PROJECT REPORT Change in services Tax by Finance Act, 2012 Introduction of Negative List - Changes in Service Tax law

effective 01.07.2012

INTRODUCTION

The Finance Minister announced implementation of a new system for taxation of services popularly known as the Negative List while presenting the Budget on 16 March 2012 for the fiscal year 2012-2013. The Govt. of India by clause No.143 to 145 of the Finance Bills 2012, had proposed constitutional amendment relating to the service tax law and accordingly said Bills has been received the assent of the president and as a result of which many changes has been taken place in the Finance Act, 1994 and related Service Tax Rules effective 1st day of July, 2012. After the enactment of the Finance Bill 2012 on 28 May 2012, Notification was issued on 06 June 2012 notifying 01 July 2012 as the date for implementation of Negative List. This would mark a paradigm shift from the way in which the services would be taxed w.e.f., 01 July 2012. That is to say, all services would be subject to service tax unless specified in the Negative List or are specifically exempted from the levy of service tax. To implement such a significant change, series of notifications have been issued on 20 June 2012, inter alia, superseding old exemption notifications, introducing new exemptions, amending the manner of valuing services and to determine the import or export of services etc.

The Central Government has issued a total of sixteen new notifications numbering from 25/2012-ST to 40/2012-ST on 20th June, 2012. These notifications along with two further important notification issued on 29th Jun12 will assist in implementation of new regime of Service Tax based on negative list of services. All these notifications (dated. 20.06.2012 in particular) shall come into force on the 1st day of July, 2012. 1) 25/2012-ST 20.06.2012 Mega exemption notification 2) 26/2012-ST 20.06.2012 Abatement Notification to be suitably read with 30/2012 ST 20.06.2012 for reverse charge mechanism 3) 27/2012-ST 20.06.2012 Exemption to services for the official use of foreign Diplomatic Mission 4) 28/2012-ST 20.06.2012 Place of Provision of Services Rules,2012 5) 29/2012-ST 20.06.2012 Exemption on property tax paid on immovable property 6) 30/2012-ST 20.06.2012 REVERSE CHARGE MECHANISM under sub-section (2) of Section 68 of Finance Act to be suitably read with 26/2012 ST 20.06.2012 7) 31/2012-ST 20.06.2012 Exemption to specified services received by exporter of goods 8) 32/2012-ST 20.06.2012 Exemption of services provided by TBI/ST 20.06.2012EP 9) 33/2012-ST 20.06.2012 Exemption to Small Service Providers 10) 34/2012-ST 20.06.2012 Rescinding of certain notifications

11) 35/2012-ST 20.06.2012 Rescinding of notification 32/2007-ST 20.06.2012 12) 36/2012-ST 20.06.2012 Amendment in Service Tax Rules, 1994 13) 37/2012-ST 20.06.2012 Seeks to amend Point of Taxation Rules, 2011 14) 38/2012-ST 20.06.2012 Amendment of Notification 28/2011-ST 20.06.2012 15) 39/2012-ST 20.06.2012 Notification under Rule 6A of Service Tax Rules 16) 40/2012-ST 20.06.2012 Special Economic Zones 17) 41/2012-ST dated. 29.06.2012 grants rebate of service tax paid on the taxable services which are received by an exporter of goods and used for export of goods 18) 42/2012-ST dated. 29.06.2012 exempts Service provided by the Foreign Commission Agent to Indian Exporters for procuring order subject to fulfillment of certain conditions specified therein 19) 43/2012-ST dated. 02.07.2012 exempts the taxable services provided by the Indian Railways from the whole of service tax levi-able thereon, w.e.f. 02.07.2012 up to and including the 30th day of Sep 2012 i.e., for 3 months (July12 to Sep12) Through this document we have made an effort to encapsulate all the relevant and key amendments that would impact the business and transactions. All implications mentioned in this note would be applicable w.e.f., 01 July 2012. These Negative list services as prescribed in new section 66D are:-

a)

Services by Government or Local Authority excluding the following services means these

are taxable:(i) Speed Post, Express Parcel post, Life Insurance provided to other than Government.

(ii) Services relating to an Aircraft or a vessel (iii) Transport of goods or passengers (iv) Support services other than (i) to (iii) above.

b) c) d) e) f) g)

Services by RBI Services by Foreign Diplomatic Mission located in India Services relating to agriculture Trading of goods Any process amounting to manufacture or production of goods. Selling of space or time slots for advertisement other than advertisements broadcast by

radio or television. h) Service by way of access to a road or a bridge in payment of toll charges. i) j) Batting, Gambling or lottery Admission to entertainment events or access to amusement facilities

k)

Transmission or distribution of electricity by an electricity transmission or Distribution

agency l) Services by way of(i) (ii) Pre-school education and education upto higher secondary school or equivalent Education as a part of a curriculum for obtaining a qualification recognized by law

(iii) Education as a part of an approved vocational education course. m) Services by way of renting of residential dwelling for use as residence n) Services by way of(i) Extending deposits, loans or advances for interest or discount. (ii) Inter sale or purchase of foreign currency o) Services of transportation of passengers (i) (ii) (iii) By a stage carrier or by railway other than First class or an air conditioned coach Metro/Mono Rail or tramway Inland waterways

(iv) Public transport in a vessel of less than 15 tonne net (other than for tourism purpose) (v) p) Metered cabs, radio taxi or auto rickshaws

Services by way of transportation of goods(i) By Road except GTA and a courier agency

(ii)

