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Service Tax & CBEC

Finance (No. 2) Bill, 2009 – Changes in Service Tax

The Finance (No.2) Bill, 2009 (the Bill) has proposed to make certain changes in Chapter V of the Finance Act, 1994 (the Act), the law governing service tax, some of which are effective on the enactment of the Bill and some thereafter from a date to be notified. In addition to the above, the Central Government has also issued notifications making some changes in the Cenvat Credit Rules, 2004, Taxation of Services (Provided from Outside India and Received in India) Rules, 2006, Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 and providing for exemptions and speedier refunds. All the notifications are effective from 7-Jul-09. However, the effective rate of service tax has been maintained at 10.3%.

1. CHANGES EFFECTIVE FROM 7-Jul-09

1.1. EXTENSION OF TERRITORIAL JURISDICTION

1.1.1. The Act is now amended to extend the provisions to installations, structures & vessels in the entire Continental Shelf of India (CSI) & Exclusive Economic Zones (EEZ) of India. Consequential changes are also made to Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 in the definition of India with regard to import of services.

1.2. CENVAT CREDIT RULES FOR SERVICE PROVIDERS

1.2.1. As per the existing provisions, Rule 3(5B) of the Cenvat Credit Rules provides that if the value of any `input’ or `capital goods’ on which Cenvat credit has been taken, is written off fully or where provision to write off has been made in the books of accounts before being put to use, the `manufacturer’ shall pay an amount equal to the Cenvat credit taken on such item. However, if the said input or capital goods is subsequently used in the manufacture of final products, the manufacturer shall be entitled to take credit of the said amount subject to the other provisions of the Cenvat Rules. The said Cenvat Credit Rule 3(5B) has now been amended to bring also the `taxable service provider’ within the ambit of the above restriction.

1.2.2. Rule 6(3) of the Cenvat Credit Rules provides that where the service provider opts not to maintain separate accounts as per Rule 6(2), he may avail the entire credit on inputs / input services but opt for either of the following:

a. Pay 8% of the value of exempted services and then utilise the entire credit available; or

b. Pay an amount equal to the Cenvat credit attributable to exempt services computed in a prescribed manner and then utilise the entire credit available.

Consequent to the reduction made in the rate of service tax from 12% to 10% w.e.f. 24-Feb-09, the amount of service tax payable as per (a) above on the exempted services has now been reduced from 8% to 6% of the value of exempt services.

1.2.3. Under the existing Cenvat Rules by virtue of Explanation to Rule 2(k), the definition of `inputs’ would include goods used in manufacture of capital goods which are further used in the factory of the manufacturer. The Rules are now amended to provide that cement, angles, Centrally Twisted Deform bar (CTD), or Thermo Mechanically Treated bar (TMT) and other items used for construction of factory shed, building, or foundation or structure for support of capital goods would not be considered as inputs.

1.3. WORKS CONTRACT COMPOSITION SCHEME

1.3.1. The Finance Act, 2007 had introduced service tax on execution of works contract w.e.f. 1.6.2007. Consequently, the Central Government provided two options to pay service tax on works contract —

a. pay service tax on gross value of contract after reducing the value of goods under Rule 2A of Service Tax (Determination of Value) Rules, 2006 (“Valuation Rules”).

b. Avail the composition scheme prescribed under Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 [“Works Contract Composition Rules”] and pay service tax @ 2% [subsequently increased to 4%] of the gross amount charged for the works contract (excluding VAT / sales tax paid on transfer of property of goods involved in execution of works contract).

