The Finance Bill, 2013, unlike in the past few years, had a few proposals to amend the service tax law that underwent a major metamorphosis in this Budget in the last fiscal. However, seemingly small proposals made, could have large implications. Further, by issuing some notifications, amendments are made in some exemptions and abatements in case of construction services of builders or developers. Most of these amendments are effective from 1st April, 2013 and one relating to builders is effective from 1st March, 2013. These are discussed below.
• Air-conditioned Restaurants:
Background:
Whether a transaction for supply of food and/or beverages in a restaurant or a hotel is a contract for sale of food or a composite contract for sale and services was a subject of controversy vis-à-vis leviability of Sales Tax (now VAT) under the sales tax law in the states for many years. The Supreme Court in Northern India Caterers (India) Ltd. vs. Lt. Governor of Delhi (1978) 42 STC 386 (SC) held that service of meals whether in a hotel or restaurant does not constitute a sale of food for the purpose of levy of sales tax but must be regarded as the rendering of a service in the satisfaction of a human need or ministering to the bodily want of human beings. It would not make any difference whether the visitor to the restaurant is charged for the meal as a whole or according to each dish separately.
This led to the amendment in article 366(29A) of the Constitution, whereby the 46th amendment included within its scope “the supply, by way of or as part of any service, of food or any drink for cash, deferred payment or other valuable consideration” as a deemed sale. Subsequent to the constitutional amendment, VAT is being paid on the sale of food in hotels. However, the question that arose was on what value of the consideration should VAT be paid.
The five member Bench of the Supreme Court in the case of K. Damodarasamy Naidu & Sons Ltd. vs. State of TN (2000) 117 STC 1 (SC) interestingly held that the entire value should be deemed to be the consideration towards the sale. While delivering its judgment, the Honourable Supreme Court observed as under:
“In our view, therefore the price that the customer pays for the supply of goods in a restaurant cannot be split up as suggested by learned counsel. The supply of food by the restaurant owner to the customer though it may be a part of service that he renders by providing good furniture, furnishing and fixtures, linen, crockery and cutlery, music, a dance floor, and a floor show, is what is the subject of levy. The patron of a fancy restaurant who orders a plate of cheese sandwiches whose price is shown to be Rs. 50/- on the bill of fare knows very well that the innate cost of the bread, butter, mustard and cheese in the plate is very much less, but he orders it all the same. He pays Rs. 50/- for its supply and it is on Rs. 50/- that the restaurant owner must be taxed.”
In East India Hotels Ltd. & Another vs. UOI & Another (2001) 121 STC 46 (SC), it was held that “when all movable properties, materials, articles or commodities are goods, food in a restaurant has necessarily to be regarded as goods. …………. The moment the dish is supplied and the sale price paid, it would amount to sale”. It is also interesting to note that the Supreme Court in Tamilnadu Kalyan Mandapam Assn. vs. UOI 2006 (3) STR 260 (SC) observed, “In case of catering contracts, service element is more weighty; visible and predominant and it cannot be considered as a case of sale of food and drink in a restaurant”. Admittedly, there was no question before the Hon. Supreme Court in this case, to examine whether sale of food in a restaurant was a service or otherwise. Nevertheless, service tax on the service in relation to serving of food or beverage including alcoholic beverage was introduced with effect from 01-05-2011. However, this remained restricted to air-conditioned restaurants which also had a license to serve alcoholic beverages. To justify the levy in this regard, the TRU in its letter dated 28-02-2011, clarified that the tax is levied on the service element and it should not be confused with the sale of food. The levy is intended to be confined to the value of services contained in the composite contract and shall not cover either the meal portion in the composite contract or mere sale of food by way of pick up or home delivery as also goods sold at MRP. Subsequently, on the onset of negative list based taxation of services with effect from 01-07-2012, the list of declared services in section 66E of the Finance Act, 1994 in sub-clause (i) included, the service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. However, the restaurants other than fully or partially air-conditioned/centrally heated and not having license to serve alcoholic beverages remained exempted as the mega exemption Notification No. 25/2012-ST dated 20-06-2012 provided for the same at entry 19.
