K. V. Hari Babu, ACMA, CS
1. Increase in rate of Service Tax from 10% to 12%:
1.1. Rate of service tax is increased from 10% to 12%. Increase in rate of service tax is effective from 01.04.2012.
1.2. The present rate of 10% is governed by Notification No.8/2009-ST Dt. 24.02.2009 which exempts all taxable services from levy of service tax under Section 66 of the Finance Act in excess of 10%.
1.3. The Notification No.8/2009 is rescinded by issue of Notification No.2/2012 – Service Tax Dt. 17.03.2012.
1.4. Consequently, service tax rate shall be 12% with effect from 01.04.2012, as prescribed under Section 66 of the Finance Act.
1.5. In this context, it is to clarify that the rate of service tax as per Section 66 of the Finance Act is 12%. However, the rate in excess of 10% is exempted by Notification No.8/2009-ST Dt. 24.02.2009 which is in operation as on date. The rate in the Section was still 12%, but for exemption provided under the Notification No.8/2009. By rescinding the Notification No.8/2009, Service tax rate as per Section 66, which is 12%, will be made effective from 01.04.2012, by virtue of Notification No.2/2012 Dt. 17.03.2012.
2. Increase in time limit for issue of invoice, challan, bill:
2.1. Time limit for issue of invoice, challan, bill by the service provider has been increased to thirty (30) days, as against the current time limit of fourteen (14) days, by amending Rule 4A(1) of the Service Tax Rules (Notification No.03/2012 – Service Tax Dt. 17.03.2012). This is effective from 01.04.2012.
2.2. In case of a banking company or a financial institution including non-banking financial company or any other body corporate or any other person, providing banking and financial services, the time limit for issue of invoice, bill, challans is increased to forty five (45) days.
2.3. These are good amendments providing additional time to the service provider to raise invoices, bills, challans etc.
3. Facility for adjustment of excess service tax paid:
3.1. Existing Rule 4B has been substituted and the new rule provides for adjustment of excess service tax paid, not involving interpretation law, taxability, classification, valuation etc. This is effective from 01.04.2012.
3.2. This is a very good trade friendly amendment, enabling the assessees to adjust the excess payment made by mistake, without any legal hassles. One of the best trust building measure from the Government.
3.3. All other existing conditions, including monetary limit and intimation to the department have been withdrawn.
4. Valuation of works contract service:
4.1. Notification 11/2012 – Service Tax Dt. 17.03.2012 proposed changes in determination of value in case of works contract service by amending the Service Tax (Determination of Value) Rules, 2006, inserting sub-rule 2A in the place of existing rule. They shall come into force from the date on which Section 66B comes into effect.
4.2. Value of the works contract service has been stipulated as gross amount charged for works contract, excluding the value of goods, property in which is transferred during the execution of works contract, which is liable for VAT. In effect, where VAT is paid on the value of goods transferred during the execution of works contract, the balance value of the works contract shall be treated as service portion and liable for service tax. This is identical to existing provision.
4.3. Where it is not possible to determine the value of services, after deducting the value of goods, property in which is transferred during the execution of works contract, on which VAT is paid, the new provision stipulates for adoption of value after providing for standard deduction as under:
|In case of Original works||Service tax shall be payable on 40% of the amount charged towards works contract|
|In case the gross amount charged includes value of land, then service tax shall be payable on 20% of the amount charged|
|In case of other works contracts including finishing and completion services||Service tax shall be payable on 60% of the amount charged towards works contract|
4.4. The above provision is similar to standard deduction provided in VAT Acts of the States towards service element.
4.5. The standard deduction percentage under Service tax Law should have been linked to standard deduction provided under the State VAT Acts. Otherwise, due to adoption of separate standard deduction by State VAT Acts and Service Tax Law, the works contractor will be ending up with payment of taxes on more than 100% of the bill/invoice value.
4.6. For ex., in most of the State VAT Acts, standard deduction permitted in case of civil construction works is 30%. That means VAT is applicable on 70% of the bill value. As per proposed amendment to Service Tax (Determination of Value) Rules, service tax is payable on 40% of amount charged. In effect, the works contractor is required to remit taxes on 110% of the bill value (VAT on 70% of the amount charged and Service tax on 40% of the amount charged).
4.7. Similar problem arises in many types of works contracts, unless and until the standard deduction under Service Tax Law is aligned with the Standard deduction with State VAT Acts.
4.8. This resembles the existing problem of levy of Service tax and VAT on software on the entire 100% value by the Information Technology service providers, even though entire value cannot be towards sale of goods and provision of service at the same time. Both State and Central Government has not resolved this problem till date, leaving the service receivers at the receiving end, as they have no alternative but to reimburse both VAT and Service Tax charged by the IT Service providers.
