Service tax analysis 2012


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An in-depth analysis of the service tax provisions as ratified by parliament with Finance Act 2012

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Service tax analysis 2012

  1. 1. Analysis ofSERVICE TAX LAWS –BUDGET 2012 UPDATE(For internal circulation only)
  2. 2. Contents• Introduction• Rate changes• Structural Changes• Place of Provision Rules• Point of Taxation Rules• Valuation Rules• CENVAT Credit Rules• General Changes• Implementation Dates
  4. 4. Introduction Wide sweeping changes to service tax legislation have been proposed All “Activities” are now covered under the gamut of service tax laws. Only exclusions are a so called “Negative List” and 34 exemptions, some of them retrospective Changes have been made in the service tax rate „Taxable territory‟ has been defined in the Act which excludes J&K. Clarifications of Point of taxation rules, which were announced last year, to ease problems faced by service providers Reverse charge concept has been revised and now included additional services Significant changes have been made to CENVAT credit rules Procedural changes have been made by amending Section V of the finance Act 1994 Service Tax Rules have been amended
  5. 5. Rate Changes
  6. 6. Rate Changes Notification no. 8/2009 ST has been withdrawn effective April 1 2012, bringing the service tax rate back to 12% from the current 10% Composition Rates have also been revised as follows : Earlier Now First Year 1.5% 3%* Life Insurance Subsequent 1.5% 1.5%* Years Works Contracts 4% 4.8% Up to Rs 1 .10% .12% Lakh Between 1 Lakh and 10 .05%+100 .06%+120 Money Lakh Changing .01%+550, .012%+660, More than 10 subject to subject to Lakh maximum of maximum of Rs 5000 Rs 6000 Air transport - 12%** * CENVAT credit is now available ** 60% abatement available Rate for CENVAT credit reversal for exempt services has been hiked by 20% from 5% to 6%
  7. 7. Structural Changes
  8. 8. Definition of Service As per the act, all services are now subject to tax• Service to be defined as “any activity carried out by a person for another for consideration, and includes a declared services.”• Activities not considered a service are : – transfer of title in goods or immovable property – a transaction in money or actionable claim – the activities specified in constitution as „deemed sale of goods‟. – service by an employee to the employer – fees taken in any Court• This clause is not applicable to : – Services rendered by MPs, MLAs, Members of Panchayats, Municipalities etc in performing functions of their office – Services rendered by any person occupying any post in pursuance of the provisions – of the Constitution – duties performed by any person as a Chairperson or a Member or a Director in a – body established by the Central Government or State Governments or local authority
  9. 9. Negative List• “Negative List" means the services which are listed in Section 66D as not liable to Service• Services covered Under Negative List areService CommentsServices provided by Government Authorities,Excluding :• Speed/Express Post, Life Insurance and other In case of other supportagency services services, service receiver•Services in relation to aircraft/vessel in to pay taxes underairport/port reverse charge system•Transport of goods, passengers•Other support servicesServices provided by Reserve Bank Of India(“RBI”)Services provided by Foreign Diplomatic MissionAgriculture and related activities ( including salepurchase of agricultural produce)Trading of goodsManufacturingSale of space or time for advertising ( other thanradio and television)
  10. 10. Negative ListService CommentsToll ChargesGames of chance ( betting, gambling and lottery) These are subject toEntertainment events and Amusement facilities state administered “Entertainment Tax”Electricity Transmission and DistributionEducation ( pre-school, vocational and recognizedqualifications)Services by way of renting of residential dwellingfor use as residence Interest does notInterest on loans and advances and interbank include any processingforex trading fee or other charges.Public Transport (Stage carriage, railways ( exceptfirst class and AC coaches), Metro/trams, inlandwaterways, transport in a vessel of less than 15tonnes ( other than for tourists), metered cabs,radio tax, auto-rickshaws.Goods Transportation ( except goodstransportation agency and courier agency)Funeral Services
  11. 11. Exemption list• Many other changes are also being timed with the introduction of negative list, including many new exemptions consolidated with the existing exemptions in a single mega exemption for ease of reference.• New exemption list is as follows :Service CommentsServices provided to United Nations or specifiedInternational OrganizationsHealth care services by a clinical establishment,medical practitioner or Para- medicsServices provided by veterinary clinicServices by a section 12AA entity for charitablepurposesServices by a person by way of• Renting of a religious place for general public• Conduct of religious ceremony Not covered underFee charged by Advocates from non corporate previous rules andincluding representation hence no change is taxability Includes testing ofServices of technical testing of drugs by approved herbal remedies andorganization vaccines
  12. 12. Exemption listService CommentsTraining or coaching relating to arts, culture orsportsServices provided Clause covers mid-•To educational inst. by way of catering day meals and•To educational inst. for transportation or admission transportationof students services Exemption only to services provided by coaches,Services provided to recognized sports body sportspersons , umpires etc and other sports bodies. Only where the tournament has beenServices by way of sponsorship of tournament or organized bychampionships specified sports bodiesServices provided to govt. or local auth. by way oferection , construction, repair, alteration , renovationof civil structure, historical monument etc.Services provided by way of erection , construction,repair, alteration , renovation of roads, bridge,tunnel , building owned by charitable organization,pollution control factory etc.Temporary transfer of a copyright relating tooriginal literary, dramatic, musical, artistic works orcinematograph films