1.3.2. The ‘gross amount charged’ under the composition scheme has now been expanded with changes in Explanation to Rule 3 of Works Contract Composition Rules. The said Explanation now provides that for the purpose of composition scheme the ‘gross amount charged’ shall be the sum, -

a. including-

· the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and

· the value of all the services that are required to be provided for the execution of the works contract;

b. excluding-

· the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and

· the cost of machinery and tools used in the execution of the said works contract except for the charges for obtaining them on hire:

1.3.3. The Circular No. D.O.F. No. 334/13/2009-TRU dated 6.7.2009 issued by Ministry of Finance expresses the following intention of the amendment —

a. the gross value should also include the value of goods received free of cost from the client;

b. Gross value should also include the goods or materials used in the works contract whether forming part of consideration of contract or not

1.3.4. This amendment would not be applicable to the following contracts—

a. where the execution of the contract has already commenced on or before 7.7.2009

b. the payment [except by way of debit or credit in any account] has been made in relation to the said contract on or before 7. 7. 2009

1.3.5. The sub-rule 3 of Rule 3 of the Works Contract Composition Rules provides that composition option is qua each contract and option must be exercised prior to payment of service tax on a works contract and the option once exercised shall apply for the entire works contract and cannot be withdrawn until the completion of the said works contract. Now sub-rule 4 has been inserted so as to provide that the above option shall be permissible only where the declared value of the works contract is not less than the gross amount charged for such works contract. Thus, the composition scheme would be applicable only if the composition rate [presently 4%] is applied on an amount which is atleast equal to or more than gross amount arrived as per para 2.3.2 above.

1.4. EXEMPTIONS

1.4.1. Tour operator services provided by tour operator, having a contract carriage permit for inter-state or intra-state transportation of passengers, is exempted for point to point transportation of passengers, and provided it is not in relation to tourism, conducted tours, charter or hire service.

1.4.2. Transaction of purchase or sale of foreign currency between scheduled banks i.e. the banks, which are included in the Second Schedule of the Reserve Bank of India Act, 1934 is exempted.

1.4.3. Certain specified associations are exempted from the levy of service tax under the category of “Services of Club or Association”. This exemption is upto 31.3.2010.

1.5. REFUNDS & EXEMPTIONS TO EXPORTERS – NEW SCHEME

1.5.1. The Government had earlier introduced a Refund Scheme for exporters vide Notification No.41/2007-ST dtd 6.10.2007 to facilitate refund of service tax paid on `specified taxable service’, received and used in connection with export of goods by the merchant / manufacturer exporter. This Notification was amended from time to time to include more taxable services eligible for refund as well as for simplifying the refund process. Yet, there were inordinate delays in grant of refund claims and in many cases refunds were denied or notices were issued to exporters. In order to ensure that exporters get refunds speedily, the entire scheme of refund is now revamped. The New Scheme for Exporters consists of two parts viz. Refund & Exemption.

1.5.2. The gist of the Modified Refund Scheme introduced vide Notification No.17/2009-ST dtd. 7.7.2009 is as follows:

a. The Refund is eligible for the `specified services’ enlisted in the Notification, which are received & used by the exporter for export of goods (and not for export of services). The exporter of goods is eligible for the refund if he has actually paid service tax on the specified service to its provider AND he has not claimed CENVAT credit on the same.

b. The Notification prescribes the procedure for claiming the refund which amongst other things includes the Form for Application of Refund, the duration within which the claim shall be filed, the documents to be attached with the refund claim & the manner of Certification of documents to be attached with the claim.

c. The Notification also stipulates that the Department must process the Refund Claims within one month of receipt of the application. A Departmental clarification also stipulates that in case of any default or deficiency noticed after the claim is received, the claim will be returned back by the department within 5 working days from the date of receipt. Beyond that period the claim has to be accepted & processed.

d. Recovery of Service Tax Refunded: Where any refund has been paid to the exporter, but the sale proceeds in respect of the said goods has not been realised in India by or on behalf of the exporter within the period allowed under the Foreign Exchange Management Act, 1999 (at present 12 months), including any extension of such period, such service tax refunded shall be recoverable as if the refund was erroneously granted.

