IMPORTANT AMENDMENTS IN SERVICE TAX BY FINANCE AC T, 2015

Rate of tax
Service tax rate increased from 12.36% to 14% subsuming Education Cess and Secondary & Higher Education Cess with effect from June 01,2015.

Swachh Bharat Cess @ 2% to be levied on all or any of the taxable services and its effective date is yet to be notified.

The following services which are taxed at a specified rate are revised as follows with effect from June 01,2015

• Booking of air tickets by air travel agent
A. Domestic bookings:- 0.7%
B. International bookings:- 1.4%

• Life insurance service
A. F irst year:- 3.5%
B. Subsequent year:- 1.75%

• Money changing service
A. gross amount of currency exchange :- 0.14% or for amount upto Rs 1,00,000/- minimum Rs.35

B. gross amount of currency exchange :- Rs 140 and 0.07% for amount exceeding Rs 1,00,000/- and upto Rs 10,00,000/-

C. gross amount of currency exchange :- Rs 770 and 0.014% for amount exceeding maximum Rs 7000/- Rs 10,00,000/-

• Service provided by lottery distributor and selling agent

A. R s. [8200] on every Rs.10 lakh (or part of Rs.10 lakh) of aggregate face value of lottery tickets printed by the organising State for a draw.
B. R s. [12800] on every Rs. 10 lakh (or part of Rs 10 lakh) of aggregate face value of lottery tickets printed by the organizing State for a draw

Amendment in Definition of ‘Service’
Explanation-2 to the definition of service is amended to exclude the following transactions from the expression transaction in money or actionable claim.

Activity by a lottery distributor or a selling agent in relation to promotion, marketing, selling, organising, or facilitating in organising lottery. Accordingly the terms lottery distributor and selling agent are suitably defined under clause 31A of section 65B(44) to mean “a person appointed or authorised by a State for the purposes of promoting, marketing, selling or facilitating in organising lottery of any kind, in any manner, organised by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998.” Consequently the entry in the negative list i.e. entry 66D(i) is also amended as discussed below:

Activity by a foreman of chit fund for conducting or organising a chit. This amendment is brought about to counter the effect of the decision of the Delhi High Court in the case of Delhi Chit Fund Association V. Union of India [2013] 32 taxmann.com 332(Delhi) holding that activity by a foreman in relation to the chit fund business being a service in relation to transaction in money is not liable for service tax. Further, the SLP filed by the department against the said decision was also dismissed by the Supreme Court. Thus this amendment explicitly states the desire of the legislature to treat such activities by a foreman of a chit fund as not a transaction in money.

Negative List
The Negative List is reviewed and pruned in order to widen the tax base as discussed below:

Effective from June 01,2015
• Any contract work or job work carried out in relation to manufacture or production of alcoholic liquor is now taxable. Accordingly, the expression “process amounting to manufacture” defined under section 65B(40) has been suitably amended to exclude any process amounting to manufacture of alcoholic liquor for human consumption from the definition. (The Seventh Schedule to the Constitution of India List-II, specifically authorizes the State Government to levy tax on the manufacture or production of alcoholic liquor and thus whether this levy is constitutionally valid may be a debatable issue in the future) [section 66D (f)].

• The expression betting, gambling or lottery has been revisited to exclude any service by way of promotion, marketing, organising, selling or facilitating the organizing of lottery by a lottery distributor or selling agent. Hence promotion, marketing, organising of lottery is now taxable. The term betting and gambling finds a place in entries 34 and 62 of the State list. The power to levy tax by the Central Government in relation to promotion, marketing, organising of games of chance including lottery was taxed under the erstwhile section 65(105)(zzzzn) and it was challenged in a writ petition filed by Future Gaming Solutions Pvt. Ltd 2015(37) STR 65 (Sikkim). The Hon’ble High Court while declaring the said section 65(105)(zzzzn) ultra vires held that it is the exclusive legislative domain of the State legislature to levy tax of any nature on lotteries by virtue of entry 62 of List II to the Seventh Schedule. It was also noted that, though Entry 40 of List 1 includes lotteries organised by Government of India or a Government of a State as a field of legislation, the power to regulate does not include power to tax. Therefore, though Parliament alone has enacted Lotteries (Regulation) Act,1998 under entry 40, taxing powers have been conferred on the State only as envisaged under entries 34 and 62 of List II to Seventh Schedule. Thus, in terms of the above decision, it appears that the Finance Act, 2015 has gone beyond its powers under the Constitution by excluding the promotion or marketing or organising of lottery from the negative list.

