Service Tax Key Changes in Budget 2014

 

Budget 2014 has introduced numerous changes with respect to Service Tax. These changes are discussed in a chronological order (i.e. changes applicable from 11th July 2014, changes applicable from date of assent to Finance Bill, changes applicable from the date of notification after assent to Finance Bill, 1 st September 2014 and 1 October 2014) in the ensuing paragraphs:-

1. Amendments applicable from 11 July 2014

1.1 New exemptions

a. Exemption is now provided to 'services provided by operators of the Common Bio-medical Waste Treatment Facility to a clinical establishment by way of treatment or disposal of bio-medical waste (vide sr. no. 2B of Not. No. 25/2012-ST).

b. The concept of 'auxiliary educational services' is omitted and in the Notification, now certain services to educational institute are specifically exempted such as catering service including any mid-day meals , security or cleaning or house-keeping services , services relating to admission to such institution or conduct of examination. Further, transportation of student and facility is also out of ambit of service tax (vide sr. no. 9 of Not. No. 25/2012-ST).

c. Section 66D (d) exempts storage or warehousing etc. of 'agricultural produce'. In this context, question had arisen as to whether 'cotton' is an 'agricultural produce' or not? Thus, to remove the ambiguity, loading, unloading, storage, warehousing and transportation etc. of cotton (whether ginned or baled) is specifically exempted (vide sr. no. 20 (k), 21 (i) and 40 of Not. No. 25/2012-ST).

d. Transportation of organic manure is now exempted to bring it at par with similar exemption available to fertilisers (vide sr. no. 20 (j), 21 (e) of Not. No. 25/2012-ST).

e. Exemption is provided to services received by the Reserve Bank of India, from outside India in relation to management of foreign exchange reserves (vide sr. no. 41 of Not. No. 25/2012-ST).

f. Exemption is provided to services provided by a tour operator to a foreign tourist in relation to a tour conducted wholly outside India (vide sr. no. 42 of Not. No. 25/2012-ST).

1.2 Liable to Service Tax

a. Sr. No. 25/2012-ST exempts ' Services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies, on human participants by a clinical research organisation approved to conduct clinical trials by the DGCI' . This exemption is now withdrawn and thus technical testing of drugs will attract service tax (sr. no. 7 of Not. No. 25/2012-ST omitted ).

b. Services for transportation of passengers by contract carriages is currently exempted vide sr. no. 23 (b) of Not. No. 25/2012-ST. However, now transportation of passengers in air-conditioned contract carriages would be liable to service tax. The taxable portion of such service shall be 40% (provided no CENVAT credit is availed) (vide Not. No. 6/2014-ST and 8/2014-ST)

c. Renting to educational institute, which was exempted earlier, would now attract service tax (vide sr. no. 9 of Not. No. 25/2012-ST).

1.3 Other changes

a. Reverse Charge Mechanism was applicable in 10 scenarios. Now, directors of 'Body Corporate'(earlier the term was 'Company') are also covered. Further, in case of service provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company, the recipient of the service will be liable to pay service tax (vide Not. No. 9 and 10/2014-ST).

b. Earlier Rule 4(7) of CENVAT Credit Rules, 2004 provided for availment of CENVAT credit on payment of value of input services and service tax thereon. Now, in case of full reverse charge mechanism, credit would be available immediately on payment of service tax. However, this will not apply to partial reverse charge (vide Not. No. 21/2014-CE).

c. Re-credit of CENVAT credit reversed on account of non-receipt of export proceeds within the specified period or extended period, will be allowed, if export proceeds are received within one year from the period so specified or extended period. This can be done on the basis of documents evidencing receipt of export proceeds [refer the newly inserted proviso to rule 6(8)].

d. Input Service Distributor: Vide Circular 178/04/2014-ST dated 10.07.2014 it is clarified that the amended Rule 7 allows distribution of input service credit to all units (which are operational in the current year) in the ratio of their turnover of the previous year/previous quarter, as the case may be. This is a clarificatory change, so,should be applicable retrospectively.

e. SEZ Refund: Not. No. 12/2013-ST is amended to bring procedural simplification of service tax refund to SEZ (vide Not. No. 7/2014-ST)

f. Advance ruling is now made available to resident private companies. This will allow resident private companies to seek advance ruling in respect of new activities being proposed to be undertaken by them (vide Not. No. 15/2014-ST)

2. Amendment to be effective from the date of Presidential assent

2.1 Services provided by the Employees' State Insurance Corporation for the period prior to 1st July 2012 is being exempted. It may be noted that the service provided by ESIC to persons governed under the Employees? Insurance Act, 1948 is already exempt for the period commencing from 1.7.2012 [vide sr. no. 36 of Not. No. 25/2012-ST].

