GST Knowledge Series 1 – What to Tax?

Everyone is eager to hear the onset of Goods and Service Tax (“GST”) in India.  The proposed GST likely to be introduced by 2017, would replace a number of indirect taxes levied by the Centre and State governments on goods and services.  It intends to replace the numerous laws as are prevailing on supply of goods and services and introduce a single taxing mechanism.  122nd Constitution Amendment Bill defines “goods and services tax” as to mean any tax on supply of goods, or services or both except taxes on the supply of the alcoholic liquor for human consumption.  Thus, it is important to understand the thre most crucial terms of this new law – supply, goods and services.  We shall now examine each of the said word in detail hereinunder.

  1. Goods

Article 366(12) of Constitution defines goods to include all materials, commodities, and articles.  The definition however, is a more restrictive one in Sale of Goods Act.   Section 2(7) of Sale of Goods Act defines goods as to mean every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.  Moveable property has further been defined as property of every description, except immovable property.  It is also pertinent to note that the definition of goods is of wide connotation since it is based on an inclusive definition.  The word “include” provides a wide connotation to the definition. [Pradeep Kumar Biswas vs. Indian Institute of Chemical Biology, (2002) 5 SCC 111].  Thus, the ambit of term goods is wide enough to include all corporeal and incorporeal property held in oneself other than immovable goods.  Characteristics of movable goods has been defined as things which are capable of abstraction, consumption and use.  Things which can be transmitted, transferred, delivered, stored, possessed etc. are goods as much as a movable property.  Such observations have been made by the Apex Court in the case of Commissioner of Sales Tax, Madhya Pradesh, Indore vs. Madhya Pradesh Electricity Board, Jabalpur reported in (1969) 1 SCC 200 and TCS v State of Andhra Pradesh. Things like Copyright, Gas, water, electricity, DEPB scraps, Information technology software etc have been held as goods in various judgments by Hon’ble courts.

 

Applicability of ST on ESOP

Employee Stock Option Plan (“ESOP”) taxation has always been a topic of debate and demand in Income Tax.  However, with the incept of Negative list under Service Tax, certain aspects of this subject requires examination from the perspective of their eligibility under Service Tax.

Before we discuss the exigibility under Service Tax, we need to understand the benefit of ESOPs.  The value of perquisite is defined as the difference between the fair market value of ESOP on the date on which the option is exercised by the employee less the amount actually paid by the employee viz. exercise price.  The said understanding is illustrated as under:

Date of vesting                                                               April 1, 2014

Date of exercise                                                             August 1, 2014

Date of allotment                                                            August 15, 2014

Exercise rate per share                                                  Rs 125

Fair market value on the date of vesting               Rs 200

Fair Market value of the date of exercise              Rs 215

 

Benefit accrued on ESOP  =       (215 – 125)       =          Rs 90

ESOP thus, is an option available with beneficiary to  purchase stocks of a company at reduced rates and difference between the rate on which such shares are exercised and they actually are purchased by the beneficiary is the benefit for such shares.  Although such benefit is a deemed cost to the company, such availability is available as actual financial benefit to the beneficiary of such ESOPs.  Deemed cost in the hands is in the manner that such securities could have fetched money to the Company from open market. Thus loss of such deemed profit is recorded as costs to reflect true value of sale of shares.  Such ESOPs are made available to employees, employees of group companies, directors and other key management personnel.

At the outset, we shall first understand the nature of ESOPs and its exigibility to Service Tax.  ESOPs basically is a gap in the actual value of stocks and the price at which they are made available.  Thus, such difference forms deemed consideration for person who is benefitted from such ESOPs.  Thus, ESOPs per se shall not constitute service, since they are making available a financial instrument at lower price and such price difference is profit obtained by selling such stock in market at theor current value.  Thus, what is important is to examine as to against what such ESOPs were given to the beneficiary.  Thus, if such ESOPs are given to person providing a taxable services then the deemed consideration (available as explained above) shall consititute consideration for such services.  It is important to note that since the Service Tax is not charged separately in ESOP transaction, the benefit shall be treated as cum tax.  We shall now examine the various situations and where ESOPs shall form consideration as exigible to Service Tax.

  1. ESOP to own employees:

ESOPs when made to employee are part of cost to company and as a part of benefits accruing from provision of services as an employee.  It is an incentive for them to remain in employment with the Company. Services of an employee have been excluded from the very definition of Service and thus, any consideration for an activity which is not service shall not be exigible to Service Tax.

  1. ESOP to Directors (including independent directors):

Directors can render their services to the Company in two capacities – One as member of Board of Directors which govern the overall policy, strategy and functioning of a company and secondly under a place of profit as an employee of the company like whole time directors, Chairman and managing director etc.

While the former activities are not conversed under any exclusion or exemption, such services provided by directors are eligible to Service Tax and thus, the benefit as accruing to directors from such ESOPs shall constitute consideration for taxable services.

In their capacity as employee managing day to day functioning of the Company, they would be in a position equivalent to an employee and such provision in such capacity would be not exigble to Service Tax as explained above.

  1. ESOPs to employees of a group company:

 

ESOPs in the hands of the employee would be not taxable as explained above.  However the question which remains to be examined is the levy of the Service Tax on cross charge between the two group companies.  In this context it is pertinent to mention that cross charge inter se group companies for provision of services or making available facilities is exigible to Service Tax.  Parallely, any cross charge for making available goods would be exigible to VAT.  This cross charge in case of ESOP would be for making available securities of the parent company to subsidiary etc.  Thus, the consideration in terms of cross charge is for making available the stocks of parent company and thus, in other words it can be said that such value is for purchase of stocks from parent company.  Thus, since purchase of stocks is sconsidered as purchase of goods, such transaction has been kept outside the purview of Service Tax.  Thus, such cross charge, to my mind, is not exigible to Service Tax.

