INDIRECT TAXES

SERVICE TAX

The amendments proposed in the finance Bill, 2008 are of Chapters V and VI of the Finance Act, 1994, (The Act), Notifications issued and the following Rules framed there under are discussed below:
· Service Tax Rules, 1994,
· CENVAT credit rules, 2004,
· Export of Services Rules, 2005
· Taxation of services (provided from outside India and Recevied in India ) Rules, 2006 and
· Works Contract (composition Scheme for payment of Service Taxs ) Rules, 2007
· The amendments come into effect from the date of enactmen; meaning the date on which the president of india gives assent to the finance Bill unless specifically mentioned otherwise. Introduction of new services and changes in existing services come into effect from the date to be notified by the Government.
 

1. RATE OF TAX : -
Rate of service tax unchanged at 12% and that of education cess and secondary and higher education cess remain unchanged at 2% And respectively.

Rate in respect of composition scheme for payment of service tax under works contract service is increased from 2% to 4% with effect from 1 st March, 2008. Accordingly effective rate in respect thereof along with education cess and secondary and higher education cess will be 4.12%. (Refer Notification Nno. 7/2008-ST dated 1 st March,2008) .

2. INCREASE IN THE THRESHOLD LIMIT : -
The threshold limit for service providers is increased from rupees eight lakh to Rupees Ten lakh . Consequently, the limit for obtaining registration is increased from rupees seven lakh to Rupees Nine lakh . (refer notification nos.8/2008-st read with notification 9/2008 and 10/2008 all dated 1st March, 2008-effective from 1st April, 2008).


3. INTRODUCTION OF NEW SERVICES :-
a. Information Technology software services: section 65 ( 105) (zzzze) : -
Information technology software is defined to mean any representation of instructions, data, sound, or image including source code and object code, recorded in a machine readable form and capable of being manipulated or providing interactivity to a user by means of a computer or an automatic data processing machine or any other device or equipment.

The following services provided in relation to information technology software used in the course of or furtherance of business or commerce are covered under this category:-

• development

• study, analysis, design, and programming

• adaption, upgradation, enhancement, implementation, and other similar services

• advice, consultancy, assistance, including conducting of feasibility studies on implementation of software, specification of database, design and security, guidance and assistance during the start up phase of a new system and advice on proprietary

• acquiring the right to use, reproduce, distribute and sell for commercial exploitation including right to use the components for creation of and inclusion in other information technology products.

• right to use information technology software supplied electronically.

Information technology software services provided to individual for personal uses are not liable to service tax.

A number of information technology relate services are already leviable to service tax under various heads. Consequential amendments made in the coverage under other services are provided with reference to the respective services.

b. Stock Exchange, Commodities Exchange and Processing and Clearing House Services: section 65(105) (zzzzg),65 (105) (zzzzh), 65 (105) (zzzzi) :-
Services provided by a recognized stock exchange or a commodity exchange or a clearing corporation, recognized or authorized by a recognized stock exchange, or a recognized or a registered association, to perform the duties and functions of a clearing house in relation to assisting, regulating or controlling the business of buying and selling of securities including services in relation to processing, clearing, and periodical settlement of transactions for or relating to sale and purchase of securities, goods or forward contracts, delivery and payment thereof or any other incidental or connected services are covered under this category.

c. Transfer of right to use tangible goods: section 65 (105) (zzzzj) : -
Hiring or leasing of tangible goods including machinery, equipment or appliances provided for use without transferring the right of possession and effective control of such tangible goods are covered under this category.

The legislative intent in this case is to cover is to cover the transactions of hiring or leasing of tangible goods where VAT is not chargeable. However, the statutory provisions do not reflect this intent specifically.

d. Management of investment under unit linked insurance plan (UPIP) scheme: section 65 (105) (zzzzf) : -
Services provided to a policyholder by a life insurer in relation to the management of investment portion of the ULIP scheme also known as segregated fund is covered under this category.

The gross amount charged by the insurance companies in addition to the amount of investment and the premium allocable to the insurance cover, by whatever name called, is liable to service tax as and when same is charged to the policy holder.

It may be noted that the risk cover premium is already chargeable under the category of life insurance services.

e. Internet telecommunication services: section 65 (105) (zzzu) :-
The finance act, 2007 consolidated six different taxable services provided by telegraph authority related to telecommunication under the category of Telecommunication services.

