Service Tax Analysis of Budget 2011

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Complete analysis of changes proposed by Budget 2011-12 in Service Tax Laws.

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Service Tax Analysis of Budget 2011

  1. 1. UNION BUDGET 2011-2012 AN ANALYSIS ON SERIVCE TAX 28 February, 2011 PRESENTED BY: CA Amarpal Total Business Solutions (All solutions under one roof)Copyright @2011 Proprietary material of CA Amarpal, 9717105008 1
  2. 2. Contents:- Particular Page No. 1. Forward 2. Changes at a Glance 3. New Services 4. Change in existing services 5. Change in Service Tax Act 6. Changes in the Rules and notification in relation to Service Tax Act 7. ExemptionsCopyright @2011 Proprietary material of CA Amarpal, 9717105008 2
  3. 3. 1. Forward:- Today, on 28th February, 2011, Hon’ble Finance Minister presented the financial budget for the financial year 2011-12. The growth during 2010-11 has been swift and broad-based. The economy is back to its pre-crisis growth trajectory. In financial year 2010-11, the GDP in India is estimated to have grown at 8.6%. Despite improvement in the availability of most food items, consumers were denied the benefit of seasonal fall in prices normally seen in winter months. These developments revealed shortcomings in distribution and marketing systems, which are getting accentuated due to growing demand for these food items with rising income levels. Exports have grown at 29.4 per cent to reach US Dollar 184.6 billion, while imports at US Dollar 273.6 billion have recorded a growth of 17.6 per cent during April-January 2010-11, over the corresponding period last year. The current account deficit is around the 2009-10 level and poses some concerns because of the composition of its financing. In the run up of the Budget, there were expectations that there would be increase in the personal income tax slaps. During this budget, there was increase in the personal income tax slaps. There is increase in MAT scope and rate. Some change in the rate of surcharges has also been proposed. There are drastic changes in Indirect tax made by Union Budget 2011-12. Excise rate on most of the exempted goods have been levied with 1%. The concessional rate of excise has been increased by 1%. The service tax base has been changed from cash basis to mercantile basis. 28 February, 2011 CA. Amarpal Copyright @2011 Proprietary material of CA Amarpal, 9717105008 3
  4. 4. 2. Changes at a Glance:- The Finance Bill, 2011 has proposed to make major changes in the service tax provisions. The summary of the changes are as under: (i) 2 new services i.e. (a) Restaurants Service and (ii) Hotel etc services have been brought under the service tax net. (ii) The scope of following 7 existing services have been changed: a. Authorized Service Station Services b. Life Insurance Services c. Club or association services d. Business Support Services e. Legal Consultancy services f. Health Services g. Commercial Training or Coaching Centre (iii) 7 new exemptions have been provided. (iv) The scope of 3 existing exemptions has been changed. (v) 11 sections of Finance Act, 1994 (Service Tax Act) have been changed to give effect to change in interest rate, increase penalties, prosecution provisions. (vi) A new set of rules named Point of Taxation Rules, 2011 have been proposed to change the point of taxation from Cash basis to mercantile basis. (vii) Some changes in Service Tax Rules, Works Contract Rules have been made. Copyright @2011 Proprietary material of CA Amarpal, 9717105008 4
  5. 5. 3. Newly Inserted services The following new services have been brought under the service tax net:(I) RESTAURANT SERVICES [65(105)(zzzzv)](a) Applicability The restaurants which have the facility of air-conditioning in any part of the restaurant, at any point of time during the financial year, have the license to serve alcoholic beverages.(b) Scope of the Services All types of services provided by such restaurant in relation to serving the food and/or beverages including alcoholic beverages, in its own premises.(c) Date of Applicability From the date to be notified after enactment of Finance Bill, 2011(II) HOTEL, INN, GUEST HOUSE, CLUB ETC SERVICES [65(105)(zzzzw)](a) Applicability All hotels, inn, guest house, club or campsite or any other same type of establishment providing the accommodation services.(b) Scope of the Services Accommodation Services provided for a continuous period of less than 3 months.(c) Date of Applicability From the date to be notified after enactment of Finance Bill, 2011 Copyright @2011 Proprietary material of CA Amarpal, 9717105008 5
