Brief Notes on Service Tax amendments introduced through Finance Bill, 2010

Brief Notes on Service Tax amendments introduced through Finance Bill, 2010 and by virtue of Notification No 2/2010-ST to 17/2010-ST all dated 27.02.10 and CENVAT Credit Rules, 2004, amendment by virtue of 6/2010-CE (NT)

It seems, in this budget 2010, finance minister want to wipe out country fiscal deficit in one stroke by overdosing taxation on services or on deemed service (by fiction of law).

I. Seven new services and one service which was earlier classified under BAS now independently classified, included in the growing list of taxable services [will be effective from the notified date after the enactment of the Finance Bill 2010]:

(i) Services of promoting, marketing or organizing of games of chance including lottery [section 65(105)(zzzzn)]: The explanation appearing under ‘Business Auxiliary service’ pertaining to caption service is being deleted and now it is having independent entry. Provision of service for promotion, marketing, organizing or assisting in organizing game of chance including lottery, bingo, lotto in whatever form, whether through internet or other electronic network would be liable to levy of service tax.

Comments: It seems revenue is not sure about sustainability of explanation in the definition clause in the court of law, as a precautionary measure explanation is deleted from taxable service of BAS and is now introduced as new taxable service in the Act.

(ii) Health Services [section 65(105)(zzzzo)]: (i) Health check-up undertaken by hospitals, nursing home or multi-specialty clinic for the employees of business entities and (ii) Health services provided under health insurance schemes offered by insurance companies.

Business entity separately defined under clause 19(b) of section 65 and thereby omitted from explanation to clause (zzzzzm) of section 65(105).

Business entity includes an association of person, body of individuals, company or firm but does not include an individual.

The tax on above service would arise only if and to the extent payment for such medical check-up or preventive care is made directly by the business entity or by insurance company to the hospital, nursing homes or multi-specialty clinic.

Comments: Any amount directly paid by the individual towards medical check-up to such hospitals etc., would not be taxable. In my opinion trend would start where company would reimburse the employee for medical check-up in order to by-pass service tax levy. Insurance company collects service tax on medical insurance premium and service tax paid by them to hospitals etc would be entitled for CENVAT Credit provided they don’t get it reimbursed from insured person while settling their bills or else it would have cascading effect and thereby additional burden on insured person.

(iii) Maintenance of medical records services [section 65(105)(zzzzp): Storing, keeping or maintenance of medical record for employee of business entity would now be taxable service.

Comments: Increasingly, this activity is being outsourced for a consideration. Such records are either maintained by certain hospitals or even by independent record keepers for a charge. This activity is now being brought under service tax.

(iv) Promoting a ‘brand’ of goods, services, events, business entity etc. [section 65(105)(zzzzq)]: Brand ambassador would now be liable to levy of service tax. Promotion or marketing of brand, trade name, logo or house mark would be taxable when provided to business entity. Brand includes symbol, monogram, label, signature or invented works.

(v) Comments: Such service is generally provided by appearing in advertisement or in a promotional event. If the brand name / house mark is promoted by a celebrity without reference to any specific product or service it is difficult to classify under BAS. Such activities, like mere establishing goodwill or adding value to a brand would fall under this newly introduced service. Service tax department earlier tried to cover it under BAS but in vain, hence new service category introduced.

(v) Granting of right or permission of exploitation of any event. [section 65(1 05)(zzzzr)]: Services of permitting commercial use or exploitation of any event organized by a person or an organization. Taxable when used for commercial exploitation of art, entertainment, business, sports or marriage.

Comments: It seems this service is brought under the service tax ambit primarily to have pound of flash in BCCI bumper revenue generation event i.e. IPL.

(vi) Services provided by Electricity Exchanges [Section 65(1 05)(zzzzs)]: After inclusion of stock exchange and commodity exchange under the ambit of service tax levy, electricity exchange is now proposed to be covered under its ambit. The proposed new service seeks to tax, the charges recovered for services in relation to assisting, regulating, controlling the business of trading, processing and settlement pertaining to sale or purchase of electricity by the associations authorized by Central Electricity Regulatory Commission.

Comments: After State run Electricity was sold to private party for peanut, we have seen that electricity charges has increase manifold. There would be no surprise that service tax paid by them on trading and other activity, may be indirectly burden on helpless and submissive consumers.

(vii) Copyright Services [Section 65(105)(zzzzt)]: The right to temporarily transfer or permit the use of copyright would now be taxable service. However, copyright pertaining to original literary, dramatic, musical and artistic works are kept outside the ambit of service tax.

