SERVICE TAX: -

New Services becomes taxable

Services provided by air-conditioned restaurants having a license to serve alcoholic beverages in relation to serving of food and/or beverages ; and (in case the air-conditioning is provided any time during the financial year this provision shall be affected) Short-term accommodation provided by a hotel, inn, guest houses, club or campsite, or any other similar establishment for a continuous period of less than three months. (it is important to note that any accommodation provided for a period of more than may be taxed as renting of immovable property)

(Above changes will come into effect from a date to be notified after enactment of the Finance Bill, 2011)

Scope Extended
o Authorized Service Stations Services [section 65 (105) (zo)]: The existing service is being replaced with a new definition to cover all persons and all motor vehicles other than those meant for goods carriage or three wheeler auto rickshaw. This also cover the services of decoration of vehicles. Life Insurance Service [section 65 (105) (zx)]: The scope of this service is proposed to be expanded to cover all services, including in relation to management of investments. The composition rate increased from 1% to 1.5% Commercial Training or Coaching Service [section 65 (105) (zzc)]: The scope of this service is proposed to be expanded to include all coaching and training that is not recognized by law irrespective of whether the institute is providing any other course recognized by law. Preschool coaching centres are also going to be with in tax net

Club or Association Service [section 65 (105) (zzze)]: The scope of the service is proposed to be expanded to include service provided to nonmembers as well Business Support Service [section 65 (105) (zzzq)]: The scope of the service is being expanded to include operational or administrative assistance of any kind. Legal Consultancy Service [section 65 (105) (zzzzm)]: The scope of the existing service is being expanded to include: Services of advice, consultancy or assistance provided by a business entity to individuals as well; Representational services provided by any person to a business entity; and Services provided by arbitrators to business entities. Services provided by individuals to other individual will remain outside the levy.

Services provided by clinical establishments [section 65 (105) (zzzzo)]: The existing levy on health services is proposed to be replaced as follows: Any service provided by a clinical establishment having the facility of central airconditioning in any part of the establishment and more than 25 beds for in-patient treatment at any time of the year; Diagnostic services provided by a clinical establishment with the aid of laboratory or medical equipment; and Health-related services provided by doctors, not being employees, providing Health-related services from the premises of a clinical establishment.

(Above changes will come into effect from a date to be notified after enactment of the Finance Bill, 2011)

New exemptions/Amendment in Exemptions

o Business Exhibitions: Exemption is provided to services provided by an organizer of business exhibitions in relation to business exhibitions held outside India. (Notification No. 5/ST-2011 effective from 1st March, 2011) Transport of passengers by Air service: Notification 26/2010-ST dated 22-6-2010 is being amended by Notification 4/2011- ST Service tax applicable in respect of Transport of passengers by air service is being revised as follows: Category Sub-Category Service Tax Rate Domestic Economy Domestic Other than Economy International Economy Existing Rs. 100/Rs. 100/Rs. 500/Revised Rs. 150/10% Rs. 750/-

(Notification No. 4/ST-2011 effective from 1st April, 2011) o Works contract services: Exemption when Works contract service rendered for the construction of residential complexes or completion and finishing services of a new complex under Jawaharlal Nehru Urban Renewable Mission (JNURM) and Rajiv Awaas Yojana (Notification No. 6/ST-2011 effective from 1st March, 2011) Exemption when Works contract service rendered within a port, or other port or airport in specified areas (Notification No. 10 & 11/ST-2011 effective from 1st March, 2011) o General Insurance Service: Exemption has been given to the taxable service of general insurance when provided under Rashtriya Swashya Bima Yojna (Notification No. 7/ST-2011 effective from 1st March, 2011)

Transport of coastal goods: An exemption of 25% from the taxable value is being provided in respect of services rendered in relation to transport of coastal goods and goods transported through national waterways or inland water (Notification No. 16/ST-2011 effective from 1st March, 2011)

Transport of goods by Air: Value of air freight included in the assessable value of goods for charging customs duties is being excluded from taxable value for the purpose of levy of service tax under the Transport of goods by air service (Notification No. 9/ST-2011 effective from 1st April, 2011)

Transport of goods by Air/Road/Rail: Services related to transportation of goods by road, rail or air provided to any person located in India, when both the origin and the final destination are located outside India is being exempted from service tax. (Notification No. 8/ST-2011 effective from 1st April, 2011)

Exemptions with retrospective effect have been given by the Finance Bill: Club or Association Service To an association or chamber representing commerce or industry in respect of membership fee for the period from 16.06.2005 to 31.03.2008; and To inter-state or intra-state transportation of passengers, in a vehicle bearing contract carriage and tourist vehicle permit for the period from 01.04.2000 to 06.07.2009

