Seminar on Service Tax at Jaipur on 20.4.2013 (Session i)

Agarwal Sanjiv & Company
Chartered Accountants
Presents
A Workshop
On
Service Tax
Conducted by
Dr. Sanjiv Agarwal
FCA, FCS
Saturday,
20th April, 2013
Jaipur © Dr. Sanjiv Agarwal
1

SESSION – I
SERVICE TAX
Overview
and
Recent Changes
2

Service Tax Overview & Recent Changes
This Presentation Covers
• Economic Overview
• Taxation of Services – Past and Present
• Major Changes in 2012 -2013
• Changes in Budget 2013 / Finance Bill, 2013
• New Penal Provisions
• Power to Arrest
3

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)

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
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

Growth of Service Tax
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)

9
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

Service Tax in India (The Past)
 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.
10

Service Tax in India (The Past)
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.
11

Service Tax – The Present
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.
12

13
All Services
(including declared Services
(-)
Specific Exclusions
(-)
Negative List Services
Exemptions
Taxable Services
(-)
Present Taxation of Services
(=)

Service Tax – The Present
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.
14

Service Tax provisions no longer
applicable (w.e.f. 1.7.2012)
 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
15

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
16

Taxable Services w.e.f. 1.7.2012
 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
17

MAJOR CHANGES IN SERVICE TAX IN 2012-
13 AT A GLANCE
 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
18

MAJOR CHANGES IN SERVICE TAX IN 2012-
13 AT A GLANCE
 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.
19

MAJOR CHANGES IN SERVICE TAX IN
2012-13 AT A GLANCE
 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.
20

MAJOR CHANGES IN SERVICE TAX IN 2012-13
AT A GLANCE
 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)
21

MAJOR CHANGES IN SERVICE TAX IN 2012-13
AT A GLANCE
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
22

MAJOR CHANGES IN SERVICE TAX IN
2012-13 AT A GLANCE
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
23

Changes in Budget 2013-14
(Finance Bill,2013)
 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.
 Definition of "process amounting to manufacture" will also
include processes under Medicinal and toilet preparations
(Excise Duties) Act, 1955.
 Service Tax to be levied on all restaurants which are air
conditioned. The condition of liquor license done away with.
24

(Finance Bill,2013)
 Benefit of exemption to copyright on cinematography to be
limited to films exhibited in cinema halls / theatres.
 All types of testing in relation to agriculture to be in
Negative List
 Existing exemption from Service Tax for low cost housing
and single residential units to continue.
 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)
 Retrospective exemption to Indian railways for services
provided between 1st July, 2012 upto 28th February, 2013 to
the extent notices have been issued.
25

(Finance Bill,2013)
 Where it is held that extended period of limitation u/s 73 is
not sustainable for making demands, Department's demand
for normal period of 18 months shall be sustainable.
 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 (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, make certain offences cognizable and others non
cognizable and bailable. 26

(Finance Bill,2013)
 New Section 78A inserted to impose penalty on directors
and officials of company for specified willful actions /
offences.
 Power to arrest provided u/s 91 where Service Tax default
is more than Rs. 50 lakhs.
 Advance Ruling can be sought to ascertain eligibility of
Cenvat Credit on input services for a manufacturer of
excisable goods. (w.e.f 1.3.2013)
 Resident public limited companies also allowed to seek
advance ruling from Advance Ruling Authority.
27

(Finance Bill,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.
 In Cestat appeals, single member bench can hear and
dispose off appeals upto a monetary limit of Rs. 50 lakhs
(previously Rs. 10 lakh).
 Mode of delivery of letters, orders etc will also include
speed post and approved courier agency.
 Service Tax appeal forms ST – 5,6 & 7 amended w.e.f.
1.6.2013
28

Penal Provisions
Section 78A Penalty for offences by director etc.
of a company
Section 89 Offences & penalties
Section 90 Cognizance of offences
Section 91 Power to arrest
Goes against non- adversarial tax policy of
Government
29

Penalty for Non- registration
Penalty for failure to take registration (Section 77(1)(a)]
Now:
 Penalty which may extend upto Rs. 10000 or Rs. 200 per
day during which default continues, whichever is
higher, starting from first day after due date till the date of
actual compliance
Proposed:
 Penalty which may extend upto Rs. 10000
 Penalty not to exceed Rs. 10000 in any case
 For non payment, there are already strict penalties u/s 76
and 78
30
New Penal Provisions

(Finance Bill,2013)
Penalty for offences by Company officials (Section
78A)
 To impose penalty for contraventions / violations by
Company
 Penalty may extend up to Rs. one lakh per official
 Penalty on any director, manager, secretary or
officer of Company
 Incharge / responsible to Company for conduct of
business of Company
 If knowingly involved in specified contraventions
 Penalty may be levied on more than one person for
single contravention / offences
31

(Finance Bill,2013)
Penalty for Offences by Company Officials (Section
78A)
Specified Contraventions
 Evasion of Service Tax
 Issuance of bill / Invoice / challan without provision
of service in violation of rules.
 Availment and utilization of credit of taxes /duties
without actual receipt of services /goods either fully
or partially.
 Failure to pay amount collected as service tax to
the credit of Central Government beyond 6 months
of the due date
32

Who is Punishable
Any person who is
• director
• manager
• secretary
• other officer
and who at the time of contravention was in
charge of / was responsible to company
 for conduct of business, and
 was knowingly concerned with such
contravention.
33
New Penal Provisions

(Finance Bill, 2013)
Penalty for offences by Company officials (Section
78A)
Personal Penalty
 Till now, there was no provision in the Finance
Act, 1994 to levy personal penalty for
contraventions by Companies (also legally held)
 There can be no penalty on directors /officers /
manager / secretary of non-company assessees
34