ESOPs are one of the many avenues which have been examined in terms of their exposure to Service Tax post negative list.  ESOPs and similar transaction remind us of the limitless possibilities of Service Tax regime which has expanded scope post July 1, 2012.  We trust that such issues would reach settlement before the advent of Goods and Services Tax.

Cross Border Transaction and Service Tax

Service Tax is a value added consumption tax which means that every service shall attract Service Tax each time service is supplied or imported along the commercial chain to its final consumption in India. The destination principle means that Service Tax shall be levied in the country in which services are finally consumed.  Thus, when such services are provided in India and received by a person in India, there is no iota of doubt on taxation of such services.  Such provision can be called as a pure domestic transaction of provision of services.  However, when we speak of “cross-border,” or “multijurisdictional” or “international” transactions, we are referring to transaction which has its source of provision in one country and its consumption in another country.  There can be more complex situations involving more than 2 countries. While issues  from Service Tax perspective in a domestic transaction primarily revolves around provision of services and its classification, issues involved in a cross-border transaction are more considering the complexities inherent in such transaction such as determination of country of consumption, exchange fluctuations, double taxation, etc. to name a few.  The present paper tries to discuss certain important aspects and its taxability in present era of negative list in Indian Service Tax regime.

Concept of Service Tax on Export

The law of no tax on exports, is common for all statues, however, what differs is the manner in which one determines how does such activity or transfer of goods or services qualify as export.  It is a trite law that service tax is a destination based consumption tax as held by the Hon’ble Supreme Court in All India Federation of Tax Practitioners v. Union of India

[2007] 10 STT 166. It was clarified that it is levied on commercial activities and it is not a charge on the business but on the consumer. The understanding has been affirmed in the case of Association of Leasing & Financial Service Companies v. Union of India [2010] 29 STT 316 (SC) as well. The position has always been upheld in Service Tax regime.  Board also issued a clarification vide Circular No. 56/05/2003-ST dated 25-4-2003, where it was clarified that the Service Tax is destination-based consumption tax and it is not applicable on export of services. Determination of export in case of services has always been a contagious issue as unlike goods where crossing of customs barrier can be determined, in case of services, being intangible, such determination becomes tough to prove.  In this respects courts have many a times resorted to the law of equivalence between goods and services [Please refer Association of Leasing & Financial Service Companies v. Union of India [2010] 29 STT 316 (SC), Godfrey Phillips India Ltd. v. State of U.P. (2005 (2) SCC 515, Moti Laminates Pvt. Ltd. v. Collector of Central Excise, Ahmedabad – 1995 (76) E.L.T . 241 (S.C.)].  However, applicability of such theory of equivalence in determination of export of services was restricted in the case of Paul Merchants v CCE, Chandigar [[2013] 30 taxmann.com 23 (New Delhi – CESTAT)],wherein Hon’ble Third member observed as follows:

“In my view, the above criteria as to what constitutes the export of goods, or import of goods which is for the purpose of the Customs Act, 1962, where the objective, besides the collection of duties on import of goods into India and export of goods from India, is also regulation of the movement of the goods across the border, cannot be applied for determining what constitutes the export of service, as unlike the movement of the goods across the international border, whether on sale basis or otherwise, where the event of export or import of goods can be easily detected, determining whether a service provided by a person in India is export or a service provided by a person abroad is service import into India, is a much complex question as, as mentioned above the services are intangible and can be provided by various modes and for this purpose one uniform criteria for all the services cannot be adopted.”

Exemption mechanism to Service Tax on exports has been prescribed since FY 1999 by tax authorities.  Earlier, the only condition for considering export of services was to receive the payment for the service in convertible foreign exchange.  However, with more and more services joining the taxable status, such mechanism became unfeasible and impractical as with increasing participation of India in global service industry, companies could avail such exemption by simply routing payment from company outside India.  Thus, the first formal step towards providing proper manner of determination of export of services was made through Export of Services Rules, 2005.  However, such Export Rules remained an unsolved mystery for a long time. There had been three categories of services.  One determines export in case of services related to immovable properties when such property was located outside India, the other category covered certain services which when performed wholly or partly outside India were considered as export.  The last and the most controversial one was services linked to recipient outside India.  Such category contained multiple conditions which were amended from time to time. Firstly, it contained the condition of services being ‘delivered outside India’ which cause lot of interpretation issues since services are intangible.  Then such phrase was replaced by ‘is provided from India’, which was a case in most scenario and was simpler to interpret.  However, the expression ‘used outside India’ continued to create problems for the assesses as authorities took a view that such services could only be used outside India when used exclusively in business outside India.  The department also issued Circular No. 111/05/2009-ST dated 24-02-2009 which provided the following clarification:

“In terms of rule 3(2)(a) of the Export of Services Rules 2005, a taxable service shall be treated as export of service if ‘such service is provided from India and used outside India’ Instances have come to notice that certain activities, illustrations of which are given below, are denied the benefit of export of services and the refund of service tax under rule 5 of the Cenvat Credit Rules, 2004 [notification No. 5/2006-CE (NT) dated 14.03.2006] on the ground that these activities do not satisfy the condition ‘used outside India’,-

(i)   Call centres engaged by foreign companies who attend to calls from customers or prospective customers from all around the world including from India;
(ii)   Medical transcription where the case history of a patient as dictated by the doctor abroad is typed out in India and forwarded back to him ;

*** not relevant***

 