4.9. Since the amendments to Service Tax (Determination of Value) Rules 2006 are yet to take place, law makers are requested to ensure that Service tax and VAT is not charged on more than 100% of the invoice value. This possible only by amending the rules stipulating that where the works contractor opts for standard deduction method under the VAT Act, then the standard deduction under service tax law shall be equivalent to the percentage of the bill value on which he remits VAT and he is required to remit service tax on the balance percentage of bill value.
5. Persons liable to pay service tax – Notification No.15/2012 – Dt. 17.03.2012:
5.1. In respect of certain services, persons liable to pay service tax and the extent to which they are responsible for payment of service tax has been proposed to be specified by this notification. This notification shall come into force from the date on which Section 66B comes into effect.
5.2. In respect of services like GTA service, Sponsorship Service, etc., already service receivers are liable for payment of tax. The new scheme proposed casts liability to pay service tax on both the service provider and service receiver, at specified percentages, in respect of some of the services. For ex., in case of works contract service provided by any individual, Hindu Undivided Family or proprietary firm or partnership firm to any company or a body corporate, the liability to pay service tax rests on both the service provider and service receiver equally i.e., 50% of tax is to be paid by works contractor and 50% is to be paid by the service receiver/contractee.
5.3. Similarly, in case of supply of manpower service, liability is cast on the service provider and service receiver in the ratio of 25% and 75% respectively. In respect of services relating to renting or hiring of motor vehicles, service receiver is liable to discharge entire liability (100%) in case of abated value; in case of non-abated value, liability is stipulated in the ratio of 60% and 40% on the service provider and service receiver respectively.
5.4. While casting liability on the service recipient is not un-common, but placing onus of discharging the liability on both the service receiver and service provider in specified percentages would be giving an impression that TDS is intended be introduced in service tax matters.
5.5. Casting liability on both the service receiver and service provider that too in different percentages, in respect of different services, would only result in increase of work, documentation on the part of assessees, but also increase the audit work of the department. For ex., in case of works contract service covered by this proposal, the service receiver has to identify whether the works contractor from whom services are received will fall into this category or not and then modify his system accordingly.
5.6. If the Government proposed remittance of tax both by service receiver and service provider in order to check evasion of tax by service provider in respect of any specific services, then entire liability can be cast on the service receiver, rather than bifurcating the liability between the service provider and service receiver, which creates increase in documentation and clerical work.
6. Increase in time limit for issue of show-cause notice from one year to eighteen (18) months:
6.1. Section 73(1) of the Finance Act 1994 is proposed to be amended increasing the time limit for issue of show-cause notice in normal cases of short-payment, erroneous refund etc., from one year to eighteen (18) months.
7. Serving of statement for the subsequent period showing the liability shall be treated as serving of notice – Section 73(1A):
7.1. For the periods subsequent to the period covered under the show-cause notice issued, it is enough if the department serves a statement on the assessee indicating the service tax liability for the period and the statement shall be treated as notice with all the grounds relied upon in the notice issued for the earlier periods.
7.2. Assessees need to note that serving of statement is equivalent to show-cause notice and take action for replying the notice, without ignoring the statement thinking that it is not a show-cause notice but only a letter/statement.
8. Time limit for filing appeals before the Commissioner (Appeals) and CESTAT – Amendments proposed to Section 85 and 86 of the Finance Act:
8.1. Time limit for filing appeals before the Commissioner (Appeals) on the orders passed in service tax matters is proposed to be reduced to two months from the existing time limit of three months.
8.2. Amendment to Section 86(1) proposed time limit for filing appeal before the CESTAT as three months from the date of receipt of the order.
8.3. These amendments are proposed to align the time limit for filing appeals in Service Tax cases with the time limit for filing appeal under Central Excise cases.
8.4. In case of appeal to be filed by the Department against the orders of the Commissioner before the CESTAT, the time limit is four months from the date on which the order is received from the Committee of Commissioner or Chief Commissioners directing filing of appeal.
9. Service tax assessees can opt for settlement of cases before settlement commission:
9.1. From the date of enactment of the Finance Bill, the option for settlement of cases before the settlement commission shall be extended to service tax assessees also. Amendment is proposed to extend the relevant provisions contained in Central Excise Act to Service Tax, by including the provisions in Section 83 of the Finance Act.
10. Major policy changes proposed in Service Tax Law, which will come into force from the date notified by the Central Government:
10.1. Under the proposed scheme, service tax will be levied on all services, except on those services which are mentioned in the Negative List. Service is defined in the proposed Section 65B(44) as “any activity carried out by a person for another for consideration and includes a declared service, but shall not include an activity which constitutes merely – (i) transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) a transaction in money or actionable claim…..”.