1.5.3. In addition, another scheme has also been introduced vide Notification No.18/2009 dtd. 7.7.2009 providing for direct exemption from service tax on following two services used by the exporter, service tax on which were hitherto payable by the exporter on a reverse charge mechanism:

· Transport of Goods by road from any CFS or lCD to Port/ Airport of Exports or from the place of removal (i.e. factory) to CFS, lCD, Port or Airport of Exports;

· Services provided by a foreign commission agent who causes sale of exporter’s goods abroad. In this case the exemption would be restricted to service tax of 1% of the FOB value of export. The service tax in excess of such limit would have to be paid as per the reverse charge mechanism. This excess would also not be entitled to refund.

a. CENVAT credit must not be availed on such services.

b. This exemption scheme is available to such exporters who are registered with Export Promotion Councils (EPCs) sponsored by the Ministry of Commerce or the Ministry of Textiles, are having Import Export Code Number (IEC) and are also registered with Service Tax / Central Excise Authorities.

c. The Notification prescribes the procedure for claiming the exemption which amongst other things includes the Form for prior Intimation to the jurisdictional Assistant / Deputy Commissioner, filing of half-yearly Return of exports made & exemption availed, the due date for filing such Return, the documents to be attached with the half-yearly Return & the manner of Certification of documents to be attached with the Return. It is further stipulated that once the exporter has opted for the exemption scheme, and if he does not avail any benefit under the scheme during any relevant half-year, he should file a NIL Return.

2. CHANGES EFFECTIVE FROM DATE OF ENACTMENT OF THE FINANCE BILL

2.1. The Bill proposes to abolish the Commissioner’s power to revise the order-in-original of the adjudicating authority u/s 84 of The Act and replace it by reference to the Commissioner (Appeals) with suitable amendments to section 84 & 86 of The Act. Thus, post amendment, on satisfaction that the Order-In-Original passed by the sub-ordinate officer is not acceptable on account of its lack of legality or appropriateness, the Commissioner would have the power to direct such sub-ordinate officer to apply before Commissioner (Appeals) for determination of the points arising out of such order.

2.2. The Service Tax Rules suffer from the deficiency of not having provisions relating to (i) relevant date for determination of rate of service tax; and (ii) place of provision of taxable services. The Bill proposes to suitably amend section 94 of The Act to empower the Central Government to make rules in this regard.

2.3. The Central government had issued a Notification No.1/2009-ST effective from 5.1.2009 exempting eight services enlisted in the Notification, from service tax when provided to a Goods Transport Agency (GTA) subject to certain conditions. The Bill now seeks to make the above exemption effective from 1.1.2005. Consequently, the Bill also provides for giving refunds for service tax which are already collected by the Government, subject to certain conditions. The application for such refunds shall be made within 6 months from the date of enactment of Bill.

3. CHANGES EFFECTIVE FROM DATE TO BE NOTIFIED AFTER ENACTMENT OF THE FINANCE BILL

3.1. SERVICE TAX PROPOSED ON FOLLOWING NEW SERVICES

3.1.1. Service of Transportation of “Coastal goods” and on transportation of goods through “National Waterways” and “Inland Waters”.

3.1.2. Cosmetic & Plastic Surgery Service

3.1.3. Legal Consultancy Service

3.2. ALTERATION OF SCOPE OF SERVICE TAX ON FOLLOWING EXISTING SERVICES

3.2.1. Service of Transport of goods through Rail to include transport by Government Railways including non-containerised freight.

3.2.2. Production/processes which result in `manufacture’ of `excisable goods’ only excluded from the purview of `business auxiliary services’

3.2.3. Exclude the services of sub-broker from the purview of service tax by deleting it from the definition of `stock broker’

3.3. CLARIFICATION ON EXISTING SERVICES

3.3.1. In the definition of `information technology software services’ it is proposed to replace the word `acquiring’ with the word `providing’. The reason being it is the `providing’ of `right to use’ and not the acquiring of `right to use’ that is a taxable service. This amendment would have a retrospective effect from 16.5.2008 when the levy of service tax on information technology software services became applicable.

[Shaleen Shah (Partner), VNCA]

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