  13. 13. Exemption listServiceServices provided in relation to serving of food orbeverages by units not having air-conditioning/heating or a license to serve alcoholicbeverages As per NotificationServices provided by way of transportation of 9 No. 8/2010-ST, datedspecified goods by railways or by a vessel. 27.2.2010Services provided by GTA by way of transportationof fruits, eggs, milk etc. where gross amountcharged for single carriage does not exceed Rs 1500and for a single consignee does not exceed Rs 750Renting of motor vehicle meant to carry more thantwelve passengers to state transport undertakingand, a means of transportation of goods to a goodstransport agencyTransport of passengers by air terminating in anairport located in AP, Assam, Manipur, Meghalaya,Mizoram, Nagaland, Sikkim, or Tripura or WB orcontract carriage for transportation of passengersServices by way of motor vehicle parking to generalpublic excluding leasing
  14. 14. Exemption listServicesServices by performing artist in folk or classical artformsServices of collecting and providing news renderedby independent journalists, Press Trust of India orUnited News of India Exemption availableServices by way of renting hotels, inns or places only to units withmeant for residential or lodging purposes. declared tariff below Rs 1000/dayServices provided by Sub broker , Member ofcommodity exchange , Mutual fund agent,Marketing agent of lottery tickets or A businessfacilitatorProcess as job worker in relation to specified goodsServices by way of making telephone calls fromPCO, Airport phones etc.Services of slaughtering of bovine animalsServices received by govt. or charitable organizationfrom service provider located in non-taxableterritory.
  15. 15. Exemption listService Exemption availableService provided by incubatee with a total business in the first three yearsturnover not exceeding 50 lakhs of incubation For services renderedServices by unincorporated body or society to own as trade union,members by way of reimbursements of charges or provision of exemptcontribution services etcServices to govt. by way of repair of ship, boat ; Transport of drinkingwaste collection; storage , transport or testing of water via pipe andwater; sewerage treatment conduits exemptServices of general insurance business
  16. 16. Declared Services• „Declared Services‟ are the services carried out by a person for another for consideration and are hence taxable , as per section 66E.• These have been introduced with a view to remove ambiguity and for the purpose of uniform application of law.• Following are the 9 activities specified:-ServicesRenting of immovable propertyConstruction of complex, building or structure or a part thereof exceptwhere entire consideration is received after issuance of certificate ofcompletion.Temporary transfer or permitting the use of enjoyment of any intellectualproperty right.Development, design, programming, adaptation etc. of informationtechnology softwareAgreeing to the obligation to refrain from ,to tolerate, to do an act.Transfer of goods by way of hiring, leasing, licensing without transfer ofright to use.Activity in relation to delivery of goods on hire purchase.Service portion in execution of works contract.Service portion in activity wherein food, other article of humanconsumption is supplied.
  17. 17. Abatements• With the introduction of the Negative list, changes has been made to abatements considering the principle of neutrality and to avoid double taxation.• The existing and new abatements are:Services Existing Proposed CENVAT taxable taxable credit portion portion allowedConvention center or Mandap All credits 60% 70%with catering except inputs All creditsPandal or shamiana with 60% 70% except oncatering inputsCoastal shipping 75% 50% No credit Credits onAccommodation in hotel 50% 60% inputs All creditsRailways: goods 30% 30% allowedRailways : passengers New levy 30% All creditsOutdoor catering 60% 50% except inputs All creditsService portion of supply of 40% 30% except inputsfood or any other article
  18. 18. Reverse charge - Amendments• „Reverse charge‟ means when liability to pay service tax has been shifted to service recipient covered.• Existing cases under reverse charge are (100% liability of recipient): • Service by insurance agent to person carrying on insurance business • Transportation of goods by road by GTA • Sponsorship services • Service provided by a person from outside India • Service by arbitral tribunal • Service by govt. located in taxable territory• Additional services covered under Reverse charge mechanism are: Services Liability of Liability of service service provider receiver Rent a Cab services From •With abatement 100% 16.07.2005 to •Without abatement 40% 27.07.2009 Supply of manpower 75% 25% Works contract services 50% 50%
  19. 19. Place of Provision of Service Rules 2012
  20. 20. Place of provision of serviceRules 2012• Given the impending introduction of GST and the new negative list provisions it became necessary to identify the taxing jurisdiction for the service. Accordingly, place of provision rules have been introduced.• These new rules will determine the place where service shall be deemed to be provided.• These are formulated by replacing the export rules and import rules.• The „place of provision‟ in different situation is proposed to be as follows: Situation Place of provision of service Location of service Generally receiver Location where Performance based services service is actually performed Where immovable Service relating to immovable property property is located Location in taxable Where above service are provided at more territory where than one location including a location in greatest prop. of taxable territory service is provided.
