6th Knowledge Master Class on Understanding Service Tax Law Nuances

1. Presents
6th Knowledge Master Class
On
Understanding Service Tax Law Nuances
Conducted by
Dr. Sanjiv Agarwal
FCA, FCS
Wednesday,
17th April, 2013
Mumbai © Dr. Sanjiv Agarwal
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2. SESSION – I
SERVICE TAX
Overview
and
Recent Changes
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3. This Presentation Covers
• Economic Overview
• Taxation of Services – Past and Present
• Major Changes in 2012 -2013
• Macro View of Budget – 2013 Proposals
• GST – An update
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4. 4
Indian Economy – An Overview
 Indian economy is the 11th largest economy in the world
and the third fastest growing even in today’s recession,
after China and Indonesia (Present growth rate around
5.5%)
 World is presently facing recession-II but Indian economy
is still a growth economy
 Inflation –food, lifestyle
 Agriculture, services and industry are the major sectors of
Indian economy. Contribution of different sectors in
March, 2012 was :
 Agriculture 19%
 Services 59%
 Industry 22%
(likely to be @ 64% in March, 2013)

5. 5
Share of Services in GDP

6. 6
Share of services in GDP tracked
Year % of GDP
 1950 15
 1970 33
 1980 36
 1994 40
 1995 41
 2000 47
 2005 53
 2010 57
 2012 59
In 2011-12, services have grown by 9.6 % which is more than GDP
growth rate

7.  Indian GDP to grow about 5 percent in 2012-13 and growth expected at
6.1-6.7 percent in 2013-14
 Tax Policy – clarity in tax Laws, stable tax regime, non-adversarial tax
administration, fair mechanism for dispute resolution, independent
judiciary
 Need to raise tax – GDP ratio which is presently around 6-7 percent.
 Service Tax contributes 11.50 percent of the gross tax revenue
 Service sector growth @ 9%, much higher than the GDP growth itself.
 Contribution of services sector in GDP at 64% including construction
sector.
 No change in Service Tax rates.
 No change in peak rates of customs and excise duties also.
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8. 8
Growth in Tax GDP Ratio in India–
Irratic and low
Years Tax GDP ratio
1990-91 10.1%
2003-04 9.2%
2007-08 11.9%
2009-10 9.7%
2010-11 10.4%
2011-12 9.9%
2012-13 7.0%*
* Expected

9. Year No of new
services
Total No of
services
Total collection
(Rs. in crore)
1994 3 3 407
2001 - 26 2612
2005 13 72 14199
2008 7 103 51301
2010 3 112 58000
2012 0 120 97509
2013 - All 132697 (RE)
131884 (A)
2014 - All 180141 (BE)

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Taxonomy of Indian Taxation
TAXATION POWERS OF UNION
 Income Tax – on income, except
agricultural income
 Excise Duty – on goods manufactured
 Custom Duty – on imports
 Service Tax – on specified services
 Central Sales Tax – on inter-state sale of goods
 Stamp Duty – on 10 specified instruments

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 Introduced in India in 1994 as a simple, modest tax with just three
services.
 Service tax – an indirect tax.
 Approach to Service Tax – Selective as against comprehensive one.
 Desirable from revenue, equity and economic view point.
 Governed by Finance Act, 1994 and a dozen of rules.
 Legislative dependence on over 25 other laws.
 Scattered and heterogeneous large mass of service providers as well as
wide spectrum of services.
 Jurisdictional application.

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Selective Approach to Service Tax
 Taxation by choice
 Service not defined but taxable service defined.
 > 120 taxable services [section 65(105)]
 Resulted in distortions / prejudice
 Untapped tax potential
 Economically unjustified
 Issues – Classification, Illogical definitions,
Constitutional challenges, deemed services etc.

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Shift to Comprehensive Approach
 W.e.f. 1st July, 2012
 Finance Act, 2012 – A land mark Act to shift from selective
positive approach to negative approach.
 It took 18 years to shift from selective approach (positive) to
comprehensive approach (negative ) to tax services
 All services to be taxed other than services specified in the
negative list and exempted services – Section 66B.

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All Services
(including declared Services
(-)
Specific Exclusions
(-)
Negative List Services
Exemptions
Taxable Services
(-)
Present Taxation of Services
(=)

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New Law of Taxation of Services
 Negative list (17 in number) specified through
statutory provisions – Section 66D.
 ‘Service’ defined for the first time.
 ‘Negative List’ and ‘declared services’ also
defined.

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 Section 65 Old definitions of Services / Taxable
Services
 Section 65A Classification of Services
 Section 66 Charge of Service Tax
 Section 66A Charge of Service Tax on Services
received from outside India.
 Import of Service Rules, 2006
 Export of Service Rules, 2005

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New Provisions in Service Tax under
Negative List
 Section 66 B deals with charge of service tax
on or after Finance Act, 2012
 Section 66 C provides for determination of
place of provision of service.
 Section 66 D comprises of negative list of
services
 Section 66 E comprises of the services which
constitute declared services
 Section 66 F provide principles of interpretation
of specified description of services
or bundled services

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 All services Taxable
[section 65B (44)]
 Declared services Taxable
(section 66E)
 Services covered under Not Taxable
negative list of services
(section 66D)
 Services exempt under Mega Exempted
Notification No. 25/2012-ST
dated 20.6.2012
 Other specified Exemptions Exempted