A separate category of services has been introduced to cover telecommunication through Internet, which includes the following services:-

• Internet backbone services including carrier services of Internet traffic by one internet service provider to another internet service provider.

• Internet access services including provision of direct connection and space for the consumer’s web page.

• Providing telecommunication services over the Internet viz; fax, telephony, audio and /or video conferencing.

Existing category of internet telephony service is now merged under this category.

4. CHANGES IN EXISTING SERVICES :-
a. Expansion in the scope of existing services : -
In the definition of thirty nine taxable services, the term “ client” or “ customer” is replaced by the term “ any person” resulting in expansion of the scope of such services.

b. Banking and other financial Services/ Foreign Exchange Broker’s Services: [ Section 65 ( 105) (zm),65 (105) (zzk)] :-
The scope of this service is expanded to cover purchase or sale foreign currency including money changing by an authorised dealer or an authorized moneychanger or a foreign exchange broker. According to the Government clarification the service provider will be liable to service tax at a presumptive rate of 0.25 % of the gross amount of currency bought or sold by him.

c. Business auxiliary services [section 65 (105) (zzb) ]

• An explanation is inserted in section 65 (19) clarifying that any service provided in relation to promotion or marketing of games of chance including lottery etc. organized, conducted or promoted by a client is covered under business Auxiliary services. The amendment is made to override Sikkim High Court ruling in the case of Martin Lottery Agencies ltd vs. UOI (2007) 8 STR 561.

• IT software services is now covered under the new category “ information technology software service” and hence the specific exclusion of the same from the definition of Business Auxiliary Service is deleted.

d. Cargo Handling Service [Section 65(105) (zr)] :-
The definition of cargo handling service under Section 65(23) is expanding to include packing with transportation of cargo or goods, with or without one or more other services like loading, uploading , unpacking etc. The services of packers and movers will now be covered under this category.

e. Internet Telephony Services [Section 65(105) (zzzu)] :-
This service category has been merged with the new category “Internet Telecommunication service” .

e. Management, Maintenance or Repairs Service [Section 65(105) (zzg)] :-
An explanation is inserted in Section 65(64) clarifying that “properties” includes information technology software. The intention is to levy service tax on the management, maintenance or repair of customised software.

f. Renting of Immovable Property [Section 65(105) (zzzz) ] :-
An explanation is inserted in section 65(90a) clarifying that renting of immovable property includes allowing and permitted use of space in immovable property, irrespective of transfer of possession or control of immovable property. Allowing the use of space for placing vending machines, dispensing machines etc. or erection of communication towers etc.on buildings is covered undr this category.

g. Consulting Engineer’s Services [Section 65(105)(g)] :-
An explanation is inserted in Section 65(105) (g) clarifying that advice, consultancy or technical assistance in the discipline of computer hardware engineering and computer software engineering is covered under this category.

h. Technical Testing and Analysis Service [Section 65(105) (zzh)] :-
Section 65 (106) defining technical testing and analysis service is amended to include technical testing and analysis of IT software. Consequently, the same is covered under this category.

I. Technical inspection and Certification Services [Section 65(105)(zzi)] :-
Section 65(108) defining technical inspection and certification service is amended to include technical inspection and certification of IT software. Consequently the same is covered under this category.

j. Tour Operator’s Services [Section 65(105) (n) ] :-
The definition of tour operator under section 65(115) is amended to include services provided in relation to journey from one place to another, generally known as point-to-point our in a vehicle having contract carriage permit, even if the vehicle does not meet the criteria specified for tourist vehicle. Service provided to educational bodies other than commercial training or coaching centers shall be excluded From the scope of taxable services. Services rendered by stage carriages (i.e., passengers paying their individual fares and having right to board or alight from such carriage according to their choice and convenience) are not covered under this category.

5. VALUATION OF TRANSACTIONS BETWEEN ASSOCIATED ENTERPRISES :-
An explanation to section 67 is amended to provide that when any transaction of a taxable is with an associated enterprise, the amount credited or debited to any account which may be called suspense account or by any other name in the books of a person liable to pay service tax, it would form part of the gross value of taxable service liable for service tax.