In many cases under the Service category of “Outdoor catering”, it has been held that it is possible to take deduction of material component in terms of Notification 12/2003. However, the Delhi CESTAT in the case of Sayaji Hotels (2011) 24 STR 177 has held that, in case of a composite contract of a “Mandap keeper” the hotel cannot artificially divide the contract and levy Service tax merely on the value of services so identified. In essence, the Delhi CESTAT rejected the theory of splitting between the value of services and goods and held that the only option the appellant had was to pay tax on the abated value as provided for in Notification 1/2006 dated 01-03-2006.
It would appear that after the rescinding of Notification 12/2003 w.e.f. 01-07-2012, the Service tax in relation to food contracts may have to be paid on the abated value as provided for or on the entire value of the contract inasmuch the new scheme of Valuation under Rule 2C does not provide for an option for claiming deduction of goods as it is provided for “Works Contract” under Rule 2A of the Valuation Rules. However, the larger issue is whether or not tax the taxing entry (i) u/s. 66E (Declared Services) which specifies service portion in an activity, can include value of goods supplied at all this is a matter that is being extensively debated. It needs to be noted that Rule 2C refers only to a “Restaurant” and does not Specify “eating joint or mess”. This appears to be inadvertent.
In addition, other valuation issues like charge of VAT on Service tax component (and vice versa), charge on other service charges (due to introduction of definition of service w.e.f. 1st July 2012) etc., are likely to be faced, which would ultimately increase the final cost to the consumer substantially.
Implication of amendment with effect from 01-04-2013:
Now, vide the Notification No. 3/2013-ST, the said entry no.19 in the Notification No. 25/2012 is amended to delete the condition for the restaurant to have a license to serve alcoholic beverages. Consequently, the amendment will have a tremendous impact, as a large number of eating places including fast food chains, coffee shops, pizza places, ice-cream parlours, cafeteria in hospitals, educational institutions or corporate offices, airports, multiplex cinema houses, book shops, auditoria, canteens in factories, food courts in shopping malls, clubs etc. are covered.
The entry 19 in the Notification No. 25/2012-ST describes a restaurant or eating joint other than those having the facility of air-conditioning or central heating in any part of the establishment, at any time during the year. This will consequentially include all the above stated illustrations including simple cafes or restaurants having a small portion or a mezzanine portion air-conditioned and will come under the service tax net. Further, even non air-conditioned portion of the café serving food would be subject to the levy. If a small ice-cream/yoghurt parlour has an air-conditioner in any part of their premises, it would be subjected to the levy. In large departmental/chain stores or book shops, small kiosks/bakeries/prepared food corners are often provided with a few tables and chairs. Since the book shop, the store or the mall has common area air-conditioned and even if the food or snacks, beverages or ice-cream are provided through “self-service” counters/desks in a tray and without the use of crockery, the exemption under entry 19 will not be available as some part of the establishment is air-conditioned. Many or most of these contracts of providing food are predominantly ‘sale’ contracts as ‘service’ element is present in a negligible proportion. In India, we have the system of ‘thali’, places serving only meals in thalis. They are known as Bhojanalayas and only lunch or dinner is served very quickly. These servings have a very little ‘service’ element. Yet, all and sundry would be subject to service tax once the turnover crosses the threshold limit of ten lakh rupees. The value of service however, in accordance with Rule 2C of the Service Tax (Determination of Value) Rules, 2006 is to be taken at 40% or in other words, after considering 60% presumptive abatement. This value is effective from 01-07-2013, as earlier 70% abatement was provided.