Comments: It basically covers temporary transfer or permitting use of cinematographic films and sound recordings under it net. Generally both cinematographic film and the accompanying sound track are the property of the producer, who can temporarily transfer it or permit its use by another person for a consideration. It is this activity, which is being taxed under this service. There is clash between State levy of Vat and Central levy of service tax. Under the States statutes it is measured as lease of intangible good and thereby considered as deemed sale in accordance with article 366(29A)(d) of Constitution. In my view when any goods, tangible or intangible is temporarily transferred and is exclusion to lessor for all right with respect to such goods, then it would be considered as deemed sale and thereby liable to levy of Vat and not service tax.

(viii) Additional service provided by builder to the prospective buyers such as preferential location etc on extra charges [Section 65(105)(zzzzu)]: Prime /preferential location charges for allotting a flat /commercial space according to the choice of the buyer i.e. direction – sea facing, park facing, corner flat, floor – first floor, top floor, Vastu etc would now be taxable service. Similarly internal or external development charges which are collected for developing /maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc would be liable to levy of service tax. However, charges for providing parking space have been specifically excluded from the scope of this service.

II. Modification / extension of the present taxable services: [will be effective from the notified date after the enactment of the Finance Bill 2010]:

(i) Commercial or industrial construction services [section 65(105)(zzq)]:

(ii) Construction of complex service [section 65(105)(zzzh)]:

For both the above service, it proposes to tax sale consideration received from buyer on account of sale of commercial space or residential premises before receiving completion certificate from the competent authority. Comments: It seems this exercise is being done for GST ahead, so as to include property transaction under GST. This provision alone will be enough to cover the dollop offered by way increase in income limits. When L & T case was referred to larger bench of Supreme Court to overcome K. Raheja Judgment, bureaucracy wants to prove themselves superior then highest Court of the Country. It is difficult to digest that sale of immovable property would now be termed as service just because buyer has paid amount in advance. It will open Pandora’s Box and would increase enormous litigation. God save our country from bureaucrats. In my opinion, the said amendment may not survive on constitutional challenge.

(iii) Renting of immovable property service [section 65(105)(zzzz)]: Retrospective amendment made, with effect from 01.06.2007, so that activity of renting of immovable property per se would constitute a taxable service.

Presently, vacant land given on lease is taxable. However, now it is proposed to levy service tax on lease of vacant land for the purpose of construction of building or temporary structure to be used for furtherance of business or commerce.

Comments: In order to overcome Hon’ble High Court of Delhi in the case of Home Solutions Retail India Ltd. & Others, which struck down the levy of service tax on renting of immovable property, such greedy provision is introduced. Assessee is being agent of Government, collecting taxes on their behalf, any retrospective amendment which increases the liability, could be treated as unconstitutional. Amendments to the Statute are in the interest of public. Do you think there is any public interest by collecting tax on non-service transaction in the guise of deeming fiction of law?

(iv) Commercial coaching and training service [section 65(105)(zzc)]: Presently service tax would attract only if training and coaching is provided by commercial institute or person. It is now proposed to levy service tax on institute or person, irrespective of profit motive, such as charitable organization, trust etc through insertion of an explanation with retrospective effect from 01.07.2003, in taxable service itself, clarifying the word commercial.

Comments: Today education is need of our country, where literacy ratio is very low. Many trust and charitable institute impart education at nominal cost, which would now be liable to levy of service tax. Whether constitutionally it is permitted to increase levy retrospectively? Famous case of ITC vs. Union of India big fight is brought back to memory.

(v) Services provided in an airport or port [section 65(105) – (zzm), (zn) and (zzl)]: Similar type of amendment is proposed under three different category of services, namely, ‘Airport service’, ‘Port service’, and ‘Other port service’.

Services provided within the precinct of airport or port as the case may be, by any person, irrespective of authorization by airport or port authority, would now be taxable under Airport service or port service / other port service respectively without applying classification principles as prescribed under section 65A of the Act.

Comments: Specific service provided within airport or port though may classifiable under some other category or may be exempted under such category, but now it would be taxable. Say a cargo handling services is provided within airport of port, for export shipment, presently, by virtue of definition under cargo handling service, such service would be exempted from levy of service tax but now it is proposed to tax under airport service or port/other port service. Presently, services provided by authorized person are only taxable under category of airport service / port service, which now proposes to tax any person irrespective of authorization issued by airport authority or port authority.

(vi) Transport of passenger by air service [section 65(105)(zzzo)]: In 2006, service tax was imposed on international air travel by a passenger embarking in India, other than economy class. It is now proposed to extend the scope to all domestic and international air passengers embarking in India, irrespective of class.

Comments: Presently, domestic air travel on popular routes has become within the reach of middle class person, but now it seems government intends that only rich should travel by air.

(vii) Auctioneer’s Service [section 65(105)(zzl)]: Under the present definition exclusion to above service is provided to ‘auction by Government’, which has given rise to confusion. In order to avoid confusion, it is being clarified through an explanation that phrase ‘auction by government’ appearing in the taxable service, namely ‘auctioneer’s service’ means an auction where government property is being auctioned and not when the government acts as an auctioneer for the private goods.