Offences & Penalties (Section 89)
Punishment to whoever commits any offence :
a) Knowingly evades payment of Service Tax
b) Wrongly avails / utilizes credit of taxes
c) Maintains false books of accounts/ supplies false information
d) Collects tax but fails to pay within 6 months of due date
• In such cases, prosecution to be initiated
• Cases of no intent to defraud also covered
• ‘Knowingly’ is very subjective; to be proved
Contd…..
35

Offences & Penalties (Section 89)
 For (a), (b) &(c) and amount > Rs. 50 lakhs –
imprisonment from 6 months to 3 years
 For (d), if amount > Rs. 50 lakh –
imprisonment from 6 months to 7 years
 For any other offence– imprisonment upto 1 year
 For second or subsequent conviction
 For (a), (b), (c), other offences – imprisonment upto 3
years
 For (d) – imprisonment upto 7 years
36

Cognizance of Offences (Section 90)
 Cognizable Offence
Failure to deposit to the credit of Central
Government service tax collected where amount
exceeds Rs. 50 lakhs
 Non-Cognizable and Bailable Offences
All offences except cognizable offence as above
 Detailed Instructions to be issued
37

Power to Arrest (Section 91)
 Similar provisions existed earlier but withdrawn in 1998
 Provides power to arrest (where evasion exceeds Rs. 50 lakhs)
 Covers all classes of assessees
 Empowers Commissioner of Central Excise
 He may authorize any officer not below the rank of
Superintendent to arrest
 Who can be arrested – any person as per Section 89
 Trigger for arrest – offences as per Section 89(1)
(Reasons to believe that offence has been committed to exist )
 Arrests to be made in terms of Code of Criminal
Procedure, 1973 (CCP)
38

Power to Arrest (Section 91)
 For Cognizable offences
 Grounds of arrest to be informed to such person
 Produced before Magistrate with in 24 hours
 Asstt. / Deputy Commissioner empowered to
release an arrested person on bail in case of
non -cognizable / bailable offences
 To have same powers as Officer -in -charge
of Police Station in terms of Section 436 of
CCP
39

Offence u/s 89 Imprisonment on
first default
Imprisonment on
subsequent
defaults
Cognizable or non-
cognizable
Knowingly evades payment of
Service tax
3 years ** 3 years Non- cognizable
Avails & utilizes credit of taxes
without actual receipt of inputs/
services, whether partly or fully
Maintains false books or fails to
supply any information or
supplies false information
Collects any amount as service
tax but fails to pay the same to
government exchequer within 6
months of due date
7 years ** 7 years Cognizable
Any other offence 1 year 3 years Non- cognizable
40
**Provided that in the absence of special and adequate reasons to the contrary to be recorded in the
judgment of the court, such imprisonment shall not be for less than six months
** if amount exceeding Rs. 50 lakh

Impact of Power to Arrest (Section 91)
 Punitive punishments measures
 Possible harassment of small service providers (sole
proprietors etc.)
 But tax amount of Rs. 50 lakhs provides a breather
 May improve compliances
 Regressive; possible threat to otherwise bonafide cases
 May increase litigation
 Need to distinguish between willful and genuine defaults
 Arrest can be made at the beginning of proceedings itself,
investigation may follow
41
Power to Arrest

Possible Measures to avoid Arrest
 Suo moto compliance
 Independent due diligence
 Promptly attending to notices / summons
 Ensuring timely / full payment of Service Tax – Taxes
not to be used for working capital / funding other
requirements
 Where delay is expected, get in touch with
Department.
 Take aggressive tax positions with utmost care –
Risk Management
 Strengthen internal processes and controls to avoid
unintended failures
42
Power to Arrest

Voluntary Compliance Encouragement Scheme, 2013 (VCES)
 Chapter VI (Clause 94-104 of Finance Bill, 2013)
 17 lakh assessees, 7 lakh returns filed
 Stop filers / non-filers
 Only a one time scheme
 To chase assessees not possible
 Hope to collect reasonable money / litigation to come down
 Action & consequences
 Truthful declaration of service tax dues since 1.10.2007 upto
31.12.2012 by defaulters as on 1.03.2013
 Payment of due tax in 1 or 2 installments
 Interest , penalties and other consequences waived
46

Voluntary Compliance Encouragement Scheme, 2013 (VCES)
 Not applicable to period before 1.10.2007 or after 31.12.2012
 Not applicable to cases involving
search, audit, investigation, SCN or summon issued cases as on
1. 03. 2013
 Not eligible if return furnished u/s 70 but disclosed amount not
paid
 To be rejected if audit etc. initiated as on 1st March, 2013
 Pay at least half of tax before, 31st December, 2013
 Pay balance by
 30th June, 2014 without interest
 31st December 2014 with interest w.e.f. 1.07.2014
 Dues for period after 31st December, 2012 to be settled as per
present Law
47

 No refund of amount paid under VCES
 Tax dues declared but not paid – to be recovered as per Law
 Even in default, only Service Tax and interest is payable
 False declaration to be rejected - reason to believe, notice to be
served
 Declaration to be final – no withdrawal / no revision
 Satisfaction of designated authority required where audit /
investigation / summons/ notice issued and pending as on
1.3.2013; Declaration liable to be rejected by written reasoned
order.
 No action can be taken after one year from date of declaration
 Acknowledgment is a must
 Once acknowledgement is issued - no re-opening permissible
before any authority
48

Goods & Service Tax
(The Future)
GST: A Common Tax
on
49
Goods Services

GST –An Update
 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.
50

GST : What Next
 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
51

Seminar on Service Tax at Jaipur on 20.4.2013 (Session i)

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Seminar on Service Tax at Jaipur on 20.4.2013 (Session i)