• Services by way of admission to entertainment events or access to amusement facilities are now taxable. Accordingly, admission to amusement parks, theme parks, water parks, etc. is liable for service tax. Also, entry into entertainment events like music concerts, non-recognised sporting events, award functions, pageants are also liable for service tax. Entertainment Tax is levied by the State Government on various amusement facilities and entertainment events. This levy may lead to double taxation and with the service tax rate of 14%, may result in making such activities exorbitantly priced. [Section 66D(j)]. It may be noted here however that when the amount charged for the entertainment events (not amusement events) is less than INR 500 then they shall continue to be exempted from service tax. Similarly, admission to exhibition of films, circus, dance or theatrical performances and recognized sporting events have also been exempted and this is without any limit under entry 47 of Mega Exemption Notification 25/2012-ST. In reference thereof, the term “recognised sporting event” is defined in clause (zab) of para 2 of the Mega Exemption Notification 25/2012-ST as “any sporting event where the participating team or individual represent any district, state, zone or country; covered under entry 11.

Government services: effective from a date to be notified

Presently, support services provided by the Government or Local authority to business entities are liable for service tax.   Service tax now applies   to all services provided by the Government or Local authority to business entities.  however,  the  liability is to be discharged by the business entities under reverse charge mechanism. however, the services provided by the Government or Local authorities to its citizens not being business entities continue to remain under the negative List and continue to be non-taxable. Further, with the increased involvement of the private sector in rendering services which were once in the exclusive domain of the Government, the change may provide a level playing field to both the private and the public players [section 66d(a)(iv)]. In this context, the term ‘Government’ is now defined in clause 26A of section 65B for the first time as follows:

“Government means the Departments of the Central Government, a State  Government  and  its Departments and a Union territory and its Departments, but shall not include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with article 150 of the Constitution or the rules made thereunder”

In terms of this provision therefore, all corporations formed under the Government statute or autonomous bodies or public sector undertakings incorporated under Companies act including boards or regulatory authorities do not qualify to be considered ‘Government’ whereas all Central Government ministries and departments working thereunder, [for instance   department   of   income   tax,   department of Company affairs etc.] various State Government and their departments, union territories and their departments are part of the expression Government. “Local authority” also is not covered by this expression, however, it is already defined under clause 31 of the said  section  65B.  further,  the  term  Governmental Authority is also defined under clause (s) of the Mega Exemption Notification 25/2012-ST which is relevant for interpreting the exemption, if any, available in this regard under the said notification.

(Note: it is expected that the Government may notify the list of services in this context).

Valuation:

Reimbursements:
Section 67 is amended to include any reimbursable expenditure or cost incurred by the service provider and charged in the course of providing or agreeing to provide a taxable service except in such circumstances, and subject to such conditions, as may be prescribed. the inclusion of reimbursable expenditure as a part of the gross value of taxable service under rule 5(1) of  the  Service  tax  (determination  of  value)  rules, 2006 (Valuation Rules) was always a subject matter of litigation and controversy. the Landmark judgment of delhi high Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. [2012-TIOL- 966-HC-DEL-ST] held that rule 5(1) of the Valuation rules is ultra vires section 67. to counter the effect of the judgment, the amendment to section 67 itself is made by including reimbursable expenditure as a part of the value of the taxable service, post may 14,  2015.  thus  litigation  process  will  be  kept  alive. nevertheless, double taxation is likely to arise in many cases unless appropriate conditions are prescribed.