  1. It is an accepted legal principle that the law has to be read harmoniously so as to avoid contradictions within a legislation . Keeping this principle in view, the meaning of the term ‘used outside India’ has to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3. For example, under Architect service (a Category I service [Rule 3(1)(i)]), even if an Indian architect prepares a design sitting in India for a property located in U.K. and hands it over to the owner of such property having his business and residence in India, it would have to be presumed that service has been used outside India. Similarly, if an Indian event manager (a Category II service [Rule 3(1)(ii)]) arranges a seminar for an Indian company in U.K. the service has to be treated to have been used outside India because the place of performance is U.K. even though the benefit of such a seminar may flow back to the employees serving the company in India. For the services that fall under Category III [Rule 3(1)(iii)], the relevant factor is the location of the service receiver and not the place of performance. In this context, the phrase ‘used outside India’ is to be interpreted to mean that the benefit of the service should accrue outside India. Thus, for Category III services [Rule 3(1)(iii)], it is possible that export of service may take place even when all the relevant activities take place in India so long as the benefits of these services accrue outside India. In all the illustrations mentioned in the opening paragraph, what is accruing outside India is the benefit in terms of promotion of business of a foreign company. Similar would be the treatment for other Category III [Rule 3(1)(iii)] services as well.

 

Thus, the above clarification tries to put things in right perspective by clarifying that export happens when the benefit of such services arise outside India. The beneficiary or recipient of services is a person who is obliged to make payment for the services provided. In this regard, reliance is placed on Tribunal’s judgment in case of Sumangalam Suiting (P) Ltd. v. CCE [2010] 29 STT 290 (New Delhi – CESTAT).  Similar decision has been held by majority in the case of Paul Merchants v CCE, Chandigar [[2013] 30 taxmann.com 23 (New Delhi – CESTAT)].  The Judgement of Paul Merchants is effective in understanding the concept of recipient of services and is very much relevant in present era post enactment of Place of Provision of Services Rules, 2012.

Thus, the position under the erstwhile Export Rules for determination of Export of services now seems to be settled.  However, Post July 1, 2012, with the advent of negative list regime in India, the Rules have now been replaced with Place of Provision of Services Rules, 2012, (“POPS”) which determines the place of performance of a service.  A service when performed (as determined as per POPS) in taxable territory is taxable under Finance Act, 1994, while if it is performed outside taxable territory, is not taxable.  To qualify as Export of service, non taxable service has to satisfy certain more criterions as provided under Rule 6A of Service Tax Rules, 1994.  We shall discuss certain important situations and their taxability as provided under POPS in the following paragraphs.  While we shall discuss the levy in general circumstances, we shall also discuss certain specific cases.  POPS rules have not been replicated for the sake of brevity.

At the outset, it is important to state that the determination of taxability would be guided by a lot factors and is not a scientific formulae.  Factors like entities who enter into an agreement, performance etc cause difference in the arrangement.  Also, the arrangement context should always override its form and the arrangement should not be one designed to bypass the taxability under the Finance Act, 1994.

 

Provision of Services outside India

Generally Services shall be decided as non taxable when services are performed in non taxable territory.  Such performance is determined to have happed outside India in line with the Rules provided in POPS. The concept is explained by way of the following examples.

Case 1:

Untitled

Indi Co (an Indian Company) provides audit services to MGS International for all its entities across globe including MGS India which is its Indian arm. While services of audit of MGS International clearly appears to be non taxable, the audit of MGS India can be in troubled waters as services appear to be provided and consumed in India.  However, since the person who is beneficiary of services and is obligated to pay for such services (MGS International) is outside India and is consuming the services (Audit report) outside India, the place of performance shall be outside India (Rule 3- location of service recipient).  Such services can never be said to be provided to a resident company as he never wanted such audit services and was not under an obligation to pay for such services.   However, in case a cross charge of audit cost is obtained from Indian entity, such cross charge cannot be said to sharing of costs but is allocation of cost for Indian services and thus, in such case, cross charge would be taxable as services are performed in India (Rule 3 of POPS).  Further, Indian entity would be liable to pay Service Tax under reverse charge being recipient of services from a non resident.

 

Case 2:

Untitled1

Indi Co (an Indian Company) provides Information technology consultancy services to MGS Tech (UK) which is used by MGS Tech for production of goods. Goods produced by MGS Tech are imported by an Indian entity (PAN India).  In this case, services of Indi Co would qualify as non taxable being performed outside taxable territory (Rule 3 – recipient location).  Further, PAN India would be required to discharge customs duty on such import.

 

Joint Ventures

A Joint Venture (JV) (when not incorporated as separate company) requires the parties to contribute their goods and services located in multiple jurisdictions to the functioning of that Joint Venture. Such arrangements usually when undertaken as a single entity (with no separate obligations of JV partners require determination of liability of JV as a whole, and its taxability is distinct from that of its JV partners.  The situation is explained as under:

PAN India (resident) and MGS Tech (non resident) enters into an arrangement with Con Asia to provide EPC services in India.  The scope of their work is collective.  Accordingly, the entire contract is agreed to be performed by their unincorporated JV – Indi JV.  Thus, services provided by Indi JV to Con India would be taxable being services by a resident to another resident (Rule 8 of POPS).  Similarly any charge for services from JV (by whatever name called – profit etc.) would be tested for taxability in India.

Alternatively, if MGS Tech and PAN India enters into an arrangement for performance of a contract where their services are distinct and separable, though under a single arrangement, it can be contested that services of MGS Tech is not taxable.

Employee transfers

There can be multiple arrangements for taking services of expatriates who work in country other than their resident state in multi national companies.  The arrangements vary from direct employment into a foreign company to secondment by home country to other country.  There can also be cost sharing of high end employees by group companies situated across different countries.  From the perspective of Service Tax, each of the above arrangement requires proper examination of facts, agreement and understanding.  While a transfer to a group company in another country would entail no Service Tax implication, a secondment would fall under provision of manpower.  In former case, if the employment contract is transferred to the Indian company by the foreign company in relation to the expat, then such services would be that of employment between Indian company and expat and shall be outside the ambit of Service Tax.  However, if such employment continues to subsist with the foreign company, such provision of expat would qualify as service and would be taxable in India (Rule 3 of POPS).  The same is the case vice- versa.  There can also be making available of man hours of persons situated in India.  Such cases also shall be non-taxable when provided to recipient outside India.