19.  Service Tax Law made shorter by about 40 percent
 Effective rate of Service Tax @ 12.36 percent w.e.f. 01.04.2012
including education cess.
 Definition of ‘service’ finds place in statutory provisions
 All services taxed including a set of services called ‘declared
services’
 Negative list of services containing 17 broad service categories out
of Service Tax ambit.
 Withdrawal of many existing exemptions / abetments or their
rationalization
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20.  Place of provision of service rules determine the location of service
and become be basis of taxation.
 Withdrawal of export of service rules and import of service rules in
view of place of provision of service rules coming into operation.
 Concept of taxable territory and non- taxable territory introduced
 Taxation of Service to be determined by provision of service in
taxable territory and non taxable territory.
 Basis of charge of Service Tax shifted under new section 66B.
 Classification of service criteria replaced by new section 66F on
interpretation principles of specified description of services or
bundled services.
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21.  Under new reverse charge mechanism, onus of paying Service Tax
will be shared by service provider and service receiver in case of
specified services.
 Service Tax on taxable services provided by service provider located in
Jammu & Kashmir state liable under reverse charge.
 Change in valuation rules in relation to works contracts and outdoor
catering / supply of food.
 Payment of Service Tax on receipt basis for all service providers being
individuals / firms / LLPs, if aggregate value of taxable services in
previous year does not exceed Rs. 50 lakh.
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22.  Criteria for Rs 10 lakh threshold exemption changed to invoices
 Time limit for appeal by assessees to Commissioner (Appeals)
reduced from 3 months to 2 months
 Revision Application Authority and Settlement Commission
provisions made applicable to service tax.
 Special Audit of Service tax assesses by CAs /CWAs
 Recovery of tax dues – legal smartness (Circular dated
1.1.2013)
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23. New Accounting Codes under new regime ( July – November 2012)
Tax Collection 00441089
Other Receipts 00441090
Penalties 00441093
Deduct Refunds 00441094
Restoration of Service Specific Accounting Codes
 C. No. 165 dated 20.11.2012 / N. No. 48/2012-ST dated 3.12.2012
 No change in law ; only for statistical analysis
 New code created for penalty
 Registration obtained under the positive list approach continue to be
valid
 Registration under all taxable services to be amended online under
specific head of services
 For reverse charge, registration should be obtained as service
receiver under respective category.
 Accounting codes for residual entry
Service Tax 00441480
Interest 00441481
Penalty 00441485
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24. Quarterly Service Tax Returns
April to June, 2012
 N. No. 47/2012-ST dated 28.09.2012 – for April to June 2012, quarterly return
prescribed.
 Order No. 3/2012 - last date of return was extended upto 25.11.2012
July to October, 2012
N. No. 1/2013-ST, dated 22.02.2013
Circular No. 137 dated 22.02.2013 / Order No. 1
 New ST-3 Form is available in offline mode
 Last date 25th March, 2013; extended to 15th April, 2013; further extended
upto 30th April 2013 vide Order No. 2/2013-ST, dated 12.4.2013
 To indicate capacity – as provider / under RCM / under partial RCM
 Filing of return for second half of 2012-13 yet to be notified
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25.  Stability in negative list maintained with only a few changes.
 Vocational courses offered by institutes affiliated to the State
Council of Vocational Training and testing activities in relation
to agriculture and agriculture produce to be in the negative list.
 Service Tax to be levied on all restaurants which are air
conditioned. The condition of liquor license done away with.
 Certain exemptions curtailed / withdrawn in relation to auxiliary
education service and renting by educational institutes,
transportation of goods by railway / vessel, vehicle parking to
general public, repair or maintenance of government aircrafts,
charitable activities etc. (w.e.f. 1.4.2013)
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Macro View of Budget – 2013 Proposals

26.  Penalty u/s 77(a) (in case of non-registration) shall be restricted
to a maximum of Rs. 10,000.
 Abatement reduced w.e.f. 1.3.2013 from 75% to 70% in case of
luxury apartments / residential complexes and others (with
carpet area of 2000 sq. ft. or more or value of Rs. 1 crore or more).
 New provisions for revised punishments for offences u/s 89,
making certain offences cognizable and others non cognizable
and bailable.
 New Section 78A inserted to impose penalty on directors and
officials of company for specified willful actions / offences.
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Macro View of Budget – 2013 Proposals

27.  Power to arrest provided u/s 91 where Service Tax default is more than
Rs. 50 lakhs.
 Resident public limited companies also allowed to seek advance ruling
from Advance Ruling Authority (w.e.f 1.3.2013)
 Stay orders of CESTAT to have a maximum period of 365 days (180+185)
upto which stay granted will be operational even when assessee is not
at fault.; Stay to get vacated after 365 days.
 Voluntary Compliance Encouragement Scheme, 2013 (VCES)
introduced as a one time amnesty measure to effect compliance and
recovery and provide amnesty from interest and penalties (last date
31.12.2013).
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Macro View of Budget – 2013 Proposals

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GST: A Common Tax
on
Goods Services

29.  Need for Centre to compensate states for loss due to
reduction in CST rate
 Agreement on CST compensation - Rs 9000 crore provided
in Budget
 Petroleum products to be under GST; Alcoholic products to
be outside GST
 Constitutional Amendment Bill, 2011- Report of Standing
Committee in this Budget session; further amendments to
be made.
 Not likely before 2014 LS elections
 No clear road map and commitment on time lines on GST
implementation
 Hope for consensus in next few months.
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30.  Time to wrap up loose ends
 GST rate – band may be introduced
 Consensus required at Empowered Committee on GST to abolish small
taxes
 Agreement on dropping Dispute Settlement Body
 GST may be introduced in phases. States to decide / opt out
 States may be empowered to raise GST rates in case of distress
 Revenue sharing mechanism to be rationalized
 What could be a suitable GST rate?
 Need for drafting a GST Law by States and Centre
 Next meeting of Empowered Committee on 11-12 May at Mussoorie
 Dual control not likely - to be controlled by Central / States based on
turnover
 Composition scheme likely, besides threshold exemption
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