Lottery distributor or selling agent:
Section 67 is also amended to include any amount retained by the lottery distributor or selling agent from the gross sale amount of the lottery tickets in addition to the fee or commission, or the discount received, which is the difference between the face value of the lottery ticket and the price at which the distributor or selling agent gets such ticket.

Exemptions

Withdrawal of Exemptions
•    Various exemptions for services provided to Government, Local authority or Governmental authority vide entry 12 are withdrawn and only selective services like construction, erection, commissioning, etc. of historical monument, archaeological sites, canals, dams, irrigation works, pipelines for water supply/treatment etc. remain exempt.

•    Exemption vide entry 13 for construction, erection, commissioning or installation of original works pertaining to airport and port also stands withdrawn.

•    Exemption in respect of transportation service available for food stuff in general by road, rail or vessel vide entry 20 and 21 has been suitably pruned to exempt only transportation of milk, salt and food grains, including flours, pulses and rice.

•    The exemption to services provided by mutual fund agents/distributor to asset management company vide entry 29 is now withdrawn and the activity is now taxable (as they used to be till 30th june, 2012) and the asset management companies are liable to  discharge  service  tax  under  reverse  Charge mechanism. It is pertinent to note that, since the tax is finally paid by the asset management companies or  the  mutual  funds,  exemption  ought  to  have been extended to the sub-distributors and sub- agents providing services to the main distributors and agents on the lines of exemption in respect of  sub-brokers  of  stock  brokers.  Further,  effect is felt by distributors on account of the amended definition of output service with effect from 01-07- 2012 whereby the service in respect of which the recipient is liable to pay entire service tax liability, such service is not  considered  output  service.  in such a scenario, service tax charged by sub- distributors on their commission cannot be taken credit of by the distributors. on account of this provision, therefore, services of sub-distributors are required to be exempted or else same service gets  taxed  twice.  this  may  be  unintended  and therefore needs to be taken care of.

•    Services by an artist in folk or classical music, dance or theatre, excluding services provided by the artist as a brand ambassador was exempt under entry 16. however where the consideration charged for such performances exceed rs. 1 lakh, the same is now taxable.
(Entry number refers to Notification 25/2012-ST)

?    New Exemptions
Certain specific services which were hitherto liable for service tax, are now exempted from service tax. the list consists of the following:-

Notification 6/2015-ST
•    Entry into museum, zoo, national park, wildlife sanctuary, tiger reserve or zoo.
•    Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail, packing, labelling of fruits and vegetables which do not alter its essential characteristics.
•    Services by operator of Common Effluent Treatment Plant by way of treatment of effluent.
•    Service provided by way of exhibition of movie by an exhibitor to the distributor or an association of persons consisting of the exhibitor as one of its members.
•    Services of life insurance business provided under ‘Varishtha Pension Bima Yojana’.

Notification 12/2015-ST
•    Exemption  is  provided  to  services  of  general insurance under the Pradhan mantri Suraksha Bima Yojna, services of life insurance under the Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Jan Dhan Yojana.
•    Services by way of collection of contribution under Atal Pension Yojana (APY).

Rationalisation of abatements

•     Uniform abatement rate of 70% of the value of service in relation to transport of goods by rail, road and vessel are prescribed effective from 01-04-2015. Similarly, the conditions in respect of non-availability of CenVat credit on inputs, capital goods and input services is also now applicable to all, regardless of  the  mode  of  transport.  the  direct  impact  of  this amendment is already felt by the users of rail services for transportation of cargo. in order to be eligible for  the  CenVat  credit  of  inputs,  capital  goods  and input services, the railways have begun charging full rate of service tax and are foregoing the abatement option. the users in many cases are unable to take CenVat  credit  and  thus  the  cost  of  availing  the transport service of railways has suddenly shot up substantially and which is further impacted by the increased rate of 14%.