When the food is not consumed in the restaurant premises but packed or parcelled from the counter, there is no setup of the eating house enjoyed or used by the person collecting cooked food/meal. As referred above, the TRU circular dated 28-02-2011 clarified that on mere sale of food by way of pick-up or home delivery, no service tax would be attracted. However, there are cafes/restaurants which charge “delivery charges” for small orders or all orders as the case may be. The question therefore arises as to whether or not such “delivery charge” is a part of “sale contract” or in the negative list based taxation, it amounts to consideration for a service of providing food at the doorstep. This is because the food is supplied at home by a delivery boy which itself is a service and a separate charge is recovered for the same. It would mean a composite yet divisible contract of sale of food and service of providing home delivery of such food and thus the service components would be exigible to service tax. So far as cafeteria/canteens in corporate offices or factories are concerned, it is relevant to note the views expressed in the Draft Circular dated 25-07-2012 vide F. No. 354/127/2012-TRU issued by Tariff Research Unit of Ministry of Finance. Paras 8, 9 and 10 of the said circular read as follows:
“8. A number of activities are carried out by the employers for the employees for a consideration. Such activities fall within the definition of “service” and are liable to be taxed unless specified in the Negative List or otherwise exempted.
9. One of the ingredients for the taxation is that such activity should be provided for consideration. Where the employees pay for such services or where the amount is deducted from the salary, there does not seem to be any doubt. However, in certain situations, such services may be provided against a portion of the salary foregone by the employee. Such activities will also be considered as having been made for a consideration and thus liable to tax. CENVAT credit for inputs and input services used to provide such services will be eligible under extant rules. The said goods or services would now not be construed to be for personal use or consumption of an employee per se and rather shall be a constituent to the taxable service provided to an employee. The status of the employee would be as a service recipient rather than as a mere employee when consuming such output service. The valuation of the service so provided by the employer to the employee shall be determined as per the extant rules in this regard.
10. However, any activity available to all the employees free of charge without any reduction from the emoluments shall not be considered as an activity for consideration and will thus remain outside the purview of the service tax liability (facilities like crèche, gymnasium or a health club which all employees may use without any charge or reduction from the salary will be outside the tax net). However the CENVAT credit for such inputs and input services will be guided by the extant rules.”
The above comments are a part of the Draft Circular which is yet not finalised. However, in the context of a canteen facility extended by an employer and in a case when consideration for the food served in the canteen is recovered by the employer and if the canteen is in the establishment, any part of which is air-conditioned, may need to examine service tax liability depending on the facts of each case.
Considering a mushroom growth of cafeteria, food courts, coffee shops, fast food chains and ice-cream parlours in all large and medium sized cities and towns of India, the number is alarmingly high and therefore, there would be widespread implications of the amendment, considering that eating out is a part of daily routine or a necessity of the young and middle-aged working population of the country.
• Service of construction of complex:
Reading of the aforesaid entry no. 12 indicates as follows:
a) 75% abatement subject to fulfillment of conditions will continue in two cases, viz.,
• Construction of residential unit having car-pet area upto 2000 square feet or less OR
• Construction of residential unit where the amount charged is less than Rs. 1 crore.
Meaning thereby that for a flat of 2500 sq. feet, if the amount charged is Rs. 80 lakh, it is entitled for abatement @ 75%. Conversely, even for a flat of 800 sq. feet, if the amount charged is Rs. 3 crore, the abatement is available @ 75%. In ef-fect, only one of the conditions mentioned above is required to be fulfilled — either the area of the residential unit is less than 2000 sq. feet or the amount charged is less than Rs. 1 crore.
b) The abatement of 75% will no longer be available to a complex, building, civil structure or part thereof not covered by the above two categories. As such, a distinction is now made for commercial and residential construction and abatement of only 70% is available for commercial constructions irrespective of the amount charged or the area. Even if the amount charged is less than Rs. 1 crore or the area is less than 2000 sq. feet, the abatement available is 70% and the effective rate of service tax is thus 3.708% in place of 3.09%.
In this context, the words used by the Finance Minister while announcing his proposals in his Budget speech are worth taking note of:
“182. Homes and flats with a carpet area of 2,000 sq.ft. or more or of a value of `1 Crore or more are high-end constructions where the component of ‘service’ is greater. Hence, I propose to reduce the rate of abatement for this class of buildings from 75 percent to 70 percent. Existing exemptions from service tax for low cost housing and single residential units will continue.”
