Union Budget 2017: Key Changes in Service Tax

Addressing parliament, Mr. Jaitley called his fourth budget one for the poor. Yet, while asserting prudent fiscal management, he also raised his 2017-18 federal deficit target to 3.2% of GDP to cover his spending promises. Mr.Jaitley started his speech by saying, “The Govt is now seen as a trusted custodian of public money, I express gratitude to people for their strong support.” He called India “an engine of global growth”, but at the same time, highlighted risks to its outlook from likely U.S. interest rate hikes, rising oil prices etc.

Passage of Goods and Service Tax (“GST”) Bill and demonetisation were highlighted as the two tectonic policy initiatives of the Government. As GST is on the anvil, not many changes are proposed to be made in Service tax and Excise, though Service charges on e-tickets booked through IRCTC has been withdrawn.

Mr. Jaitley stated that the GST Council has finalised its recommendations on almost all the issues based on consensus on the basis of 9 meetings held. Further, preparation of IT system for GST is also on schedule and the extensive reach-out efforts to trade and industry for GST will start from April 1, 2017 to make them aware of the new taxation system.

We are sharing with you the key highlights of the Union Budget 2017 in the arena of Indirect Taxes along with snapshot of important changes on Economical front and Direct taxes:

Important changes under Service TAX

A. Changes In Chapter V of the Finance Act, 1994 [“the Finance Act”] (Will come into force when the Finance Bill, 2017 is enacted unless otherwise stated):-

I. Changes in relation to the Negative List – Section 66D of the Finance Act:-

♦ Section 66D(f):Proposed to be deleted

Presently, services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption,are covered under Section 66D(f) of the Finance Act. These services are proposed to be deleted from the Negative List.

However, the exemption is being continued by amending Entry No.30 of the Mega Exemption Notification No. 25/2012-ST dated June 20, 2012 (“the Mega Exemption Notification”).[Read with Notification No. 7/2017-ST dated 02.02.2017 vide which changes have been made in the Mega Exemption Notification].

II. Other Important Changes in the Finance Act:-

a. Omission of definitions

♦ Changes in Section 65B of the Finance Act:

• Section 65B(40) of the Finance Act is proposed to be deleted containing the definition of the term “process amounting to manufacture or production of goods”, with the deletion of Section 66D(f) of the Finance Act.

It is being incorporated in the Mega Exemption Notification with insertion of corresponding exemption thereunder.

b. Legislative Changes regarding Authority for Advance Ruling:

♦ Changes in Section 96Aof the Finance Act:

Section 96A of the Finance Act contains various definitions for Advance Rulings. Clause (d) of Section 96A has been amended so as to substitute the definition of “Authority” to mean the Authority for Advance Ruling as constituted under Section 28E of the Customs Act, 1962.

Section 28E of the Customs Act, 1962, has also been amended so as to substitute the definition of “Authority” to mean the Authority for Advance Ruling as constituted under Section 245-O of the Income Tax Act, 1961.

♦ Changes in Section 96B of the Finance Act:

Section 96B of the Finance Act provides that no proceeding before, or pronouncement of advance ruling by, the Authority shall be questioned or shall be invalid on the ground merely of the existence of any vacancy or defect in the constitution of the Authority.

Since Section 245P of the Income Tax Act, 1961 provides the same, Section 96B relating to vacancies not to invalidateproceedings has been omitted.

♦ Changes in Section 96C of the Finance Act:

Section 96C of the Finance Act contains provisions regarding application for Advance Ruling.

Sub-section (3) of Section 96C has been amended so as to increase the application fee forseeking advance ruling from Rs. 2,500/- to Rs. 10,000/- onthe lines of the Income Tax Act, 1961.

♦ Changes in Section 96D of the Finance Act:

Section 96D of the Finance Act contains the procedure of Advance Ruling after receipt of application.

Sub-section (6) of Section 96D has been amended so as to extend the existing time limit of90 days to 6 months by which time the Authority shall pronounce its ruling, on thelines of the Income Tax Act, 1961.

♦ Insertion of New Section 96HA after Section 96H of the Finance Act:

A new Section 96HA, providing transition provisions,has been inserted, after Section 96H, so as to provide for transferring of the pendingapplications before the Authority for Advance Rulings (Central Excise, Customs and Service Tax) to the Authority constituted under Section 245-O of the Income Tax Act, 1961,from the stage at which such proceedings stood as on the date on which the Finance Bill,2017 receives the assent of the President.

c. Other Legislative Changes:

♦ New Section 104 inserted to prescribe special provision for exemption in certain cases relating to long term lease of industrial plots:

Notification No. 41/2016-ST dated 22.09.2016, which has exempted from Service tax, one time upfront amount (called as premium, salami, cost, price, development charges or by whatever name) payable for grant of long-term lease of industrial plots (30 years or more) by State Government Industrial Development Corporations/Undertakings to industrial units, has been made effective from 01.06.2007 (i.e. the date when the services of renting of immovable property became taxable).

Further, refund shall be made of all such Service tax which has been collected, but which would not have been so collected, had the stated exemption been in force at all material times. Application for refund shall be made within a period of 6 months from the date on which the Finance Bill, 2017 receives the assent of the President.

♦ New Section 105 inserted to prescribe special provision for exemption in certain cases relating to life insurance services provided to members of armed forces of Union:

Service tax exemption to taxable services provided or agreed to be provided by the Army, Naval and Air Force Group Insurance Funds by way of life insurance to members of the Army, Navy and Air Force under the Group Insurance Schemes of the Central Government, is being made effective from 10.09.2014i.e. the date when services of life insurance became taxable, to 01.02.2016 (both days inclusive).

