and charged by the service provider in the course of providing taxable services, except in prescribed conditions.

(ii) Any amount retained (viz. in addition to fee/commission) or discount received by lottery distributor or selling agent (i.e. difference between face value of lottery and procurement price of ticket).

The above amendments would be effective from enactment of the Finance Bill, 2015.

b. Inclusion of reimbursable expenses in the value of taxable services?

To overcome the decision of the Hon’ble Delhi High Court in Intercontinental Consultants, the definition of ‘consideration’ in Explanation to Section 67 has been suitably amended.

Delhi High Court in the case of Intercontinental Consultants & Technocrats (P) Ltd vs Union of India [2012] 28 Taxmann.com 213 (Delhi) has considered whether out of pocket expenses or reimbursable expenses incurred by the service provider in the course of providing the taxable services has to be included in the value of taxable services. The petitioner filed a writ petition before the High Court for quashing the show cause notice issued by the Service Tax Department for recovery of Service Tax on amount received as reimbursement of expenses such as hotel accommodation, travelling etc. under Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.

Delhi High Court decided in favour of the Assessee, but the Department is in appeal before the Supreme Court against the decision of the High Court which is pending for disposal.

Thus, after the amendment in the definition of ‘consideration’ in Explanation to Section 67 there is no doubt that any expenditure incurred by the service provider for providing any taxable services has to be included in the value of taxable services unless specifically excluded and Service Tax would be chargeable on the total value including the reimbursable expenses incurred by the service providers.

However, the inclusion of reimbursable expenses for the period prior to this amendment is yet to be decided by the Hon’ble Supreme Court.

6. Introduction of Definitions

“Government”

Hitherto, the term “Government” has not been defined in the Act or the Notification. This has given rise to interpretational issues. To address such issues, definition of the term “Government” is now being incorporated in the Act to mean Central Government, State Government, Union Territory and its departments. But it would not include entities whose accounts are not required to be kept under Article 150 of the Constitution.

‘Service’

Definition of the term ‘service’ amended to include services provided by chit fund foreman for conducting a chit and distributor/selling agent of lottery for organising/conducting a lottery.

7. Rationalisation of Abatements

Service tax on transportation of goods and passengers

Effective 1st April 2015, uniform abatement of 70% is prescribed for transport by rail, road and vessel with a condition of non-availment of CENVAT credit on inputs, capital goods and input services. As a result, these services would be taxable at 30% of the service value.

In works contract valuation provisions, effective from 1st October 2014, there will be two slabs for computing taxable value of 40% and 70% instead of the existing three slabs of 40%, 60% and 70%.

Service tax on air transport of passengers

Effective 1st April 2015, service tax is payable on 60% (instead of 40 per cent) of service value in case of air transport services of passenger in other than economy class.

Service tax on chit fund service

Effective from 1st April 2015, Abatement is being withdrawn from chit fund service. Consequently, Service Tax shall be paid by the chit fund foremen at full consideration received by way of fee, commission or any such amount. They would be entitled to take CENVAT Credit.

8. Modification in Penal Provisions

(a) Section 76

Penal provisions in cases not involving fraud/collusion/or wilful misstatement or suppression of facts or contravention of any provision of the Act or rules with the intent to evade payment of service tax, have been proposed to be rationalised as under:

o Maximum penalty reduced from 50% to 10% of the Service tax amount in such cases;

o No penalty is to be paid if service tax and interest is paid within 30 days of issuance of notice under section 73(1);

o Reduced penalty equal to 25% of the penalty imposed, if the service tax, interest and reduced penalty is paid within 30 days of such order;

o If the service tax amount gets reduced in any appellate proceeding, then penalty amount shall also stand modified accordingly, and benefit of reduced penalty (25% of penalty imposed) shall be admissible if service tax, interest and reduced penalty is paid within 30 days of such appellate order.