The above extract from the speech of the Finance Minister indicated that the reduction in abatement was to be restricted to certain residential premises. However, the language of the notification does not support that and conveys clearly that the abatement of 75% will not be available except in two cases referred above.
• Copyright for cinematographic films:
In Notification No.25/2012-ST, entry no.15 exempted “Temporary transfer or permitting the use or enjoyment of a copyright covered under clauses (a) or (b) of s/s. (1) of section 13 of the Indian Copyright Act, 1957 relating to original literary, dramatic, musical, artistic works or cinematograph films” with effect from 01-07-2012. It is relevant to note in this context that actors, directors and various other technicians are brought under the net of service tax vide the new definition of service and the negative list based service tax regime from 1st July, 2012. Accordingly, a film producer is required to pay various actors, technicians and/ or other professionals their charges along with service tax and thus there is a cost addition of 12.36% to the producers. However, such producer of the film, the owner of copyrights of his film was not liable to pay service tax on his services of transferring or permitting use of such copyright in favour of distributors and/or theatre owners on account of the entry prior to amendment.
Implication of amendment with effect from 01-04-2013:
• Now, this entry of exemption is restricted to “cinematograph films for exhibition in a cinema hall or cinema theatre”.
Thus, the exemption in respect of original literary, dramatic, musical or artistic work is retained without any change. However, grant of copyright is restricted only to transfers or permissions for the use of exhibition in a cinema hall or a cinema theatre.
• The intention for the amendment is explained in CBEC letter dated 28-02-2013 as follows:
“The benefit of exemption u/s. No. 15 of the notification in relation to copyrights for cinematograph films will now be available only to films exhibited in a cinema hall or theatre. This will allow service providers to pass on input tax credits to taxable end-users”.
Now, when a film producer grants copyrights or temporarily transfers these to distributors for exhibition of the film in theatres, the producer is still not liable for service tax. However, when rights are granted for direct to home (DTH) exhibition or to broadcasting agencies viz. TV channels, satellites etc., the film producer is liable to service tax and in turn broadcasting TV channels already being under the tax net would be eligible to CENVAT credit of the service tax paid for temporary transfer of copyrights in their favour. However, film producers paying service tax to actors, technicians etc. would be eligible for only proportionate credit as they would be providing taxable service in respect of DTH or broadcasting rights whereas services of transfer of rights for exhibition in cinema continue to be exempt. The CBEC letter therefore appears to be only partially correct considering the above discussion.
• Renting of immovable property and auxiliary education services provided by specified educational institutions:
Background:
Entry No. 9 in the Notification 25/2012-ST exempted service to or by an educational institution in re-spect of education exempted from service tax by way of renting of immovable property or education auxiliary service. The term “auxiliary educational service” is defined in the said Notification 25/12-ST itself as follows:
“(f) “auxiliary educational services” means any services relating to imparting any skill, knowledge, education or development of course content or any other knowledge – enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government, or transportation of students, faculty or staff of such institution”
Education which is not taxable under the negative list in section 66D appears at entry (1) and reads as follows:
“(l) services by way of-
(i) pre-school education and education up to higher secondary school or equivalent;
(ii) education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;
(iii) education as a part of an approved vocational education course”
Implication of amendment with effect from 01-04-2013:
Exemption will not continue for services provided by such institutes to other persons for the said services. However, such other persons providing auxiliary educational services or renting of immovable property services to the educational institutes would continue to be exempt. Educational institutions imparting education recognised by law such as university-affiliated colleges or any higher secondary school often provides its premises like halls, auditoria or ground on hire for any official, social, cultural or political functions. Prior to the introduction of the negative list from 01-07-2012, this service was covered under the category of mandap keeper. In the negative list taxable categories have ceased to exist and entry no.9 exempted renting of immovable property. Therefore letting off of institution’s immovable property was declared exempt. Now again, this becomes taxable. Even when the schools provide small counters/ place to banks in their premises for facilitating students/parents to pay school fees, this was taxable prior to 01-07-2012 and is noe taxable again. The definition of auxiliary educational services is such that generally services provided by others or those outsourced by the specified educational institutes would get covered. For instance, admission process outsourced by a university or the services of bus contractor etc. Nevertheless, if a school owns its transport vehicles and recovers charges from students for these facilities, it now will attract service tax. Similarly, if a place for canteen is let out to a contractor, it will attract service tax. If a training programme is conducted by a school for persons other than to specified education institutions, it will also become taxable as the scope of entry 9 is substantially narrowed. Further, educational institutions conduct a large number of extra-curricular courses (in addition to basic education) which are usually charged sepa-rately. These could get hit unless they fall under Entry No. 8 of Notification 25/2012- ST i.e., recreational activities in relation to arts, sports, etc.