10.2. Section 66B provides for levy of service tax on all the services, other than those specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another person.
10.3. Section 66D contains the negative list of services.
10.4. In effect, the proposed scheme aims at levy of service tax on all services rendered by a person to another person for consideration including the declared services, but excluding the services in the negative list and services exempted by notification, provided in the taxable territory.
10.5. Section 66C is aimed at providing the rules relating to determination of place where the services are provided or deemed to have been provided. Draft Place of Provision of Services Rules, 2012 are framed under this Section and are placed for public opinion. The ‘Place of Provision of Services Rules, 2012’ will replace the ‘Export of Services, Rules, 2005’ and ‘Taxation of Services (Provided from outside India and received in India) Rules, 2006, from the date of effect to be notified by the Central Government in this behalf.
10.6. Section 66E contains the list of declared services. One of the declared services is – development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software. In case of Software development, whether customized or canned, the contract between the developer and the customer finally emerges as the one relating to sale of goods. Hon ‘ble Supreme Court in the case of Tata Consultancy Services held that software is goods. Consequently, State Governments are collecting VAT on software sales. However, under the Service Tax Law, even software development is included under the category of services and tax is being levied. Consequently, both VAT and Service tax is levied on the same transaction on entire value. In case the software developer raises tax invoice and remit VAT on the amount collected from the customer/buyer, the service tax law should provide exemption to such transaction from service tax.
11. CENVAT credit on motor vehicles and components, parts and accessories of motor vehicles (Notfn. 18/2012 – CE-NT Dt. 17.03.12:
11.1. Motor vehicles other than those falling under tariff headings 8702, 8703, 8704 and 8711 and their chasis are included in the definition of capital goods. Therefore, CENVAT credit is permitted on motor vehicles used in the factory of the manufacturer of final products or service providers for rendering services. Components, parts and accessories of the motor vehicles are also eligible for CENVAT credit.
11.2. Motor vehicles excluded are – Motor vehicle for transport of persons (8702), Motor cars and other motor vehicles principally designed for transport of persons (8703), Motor vehicles for transport of goods (8704), Motor cycles and mopeds (8711). These motor vehicles registered in the name of service provider for providing specified services like tour operator, rent-a-cab service etc., continue to be eligible for CENVAT credit.
11.3. The notification would be effective from 01.04.2012. Manufacturers and service providers would be benefitted by this amendment.
12. Removal of capital goods on which CENVAT credit was availed – New sub-rule 5A is inserted with effect from 17.03.2012.
12.1. Manufacturer or Service provider is required to pay an amount equal to CENVAT credit availed, reduced by percentage points as specified in the amendment in respect of computers and computer peripherals and other capital goods, on removal of goods after use either as capital goods or as waste and scrap.
12.2. In case the amount of CENVAT credit calculated to be reversed/paid is less than the duty payable on the transaction value of capital goods removed as waste and scrap, the manufacturer or service provider is required to remit duty on the transaction value.
12.3. The new sub-section 5A has imposed liability on the service provider on removal of capital goods as waste and scrap, which was missing in the existing rule and resulted in interpretation that service provider need not reverse the CENVAT credit or pay duty on removal of capital goods as waste and scrap.
12.4. The new sub-rule 5A stipulates that in case the duty payable on the transaction value of waste and scrap is more than the CENVAT credit to be reversed/paid, then the manufacturer or service provider shall remit duty on transaction value. This will create practical difficulties to the manufacturers or service providers. It is not practically possible, in many cases, to identify the original purchase details and CENVAT credit availed on capital goods which have become scrap and waste, since capital goods which have become useless are generally dumped and sold as a lot. Therefore, suitable amendment to the rule is required to be done, permitting the manufacturer/service provider the option of payment of duty on transaction value on capital goods removed as waste and scrap, without linking the same with the amount of CENVAT credit availed.
13. Interest is applicable only in case credit is taken and utilised wrongly: Amendment to Rule 14 – Effective from 17.03.2012:
13.1. A welcome amendment to CENVAT rules. Great relief to trade and industry. Consequent to replacement of the words “taken or utilised wrongly” with the words “taken and utilised wrongly”, interest is applicable only in case the credit taken wrongly is utilised against the payment of service tax or excise duty.
13.2. Government has taken pragmatic approach and amended the rules, considering the fact that interest cannot run unless the CENVAT credit taken wrongly is utilised against tax liability. Government should have given retrospective effect to the above amendment, making clear that the intention of the legislature is to charge interest only if the credit is taken wrongly and utilised against tax payment. The retrospective effect would have resulted in closing of litigation in number of cases.