• ?    The  transport  of  passengers  by  air  in  higher  class has become dearer since the abatement has been reduced from 60% to 40%.

•     Abatement of 70% available for services provided in relation to chit has now been withdrawn.

Service Tax Rules: Aggregator Model

    One of the significant amendments carried out under the  finance act,  2015  is  the  levy  of  service  tax  on e-commerce transactions under aggregator model. The term ‘Aggregator’ is defined under the Service tax rules clause 2(aa) as “a person who owns and manages a web based software application and by means of the application and a communication device enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator”. the terms “brand name” and “trade name” are also defined under the Rules. The liability to discharge service tax is on the aggregator under reverse charge mechanism. thus, it is assumed that the aggregator is the service receiver. it is also provided that if the aggregator does not have presence in the taxable territory, the person representing the aggregator would discharge the liability or the aggregator would appoint a person for discharging tax liability.  the amendment clearly sets out intention of the legislature to levy service tax on certain formats in e-commerce space. accordingly, companies providing services by acting as an aggregator like travel portals, cab services, food portals etc. would be hit by this amendment irrespective of their establishments being in the non- taxable or taxable territory.

CENVAT Credit

Time  limit  for  availing  CENVAT  credit  is  extended from  six  months  to  one  year.  therefore,  the  issue faced by many assessees on account of amendment made by Finance (No.2) Act,2014 is to a significant extent resolved, as credit can be availed by the end of a period of one year from the date of invoice. for example, if credit was missed out to be availed on an input service of invoice dated may 15, 2014 and if this was noticed only in january,2015, the credit was not available in terms of proviso to rule 4(7) of CENVAT Credit  rules,  2004  (CCR,  2004).  However  in  terms of the amended provision, the said missed out credit would be available in the month of april, 2015.

CENVAT   credit  for  service  tax  paid  under  partial reverse charge is immediately available on payment of service tax to the Government. thus the condition in respect of allowing CenVat credit only after payment is made to the vendor, being a mere contractual arrangement is now done away with.

CENVAT   credit   wrongly   availed   and   utilised   or erroneously refunded is recoverable with interest as per  rule  14  of  the  CenVat  credit  rules,2004.the said rule 14 is amended from march 1, 2015 now to provide for recovery of CenVat credit wrongly availed or  erroneously  refunded  and  also  CenVat  credit wrongly availed and utilised or erroneously refunded with interest. additionally, sub rule (2) thereof provides for  the  “first  in  first  out”  method  for  computing  the amount of credit wrongly utilised on monthly basis. in the prescribed method, an assessee is required to first utilize the opening balance of a month. thereafter, one has to utilise the admissible credit availed for the said month and lastly the inadmissible credit availed is to be calculated for utilisation and thus arrive at an amount of  aggregate  credit  wrongly  utilised.  the  prescribed computation method thus determines credit to be treated as “availed and utilised” for levying interest thereon.

Penal provisions

In an attempt to encourage voluntary tax  compliance and reduce litigation, the Government has considerably reduced penalties under service tax and aligned them with Central excise law:-

    Section 76 providing for a levy of penalty in cases of short payment or non-payment of service tax, however not involving fraud, collusion or willful misstatement or suppression of facts or contravention of the provisions of the act is amended to provide as follows:-

•    Maximum penalty not exceeding 10% of the amount of service tax.
•    No penalty is leviable if service tax along with interest is paid within 30 days of service of show cause notice.
•    Reduced penalty of 25% of the penalty imposed has been prescribed when service tax is paid with interest and reduced penalty within 30 days of  the receipt of the adjudication order or within 30 days of the date of the appellate order in cases where the amount of service tax is increased at the appellate stage or court level. Thus, at appellate or court level, the time limit prescribed for payment of service tax with interest and/or penalty is now provided with reference to the date of order in place of communication of the order, thus reducing the time to such extent.