• Charitable activity of advancement of object of general public utility:
Background:
The Notification 25/2012 at entry 4 exempts services by an entity registered u/s. 12AA of the Income -tax Act, 1961 by way of charitable activities and in turn the said notification contains definition of “charitable activities” at 2(k) as follows:
“(k) “charitable activities” means activities relating to –
(i) public health by way of –
(a) care or counseling of (i) terminally ill persons or persons with severe physical or mental disability, (ii) persons afflicted with HIV or AIDS, or (iii) persons addicted to a dependence-forming substance such as narcotics drugs or alcohol; or
(b) public awareness of preventive health, family planning or prevention of HIV infection;
(ii) advancement of religion or spirituality;
(iii) advancement of educational programmes or skill development relating to,
(a) abandoned, orphaned or homeless children;
(b) physically or mentally abused and traumatised persons;
(c) prisoners; or
(d) persons over the age of 65 years residing in a rural area;
(iv) preservation of environment including watershed, forests and wildlife; or
(v) advancement of any other object of general public utility up to a value of,
(a) Rs. 18,75,000 for the year 2012-13 subject to the condition that total value of such activities had not exceeded Rs. 25,00,000 during
2011-12;
(b) Rs. 25,00,000 in any other financial year subject to the condition that total value of such activities had not exceeded Rs. 25,00,000 during the preceding financial year;
Implication of amendment from 01-04-2013:
Now, the last sub-clause (v) is omitted. As it is, the term charitable activity is defined in a restrictive manner to include only a few specific activities. Some other activities of general nature like public awareness programmes etc., conducted by any 12AA registered organisation would not qualify to be exempt anymore.
• Others:
- Transportation of goods by rail and transportation of goods by road.
Exemption in respect of transportation of goods by rail and vessel is contained at entry 20 and transportation of goods by road at entry 21 of the Notification 25/2012-ST. Amendments are made in both these entries to bring exemption in respect of all the modes of transport at par. Transportation of petroleum or petroleum products, postal mail or mail bags and household effects by rail or vessel was exempted at entry 20. This is now withdrawn. Therefore, transportation of petroleum/ petroleum products, postal mail or household effects by any mode of transport is now liable for service tax. Under entry 21 for goods transportation by road, transportation of fruits, vegetable, eggs, milk, food grain and pulses only was exempt. Now, in its place and like in the case of rail or vessel transportation, the exemption is redefined and scope is expanded to include the following products:
• Agricultural produce
• Foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages
• Chemical fertilisers and oilcakes
• Registered newspapers or magazines, relief material for victims of natural or man-made disasters
• Defence equipments.
The existing exemption in respect of consignment of single goods carriage for Rs. 1,500/- or less and consignment for a single consignee for Rs. 750/- or less continues to remain exempt.
• Exemption provided at entry no.24 in Notification 25/2012-ST for vehicle parking services to general public stands withdrawn from 01-04-2013 and therefore parking charge recovered from general public now is liable for service tax.