3. Amendment to be effective from a date to be notified after the Presidential assent

3.1 Liable to Service Tax

a. Section 66D (g) exempts ' selling of space or time slots for advertisements other than advertisements broadcast by radio or television'. Thus, radio or television advertisements are liable to service tax. Now, the advertisements in internet websites, out-of-home media, on film screen in theatres, bill boards, conveyances, buildings, cell phones, Automated Teller Machines, tickets, commercial publications, aerial advertising, etc. are under the tax net. Sale of space for advertisements in print media, however, would remain excluded from service tax.

b. Transport of passenger in radio taxi was not liable to service tax (as it was covered undersection 66D (o). However, this exemption is withdrawn and thus, radio taxis such as OLA, Meru, TabCab etc.will have to revisit their tax position.

3.2 Other changes

a. Section 87 is being amended to incorporate power to recover dues of a predecessor from the assets of a successor who purchased from the predecessor as it is presently provided for in section 11 of the Central Excise Act, 1944.

b. Pre-deposit : To expedite the process of disposal of appeals, amendments are proposed in the Customs and Central Excise Acts to free the Appellate Authorities from hearing stay applications and to take up regular appeals for final disposal. Now, mandatory fixed pre-deposit is provided as under:

Appellate Authority	Stage	Percentage prescribed	Percentage applicable on
Commissioner (Appeals) or Tribunal	First Stage	7.5%	Duty demanded or penalty imposed or both
Tribunal	Second Stage	10%	Duty demanded or penalty imposed or both

The amount of pre-deposit payable would be subject to a ceiling of Rs. 10 Crore. All pending appeals/stay application would be governed by the statutory provisions prevailing at the time of filing such stay applications/ appeals.

Introduction of compulsory pre-deposit will have its own share of complications as even in frivolous cases the assessee will be required to pre-deposit prescribed amount.

4. Amendment to be effective from 1 September 2014

Earlier there was no time limit for availment of CENVAT credit on inputs and input service. Now, time limit for availment of CENVAT credit on inputs and input service is now provided as 6 months. This is a regressive provision (vide Not. No. 21/2014-CE).

5. Amendment to be effective from 1 October 2014

a. Currently Not. No. 30/2012-ST provides for abatement of 50% for coastal transportation. Now, this abatement is increased to 60%and thus effective rate is reduced from 6.18% to 4.944% (vide Not. No. 8/2014-ST).

b. Rule 2A of Service Tax Valuation Rules(pertaining to Works Contract) provides for two separate taxable values i.e. 60% and 70%. Now, 70%, a uniform value is being proposed. (vide Not. No. 11/2014-ST). However, there is no change in respect of 40% prescribed for 'original works'.

c. Currently, in case a rent-a-cab service provider (being individual, firm etc.) does not avail abatement then the liability to pay 60% service tax is on service provider and 40% on service receiver. Now, this percentage is changed to 50% each(vide Not. No. 10/2014-ST)

d. As per Rule 4 of Place of Provision of Services Rules, 2012 service tax is applicable if the goods are located in India at the time of performance of services such as repairs / maintenance etc. Now, second proviso to rule 4(a) is being amended to prescribe that it would suffice for the purpose of exclusion of repair service from applicability of rule 4(a) that the goods imported for repair are exportedafter repair without being put to any use other than that which is required for such repair.

An intermediary of goods , such as a commission agent or consignment agent shall be covered under rule 9(c) of the Place of Supply of Services Rules. This is a significant change (vide Not. No. 14/2014-ST).

e. In case of reverse charge, the point of taxation will be the payment date or the first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier. It is clarified that this amendment will apply only to invoices issued after 1st October, 2014 (vide Not. No. 13/2014-ST).

f. In view of specific exclusion under Rule 2 (l) of CENVAT Credit Rules, 2004, CENVAT credit is not eligible on rent-a-cab services. Now, CENVAT credit has been made available with respect to rent-a-cab services if the service is availed by a person in the same line of business. Similarly, tour operator service providers are also being allowed to avail CENVAT credit on the input service of another tour operator, which are used for providing the taxable service (vide Not. No. 8/2014-ST)

g. Now, varying rate of interest isbeing provided for delay in payment of service tax. Upto 6 months, the interest rate would be 18%, if the delay is more than 6 months to 12 months then 24% and if delay is more than 12 months then 30%. This is a very harsh measure (vide Not. No. 12/2014-ST)

h. Also, e-payment of service tax will be mandatory for all (vide Not. No. 9/2014-ST)

6. Rate of foreign exchange (date not yet specified):

Currently, as per section 67A the customs rate as notified time to time is to be used. Going forward, Rules will be framed by the Government for determination of rate of exchange to be used for calculation of taxable value.

7. Conclusion

7.1 The Budget has introduced numerous changes. Though, the industry has requested for many procedural and fundamental changes, most of such demands went unheard.

7.2 Still, looking at few positive changes (such as with respect to pre-deposit etc.), one can hope that in days to come more simplifications will follow.