[Read with new insertion of Entry No. 26D in the Mega Exemption Notification vide  Notification No. 7/2017-ST dated 02.02.2017]

Further, refund shall be made of all such Service tax which has been collected, but which would not have been so collected, had the stated exemption been in force at all material times. Application for refund shall be made within a period of 6 months from the date on which the Finance Bill, 2017 receives the assent of the President.

B. Changes in the Mega Exemption List of Services Vide Notification No. 7/2017-ST dated 02.02.2017 amending Notification No. 25/2012-ST dated 20.06.2012 (Effective From 02.02.2017unless otherwise stated):

♦ Entry No. 9B: Removal of the word “residential”

The exemption vide Entry No. 9B of the Mega Exemption Notification, exempts services provided by Indian Institutes of Management (IIMs) by way of two year full time residential Post Graduate Programmes (PGP) in Management for the Post Graduate Diploma in Management (PGDM), to which admissions are made on the basis of the Common Admission Test (CAT), conducted by IIM.

Entry No. 9B has been amended so as to omit the word “residential” appearing in the notification. The exemption remains the same in all other respects.

♦Entry No. 30 w.e.f. the date on which the Finance Bill, 2017 receives assent of the President: Divided in two parts so as to include the following exemption under sub-part (i):

Services by way of carrying out-

(i) any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption.

[Read with corresponding deletion of Section 66D(f) of the Finance Act]

♦ New Entries inserted to exempt the following:

a) Entry 23A:Services provided to the Government by way of transport of passengers, with or without accompanied belongings, by air, embarking from or terminating at a Regional Connectivity Scheme Airport, against consideration in the form of Viability Gap Funding (VGF).

Provided that nothing contained in this entry shall apply on or after the expiry of a period of one year from the date of commencement of operations of the Regional Connectivity Scheme Airport as notified by the Ministry of Civil Aviation.

b) Entry 26D: Services of life insurance business provided or agreed to be provided by the Army, Naval and Air Force Group Insurance Funds to members of the Army, Navy and Air Force, respectively, under the Group Insurance Schemes of the Central Government.

♦ New definition provided for certain terms in paragraph 2 relating to definition of –

a) (ya) w.e.f. the date when the Finance Bill, 2017 receives the assent of the President “process amounting to manufacture or production of goods” means a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 (1 of 1944), or the Medicinal and Toilet Preparation (Excise Duties) Act, 1955(16 of 1955) or any process amounting to manufacture of opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force.

As Section 66D(f) of the Finance Act has proposed to be omitted, consequently, the definition of ‘process amounting to manufacture’ has also been deleted from Section 65B(40) of the Finance Act and has been incorporated in the Mega Exemption Notification.

C. Retrospective amendment in Service Tax (Determination of Value) Rules, 2006 Vide Clause 128 of the Finance Bill, 2017 (Will come into force when the Finance Bill, 2017 is enacted)

♦ Under Rule 2A:

Rule 2A of Service Tax (Determination of Value) Rules, 2006, has been amended with effect from 01.07.2010 so as to make it clear that value of service portion in execution of works contract involving transfer of goods and land or undivided share of land, as the case may be, shall not include value of property in such land or undivided share of land.

D. Repeal of Research and Development Cess Act, 1986

• Research and Development Cess Act, 1986 (32 of 1986) is proposed to be repealed vide Clauses 139 to 142 of the Finance Bill, 2017.
• Notification No. 14/2012-ST dated 17.03.2012 exempts the taxable service involving import of technology from so much of the Service tax leviable thereon as is equivalent to the amount of cess payable on the said import of technology under the Research and Development Cess Act, 1986. Consequently, with effect from the enactment of the Finance Bill, 2017, the stated exemption from Service tax would be not available to a taxable service involving import of technology on which Research and Development Cess is not payable. In other words, full Service tax along with cesses (Swachh Bharat Cess and KrishiKalyan Cess) would be applicable to such taxable service.

E. Amendment in the Cenvat Credit Rules, 2004 (“the Credit Rules”) vide Notification No. 4/2017-Central Excise (N.T) dated 02.02.2017 (Applicable from the date of publication in the Official Gazette):

♦ Changes in Rule 6(3D) of the Credit Rules: Reversal of credit taken on common inputs and input services

Explanation I applicable to sub-rule 3 and 3A of Rule 6 of the Credit Rules, provides that the ‘value’ for the purpose of reversal of credit taken on common inputs and input services used in providing taxable and exempted services, shall not include the value of service by way of extending deposits, loans or advances against consideration in the form of interest or discount.

The said clause (e) has been amended so as to exclude banks and financial institutions including NBFCs engaged in providing services by way of extending deposits, loans or advances from its ambit.

♦ Changes in Rule 10 of the Credit Rules – Transfer of Cenvat credit:

A new sub-rule 4 has been inserted in Rule 10 of the Credit Rules, so as to provide that transfer of Cenvat credit by the jurisdictional Deputy/Assistant Commissioner of Central Excise, shall be allowed within 3 months from the date of receipt of application from the manufacturer or service provider in this regard, subject to the fulfilment of the conditions prescribed under Rule 10(3).

Further, the stated period of 3 months may be extended by the Principal Commissioner of Central Excise or Commissioner of Central Excise, as the case may be, for a further period not exceeding 6 months, on sufficient cause being shown and reasons to be recorded in writing.