(Effective from the date of enactment of the Finance Bill)

SEZ Refunds
Notification No. 17/2011-ST has been issued superseding notification 9/2009-ST dated 03.03.2009. The new notification has the following features: Criteria for the determination of wholly consumed services have been laid down in the notification, borrowing from the Export of Services Rules, 2005. It has also been specified that all services received by an entity in a SEZ, which does not have any other DTA operations, will constitute wholly consumed services. No service tax is required to be paid ab-initio if the same are meant to be wholly consumed within SEZ, including services liable to tax on reverse charge basis under section 66A. Refund of the remaining services i.e. which are not wholly consumed shall be available on pro rata basis i.e. ratio of SEZ turnover to total turnover. Suitable rule has been introduced in CENVAT Credit Rules, 2004 to waive the requirements of rule 6 in case of services provided, without payment of tax, to a SEZ unit for its authorized operations.

(Notification No. 17/ST-2011 effective from 1st March, 2011)

Point of Taxation Rules, 2011

Points of Taxation Rules, 2011 have been framed. These rules determine the point in time when the services shall be deemed to be provided.

The general rule will be that the time of provision of service will be the earliest of the following dates: Date on which service is provided or to be provided Date of invoice Date of payment

(Notification 18/2011-ST effective from 1st April, 2011) The proposed changes will substantially peperone the liability to deposit the service tax liability The change is perhaps made to align with the provisions of VAT for implementation of GST. Excise duty is also collected at the time of removal of goods It is however un fair on the part of the assessee that availment of CENVAT credit will be only available on actual payment of input services Some changes have been made to align the provisions consequent to the Introduction of Point of Taxation Rules, 2011: o A new rule 5B has been introduced to provide that the applicable rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided. o In place of existing Sub Rule (3) of Rule 6, a new sub-rule (3) has been substituted to provide that when an invoice has been issued or a payment received for a service which is not subsequently provided, the assessee may take the credit of the service tax earlier paid when the amount has been refunded by him to the recipient or issue of credit note, as the case may be.

Changes in Service Tax Rules, 1994

o The monetary limit of Rs.100,000/- for adjustment of excess amount paid by an assessee under Rule 6(4B)(iii) is being raised to Rs.2,00,000/-. (The change will come into effect from 1st April, 2011) o Rule 6(7A) is being amended to provide that that an insurer carrying on life insurance business shall have the option to pay tax, on the amount of gross premium charged from a policy holder reduced by the amount allocated for investment, where the breakup of the amount allocated for investment is shown separately to the policy holder; on an amount calculated @ 1.5% of the gross amount of premium charged from a policy holder in cases other than above; towards the discharge of his service tax liability instead of paying service tax at the rate specified in section 66 of Finance Act, 1994. Such option shall not be available in cases where the entire premium paid by the policy holder is only towards risk cover in life insurance.

(The above change will come into effect from a date to be notified, after the enactment of Finance Bill, 2011) o Clause (B) of Rule 6(7) pertaining to sale and purchase of foreign exchange is being amended to, omit the proviso as well as the illustration; and reduce the composition rate from 0.25% to 0.1% of the gross amount of currency exchanged towards discharge of service tax liability. (The change will come into effect from 1st April, 2011) Rule 6(6A) is being inserted, to provide that if any amount of service tax has been selfassessed and not paid, the same shall be recoverable with interest under section 87 of the Act. Thus, there shall be no need to resort to provisions of section 73 for the recovery of such self-assessed amounts. (The change will come into effect from 1st April, 2011)

Service Tax (Determination of Value) Rules, 2006

o A new rule (2B) has been inserted. It is being defined that the value of the money changing service: for a currency exchanged either from or to Indian Rupees, shall be equal to the units of currency exchanged multiplied by the difference in the buying rate or the selling rate, as the case may be, and the RBI reference rate for that currency for that day; for a currency where the RBI reference rate is not available, shall be 1% of the gross amount of Indian Rupees provided or received, by the person changing the money; Where neither of the currencies exchanged is Indian Rupee, shall be equal to 1% of the lesser of the two amounts the person changing the money would have received by converting any of the two currencies into Indian Rupee on that day.

