Legislative changes

Increase in service tax rate

A proposed amendment to Section 66B of the Finance Act will increase the rate of service tax from 12.36% to 14% (including education cess and secondary and higher education cess). The government has yet to determine the effective date for the amendment.

The increase is in line with the government's objective to introduce goods and services tax (GST) in April 2016. Under the GST regime, all goods and services will be liable to a single tax rate, which is expected to be higher than the current rate.

Swachh Bharat cess

A new cess – the so-called 'Swachh Bharat' cess – has been proposed for all taxable services. This cess will be levied at a rate of 2% of the value of the service. After the Finance Bill 2015 comes into force, the central government will announce the effective date for the new cess. The details of the cess will be announced in due course.

Chapter V of the Finance Act and the rules thereunder – including those relating to refunds and exemptions from tax, interest and the imposition of penalties – may apply in relation to the levy and collection of Swachh Bharat cess on taxable services.

The availment of central value added tax (CENVAT) credit for Swachh Bharat cess is not specifically mentioned.

Definition of 'service'

As defined under Section 66B(44) of the Finance Act, the term 'service' specifically excludes any activity which constitutes only a monetary transaction or actionable claim. Explanation 2 to Section 66B(44) clarifies that the term 'transaction in money' does not include activities relating to the use of money or its conversion (by cash or any other means) from one form, currency or denomination to another for which a separate consideration is charged.

The proposed amendment to Explanation 2(f) states that a monetary transaction or actionable claim will not include activities carried out in relation to, or for the facilitation of, a monetary transaction or actionable claim, including activities carried out by:

  • lottery distributors or agents involved in the promotion, marketing, organisation or sale of lottery tickets or the organisation of a lottery of any kind; or
  • chit fund supervisors in relation to the conduct or organisation of chits.

Further, an explanation to Entry (i) of Section 66D of the Finance Act (the negative list) has been proposed. The explanation will state that the expression 'betting, gambling or lottery' will not include activities specified under Explanation 2.

Paragraph 2.8.2 of Taxation of Services: An Education Guide, dated June 20 2012, clarifies that services provided by a chit fund supervisor are not considered a monetary transaction; hence, they are liable to tax.

However, in Delhi Chit Fund Association v Union of India,(1) the Delhi High Court held that services provided by a chit fund supervisor are excluded from the ambit of the term 'service', as they are considered activities performed in relation to a monetary transaction and thus are not covered by Explanation 2.

The proposed amendment specifically provides that the legislature intends to levy service tax on activities undertaken by chit fund supervisors.

Other legislative changes

Section 66F(1) of the Finance Act provides that unless otherwise specified, reference to a service does not include reference to any input service. An illustration incorporated into Section 66 of the Finance Act has been proposed in order to exemplify this policy. The illustration will relate to services rendered by the Reserve Bank and agency services rendered by banks to the Reserve Bank for the provision of services. Further, the illustration will help to clarify that input services are not automatically put on the negative list or exempted based on the exemptions available to the main service.

The definition of the term 'consideration' under Explanation (a) of Section 67 of the Finance Act has been expanded to include:

  • any reimbursable expenditure or cost incurred by a service provider and charged in the course of providing, or agreeing to provide, a taxable service; and
  • any amount retained by a lottery distributor or agent from the gross sale of a lottery ticket in addition to the fee, commission or discount received, if any (ie, the difference between the actual value of the lottery ticket and the price at which the distributor or agent sells the ticket).

However, in Intercontinental Consultants & Technocrats Ltd v UoI,(2) the Delhi High Court recently held that only the consideration paid quid pro quo for services rendered is subject to service tax.

The abovementioned amendment seeks to overcome the high court's decision.

Change in penal provisions

The following amendments have been proposed for Section 73 of the Finance Act:

  • A new sub-section (1B) has been proposed to provide that requests for the recovery of service tax which have been self-assessed and declared in a return, but not paid must be made under Section 87. No notice under Section 73(1) will be required.
  • Sub-section 4A – which provides for reduced penalties if true and complete details of a transaction are available on specified records – will be removed.

Section 76 of the Finance Act has been proposed to be amended to limit penalties to 10% of the service tax paid in cases of:

  • fraud or collusion;
  • wilful misstatement;
  • suppression of facts; or
  • contravention of the Finance Act or associated rules in order to evade payment of service tax.