Further, under such scenario, usually the companies forget to add up the portion of salary paid in the home country to the employees and consider only the amounts paid to them in foreign country.  Similarly if company is paying any other costs relating to such provision of manpower, then such costs would add up to increase the liability of the company to whom such employee is seconded. To complicate things further, there can be arrangements having ESOPs from home country which require special attention on a case to case basis.

Business Process Outsourcing

Business Process Outsourcing Industry had been one of key movers of the Indian economy in the last decade.  The possibility of Information technology shrinking the world and creating employment opportunities in respect of work in country in another continent became a reality.  Calls from call centres situated in India handling customer complaints for US and UK brought income to the youth and also, tax worries for big corporate.  The question as to whether such services would qualify as export had always been contended by the tax authorities in Service Tax regime prior to July 1, 2012.   Such BPO services were contested to have been provided in India and thus, benefits of such services being export were denied to the companies.  However, such services were clarified to be export vide Circular No. 111/05/2009-ST dated 24-02-2009 (provided earlier).  The situation remains same in present context post enactment of POPS.  Such services would be export when provided to recipient outside India (Rule 3 of POPS).

 

Relevance of Transfer Pricing Report under Income Tax Act, 1961

There is no transfer pricing rules prescribed under Finance Act, 1994.  The valuation in Finance Act, 1994 is determined in accordance with Service Tax (determination of Value) Rules, 2006 (“Value Rules”).  The Rules provides the manner for determination of value of services in different cases.  However, no specific rule is provided for determination of value in case of associated enterprises (as provided in Excise and Income Tax).  Since Excise valuation shall cover valuation of only goods, the Transfer pricing provisions under Income Tax provides arms length pricing for both goods and services.  Thus, the question arises as to whether transfer pricing report can be relevant in any manner from Service Tax perspective.  The question can be answered in affirmative (not all cases but many).  Rule 4 of the Value Rules provides powers to Central Excise Officer to question the valuation of services (not limited to associated enterprises).  The Rule provides that where the Central Excise Officer is satisfied that the value so determined by the service provider is not in accordance with the provisions of the Act or these rules, he shall issue a notice to such service provider to show cause why the value of such taxable service for the purpose of charging service tax should not be fixed at the amount specified in the notice.  Thus, for determining the arms length prices (specifically incases when there is no recipient other than related parties), derivation of valuation can be based on transfer pricing report.

Conclusion:

The complications in cross border transactions is multifold and it should be the aim of the government to provide clear guidelines on all such possible situations.  The concept of providing clarification in case of cross border transaction is prominent in all developed economies as they understand that such ignorance can cost heavily to their foreign investors.  Indian laws are considered as one of the most complicated ones, and thus, all foreign investors shall always like to factor all tax costs so that they can conceive their profits and break even in a closer to certain manner.

 

Budget 2014 – Service Tax Provision

Clause by Clause analysis of Service Tax provisions in Finance (No.2) Bill, 2014

Budget 2014 seems to be a mix bag for meeting multiple objectives.  The budget aims to serve rectification which cannot be undone, planning for “achhe din” in long term, in short term a budget of introduction of remedial measures by stroke of pen and a budget infusing confidence in government policies by Indian citizens and investors across globe.  To the surprise of all, Finance Minister has brought in changes more than expected.  While everyone thought it to be a status quo kind of budget, the new government has made it clear in its very first budget that every year counts and there shall be no rest till the objective is achieved.  The budget seems to address certain much requisite changes while bringing in stronger provisions to push compliance amongst subjects.  Amongst other taxes, Finance Minister has brought about a number of changes in Service Tax as well.  Changes  range from reduction in exemptions, to curtailment of power of relief by Appellate authorities to plugging of procedural lapses.  Even the Budget Circular to this effect explains the basis of changes as “The main focus in service tax at the present juncture is to widen the tax base and enhance compliance.”  In a simple gist:

  • Advertisement and travel by radio cabs and air-conditioned contract carriages withdrawn got costlier
  • All commission earned from outside India is now taxable
  • Carrying cost of cotton and organic manure reduced
  • Relief to rent a cab operators and tour operators from cascading effect of taxes
  • Scope of exemption to Education related services narrowed to few specified services
  • Recovery from Successor made possible under Service Tax
  • Mandatory stay deposit
  • Penalty relief in case of extended period no longer available to assessee. Thus, penalty seems to have become automatic.

We shall now discuss the important changes as brought in by the Budget in detail.

1. Changes in Negative List:

1.1.Transportation by Radio taxi made taxable
[effective from a date to be notified later after enactment of Finance (No.2) Bill, 2014]:

Service tax is proposed to be levied on services provided by radio taxis or radio cabs, whether or not air-conditioned [section 66D (o)(vi)]. The abatement presently available to rent-a-cab service would also be made available to radio taxi service. A definition of radio taxi is being included in the exemption notification No.25/2012-ST, which reads as follows:

““radio taxi” means a taxi including a radio cab, by whatever name called, which is in two-way radio communication with a central control office and is enabled for tracking using Global Positioning System (GPS) or General Packet Radio Service (GPRS)”

 

1.2. All sale of space except print media made taxable [effective from a date to be notified later after enactment of Finance (No.2) Bill, 2014]:

Service tax leviable currently on sale of space or time for advertisements in broadcast media, namely radio or television [section 66D (g) read with section 66B], is proposed to be extended to cover such sales on other segments like online and mobile advertising. The new levy would further extend to 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. Sale of space for advertisements in print media, however, would continue to be in the negative list and hence remain excluded from service tax. Print media is being defined in service tax law for the purpose.