  6. 6. 4. Modification in the scope of existing services The scope of the following services has been enlarged:(I) Authorized Service Station Services [Sec. 65(105)(zo)] The scope of the above services has been enlarged, a) To cover the services of repair, reconditioning, etc provided by service stations (whether authorized or not). b) To cover all services of decoration and similar services along with the services already covered. c) However, services provided in relation to (i) 3 wheeler scooter auto-rickshaw, and (ii) motor vehicles meant for goods carriage, shall not be covered.(II) Life Insurance Services [Sec. 65(105)(zx) The scope of the ‘Life Insurance serves’ has been widened to cover all the services provided to any person provided by any insurer including re-insurer carrying on life insurance business. Earlier it was limited to the service provided to policyholders only. Further more, it is also being provided that tax shall be charged on the portion of the premium other than what is allocated for investment, when the break-up of premium is shown separately in any document given to the policy holder. The composition rate is being increased from 1% to 1.5%.(III) Club or association service [Sec. 65(105)(zzze) The scope of club or association services has been extended to cover the services provided to its non-members along with it members. Copyright @2011 Proprietary material of CA Amarpal, 9717105008 6
  7. 7. (IV) Business Support Services [65(105)(zzzq) The scope of service of business support has been expended by amending the definition of ‘Business Support Service’ to cover the all operational or administrative assistance in any manner.(V) Legal consultancy services [65(105)(zzzzm) The scope of ‘Legal consultancy services’ is being expanded by bringing within its ambit the; a) Service provided by a business entity to individuals in relation to advice, consultancy or assistance in any branch of law, in any manner; b) Representative service provided by any person to any business entity (representational services, provided to individuals will continue to be exempt); and c) Service of ‘arbitration’ provided by an arbitral tribunal to any business entity Crux: - All the legal consultancy services shall be liable to service tax except legal services provided by an individual to another individual and representative services to an individual.(VI) Health Services [65(105)(zzzzo) The scope of ‘Health Services’ is being expanded by including; i. All services, including diagnostics services, provided by an centrally air conditioned (wholly or partially) clinical establishment having more than 25 beds for in-patient treatment during any part of the year; Copyright @2011 Proprietary material of CA Amarpal, 9717105008 7
  8. 8. ii. Diagnostic services being provided by a clinical establishment with an aid of laboratory or other medical equipment; and iii. Services provided by a doctor, not being an employee of a clinical establishment, from the premises of such establishment. In view of the coverage of health services under (a), (b) and (c) above, the existing health service where payments are required to be made directly by the insurance company or business entities would no longer be operational.(VII) Commercial Training or Coaching Centre 65(105)(zzc) The scope of the ‘Commercial Training or Coaching Services’ have been widened by amending the definition of ‘Commercial training or coaching centres’ to cover all unrecognized courses within the tax net irrespective of the fact that such courses are conducted by an institute which also conducts courses which may lead to grant of a recognized degree or diploma.All the above changes will come into effect from a date to be notified, after theenactment of Finance Bill, 2011. Copyright @2011 Proprietary material of CA Amarpal, 9717105008 8
  9. 9. 5. Changes in Service Tax Act The following changes have been proposed to amend the other provision of Finance Act, 1994 (Service Tax Act).(I) Penalty for delay in filing service tax return [Sec. 70] Section 70 prescribes the maximum penalty in case of delay of return filing. The maximum penalty, under this section has been increased from Rs. 2,000 to 20,000. However, the existing rate of penalty per day as prescribed under rule 7C of the Service Tax Rules are being retained without any change.(II) Reduction in penalty amount [Sec. 73] The benefit of reduction of penalty in cases of fraud, collusion etc. which was available under section 73 has been withdrawn by omitting sub-section (1A) of section 73 together with both the proviso to sub-section (2) of section. Further, a new sub-section (4A) is being inserted in section 73 to provide that reduction of penalty shall be available in cases where during the audit, verification or investigation, it is found that the transaction not reported to the department are available in the records or invoices. Moreover, the penalty is being reduced to 1% per month of tax amount upto a maximum of 25%.(III) Reduction in interest [Sec. 73B and section 75] Appropriate provisos has been inserted both in section 73B and section 75 to reduce the interest rate by 3% for the assessees whose value of taxable services during the financial year does not exceed Rs. 60 Lakhs. Copyright @2011 Proprietary material of CA Amarpal, 9717105008 9