In this regard, the following amendments have been proposed:

  • No penalty will be imposed if the service tax amount and any interest are paid within 30 days of issuance of a notice.
  • A reduced penalty equal to 25% of the penalty imposed under the original order will be applied if the service tax, interest and reduced penalty are paid within 30 days of the order.
  • A 25% reduction of the service tax amount will be applied if a penalty is reduced by way of court proceedings and the service tax, interest and reduced penalty are paid within 30 days of the court order.

Section 78 of the Finance Act – which provides for penalties up to 100% of the service tax amount in cases involving fraud, collusion, wilful misstatement, the suppression of facts or contravention of the Finance Act or rules in order to evade payment of service tax – has been proposed to be amended in the following manner:

  • A 15% reduction of the penalty is available if the service tax and interest are paid within 30 days of issuance of the notice.
  • A reduced penalty equal to 25% of the penalty imposed under the original order will be applied if the service tax, interest and reduced penalty are paid within 30 days of the order.
  • A reduced penalty equal to 25% of the service tax amount will be applied if the fine is reduced by way of court proceedings and the service tax, interest and reduced penalty are paid within 30 days of the court order.

A new Section 78B of the Finance Act will prescribe (by way of a transition provision) that the amended Sections 76 and 78 will apply in cases either where no notice is served or where notice is served under Section 73(1) but no order has been issued under Section 73(2) before the Finance Bill 2015 comes into force.

In respect of cases covered by Section 73(4A), if no notice is served – or notice has been served under Section 73(1) but no order has been issued under Section 73(2) before the Finance Bill 2015 comes into force – penalties will not exceed 50% of the service tax amount.

Section 80 of the Finance Act, which waives penalties in certain circumstances, has been proposed to be removed. The removal of this section will be a substantial setback for assessees that may have had penalties imposed under Section 76 or 78 waived because they could prove that there was reasonable cause for their failure to pay.

An amendment to Section 86 has been proposed in order to revise the provisions under Section 35EE of the Central Excise Act applicable to orders of the appeals commissioner regarding rebates of service tax on input services or duty paid on inputs of exported services.

Further, all appeals which were filed with the Tax Tribunal after the Finance Act 2012 came into force and are still pending when the Finance Bill 2015 receives assent from the president will be considered in accordance with Section 35EE of the Central Excise Act. This will provide much-needed relief to service exporters (mainly business process outsourcers and IT, telecoms and media exporters) whose refunds have been rejected by the appeals commissioner.

Finally, an amendment to Section 94 of the Finance Act has been proposed to empower the central government to formulate rules for determining whether an amount constitutes consideration under Section 67 of the Finance Act.

Changes in negative list

The changes proposed in the negative list are outlined in Section 66D of the Finance Act as follows.

Admission to entertainment events and amusement facilities

Admission costs for entertainment events and access to amusement facilities have been removed from the negative list. Accordingly, service tax will be levied on services provided by way of admission to:

  • amusement facilities which provide fun or recreation by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks and theme parks; and
  • entertainment events (eg, concerts, pageants, musical performances, award functions and sporting events other than recognised sporting events), if the admission charge is more than Rs500.

However, services by way of admission to entertainment events – in particular, exhibitions of cinematographic films, circuses, recognised sporting events, dances, theatrical performances (eg, dramas and ballets) – will continue to be exempted.

Manufacture or production of goods

The negative list includes services by way of any process amounting to the manufacture or production of goods. A 'process amounting to the manufacture or production of goods' has been defined as a process on which excise duty is levied under Section 3 of the Excise Act or any process amounting to the manufacture of alcohol for human consumption, opium, Indian hemp or other narcotics on which excise tax is levied under any state act.

This definition has been amended to exclude the manufacture and production of alcohol for human consumption. Accordingly, service tax will be levied on these activities.

The levy of service tax on the manufacture and production of alcohol was debated before the negative list was introduced, as it was considered a business auxiliary service.(3) However, once introduced, the manufacture and production of alcoholic beverages was covered under the negative list; as such, these practices were not liable to service tax.

Services provided by government or local authorities

'Government' has now been defined to mean the departments of the central government, state governments and union territories, but does not include entities whose accounts need not be kept in accordance with Article 150 of the Constitution (Form of Accounts of the Union and States) or the rules thereunder.

The definition is intended to resolve interpretational issues regarding coverage under the negative list.

Service tax is imposed on support services provided by the government or local authorities to business entities. An amendment to Section 66D(a)(iv) of the Finance Act has been proposed in order to exclude all services provided by the government or local authorities from the negative list. Accordingly, any service provided by the government or a local authority to a business entity will be liable to service tax, unless the service is on the negative list or otherwise exempt. Therefore, the definition of 'support service' is also proposed to be removed.