 

(39a) “print media” means,—

(i) “book” as defined in sub-section (1) of section 1 of the Press and Registration of Books Act, 1867, but does not include business directories, yellow pages and trade catalogues which are primarily meant for commercial purposes;

(ii) “newspaper” as defined in sub-section (1) of section 1 of the Press and Registration of Books Act, 1867;’

Book has been defined in the captioned Act as follows:

“”Book” includes every volume, part of division of a volume, and pamphlet, in any language, and every sheet of music, map, chart of plan separately printed.”

Newspaper has been defined as under:

“newspaper” means any printed periodical work containing public news or comments on public news

 

2. Changes in Exemptions, Abatements and Reverse Charge:

2.1.Changes in Exemptions:

 

2.1.1. Withdrawal of exemption to services by way of technical testing or analysis of newly developed drugs [effective from July 11, 2014]:

 

Exemption to services by way of technical testing or analysis of newly developed drugs, including vaccines and herbal remedies on human participants by a clinical research organization approved to conduct clinical trials by the Drug Controller General of India is being withdrawn.  India being a big market for Human drug testing, such exemption was primarily used by Multinationals for their testing and not primarily for production of drugs for masses and accordingly the said exemption was removed.

2.1.2.Exemption to Auxiliary Education Services deleted [effective from July 11, 2014]:

 

At present, a huge number of services (as per certain experts almost all input services used by educational institutions) as received by educational institution are exempt from Service Tax under the umbrella of “auxiliary educational services”. With prevailing doubts regarding the scope and meaning of “auxiliary educational services”, the entire concept has been delted and instead, exemption to specific services when provided to educational institutions.

Accordingly, the following services received by eligible educational institutions are exempted from service tax:

  • transportation of students, faculty and staff of the eligible educational institution;
  • catering service including any mid-day meals scheme sponsored by the Government;
  • security or cleaning or house-keeping services in such educational institution
  • services relating to admission to such institution or conduct of examination. Further, for the purposes of this exemption, “educational institution” is being defined in the exemption notification 25/2012-ST as institutions providing educational services specified in the negative list.

Further, the exemption to services provided by way of renting of immovable property to educational institutions also has been withdrawn and thus, all Company Trust model providing infrastructure to educational institutions without any indirect tax shall now have a tax cost.

However, to add on the ambiguity, services provided by educational institution to its students, faculty and staff has been added and accordingly, the authorities might contest that for the period prior to July 11, 2014, such services were taxable.  It is requested that government should bring suitable clarification to this effect also.

 

2.1.3.Exemption to accommodation places expanded [effective from July 10, 2014]:

 

In order to address doubts on account of use of the word “commercial” in the entry 18 of the Mega Exemption Notification as to whether dharmashalas, ashram or any such non commercial entity which offer accommodation would be covered therein, government has made the entry generic to all places offering accommodation services. Accordingly, Services by any place of stay be it Hotel, camsite, dharamshala etc, providing services of residential or lodging and having declared tariff of a unit of accommodation below one thousand rupees per day or equivalent shall now be exempted from Service Tax.

 

2.1.4.Exemption in respect of services in relation to municipal corporation [effective from July 11, 2014]:

 

For greater clarity, the exemption in respect of services provided to Government or local authority or governmental authority, has been made more specific. Services by way of water supply, public health, sanitation conservancy, solid waste management or slum improvement and up-gradation will continue to remain exempted but the exemption shall not be available to ancillary services for such functions such as consultancy, designing, etc.

2.1.5.Extension of exemption to life micro-insurance schemes having sum assured upto Rs 50,000 [effective from July 11, 2014]:

 

All life micro-insurance schemes approved by the Insurance Regulatory Development Authority (IRDA), where sum assured does not exceed Fifty Thousand Rupees are being exempted from service tax.

 

2.1.6.Extension of exemption to transportation of organic manure and cotton [effective from July 11, 2014]:

 

Transport of organic manure and cotton, ginned or baled by GTA, rail or vessel has been exempted. Therefore, organic manure will be on par with fertilizer which is already exempted.

2.1.7.        Extension of exemption to activities related to cotton, ginned or baled [effective from July 11, 2014]:

 

Services by way of loading, unloading, packing, storage or warehousing, transport by vessel, rail or road (GTA), of cotton, ginned or baled, is being exempted.  This comes in addition to similar exemption provided to rice by government.  However, service tax for intervening period i.e. from July 1, 2012 till July 10, 2014 shall be demanded by authorities on such services.

2.1.8.Extension of exemption to activities of Common Bio-medical Waste Treatment Facility operators [effective from July 11, 2014]:

 

Services provided by Common Bio-medical Waste Treatment Facility operators by way of treatment, disposal of bio medical waste or processes incidental to such treatment or disposal are being exempted.

 

2.1.9.Exemption in respect of air-conditioned contract carriages withdrawn [effective from July 11, 2014]:

 

Presently service of passenger transportation by a contract carriage (other than radio cabs whether air-conditioned or not) other than for the purposes of tourism, conducted tour, charter or hire, is exempt from service tax.  The scope of exemption is being reduced by withdrawing the exemption in respect of air-conditioned contract carriages. As a result, any service provided for transport of passenger by air-conditioned contract carriage including which are used for point to point travel, will attract service tax. Service tax will be charged at an abated value of 40% of the amount charged from service receiver; therefore, effective tax will be 4.944%. Services by non-air conditioned contract carriages for purposes other than tourism, conducted tour, charter or hire continue to be exempted.