  10. 10. (IV) Penalty for delay in payment of service tax [Sec.76] The penalty for delay in making the payment of service tax has been reduced from Rs. 200 per day to Rs. 100 per day or from 2% to 1% per month whichever is higher. Also the maximum penalty has been reduced from 100% to 50% of the tax amount.(V) Penalty for contravention of rules and provision of act [Sec. 77] The penalty prescribed u/s 77 for contravention of rules and provisions of the act for which no penalty is specified elsewhere, has been increased from Rs. 5,000/- to Rs. 10,000/-.(VI) Penalty for suppressing etc of value of taxable services [Sec. 78] Section 78 has been amended to revise the maximum penalty. Hereafter, penalty will be mandatory and equal to tax evaded. Moreover, in cases, where the transactions which are available on records are not reported to the department, shall be equal to 50% of the tax amount. Further, the penalty is being reduced to 25% of the tax amount in cases where tax dues are paid within 30 days along with interest and reduced penalty. Furthermore, for assessees whose value of taxable services during the any year covered by the SCN does not exceed Rs. 60 Lakhs, the period of 30 days shall be revised to 90 days. Copyright @2011 Proprietary material of CA Amarpal, 9717105008 10
  11. 11. (VII) Other changes (i) Amend the power to waive penalty u/s 80. While penalties u/s 76 and 77 are being retained, penalty u/s 78 is being waived only in cases where the transactions are captured in the specified records. (ii) The power to issue warrant u/s 82 has been shifted from ‘Commissioner of Central Excise’ to ‘Joint Commissioner of Central Excise’ and execution of such warrant at the level of Superintendent. (iii) Make section 9A, 9AA, 9B, 9E, 34A and new section 35R of the Central Excise Act, 1944 applicable to service tax under section 83. (iv) A new section 88 is being inserted to create first charge on the property of the defaulter for recovery of service tax dues from such defaulter subject to provisions of section 529A of Companies Act, the Recovery of Debt due to Bank and Financial Institution Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (v) Reintroduce the provisions relating to prosecution u/s 89 which may be upto 3 years imprisonment. The prosecution shall apply in the following cases; a. Provision of service without invoice; b. Availment and utilization of Cenvat credit without receipt of inputs or input services; c. Submitting false informations and d. Non-payment of collected amount of service tax for a period of more than 6 months. Copyright @2011 Proprietary material of CA Amarpal, 9717105008 11
  12. 12. All the above changes from point (I) to (VII) will come into effect from a date to be notified, after the enactment of Finance Bill, 2011. (vi) The interest rate (i) u/s 75 for delay in payment of service tax and u/s 73B for payment of service being received in excess is being proposed to increase from 13% to 18%. This change shall come into effect from 01.04.2011.6. Changes in the Rules or notification The following changes have been proposed to amend the rules/notifications made to implement the service tax act. The details are as under;(I) Works Contract Rules, 2007 A new sub-rule 2A has been inserted to captioned rules to provide that the credit of tax on input services of ‘Erection, commissioning or installation’, ‘Commercial or industrial construction’ and ‘Construction of complex’ services as used by a person providing ‘Works contract service’ shall be restricted to 40% of tax paid, when such input tax has been paid on full value of the service after availment of Cenvat credit on inputs. Such change shall come into effect from 01.03.2011.(II) Service Tax (Determination of Value) Rules, 2006 A) Value of money changing services; (i) For a currency exchanges either from or to Indian Rupees, shall be equal to the units of currency exchanged multiplied by difference in the buying rate or the selling rate, as the case may be, and the RBI reference rate for that currency for that day; Copyright @2011 Proprietary material of CA Amarpal, 9717105008 12
  13. 13. (ii) For the currency, where the RBI reference rate is not available, shall be equal to 1% of the gross amount of Indian Rupees provided or received, by the person changing the money; (iii) Where neither the currency exchanged is Indian Rupees, shall be equal to1% of the lesser amount to two amounts the person changing the money would have received if such currencies are converted to the Indian Rupees. B) Value of Telecommunication services, shall be equal to gross amount charged by the telegraph authority from the service receiver. These amendments shall come into effect from 01.04.2011.(III) Service Tax Rules, 1994 The appropriate amendment has been proposed to make in the Service Tax Rules, 1994 to implement the following changes; (i) The basis of charging rate of tax has been shifted from cash basis to the basis when the services are deemed to have been provided. To implement such provision, new set of rules named ‘Point of Taxation Rules, 2011’ has been prescribed. Under the ‘Point of Taxation Rules, 2011’ point of taxation shall be the date which (i) provision of service, (ii) receipt of payment or (iii) issuing the invoice whichever is earlier. (ii) The monetary limit of Rs. 1,00,000/- prescribed under Rule 6(4B)(iii) for adjustment of excess payment has been increased to Rs. 2,00,000/-. Copyright @2011 Proprietary material of CA Amarpal, 9717105008 13