Section 78 providing for a levy of penalty for a wilful intent to evade service tax is amended to provide as follows:-
•    Penalty equals 100% of the service tax amount.
•    Reduced penalty of 15% is leviable if service tax along with  interest  and  such  reduced  penalty  is paid within 30 days of service of show cause notice.
•    Reduced penalty of 25% of the penalty imposed has been prescribed on payment of service tax, interest and reduced penalty within 30 days of the receipt of the adjudication order or within 30 days of the date of the appellate order in cases where the amount of service tax is increased/modified at the appellate stage or court level. thus, at appellate or court level, the time limit prescribed for payment of service tax with interest and/or penalty is now provided with reference to the date of the order in place of communication of the order, thus reducing the time to such extent.

Section 73(4A) triggered pursuant to any audit, investigation or verification providing for a reduced penalty in case where true and complete details of transactions are recorded in the books of account is now omitted. however, a saving clause is inserted under the said section 78, for the period between 08-04-2011 and 14-05-2015  [both  days  inclusive]  to prescribe a penalty @ 50% of the service tax determined, if the details of such transactions are recorded in the specified records.

Transitory Provisions
In order to provide benefit of reduced penalty to cases where a show cause notice has been issued u/s. 73(1) or under the proviso thereto, but no order has been passed under section 73(2) before 14-05-2015, section 78B is inserted to provide that the period of 30 days for closure of proceedings on the payment of service tax, interest and penalty is to be counted from 14-05-2015 i.e. the date of enactment of the finance act,2015.

Omission of Non-obstante Clause-Section 80
In a significant move, non-obstante clause of section 80 providing powers to condone penalty is omitted   at the end of twenty one years of the existence of service   tax.   Therefore,   penalty   is   now   invocable notwithstanding genuine cause or difficulty of the tax payers and no action will be considered bonafide.

Few Concerns

Threshold Limit
The  service  tax  rate  has  been  increased  to  14%  in order to prepare the trade and industry for GST-one of the biggest taxation reforms in india. However, commensurate increase has not been brought about in the threshold limit and the same has remained constant at Rs. 10 lakh which may affect small and marginal service providers.

CENVAT Credit
There  has  also  been  a  conscious  effort  made  to broaden the base of service tax by pruning the negative list and the exemption notification as a precursor to GST. However, one of the basic aims for the introduction of GST is to provide seamless credit across value chains, but the CENVAT credit provisions have not been accordingly expanded leading to increased cost pressures for trade and industry.

Balance in education Cess & Secondary and higher education Cess account

The service tax rate of 14% has subsumed the education cess and higher education cess. however, whether the balance of education cess and higher education cess paid on inputs, input services and capital goods lying unutilised on the date the new service tax rate is applicable will be available to the service providers for discharging service tax liability is a question which has remained unanswered. In case of Central Excise vide Notification No.12/2015 Central excise (n.t.), it is provided that credit of education Cess and Secondary and higher education Cess paid on inputs or capital goods received in factory on or after 01-03-2015 can be utilised for payment of duty of excise. Similarly, credit balance of 50% of these Cesses paid on capital goods received in the factory of manufacturer as  well  as  input  services  received  during  F.Y.  2014-15 also  can  be  utilised  for  payment  of  excise  duty.   Thus, the intent of the legislation is clear that balances in the Cess accounts of the earlier period are not allowed to be used for duty payment. Further, similar notification is not issued as yet for service providers. in the scenario, the issue of use of credit of cesses remains questionable until the issue of such notification.

(note:  reference  to  sections  made  in  the  article  refer  to  the provisions of the Finance Act,1994 unless otherwise specified)

Some of the aspects included above may require detailed analysis. Such discussion will be covered under regular service tax feature of BCAJ from time to time hereafter.