For this purpose, the term, “associated enterprise” is assigned the same meaning as provided in Section 92A of the Incom-tax Act, 1961 dealing with transfer pricing provisions.

It may be noted that in case of transactions occurring between associated enterprises, service tax would be payable after receipt of payment or crediting / debiting of the amount in the books of account whichever is earlier. It will also apply to service tax payable under reverse charge / section 66A.

6. AMENDMENTS IN THE ACT :-
a. Section 71 is inserted whereby CBEC is empowered to notify a scheme enabling specified class or classes of persons to prepare and furnish returns of service tax through a Service Tax Return Preparer on the lines it is done under the Income-tax Act 1961.

b. Section 72 is inserted to empower Central Excise Officer to make Best Judgement assessment after allowing assessee to represent his case where an assessee has failed to furnish service tax return under section 70 or the return furnished is not in accordance with the provisions of the Act or rules made thereunder.

c. Section 77 is substituted to provide penalty for specific contraventions as follows :-

d. Section 78 is amended to provide that where penalty for failure to pay tax on account of fraud, wilful misstatement, suppression of facts, etc. levied, the penalty for failure to pay service tax under section 76 shall not be imposed.

7. AMENDMENTS IN THE RULES :-
a. Rule 6(1A) is introduced to extend the facility to pay tax in advance and adjust the same against the subsequent period’s service tax liability. The same shall be intimated to the jurisdiction Superintendent of Central Excise within 15 days from the date of such payment and details thereof and its adjustment shall be indicated in the half yearly return.

b. The monetary limit for self adjustment of service tax in certain cases is increased from Rs. 50,000 to Rs. 1,00,000.

c. The time limit for revision of return from 60 days to 90 days.

d. Under Rule 7C, Central Excise Officer is empowered to reduce or waive the penalty for delayed filing of half yearly return, if the gross amount of service tax payable is Nil.

( These amendments are effective from 1st March,2008 . Refer Notification No.4/2008-ST, dated 1st March, 2008 ) .

8. SERVICES IN RELATION TO TANGIBLE GOODS PROVIDED FROM DISTSNT LOCATION IN THE COURSE OF EXPORT AND IMPORT OF SERVICES :-
Rule3(1)(ii) of the Export of Services Rules, 2005 and Rule 3(ii) of Taxation of services (Provided from Outside India and Received in India )Rules 2006 apply to all those services where the place of performance is the applicable criterion. Insertion of provision in both the above rules has enabled to determine taxing jurisdiction in respect of the following categories of services :-

• Management, maintenance or repairs

• Technical testing and analysis

• Technical inspection and certification

Services under any of the above categories shall be treated as export if they are provided in relation to goods, material or immovable property situated outside India at the time of provision of service, even though the service is provided through internet or electronic network including computer network or such other means ; i.e., provided remotely and not physically performed outside India.

Similarly , in a converse situation of import, it is provided that where any of these services is provided by a person from outside India, and the services are in relation to any goods or material or any immovable property situated in India at the time of provision of service, through internet or an electronic network including computer network, then such taxable services whether or not physically performed in India shall be treated as performed in India and shall be treated as import and shall attract service tax under reverse charge. (Refer notifications No,5/ 2008-st and no06/ 2008 – s both dated and effective from 1st march ,2008)

9. EXEMPTIONS :-
a. Taxable service provided by a person located outside india in relation to booking of an accommodation in a hotel located in India for a customer located outside is exempted. (refer notification no.14/ 2008 st dated 1st March ,2008) .

b. In case of Goods Transport Agency Services (GTA) an abatement of 75% can now be availed without fulfillment of the following conditions :-

• non availment of CENVAT credit by the provider of GTA service and

• non availment of benefit under notification no. 12/2003 st dated 20th June, 2003.