(The change will come into effect from 1st April, 2011) o An explanation is being added to rule 5(1) to clarify that for the purpose of Telecommunication services, the value of the taxable service shall be gross amount charged by the telegraph authority from the service receiver (The change will come into effect from 1st April, 2011)

Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007
A sub-rule (2A) is being inserted in rule 3 to provide that the credit of tax on input services of Erection, commissioning or installation, Commercial or industrial construction and Construction of complex services shall be restricted to 40% of the tax paid, when such tax has been paid on full value of the service after availment of CENVAT credit on inputs. This has been done to ensure that the credit on inputs is not availed of indirectly while using the composition scheme.

Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006
Amendment is done so as to move some of the specified services from one category to another.

Changes in the Act: Provisions Relating to Penalty and Interest

The maximum penalty for delay in filing of return under section 70 is proposed to be increased from Rs. 2,000/- to Rs. 20,000/-. However, the existing rate of penalty is being retained under rule 7C of the Service Tax Rules, 1994. The provisions of section 73 (1A) and both the Provisos of section 73 (2) are proposed for deletion. As a result, the benefit of reduced penalty shall not be available in cases of fraud, mis-statement, suppression, collusion etc. in the ordinary course. Further, a new sub-section 4A is being inserted in section 73 to provide for reduced penalty in cases where during the course of audit, verification or investigation it is found that the transactions not reported to the department are available in the records or invoices. The extent of penalty is being further reduced to 1% per month of the tax amount for the duration of default, with an upper ceiling of 25% of the tax amount. Interest rate for delayed payment of service tax is being increased to 18% per annum. (Notification No. 15/2011-ST - effective from 1st April, 2011) A concession of 3% in the rate of interest has been proposed in the Bill for tax-payers whose turnover during any of the years covered in the notice or the preceding financial year is below Rs 60 lakh. (Section 73B and 75) Penalty for failure to pay tax under Section 76 is being reduced from 2% to 1% per month or Rs. 100/- per day, whichever is higher. Maximum penalty is reduced to 50% of the tax amount. The maximum penalty under section 77 for contravention of various provisions is proposed to be increased from Rs. 5000/- to Rs. 10000/-. However, the daily rate of penalty, wherever applicable, is being retained. Penalty under Section 78 is being changed to revise the maximum penalty. Penalty will hereafter be mandatory and equal to tax evaded. Moreover, in situations covered under sub section 4A of section 73, the penalty shall be 50% of the tax amount. Further, the penalty is being reduced to 25% if the tax dues are paid within one month together with interest and reduced penalty. For assessees having a turnover of up to Rs. 60 lakh in any of the years covered in the show cause notice or in the preceding year, the period of one month shall be

revised to 90 days.

Section 80 is being amended, while Penalties under section 76 and 77 are being retained, Penalty under section 78 is changed, by substituting section 78 with the words proviso to section 78. Now, the power to waive penalty shall be available only in cases where the information is captured properly in the specified records.

Other Provisions
Power to issue search warrant is given at the level of Joint Commissioner and the execution of such warrant at the level of Superintendent. A new section 88 is inserted so as to create first charge on the property of the defaulter for recovery of service tax dues subject to provisions of some other Act. The provisions relating to prosecution are being introduced under section 89 as follows: o The prosecution shall apply in the following situations: Provision of service without invoice; Availment and utilization of Cenvat Credit without receipt of inputs or input services; Submitting false information; and Non-payment of collected amount of service tax for a period of more than six months. The sanction for the prosecution will be granted at the level of Chief Commissioner.

Amendment in Cenvat Credit Rules 2004:

Rule 2: - Definitions Capital goods: A new sub clause (1A) has been inserted in clause (a) of Rule 2, to include specified capital goods used outside the factory of the manufacture of the final products for generation of electricity for captive use within the factory. Exempted Services: Definition of exempted services has been widened: o Services in which abatement is claimed:to include Services whose part of the value is exempted on the condition that no credit of inputs and input services, used for providing such taxable services ,shall be taken. o Trading goods: An explanation is inserted to clarify that exempted services includes trading

Exempted Goods: Definition of exempted goods has been widened, to include goods in respect of which the benefit of an exemption under notification No. 1/2011-CE is availed Input: A new definition of Input has been inserted in place of existing definition: o Input has been defined to include, inter-alia, all goods used in a factory by the manufacturer and goods used for providing any output service; o Exclusions: Goods that shall not constitute input have been specifically excluded. These shall include, besides petroleum items, any goods used for construction of a civil structure (by a manufacturer as well as a service provider) excepting when they are used in the provision of any of the specified construction services. Thus, goods used by a sub-contractor for rendering services of construction to the main contractor shall constitute input. Exclusions also cover goods such as food items, goods used in a guesthouse, residential colony, club or a recreational facility or a clinical establishment which are primarily meant for the personal use or consumption of the employees. When any of these goods are used directly in the manufacture of final products or provision of a service they will constitute input. Goods which are having no relationship with the manufacture have also been excluded.