  21. 21. Place of provision of serviceRules 2012 • Central govt. is empowered to notify any description of service • Where provision of service is determined in more than one rule, the provision is determined acc. to the rule that occurs later.Situation Place of provision of serviceProvider and receiver are located in taxable Location of serviceterritory receiver Location of serviceSpecific services provider Place of destination ofService of transportation of goods goods Location of person liable toGoods transport agency services pay tax. Place where personPassenger transportation services embarks for conveyance First scheduled point ofService provided on board a conveyance departure of that conveyance.
  22. 22. Point of Taxation
  23. 23. Point of Taxation Rules -AmendmentsScenarios: Situation Point of TaxationInvoice is issued before completion of Time of issue of invoiceservice and receipt of paymentService is completed and invoice is Time of issue of invoiceissued within 30 days/45 daysService is completed and invoice is not Date of completion of serviceissued within 30/45 daysPayment is received in advance before Date of receipt of payment, to theissue of invoice or completion of service extent of such paymentFor the purposes of this rule, wherever any advance, by whatever nameknown, is received by the service provider towards the provision of taxableservice, the point of taxation shall be the date of receipt of each such advanceInvoice to be issued:Within 30 days of “completion of service”For banking /financial institution or any other providing service in relationto banking – within 45 days of completion of service.
  24. 24. Point of Taxation Rules -Amendments In case of individuals and firms, in case of aggregate value of taxable services provided in a year being Rs 50 lakhs or less, option to pay service tax on payment basis up to taxable services up to such limits is available In case service provider receives up to Rs. 1000 in excess of the invoice amount; there is no need to raise fresh invoice for such excess amount if POT rules are followed. Exporter of service is not required to pay tax if payment is received within period specified or extended period as allowed by RBI. „Date of Payment‟ has been specifically defined under Rule 2A: Situation Service provided after change in effective rate of tax In normal case Earlier of dates of entry into books of account or actual credit . In case of change of Date when amount is actually credited in rate or new levy the bank; if it is credited more than four between said two days after date of such change. dates [Rule 5]
  25. 25. Introduction of New Service -ProceduresIn the case of introduction of new services under tax ambit the followingsituations with follow : Scenario Point of Taxation Event 1 Event 2 Invoice issued & Payment received No Service Tax NA before Service Payable became Taxable New Service Invoice issued Payment received No Service Tax brought within 14 days of before Service Payable under gamut Completion of became Taxableof Service Tax Service Invoice issued within 14 days of Service provided Completion of No Service Tax before tax became Service and Payable applicable payment received after Service became taxable
  26. 26. Continuous Supply of Services Continuous Services• Telecommunication Services • Any other service if provided• Commercial or Industrial continuously or on recurrent Construction basis under a contract for a• Construction of Residential period exceeding three Complex months.• Internet Telecommunication• Works ContractThe point of taxation in the case of continuous supply of servicesshall be as follows: Date of issue of invoice or receipt of payment, whichever is earlier, if the invoice is issued within the prescribed period of 30 days from the datea of completion of the provision of service. Date of completion of the provision of service or receipt of payment, if the invoice not issued within the prescribed period as above.Separate rules for continuous services have been omitted.Provisions of rules for new levy and changes of rates will alsoapplicable to continuous supply.
  27. 27. Specified Services When CENVAT Point of TaxationNature of Service Credit available to Conditions (POT) Service Recipient If payment is not received within time, Date of Receipt prescribed (6Export of service NA of Payment Months) by RBI, POT as per normal provisions If payment is not made within 6 months from the date of invoice, POT would be as perPersons required normal pay service tax Date of payment of Therefore, if after six as recipient of Value & Service Date of Payment months payment for service (Reverse tax mentioned on invoice has not been Charge Invoice made, then there Mechanism) would be liability to pay service tax but no corresponding credit would be allowed
  28. 28. Specified Services When CENVAT Point of TaxationNature of Service Credit available to Conditions (POT) Service Recipient A) Specified Services: - Architect, Interior Decorator, CA/ CS/ Cost Individuals/ Accountants/Scientif Proprietorship/ ic & Technical Date of Receipt Date of Receipt of Partnership firms consulting/ Legal of Payment Invoice providing B) Credit is available specified Services to the Service Recipient on receipt of invoice though no amount has been paid They must have turnover of 50 lakhs Other Date of Receipt or less duringIndividual/partner of Payment preceding F/Y. ships firms(LLP) Payment basis shall applicable up to Rs. 50 lakhs.