(b) Section 78

Penal provisions in cases involving fraud/ collusion/or willful misstatement or suppression of facts or contravention of any provision of the Act or rules with the intent to evade payment of service tax, have been proposed to be rationalised as under:

o Penalty shall be 100% of service tax amount involved in such cases;

o Penalty equal to 15% of the service tax amount is to be paid if service tax, interest and reduced penalty is paid within 30 days of service of notice in this regard;

o Reduced penalty equal to 25% of the penalty imposed, if the service tax, interest and reduced penalty is paid within 30 days of such order;

o If the service tax amount gets reduced in any appellate proceeding, then penalty amount shall also stand modified accordingly, and benefit of reduced penalty (25% of penalty imposed) shall be admissible if service tax, interest and reduced penalty is paid within 30 days of such appellate order.

The existing benefit of reduced penalty in following specified situations stands withdrawn:

o 50% of the Service tax amount where true/complete details of transactions are available.

o 25% of the Service tax amount where value of taxable service does not exceed ` 60 lakhs and payment is made within 90 days from the date of communication of the order.

(c) Section 80

The existing provision for waiver of penalty in cases where assessee proves the reasonable cause for failure to pay service tax stands withdrawn (effective from enactment of the Finance Bill, 2015).

9. Section 78B – Transitionary provision

A new section 78B is being inserted to prescribe, by way of a transition provision, that,-

o Amended provisions of sections 76 and 78 shall apply to cases where either no notice is served, or notice is served under sub-section (1) of section 73 or proviso thereto but no order has been issued under sub-section (2) of section 73, before the date of enactment of the Finance Bill, 2015; and

o In respect of cases covered by sub-section (4A) of section 73, if no notice is served, or notice is served under sub-section (1) of section 73 or proviso thereto but no order has been issued under sub-section (2) of section 73, before the date of enactment of the Finance Bill, 2015, penalty shall not exceed 50% of the service tax amount.

10. Rebate Claims

Appeal against the order of Commissioner (Appeals) in matters relating to rebate of Service tax shall be filed with Central Government and not Tribunal, this shall be effective from enactment of the Finance Bill, 2015.

11. Rationalisation of Service Tax Rules, 1994

o In case of aggregator model, foreign aggregator of service can appoint a person representing the aggregator or any other person in India for the purposes of payment of service tax (effective 1st March 2015).

o Provisions for issuing digitally signed invoices have been added along with the option for maintaining the records in electronic form and their authentication by means of digital signatures.

12. Reverse Charge Mechanism

o Manpower supply and security services when provided by an individual, HUF, or partnership firm to a body corporate are being brought to full reverse charge. Currently, these are taxed under partial reverse charge mechanism.

o Services provided by mutual fund agents, mutual fund distributors and agents of lottery distributor are being brought under reverse charge consequent to withdrawal of the exemption on such services.

Accordingly, Service Tax in respect of mutual fund agents and mutual fund distributors services shall be paid by assets management company or, as the case may be, by the mutual fund receiving such services. In respect of sub-agents of lottery, Service Tax shall be paid by the distributor or selling agent of lottery.

These amendments would be effective 1st April, 2015.

13. CENVAT Credit

In case of partial reverse charge, the CENVAT credit can be availed by the service recipient as under:

o With respect to service tax to be paid by the service recipient, credit can be claimed on depositing the same with the Government Treasury.

o With respect to service tax charged by the service provider, credit can be claimed immediately on receipt of invoice. However, credit to be reversed if payment not made within a period of three months which can be re-availed on making payment.

These amendments would be effective 1st April 2015.

Further, the time limit for availment of CENVAT credit on input services is increased from six months to one year from the date of issuance of any of the specified documents.

14. Others

o Effective 1st March 2015 the scope of advance ruling is extended to cover all resident firms such as one person company, sole proprietor, partnership firm, etc.

o Effective from the date of enactment of Finance Bill, 2015 the recourse to settlement shall not be available in cases where proceedings are referred back in any manner to the adjudicating authority for fresh adjudication.

Mukul Gupta,
Naveen Garg,
Advocate