Keeping in background, the roll-out of GST in April 2016; the Finance Minister’s proposals this time around are introduced with a view to prepare the economy for the smooth transition to the new levy. These are discussed with the respective proposed amendments herein below.
1. Roll out of Goods and Services Tax (‘GST’):
Unlike the last year, in his Speech this year, the Finance Minister has given reaffirmed commitment to introduce India’s most awaited tax reform, the GST, effective from 1st April 2016 having already introduced a Constitutional Amendment Bill 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 and Higher Secondary Education Cess, increased rate of Service tax, 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, widening the tax base and enhancing compliance, it is proposed to tax services at the increased rate of 14% (Education Cess of 3% proposed to be done away with) as tax rates on services under GST are likely to go up.
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 ‘Education cess’ and ‘Secondary and Higher Education cess’ shall be continued to be levied in Service Tax.
3. Swachh Bharat Cess:
With the objective of financing and promoting Swachh Bharat initiatives, Swachh Bharat Cess 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.)
4. Broadening of tax base-Negative List pruned:
With the object of broadening the tax base, 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, which were hitherto outside the levy of Service tax:
(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.)
5. Broadening of tax base-Withdrawal of Exemptions:
In order to widen the tax base, 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 from 1st April 2015:
(i) a civil structure meant for use other than for commerce, industry, etc.
(ii) a structure meant predominantly for use as an educational, clinical, or an art or cultural establishment.
(iii) a residential complex predominantly meant for self-use or the use of their employees.
The Finance Minister has proposed to provide the following new exemptions, effective from 1st April 2015:
(All the above New Exemptions shall come into effect from the 1st April, 2015)
7. Amendments in Valuation related aspects:
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)
Inclusion of reimbursable expenses in the value of taxable services?
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 was examined by the Hon’ble Delhi High Court in the case of Intercontinental Consultants & Technorats (P.) Ltd. v. Union of India  28 taxmann.com 213 (Delhi) where 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.
Though the Delhi High Court decision is in favour of the Assesse, the Department has filed an appeal to the Supreme Court against the decision of the High Court which is pending for disposal.
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.
Thus, after the amendment 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 the amendment is yet to be decided by the Hon’ble Supreme Court.
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 (effective from enactment of the Finance Bill, 2015).
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 organizing/conducting a lottery (effective from enactment of the Finance Bill, 2015).
9. Rationalization of Abatements:
♣ Service tax on transportation of goods and passengers:
Effective from 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 (40% and 70%) instead of the existing three slabs (40%, 60% and 70%).
♣ Service tax on air transport of passengers:
Effective from 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.
10. Section 76:
Penal provisions in cases not involving fraud/ collusion/ or wilful mis-statement 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 rationalized as under:
11. Section 78:
Penal provisions in cases involving fraud/ collusion/ or wilful mis-statement 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 rationalized as under:
The existing benefit of reduced penalty in following specified situations stands withdrawn:
12. 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).
13. Section 78B-Transitonary provision:
A new section 78B is being inserted to prescribe, by way of a transition provision, that,-
14. 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 (effective from enactment of the Finance Bill, 2015).
15.Rationalization of Service Tax Rules, 1994:
16. Reverse charge mechanism:
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.
(The above amendments would be effective from 1st April 2015)
17. CENVAT Credit:
In case of partial reverse charge, the CENVAT credit can be availed by the service recipient as under:
(The above amendment would be effective from 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.