As a consequence, notification no 1/2006- ST dated 1st march 2006 is suitably amended (Refer notification No.012 / 2008 read with notification no.13 / 2008 both dated and effective from 1ST March, 2008)

10. CENVAT CREDIT RULES 2004 :-
a. Definition of input services is the context of a manufacturer whereby in rule2 (i)(ii) the words “ clearance of final products from the place of removal” have been substituted by “clearance of final products, up to the place of removal”. This amendment is made to overcome the controversy generated due to conflicting tribunal decision in respect of CENVAT credit on outward transportation.

b. As a consequence of unconditional abatement of 75% being granted in regard to services of transportation of goods by road the said service category is excluded from the definition of “output service” in rule 2(p) (this amendment is effective from 1st march ,2008) .

c. First Proviso to rule 3 is amended to permit removal of capital goods outside the premises of the output service provider for providing output service without any time restriction.

d. Rule 6(1) is amended whereby the words “exempted goods or exempted services” are substituted by “exempted goods or for provision of exempted services” .

e.

i. The existing Rule 6(3) has been revamped to provide the following options as applicable to a manufacturer of output service provider using common inputs / input services for providing taxable as well as exempted goods/taxable as well as exempted services but not maintaining separate account of receipt, consumption and inventory of inputs or input services :-

• manufacture shall pay an amount equal to 10% of the value of exempted goods and the output service provider shall pay an amount equal to 8% of the value of exempted services.

• manufacture or output service provider shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in or in relation to manufacture of exempted goods/provision of exempted services subject to compliance of detailed procedure prescribed in Rule 6(3A) .
  The options stated above are required to be exercised for all exempted goods manufactured by a manufacturer or all exempted services provided by an output service provider. An option once exercised cannot be withdrawn during any financial year.

ii. the procedure prescribed requires the manufacturer/ output service provider to :-

• intimate in writing to the Superintendent of Central Excise, giving the specified particulars ;

• determine and pay provisionally every month, an amount equivalent to CENVAT Credit attributable to manufacture of exempted goods provision of exempted services in accordance with the formula prescribed in Rule 6(3A)(b);

• determine finally. The amount of CENVAT Credit attributable to exempted goods/ exempted services for the whole financial year, in accordance with the formula prescribed in Rule 6(3A)©;

• determine shortfall/surplus in payment of CENVAT Credit;

• pay the shortfall by 30th June. In case of delay, interest would be payable at the rate of 24% per annum;

• adjust the excess amount on his own by taking credit of such amount; and

• intimate in either case to the jurisdictional Superintendent of Central Excise, within 15 days from the date of payment/date of adjustment giving the specified particulars.

f. Rule 7A is inserted to prescribe a procedure to enable the output service provider to take credit on inputs and capital goods on the basis of invoice, bill or challan issued by its other offices or premises.

Rules relating to Registered Dealer Mechanism under Central Excise shall apply mutatis mutandis to such offices or premises of the output service provider.

g. Rule 15A is inserted to provide for a general penalty up to Rs. 5,000 in case of contravention of any of the provisions of the rules for which no specific penalty is provided.

(Refer Notification No. 10/2008-CE(N.T.) dated 1st March 2008)

11. SERVICE TAX DISPUTE RESOLUTION SCHEME,2008 :-

The salient features of the scheme are as follows :-
a. The scheme is operative between 1st July 2008 and 30th September, 2008.

b. It is offered to persons in dispute for service tax, cess, interest or penalty as on 1st March, 2008 in respect of which-
· an order has been passed;
· a demand notice or a show cause notice has been issued prior to 1st March, 2008.

c. The scheme shall not apply to cases where :-
· The service tax amount in dispute exceeds Rs. 25,000/= or
· The order is made or notice is issued under section 73A .


d. A person opting for the scheme is required to make a declaration in the form to be prescribed.

e. A designated authority to issue an order within 15 days of the receipt of declaration .

f. Settlement mechanism :
Tax arrear on account of determination / assessment / order of an adjudicating authority or on account of show cause notice or demand notice:

@50% of the service tax amount

@25% of interest / penalty / interest plus penalty

if penalty exceeds service tax to which it relates the amount of service tax shall be considered to be the amount of penalty.

g. the declaration to pay the amount determined within 30 days of the date of the order of the authority on submission of proof of payment of the tax, the declaration to receive the certificate as conclusive evidence, based on which, any appeal filed or reply made to show cause notice would stand withdrawn and the matter involved cannot be reopened in any other proceeding.

h. the amount paid by the declarant under the scheme is non-refundable.

i. in case of a writ petition filed by the declarant before any high court or the Supreme Court, furnishing of proof of withdrawal of the writ would be required.

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