  14. 14. (iii) A new Rule 6(6A) has been inserted to provide that if any amount of service tax has been self-assessed and not paid, the same shall be recoverable with interest under section 87 of the Act. Thus, there will be not need to resort to section 73. (iv) Rule 6(7A) of Service Tax Rules, 1994 is being amended to provide that an insurer carrying on life insurance business have the option to pay tax,- a. On the amount of premium charged from a policy holders reduced by the amount allocated for investment, where the breakup of the amount allocated for investment is shown separately to the policy holder; b. On an amount calculated @1.5% of the gross amount of premium charged from a policy holder in cases other than (i) above; towards the discharge of his service tax liability instead of paying service tax at the rate specified in section 66 of Finance Act, 1994. Such option shall not be available in cases where the entire premium paid by the policy holder is only towards risk cover in life insurance. (v) Rule 6(7B) of above Rules pertaining to sale and purchase of foreign exchange is being amended to, - (i) Omit the proviso as well as the illustration; and (ii) Reduce the composition rate from 0.25% to 0.1% of the gross amount of currency exchanged towards discharging of service tax liability. The above changes in the point (i) to (v) shall be effective 01.04.2011.Copyright @2011 Proprietary material of CA Amarpal, 9717105008 14
  15. 15. (IV) Other changes (i) Appropriate changes have been made in Export of Service Rules, 2005 and Taxation of Service (Provided from outside and Received in India) Rules, 2006 above rules to amend so as to move some of the specified services from one category to another. (ii) An abatement of 25% from taxable value is being provided for the purpose of levy of service tax under ‘Transport of goods through coastal and inland shipping’. These above other changes shall be effective from 01.03.20117. Exemptions The following changes have been proposed to extend/withdraw the exemptions. The details are as under: (i) A new section 96J has been inserted to Finance Act, 1994 to provide the exemption to the club or association formed for representing industry or commerce, for the period form 16/06/2006 to 31/03/2008. Such club or association can claim refund of service tax if already paid during such period. (ii) Retrospective effect has been given to the amendment to notification no. 20/2009 dated 07/07/2009 exempting service tax on inter-State or intra- State transportation of passengers in a vehicle bearing contract carriage permit or a tourist vehicle permit for the period from 01.04.2000 to 06.07.2009. Copyright @2011 Proprietary material of CA Amarpal, 9717105008 15
  16. 16. The above changes in point (i) & (ii) shall be effective from the date to be notified after enactment of the Bill. (iii) The rates of service tax on travel by air are being revised which are as under: a. Domestic Travel (economy class) : from Rs. 100 to Rs. 150 b. International Travel (economy class) : from Rs. 500 to Rs. 750 c. Domestic Travel : (Standard rate) The above changes in point (iii) shall be effective from 01.04.2011. (iv) Exemption is being proposed to services provided by an organizer of business exhibitions in relation to business exhibitions held outside India. (v) Exemption is being provided to ‘works contract’ services provided for construction or finishing of new residential complex under ‘Jawaharlal Nehru National Urban Renewal Mission’ and ‘Rajiv Awaas Yojana’. (vi) Exemption is being provided to ‘General Insurance Services’ when provided under ‘Rashtriya Swasthya Bima Yojana’. (vii) Exemption is being provided to ‘Works Contract’ services provided within a port or other port or an airport for specified services. The above changes in point (iv) to (vii) shall be effective from 01.03.2011Copyright @2011 Proprietary material of CA Amarpal, 9717105008 16
  17. 17. (viii) Exemption has been extended to services of transportation of goods by air, roads or air when both the origin and the destination are located outside India. (ix) Value of air freight included in the assessable value of goods for charging customs duties is being excluded from taxable value for the purpose of levy of service tax under the ‘Transport of goods by air, services. (x) A modified scheme is being introduced to refund service tax to SEZ units and developers and notification no. 9/2009 –ST is being superceded. In the modified scheme, ‘wholly consumed’ services are being defined in the notification in order to extend ‘outright exemption’ and to permit refund of all other services on a proportionate basis. The above changes in point (viii) to (x) shall be effective from 01.04.2011 The endCopyright @2011 Proprietary material of CA Amarpal, 9717105008 17

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