(viii) Expansion of the scope of Information Technology Software service: Presently, IT service is taxable when used in the course or furtherance of business or commerce, however, now it is proposes to tax IT service whether or not used in the course or furtherance of business or commerce.

Comments: All powerful IT industry won’t mind such amendment as corresponding CENVAT Credit which otherwise would have proportionately reduced, would now be entitled for credit.

(ix) Management of investment under Unit Linked Insurance Premium Service [section 65(105)(zzzzf)]: Presently, insurer pay service tax on difference between actual premium received from policy holder less premium attributable towards life, health or specified purposes. In other words, in addition to fund management charges, insurer was liable to pay service tax on amount collected from policy holder towards premium allocation charges (which is very stiff during initial tenure of policy), policy administration charges, policy surrender charges, switching charges, partial withdrawal charges, miscellaneous charges etc. Now it is proposed to collect service tax only on fund management charges, maximum charge fixed by IRDA or actual amount charged to policy holder, which ever is higher.

Comments: It seems there is bumper saving for ULIP insurer. After IT industry, it seems Insurance companies can have their say. I don’t see any logic for not charging service tax on hefty amount collected by such insurance company under different nomenclature. Premium allocation charges which in most case exceed 10% of the premium amount in first year and continues to be very high for the initial years, shall be out. Similarly, administration charges and other charges collected by insurance companies under different nomenclature, will escape the levy.

(x) Expanding the scope of Sponsorship Service [section 65(105)(zzzn)]: Sponsorship service was brought under tax net in Budget 2006, where service tax is payable under reverse charge mechanism i.e. payable by person sponsoring the event. However, sponsorship of sports events was kept out of the purview of the taxation. Now, the exclusion available for sponsorship pertaining to sports is being removed. Presently, sponsorship payment made to body corporate or firm is taxable, whereas now payment made to any person would be taxable.

Comments: Corporate involvement in sports more particularly in cricket and tennis has increased in recent years. It has become profitable activities for such entities. The only negative which I could visualize, is artistic, musician, literary, dramatic works would suffer.

III. Other Amendments (effective from a date notified after enactment of the Finance Bill, 2010):

(i) Inserts an explanation to Section 73(3): Clarifies that no penalty shall be imposed where service tax along with interest has been paid before issuance of notice by the department.

Comments: This is welcome steps by the CBEC as it would reduce considerable litigation. Further explanation to section 73(3) start with the words ‘for the removal of doubts’, does it imply that cases in which proceeding is already initiated by the department would be dropped and cases under litigation would be withdrawn.

(ii) Amendment to Export of Service Rules, 2005 [with effect from 27.02.2010 by virtue of Notification No.6/2010-ST]:

(a) The condition prescribed under clause (a) of Rule 3(2) i.e. ‘such service provided from India and used outside India’ has been deleted.

(b) The taxable service, namely, ‘Mandap Keeper service’ has been shifted from the list under Rule 3(1)(ii) {i.e. performance related services} to the list under Rule 3(1)(i) {i.e. immovable property related services} and three taxable services, namely ‘Chartered Accountant Services’, ‘Cost Accountant Services’ and ‘Company Secretary’s Services’, have been shifted from the list under rule 3(1)(ii) to rule 3(1)(iii) {i.e. recipient location based services}.

Comments: It is again a welcome amendment in view of difficulty faced by the assessee while following the Export service rules.

IV. Exemptions:

The following exemptions from service tax are provided with effect from 27.02.2010.

(i) Exempt the right to use packaged or canned software covered under information technology service {item (v) of section 65(105)(zzzze)} from whole of service tax provided such software is intended for single use and packed accordingly and manufacturer, duplicator or holder of copyright to such software has paid excise duty on the entire amount received from the buyer. (Notification No. 2/2010-ST and Notification No. 17/2010-ST both dated 27.02.2010).

Comments: The purpose of said notification seems to have lost as exemption is available, provided such software is for single use. It seems Government intends to tax such software only once i.e. either at manufacturing stage or at the time of import, but here every sale (right to use), other than sold to ultimate consumer would attract tax in the form of service tax. To my mind the said exemption sounds impractical.