Exemptions and concessions

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Abatement of service tax

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Amendment to Service Tax Rules

Amendment to definition of 'person liable to pay service tax' under Rule 2(1)(d) of the Service Tax Rules 

An aggregator (including any representative office in India) will be liable to pay service tax in relation to any services in which it is involved. If an aggregator has no presence in India (including presence by way of a representative), an agent appointed by the aggregator will be liable to pay service tax. Entry 11 has been inserted in Notification 30/2012 to provide that aggregators are liable for 100% of service tax in such cases (effective as of March 1 2015).

'Aggregator' has been defined as an owner and manager of a web-based software application that, by means of an application or communication device, enables customers to connect with specific service providers under the trade or brand name of the aggregator.

In relation to the definition of 'aggregator', broad definitions of 'trade name' and 'brand name' have been introduced in Rule 2(1)(bca) of the Service Tax Rules 1994.

Due to the curtailment of the scope of the negative list (ie, the exclusion of all government services to business entities), business entities will be liable to pay service tax even for newly taxed services. This change will be effective from a date to be announced after the enactment of the Finance Bill 2015.

Mutual funds or asset management companies are liable to pay service tax in respect of services received by them from a mutual fund agent or distributor. Entry 1B has been inserted in Notification 30/2012 to provide that service recipients will be liable for 100% of service tax in such cases (effective as of April 1 2015).

In relation to services provided (or agreed to be provided) by an agent to a lottery distributor or agent, the recipient of the service will be liable to pay service tax. Entry 1C has been inserted in Notification 30/2012 to provide that service recipients will be liable for 100% of service tax in such cases (effective as of April 1 2015).

Digitally signed invoices and electronic records (effective as of March 1 2015)

Any bill, invoice or challan issued under Rule 4A of the Service Tax Rules or consignment note issued under Rule 4B can be authenticated by means of a digital signature.

The maintenance of records in accordance with Rule 5 is permitted in electronic form, subject to the authentication of each page of the record by means of a digital signature.

The Central Board of Excise and Customs will specify the conditions, safeguards and procedures which must be followed by persons using electronic invoices and records.

Order 1/2015 (which came into force on March 1 2015) specifies the documents, time limits and procedures regarding registration of single premises.

Rule 6 provides alternative composite rates of service tax for:

  • services provided by air travel agents;
  • money changing services;
  • insurance services; and
  • services provided by lottery distributors or agents.

Due to the increased service tax rate (from 12.36% to 14%), the composite rates above have been proportionately increased. These changes will apply from a date to be announced in the Official Gazette. A summary of the old and amended composite rates is provided in the following table.

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Amendment in percentage of tax required to be paid under reverse charge mechanism (effective from April 1 2015)

Serial 8 of the table in Notification 30/2012

In respect of the supply of labour and security services (provided by an individual, Hindu undivided family, partnership firm or association of persons located in a taxable territory to a business entity registered as a corporate body in the same taxable territory), a 100% reverse charge mechanism has been prescribed, relieving the service provider of partial tax liability. Previously, in respect of these services, the service provider was liable for 25% of the service tax and the service recipient was liable for the remaining 75%.

Expanded scope of advance ruling mechanism

As of March 1 2015, the advance ruling mechanism has been extended to all resident firms, including:

  • 'firms' as defined in Section 4 of the Indian Partnership Act 1932;
  • limited liability partnerships, as per Section (2)(1)(n) of the Limited Liability Partnership Act 2008;
  • limited liability partnerships which have no company partner;
  • sole proprietorships; and
  • one-person companies.

This inclusion has made the advance ruling mechanism available to all resident assessees, which is a welcome step to help to reduce litigation.

For further information on this topic please contact Rohan ShahAqeel Sheerazi or Santosh Maurya at Economic Laws Practice by telephone (+91 22 6636 7000) or email (rohanshah@elp-in.comaqeelsheerazi@elp-in.com or santoshmaurya@elp-in.com).

Endnotes

(1) 2013 TIOL 331 HC DEL ST.

(2) 2013 (29) STR 9 (Del).

(3) Maa Sharda Wine Traders v Union of India, 2009 (15) STR 3 (MP) and Som Distilleries Pvt Ltd v Union of India, 2009-TIOL-292- HC-MP-ST-LB.

(4) Description of services in respect of which exemption from payment of service tax has been proposed.

(5) Chennai, 2014 (34) STR 819 (Mad.).

(6) Notification 25/2012- ST, June 20 2012.

(7) Notification 42/2012-ST, June 29 2012.

(8) Tax base on which tax is to be computed post-amendment.

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