Input Service: o Definition of input service has been aligned with the definition of input such that goods that do not constitute input do not qualify as input service. Thus a service relating to construction of civil structure will not constitute input service unless it is provided by a sub-contractor to the main contractor. Expression activities relating to business has been deleted and Business exhibition and legal services added in the list of services.

Similarly services relating to motor vehicle i.e. rent-a-cab, use of tangible goods, insurance or repair of vehicle shall not constitute an input service except in respect of output services where credit on motor vehicle is permitted as capital goods. Services which are meant primarily for the personal use or consumption of employees will not constitute an input service. A list of specific services has also been given by way of example in the definition. outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness center, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession Most of these services constitute a part of the cost-to-company package of the employee and are provided either free of charge or on concessional basis to company employees.

Rule3: CENVAT credit of Excise shall not be allowed to be taken when paid on any goods in respect of which the benefit of an exemption notification under N.No.1/2011-CE,dated 1st March, 2011 is availed. Moreover CENVAT credit shall not be utilised for payment of any duty of excise on goods in respect of which the benefit of an exemption under notification No. 1/2011-CE, dated the 1st March, 2011 is availed

CENVAT credit shall not be allowed in excess of eighty-five per cent. of the additional duty of customs paid under sub-section (1) of section 3 of the Customs Tariff Act, on ships, boats and other floating structures for breaking up falling under tariff item 8908 00 00 of the First Schedule to the Customs Tariff Act; Definition of Input has been changed to include any goods used for providing free warranty for final products. A consequential amendment In sub rule (5) that is related to reversal/payment of Cenvat where input are removed as such, is made through insertion of a proviso after the first proviso, that such reversal/payment shall not be required to be made where any inputs are removed outside the factory for providing free warranty for final products:;

In sub-rule (5B), that is related to reversal/payment of Cenvat on account of written off or provision for writing off of Input or capital goods before being put to use is made in the books of account, the words and letters fully are replaced by fully or partially with effect from the 1st day of March, 2011.

Rule 4 Definition of Capital Goods has been changed to include specified capital goods used outside the factory of the manufacture of the final products for generation of electricity for captive use within the factory. A consequential amendment In clause (a) of sub rule (2), which specifies that the Cenvat in respect of Capital goods shall be used partly in the same financial year and partly in the next year, is made through insertion of words or outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory, after the words provider of output service Sub-Rule 7 is amended to provide for reversal of CENVAT Credit in case of payment made towards input services is received back, in proportion to the CENVAT credit availed in respect of the amount so received back.

Rule 6 Rule 6 is amended to provide for the following: Option to maintain separate accounts only in respect of inputs (and not together with input services) has also been given so that allocation as per formula given in rule 6(3A) is done only in so far as credits on input services are concerned. The amount payable under rule 6(3) (i) in respect of services has been reduced from 6% to 5%. Moreover in the case of exempted services (that are partially taxed with no facility of credits) this amount shall be 5% of the exempted value of the service. In case of exempt goods, amount payable will be reduced by the amount paid at the concessional rate. For the purpose of applying the formula under rule 6(3A) the value of trading service as well as value of services covered by composition schemes has been defined. The value of trading service shall be the difference between the sale price and purchase price of goods. The value in respect of services covered by a composition scheme will be tax amount divided by the rate of service tax applicable under section 66 read with any general exemption.

New Sub Rule (3B) is being introduced to provide that only 50% of the CENVAT Credit availed will be available for utilisation towards payment of service tax under "Banking and Other Financial Services." by the banking company and financial institution. New Sub Rule (3C) is being introduced to provide that only 80% of the CENVAT Credit availed will be available for utilisation towards payment of service tax by the providers of life insurance service and management of investment under ULIP.

Sub rule (5) that allows full credit of 17 specified services has been deleted.

New sub-rule (6A) has been added to allow provision of services without payment of service tax to a unit in SEZ or to a developer in SEZ for their authorized operations, without requirement of reversal of any CENVAT credit on this account. Most of the Cenvat changes will come into effect from 01.04.2011 except a few that will be effective from 01.03.2011.

Small Assessee
An assessee who is a sole proprietor and has a turnover of up to Rs 60 lakhs shall not be subject to audit by the service tax department Rate of interest chargeable under the Service Tax law shall be reduced by 3% in case of all assessee having turnover of up to Rs 60 lakhs. The period for making the payment in order to avail the benefit of reduced penalty under the second proviso to Section 78 shall be 90 days for these assessees.