2.1.10.ESIC services for prior period exempted [effective from date of enactment of Finance (No.2) Act, 2014]:

 

This was an amendment to remove the ambiguity whereby in absence of exemption, services of ESIC could have been brought within the scope of service tax.  Service provided by Employees State Insurance Corporation (ESIC) during the period prior to 1.7.2012 is proposed to be exempted from service tax.

2.1.11.    Services received by RBI from outside India for specific forex management exempted [effective from July 11, 2014]:

 

Specialized financial services received by RBI from outside India, in the course of management of foreign exchange reserves, e.g. external asset management, custodial services, securities lending services, are being exempted.  On such services RBI was to discharge Service Tax under reverse charge.

 

2.1.12.Services provided by an Indian tour operator to foreign nationals for foreign tours exempted [effective from July 11, 2014]:

 

Services provided by the Indian tour operators to foreign tourists in relation to tours wholly conducted outside India are being exempted. This exemption is available to Indian tour operators in cases where they organize tours for a foreign tourist wholly outside India, e.g., service provided to a Sri Lankan for a tour conducted in Bhutan. It may be noted that service provided by a tour operator in relation to an inbound or an outbound tours continue to be leviable to service tax.  In brief:

Tour Wholly In India Wholly Outside India Partially in India
Indian Tourist Taxable Taxable Taxable
Foreign Tourist Taxable Non Taxable Taxable

2.2.Changes in Abatements:

2.2.1.Condition of non availment of Cenvat credit not applicable on service recipient in case of GTA [effective from July 11, 2014]:

 

The condition for availing abatement in case of GTA service is being amended with immediate effect to clarify that the condition for non- availment of credit is required to be satisfied by the service providers only. Service recipient will not be required to establish satisfaction of this condition by the service provider. Accordingly, in case of GTA, service recipient can discharge the liability at the abated value of 25%.  This is a welcome clarification to remove all ambiguities in this arena as certain industries discharge huge Service Tax under reverse charge in GTA.  Technically, when service recipient is liable to pay Service Tax, the services of GTA gets outside the purview of output services and thus, no Cenvat Credit could be availed on such services by service provider.  However, the present clarification has fortified the understanding.

2.2.2.Abatement on services of air-conditioned contract carriages [effective from July 11, 2014]:

Service of transportation of passenger by air-conditioned contract carriages is taxable with immediate effect, as stated earlier. Hence, an entry has been inserted at Sl. No. 9A providing that the taxable portion of such service shall be 40% with the condition that CENVAT credit of inputs or capital goods or input services has not been taken.

2.2.3.Abatement on services of radio taxes [effective from enactment of Finance (No.2) Act, 2014]:

 

Service of transportation of passenger by radio taxis is proposed to be made taxable by amending the Finance Act, 1994. Hence, suitable abatement has been provided that the taxable portion of such service shall be 40% with the condition that CENVAT credit of inputs or capital goods or input services has not been taken.

2.2.4.Allowance of Cenvat credit of another rent a cab operator in case of availment of Cenvat Credit by rent a cab operator [effective from October 1, 2014]:

The condition against abatement in case of rent a cab is amended to allow the credit of input service of renting of a motor cab if such services are received from a person engaged in the similar line of business i.e. a sub-contractor providing services of renting of motor cab to the main contractor. Credit shall be available as under:

  • The whole of the CENVAT credit has been allowed with respect to input service of renting of any motor cab, received from a person who is paying service tax on 40% of the value of services.
  • The CENVAT credit eligibility will be restricted to 40% of the credit of the input service of renting of any motor cab if service tax is paid or payable on full value of the services i.e. no abatement is availed. Thus, if the sub contractor is not availing abatement, then credit from his invoice shall be restricted to 40% of such credit as shown on invoice.

It is pertinent to note that no other Credit other than above is allowed against such services and such services shall continue to be considered as exempted services for all purpose of Cenvat credit. Also, such benefit is not available in case of radio taxis, which has been provided abatement by way of a separate entry. This is a welcome step for tour operators and Hospitality industry including Hotels who have faced this problem of dual taxation since long.

2.2.5.Allowance of Cenvat credit of another Tour operator in case of availment of Cenvat Credit by a tour operator [effective from October 1, 2014]:

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. This is being provided to avoid cascading of taxes.

  • Increase in abatement in case of transport of goods by vessel [effective from October 1, 2014]:

Taxable portion in respect of transport of goods by vessel is being reduced from 50% to 40%. Effective service tax will decrease from the present 6.18% to 4.944%, with effect from 1st October, 2014.

2.3.Changes in reverse Charge:

 

2.3.1.Ratio under reverse charge changed for rent a cab [effective from October 1, 2014]:

In renting of motor vehicle, where the service provider does not take abatement the portion of service tax payable by the service provider and service receiver will be modified as 50% each.  Thus, in all cases where there is full Service Tax charged or no Service Tax charged by service provider of rent a cab, recipient shall now discharge 50% of 12.36%.

  • Scope of Reverse charge liability in case of payment to directors expanded [effective from July 11, 2014]:

Earlier only Companies were liable to pay Service tax under reverse charge on payments made to Directors.  Service provided by a Director to a body corporate is being brought under the reverse charge mechanism thereby including body corporates such as the Reserve Bank of India etc.

  • Scope of Reverse charge liability in case of payment to recovery agents [effective from July 11, 2014]:

Service recipient being Banks, Financial Institutions and NBFC shall now be liable to discharge the liability of Services Tax under reverse charge mechanism for services provided by Recovery Agents to them. Recovery agents being individuals and that too in most of the cases had been non compliant and thus, in order to plug such leakage of revenue, whole of the liability has now been shifted to financial institutions.  This would add upto the cost of such institutions as only 50% of such amount is available as Cenvat credit to them.