(ii) Exemption from service tax is being provided to services relating to ‘Erection, Commissioning or Installation’ of, –

• Mechanized food grain handling systems etc;

• Equipment for setting up or substantial expansion of cold storage; and

• Machinery / Equipment for initial setting up or substantial expansion of units for processing of agricultural, apiary, horticultural, dairy, poultry, aquatic, marine or meat products. (Notification No.12/2010-ST dated 27.02.2010)

(iii) The scope of present exemption of transportation by road of perishable item is extended. From now on transport of fruits, vegetables, eggs, milk, food grain or pulses by road in goods carriage shall be exempted from whole of service tax. (Notification No. 4/2010- ST, dated 27.02.2010)

(iv) Statutory taxes charged by any government (including foreign governments) on air passenger would be excluded from taxable value for the purpose of levy of service tax under the Air Passenger Transport Service. (Notification No. 15/2010-ST dated 27.02.2010)

(v) Exemption from service tax is being provided to Indian news agencies under ‘Online Information and Database Retrieval Service’ and ‘Business Auxiliary Service’ subject to the condition that such news agency is notified for the purpose solely for collection and distribution of news and such news agencies specified under clause (22B) of section 10 of the Income Tax Act. It further provides such news agency applies its income or accumulates it for collection and distribution of news. (Notification No. 13/2010 dated 27.02.2010)

(vi) Exemption from service tax is being provided to the ‘Technical Testing and Analysis Service’ and ‘Technical Inspection and Certification service’ provided by Central and State seed testing laboratories and Central and State seed certification agencies (Notification No.10/2010- ST dated 27.02.2010)

(vii) Exemption is provided to the transmission of electricity. However, in first place, I could not find the service tax charge on transmission of electricity under the Act. (Notification No. 11/2010-ST dated 27.02.2010)

V. Withdrawal or Amendment to existing exemptions [proposed changes would take effect from 01.04.2010]:

(i) Transport of Goods by Rail (Notification No. 7/2010 dated 27.02.2010): Exemption earlier granted on transportation by government railway, through notification No. 33/2009 dated 01.09.2009 is being withdrawn. Now, therefore, rail freight, either through private operator or by Indian Railway would attract levy of service tax. However, there is some relief, as abatement of 70% of the gross value of freight charged on goods is provided vide notification No.9/2010-ST dated 27.02.2010. There is also an exemption from whole of service tax levy to certain specified goods transported by rail vide Notification No. 8/2010-ST dated 27.02.2010.

(ii) Vocational training scope restricted under the category of ‘Commercial training or coaching service’. (Notification No.3/20 10-St dated 27.02.20 10): A new definition of vocational training institute introduced. Service tax exemption will be available only to industrial training institutes or industrial training centre affiliated to National Council of Vocational Training. Lot of training institute who use to impart vocational training would now be covered and thus jobless person has to bear additional cost of service tax indirectly burden upon them.

(iii) Exemption from service tax, presently available to group personal accident scheme provided by government of Rajasthan to its employees, under general insurance service is withdrawn. (Notification No. 5/2010-ST, dated 27.02.2010)

(iv) Notification No.1/2002-ST dated 01.03.2002 is being superceded by Notification No.14/2010-ST, dated 27th February 2010 to provide that the construction and operation of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oils and natural gas in the Exclusive Economic Zone and the Continental Shelf of India and supply of any goods connected with these activities would be within the purview of the provisions of Chapter V of the Finance Act, 1994. Similar changes have been made in the definition of the term ‘India’ appearing in the Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India & Received in India) Rules, 2006. (Notification No.6/2010-ST and Notification No.16/2010-ST, both dated 27th February, 2010 refers).

(v) Legal backing to Circular No.120/01/2010-ST dated 19.01.2010, Notification No. 7/2010-CE (NT) dated 27.02.2010 in relation to refund of accumulated CENVAT credit to exporters: Retrospective changes effected from 14.03.2006 (i.e. from the date of issue of notification) pertaining to refund entitlement to exporter. The essence of the changes is that refund shall be available for all goods, or input services, on which CENVAT is permissible and should be processed accordingly. Further, refund of CENVAT should not be linked to CENVAT taken in a particular period only.

Prospective changes:

1. The table given in annexure should be certified by a person authorized by the Board of Directors (in the case of a limited company) or the proprietor/partner (in case of firms/partnerships) if the amount of refund claimed is less than Rs.5 lakh in a quarter. In case the refund claim is in excess of Rs.5 lakh, the declaration should also be certified by the Chartered Accountant who audits the annual accounts of the exporter for the purposes of Companies Act, 1956 (1 of 1956) or the Income Tax Act, 1961 (43 of 1961), as the case may be.

It is said that service is the third segment of the world’s economic system. The first being agriculture, the second industry and the third the service. But on perusal of wholesome changes in service tax, I think in India service segment will be ranked as first.

Though understanding and complying with statutory provisions relating to service tax may be a ‘living nightmare’ for service tax payers, the same provides a ‘dream like’ avenue of practice for professionals.

“Man is a thinking animal, a talking animal, a tool-making animal, a building animal, a political animal, a fantasizing animal. But in the twilight of a civilization, he is chiefly a taxpaying animal” (Hugh Maclenan).

Bhavin Mehta