  29. 29. Valuation Rules
  30. 30. Changes in Valuation rules• A new clause has been inserted in Rule 6 to include any amount realized as demurrage within the value of services.• Accidental damages due to unforeseen action would no longer form part of value of service.• Interest on loans will now be an exempt income rather an exclusion from value; so credit reversal will take place in case of interest on loans.• „Prescribed manner‟ in Rule 3 will be applicable only in case where valuation is not ascertainable.• In the case of works contracts If value of goods cannot be determined, gross value for service tax purposes will be:Nature of contract Taxable valueIn case of original work (includes additions and 40%alterations)where gross amount include value of land 25%Otherwise including completion and finishing 60%
  32. 32. CENVAT Credit Rule Changes Rule 5 has been amended to provide taxes paid on any inputs or input services will be entitled to be refunded in the ratio of export turnover to total turnover. Credit on goods can be allowed without bringing them to the premises provided documents regarding delivery and location have been maintained. In case of ISD, credit of inputs services is allocated to only such units where they have been put to use or proportionate to turnover if utilized for more than one unit. Credit of service tax paid on hiring, insurance, repairs of all Motor cars except those specified will be allowed. Rule 9(1)(e) has been amended to allow availment of credit on tax payment challans in case service tax paid on reverse charge basis. The rate for payment under rule 6(3) has been increased from 5% to 6% of value of exempted goods and services. Documents for availing credit have been amended to include challans evidencing payments by all categories of service receiptant.
  34. 34. General Changes Changes in frequency of filing returns :- Organization Type Individual /firm Others /LLPTax Liability Tax liability Tax liability <25lacs in >25lacs in preceding year preceding yearReturn Filing Frequency Monthly Quarterly
  35. 35. General changes• Ambit of „Money‟ defined in sec 67 has been amended to expand the meaning.• A new section 67A has been introduced to prescribe the applicable rate of exchange, value of taxable service & rate of service tax.• Definition of „works contract‟ has been extended to include movable properties.• Provisions of section 73 has been amended regarding recovery of tax as follows:Amendment comments to take care of the shorter periodPeriod of issuance of demand notice available due to reduction of periodextended from 12 to 18 months of new return EST-1A new sub section (1A) have beenintroduced to follow up thedemand.To avoid overruling reference tosubsection 3 is being deleted fromsub section 4(A)• Provision relating to settlement commission are being bought in service tax.• A common simple return for Excise and Service tax has been prescribed.
  36. 36. General changes• Provisions of appeals have been amended to align with Excise Law which will come into force from the date president will give consent to Finance bill 2012. – Appeals to CCE(appeals) reduced to 2 months – Appeals to Appellate tribunal increased to 4 months• Revision mechanism under CE Act has been made applicable to Service Tax.• Section 89 related to offences has been amended to provide that any person who knowingly evades payment of services tax shall be punishable.• Special audit provisions u/s 14AA ahs been made available to Service Tax.• In respect of renting of immovable property penalty shall not be imposable for default in the payment of service tax provided service tax along with interest is paid within period of 6 months from date Finance Bill 2012 receives consent of president.• Taxable service of import of technology has been exempted from service tax to the extent R&D cess has been payable subject to certain conditions.• Scheme for electronic refund of tax paid on taxable services used for exports of goods at post removal stage had been made operational since 3.01.2012.• It has been clarified that rate applicable for 8 specified services will be 12% if payment is made on or after 1.04.2012 and in case of need supplementary invoices may be issued to reflect the same.
  37. 37. Implementation Dates• The Effective dates for the various changes proposed by the bill are as below :Provision Effective Date Date to be notified after theNegative list for services enactment of the Finance Bill, 2012Amendments to Point of TaxationRules under the March 17, 2012Finance Act, 1994Amendments to CENVAT Credit Effective from April 1, 2012Rules, 2004Legislative changes in Customs and Date of enactment of the Finance Bill,Excise 2012New rate of Service Tax April 1, 2012
  38. 38. THANK YOU
  39. 39. DisclaimerThis presentation provides general information existing at the time of preparation.The presentation is intended as a news update and Arkay & Arkay, CharteredAccountants neither assumes nor accepts any responsibility for any loss arising to anyperson acting or refraining from acting as a result of any material contained inthis presentation. It is recommended that professional advice be taken based on thespecific facts and circumstances. This presentation does not substitute the need to referto the original pronouncements.
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