 

3.Substantial changes in Service Tax provisions:

 

3.1.Service tax to have its own Rate of Exchange [effective from a date to be notified later after enactment of Finance (No.2) Bill, 2014]:

 

Currently, Custom notified rates are used for discharge of liability on import and export transaction under Service Tax.  The Explanation to Section 67A is being amended to enable the Government to prescribe rules for determination of rate of exchange for calculation of taxable value in respect of certain services. Separate set of Rules shall be prescribed once the amended Section is notified.

3.2.Advance Ruling made available to resident Private Limited Companies [effective from July 11, 2014]:

 

The resident private limited company is being included as a class of persons eligible to make an application for Advance Ruling in service tax.

 

3.3.Timebound adjudication of Service Tax notices [effective from enactment of Finance (No.2) Bill, 2014]:

 

Section 73 is being amended to prescribe time limits for completion of adjudication as already exists in Central Excise. This time limit would need to be followed, as far as possible.  Time limit as prescribed is as follows:

In case of notice issued within eighteen months (without extending limitation) Within six months from the date of notice
In case of notice issued evoking the extended period of five years Within one year from the date of notice

However, the section provides the limit with the words – “where it is possible to do so”.  Thus, the option for closing order beyond the prescribed period remains with the assessing officer.

 

3.4.Power to waive penalty under Section 80 restricted [effective from enactment of Finance (No.2) Bill, 2014]:

 

Section 80 is being amended to exclude the power to waive the following penalties:

  • Penalty under Section 77 – providing penalty for contravention of rules and provisions of Act for which no penalty is specified elsewhere
  • Penalty under Section 78A – The only waiver available in Section80 waas that of first proviso to Section 78(1) Provided that where true and complete details of the transactions are available in the specified records,

Thus, the only penalty now availed to be waived under Section 80 is that of Section 76, which is not effective in light of provision of Section 73(3).

 

3.5.Power to search expanded [effective from enactment of Finance (No.2) Bill, 2014]:

 

Powers under Section 82(1) is being expanded, to empower Joint Commissioner or Additional Commissioner or any other officer notified by the Board to authorize any Central Excise Officer to search and seize.

3.6.Recovery from successor incorporated [effective from enactment of Finance (No.2) Bill, 2014]:

 

Section 87 is being amended to incorporate power to recover dues of a predecessor from the assets of a successor purchased from the predecessor as it is presently provided for in section 11 of the Central Excise Act, 1944.  Accordingly, any person acquiring any business must ensure two things – that there are no outstanding Service Tax dues of the business as they cannot be withheld by the transferor and also intimation to such transfer is preintimated to Central Excise officer so as to nullify any unknown Service Tax liabilities.

3.7.Rule making power of government enhanced [effective from enactment of Finance (No.2) Bill, 2014]:

 

Section 94 is being amended to obtain rule making powers (a) to impose upon assessees, inter alia, the duty of furnishing information, keeping records and making returns and specify the manner in which they shall be verified; (b) for withdrawal of facilities or imposition of restrictions (including restrictions on utilization of CENVAT credit) on service provider or exporter, to check evasion of duty or misuse of CENVAT credit; and (c) to issue instructions in supplemental or incidental matters.

 

3.8.Interest provisions made harsh [effective October 1, 2014]:

 

To encourage prompt payment of service tax, it is being proposed to introduce interest rates which would vary on the extent of delay. Simple interest rates per annum payable on delayed payments under section 75, are prescribed as follows:

Sl.No Period of delay Rate of simple interest
(1) (2) (3)
1. Up to six months 18 per cent.
2. More than six months

and up to one year

18 per cent. for the first six months of delay and 24 per cent. for the delay beyond six months.
3. More than one year 18 per cent. for the first six months of delay; 24 per cent. for the period beyond six months up to one year and 30 per cent. for any delay beyond one year.

 

4.Changes in Rules

4.1.Changes in Service Tax Rules

4.1.1.E-payment made mandatory [effective from October 1, 2014]:

 

E-payment of service tax is being made mandatory for all assesses.  Relaxation from e-payment may be allowed by the Deputy Commissioner/Asst. Commissioner on case to case basis.

4.2.Changes in place of provision of Services Rules [effective October 1, 2014]

 

4.2.1.Place of provision in case of repair of goods which are to be reexported rationalised:

Rule in case of goods imported for repaid is 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 exported after repair without being put to any use other than that which is required for such repair. It has further been clarified that this exclusion does not apply to goods in general and goods be imported specifically for repair.  In case of goods that arrive in the taxable territory in the usual course of business and are subject to repair while such goods remain in the taxable territory, e.g., any repair provided in the taxable territory to containers arriving in India in the course of international trade in goods will be governed by rule 4.

4.2.2.Change of place of provision in case of intermediately of goods:

The definition of intermediary is being amended to include the intermediary of goods in its scope. Accordingly, 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 and his place of provision shall be the location of service provider.  Accordingly, all commissions for foreign buyers / sellers shall now be taxable in India and vice versa.  Thus, there shall be no longer an export of service by Commission agent.  The amendment is brought in purview as India is a major market for sourcing of goods and to counter the decision in cases like GAP International Sourcing (India) P. Ltd.  v CST [2014-TIOL-465-CESTAT-DEL], wherein it was held that recipient of such services is located outside India.

4.2.3.Change of place of provision in case of shipping industry:

Place of provision of Service consisting of hiring of Vessels (excluding yachts) and Aircraft, irrespective of whether short term or long term, will be covered by the general rule, that is, the place of location of the service receiver. Hiring of yachts would however continue to be covered by rule 9 (d) i.e. location of service provider.

4.3.Changes in place of Point of Taxation Rules [effective October 1, 2014]

 

4.3.1.Change of point of taxation in case of reverse charge mechanism:

The first Proviso to rule 7 of the Point of Taxation Rules is being amended to reduce the time allowed for payment to service provider from six months to three months.  However, as a relief, in case such payment is not made within prescribed time, the liability to pay Service Tax shall arise from the first day that occurs immediately after a period of three months from the date of invoice. Thus, in case of reverse charge, the amended date of liability is as under:

Date of payment Point of taxation
Payment made to vendor within three months from date of invoice Date of Payment
Payment made to vendor after three months from date of invoice First day that occurs immediately after a period of three months from the date of invoice

Suitable provision for invoices issued before October 1, 2014 and whose payment period of six months is pending as on October 1, 2014 is made by way of Rule 10 which provides that if payment is made within six months from the date of invoice, date of payment shall be point of taxation, else Rule 3 shall apply.

4.4.Changes in Determination of Value Rules

4.4.1. Ratio of services in Works contract modified [effective from October 1, 2014]:

In Rule 2A of the Service Tax (Determination of Value) Rules, 2006, category “B” and “C‟ of works contracts are proposed to be merged into one single category, with percentage of service portion as 70%.  Thus, the following two categories of valuation under Option 2 of Rule 2A shall remain in case of works contract:

5.Changes in Cenvat Credit Rules, 2004

5.1.Time restriction on availment of Cenvat credit on missed invoices [effective from September 1, 2014]:

A manufacturer or a service provider shall take credit on inputs and input services within a period of six months from the date of issue of invoice, bill or challan.  Thus, the decisions in case of Central Bank of India [2012-TIOL-1314-CESTAT-MAD] holding that there is no time limit for taking Cenvat Credit shall no longer help assessee in availing long forgotten credit.

 

5.2.Payment as pre-condition for availment of Cenvat Credit removed in case of full reverse charge [effective July 11, 2014]:

In case of service tax paid under full reverse charge, the condition of payment of invoice value to the service provider for availing credit of input services is being withdrawn. However, there is no change in respect of partial reverse charge.

5.3.Cenvat credit to reinstate on reinstatement of output services as Export [effective July 11, 2014]:

Re-credit of CENVAT credit reversed on account of non-receipt of export proceeds within the specified period or extended period, to 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.

 

5.4.Place of removal defined [effective July 11, 2014]:

 

Place of removal has been defined as under:

 

(qa) “place of removal” means-

  • a factory or any other place or premises of production or manufacture of the excisable goods;
  • a warehouse or any other place or premises wherein the excisable goods have been permitted to be deposited without payment of duty;
  • a depot, premises of a consignment agent or any other place or premises from where the excisable goods are to be sold after their clearance from the factory,

 from where such goods are removed;

 

  

6.Changes in Appellate proceedings – Stay

 

6.1.Time restriction on availment of Cenvat credit on missed invoices:

Section 35F of the Central Excise Act has already been made applicable to Service Tax. This section is being substituted with a new section to prescribe a mandatory fixed pre-deposit of 7.5% of the tax demanded or penalty imposed or both for filing of appeal before the Commissioner (Appeal) or the Tribunal at the first stage, and 10% of the duty demanded or penalty imposed or both for filing second stage appeal before the Tribunal. 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. This new provisions would, mutatis mutandis, apply to Service Tax.  This provision though would reduce the time for deposition of appeals as stay would no longer be a separate hearing, however, there is a cost attached to it which even a genuine tax payer and even in case of financial hardship would have to bear to get justice.

7.Application of more sections of Central Excise on Service Tax

 

Section 83 is being amended to prescribe that the provisions of following sections of the Central Excise Act shall apply, mutatis mutandis, to service tax

 

7.1. Section 5A(2):

This section has been introduce to expand the power of government to bring out a change in understanding by way of explanation in a notification or order at any time within one year of issue of notification or order, for clarifying the scope or applicability thereof and such explanation shall have effect from the date of issue of such notification or order.

7.2. Section 15A:

This new section is being inserted in the Central Excise Act to stipulate that third party sources shall furnish periodic information, as specified, in the manner as may be prescribed.

7.3. Section 15B:

This new section is being inserted in the Central Excise Act to prescribe that failure to provide information under section 15A of the Act would attract penalty as specified.

8. Simplification of SEZ refunds procedure [effective from July 11, 2014]:

  • Time bound issuance of Form A-2 by jurisdictional Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise has been prescribed. Time provided is 15 days
  • Such authorisation is made valid from the date of its verification and in case of delay in submission of Form A-1, from the date of submission of Form A-1.
  • Form A-1 has been made suitable document for non charge of Service Tax by service providers providing services to eligible SEZ units subject to submission of authorisation in Form A-2 later to such service providers. However, when such authorisation is not made available within a period of three months, the benefit so provided shall stand withdrawn.
  • Determination of service being provided in SEZ is simplified by providing suitable explanation to this effect stating that a service shall be treated as used exclusively for the authorised operations if the service is received by the SEZ Unit or the Developer under an invoice in the name of such Unit or the Developer and the service is used only for furtherance of authorised operations in the SEZ. Thus, the test relating to physical performance of such services as often disputed by department shall stand relaxed.
  • Condition of mentioning Service Tax registration number removed in case of full reverse charge liability

 

Conclusion:

As said, that all big suprises come in small packages, this budget though appeared humble has brought in many changes.  Though directly or indirectly all amendments aim to boost the revenue collection, certain clarificatory ones have also come to the benefit of assessee.  However, with aim to tighten compliance, changes like mandatory stay deposit etc would hinder the path of free justice.  All in all, this budget would help India Inc. to revisit their Service Tax compliances more thoroughly.