By an aircraft or a vessel from a place outside India to the first customs station of

landing in India (iii) By Inland waterways q) Funeral, burial, crematorium or mortuary services including the transportation of the

deceased DEFINITION OF SERVICE For the first time since the introduction of service tax law, term service has been defined under the Negative list regime to mean any activity carried out by a person for another for consideration, and includes a declared service. Taxable service provided only in the Taxable Territory shall be taxed. Such determination is to be done in terms of Provision of Services Rules, 2012. In this context, Taxable Territory has been defined to mean whole of India excluding state of J&K. The term activity has not been defined but a very wide and broad interpretation has sought to be provided. It has been clarified that activity could be active or passive and would also include forbearance to act. In this context, agreeing to the obligation to refrain from an act or to tolerate an act or a situation has been declared to be a service. Therefore, it seems that there is a possibility that following could fall within the scope of service tax net w.e.f., 01 July 2012: o Assignment or novation of a contract for a consideration o Transfer of right to use all types of Intellectual Property (including software) o Agreeing to perform/non-perform in a certain way or manner i.e., to say noncompete agreements etc.

o Payment of fees to non-executive director However, following have been clarified to be out of the ambit of term service o Any transaction in money or actionable claim o Transfer of title in goods or immovable property (i.e. sale, gift etc.) or deemed sale as per article 366(29A). However, a dichotomy with regard to dual taxability of software seems to continue. o Services provided under an employer-employee relationship In view of the above, an undertaking may like to do an analysis of all revenue/expenses of its companies to ascertain the risk or exposure, if any, of certain transactions or activities falling under tax net on account of the introduction of Negative List. VALUATION OF SERVICE Certain significant amendments have also been introduced in the valuation principles of services. Key amendments have been highlighted below: Inclusions: Amount realized as demurrage (or by any other name called) for provision of service beyond the period originally contracted or in any manner relatable to the provision of service. Exclusions: Interest charged or paid on delayed payments, Accidental damages due to unforeseen actions not relatable to provision of service Key Exemptions

Following key exemptions have been provided from levy of service tax: o Services by way of transfer of a going concern as a whole or an independent part thereof o Services received and provided between persons located in a non-taxable territory. For instance, design services provided by SAG to another foreign entity in respect of an Indian project, there should be no service tax implication on SAG. This is in line with current provisions. o Sub-contractor providing works contract services to main contractor in respect of exempt works contract services. For instance, benefits of exemption for service provided to railway should also be available to sub-contractor - Please refer Para 9 for detailed analysis. o Benefits available to railways have also been clarified to be available to metro or mono rail - Please refers to Para 9 for detailed analysis. o Services by way of sponsorship of sporting events organized by specified organizations like national sports federation, association of Indian Universities etc. WORKS CONTRACT Composition scheme which permitted payment of service tax @4.94% on total value of contract has been dispensed with. Deduction of specified proportion of contract value, depending upon nature of works contract, has been prescribed to discharge service tax. Scope of works contract has been extended to even include repair, maintenance, renovation and alteration etc of any moveable or immovable property. o Following schemes of taxation would now exist as regards taxability of works contract:

o Where actual value of property in goods transferred and services provided are determined then respective taxes would apply on the respective values of goods and service. o Where values are not determined as above, then following method should be followed: In this connection original works would mean All new constructions All types of additions and alterations to abandoned or damaged structures on land those are required to make them workable Erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise From, above discussion, it seems that there would be double taxation on certain proportion of contract value of works contract wherein both VAT as well as service tax would be levied. One of the significant impacts seems to be in case of CAMCs or AMCs wherein a comprehensive price is quoted for replacement of parts and spares as well as for provision of services. Further, it is understood that in most cases, it is practically not possible to ascertain the quantum of goods and items supplied. Further, no CENVAT credit of specified duties paid in respect of Inputs used in or in relation to works contract would be available. There is no restriction in availing credit on capital goods and input service by the service provider and hence the service provider of the works contract can take credit on capital goods and input service. REVERSE CHARGE

Provisions of Section 68(2) are proposed to be amended to empower the Government to also notify the extent and proportion of service tax that needs to be discharged by the person made liable to pay service tax. Below are relevant service transactions towards which service tax needs to be paid under reverse charge basis: o Service tax needs to be paid only on 25% of the invoice Value subject to specified conditions being fulfilled o Services should be provided by an individual, HUF, partnership firm (whether registered or not) including association of persons to a company registered under the Companies Act, 1956 or a business entity registered as a body corporate. For the purpose of works contract service, where both service provider and service recipient are liable to pay tax, then each of the persons has the option to choose such method of valuation which might be independent of the other PLACE OF PROVISION OF SERVICES RULES, 2012 (PPSR) These Rules will determine the place of provision of service and will supersede Export and Import Rules w.e.f., 1 July 2012. As a thumb rule, PPSR provides that place of provision of service shall be the location of the service recipient. However, where location of service recipient is not available in the ordinary course of business, it shall be the location of the service provider. Certain exceptions have been carved out to the above general principle and the relevant ones have been outlined below:

Sl. No.

Scenario/ Situation

Place of provision of Service

Where services are provided in It will be the place where services are actually respect of goods that are performed. Relevant for CAMCs, installation

required to be made physically & Commissioning services. available by the service receiver to the service provider (in order to provide service)

Services relating to immovable Place where immovable property is located or property intended to be located. Relevant for civil works contract.

Services relating to events

Place where the event is actually held

Services where both provider Place of location of the service provider and recipient of services are located in the taxable territory

Intermediary services

Location of the service provider

With regard to Sl. No 1 above, please note that said rule shall not apply in case of goods which are temporarily imported into India for repairs, reconditioning or re-engineering for re-export. That is to say, in such a scenario, place of supply should be the location of recipient and should

therefore qualify as export if the consideration is received in FE. With regard to S No 5 above, please note that Intermediary; has been defined as a broker, agent etc who arranges or facilitates a provision of a service between two persons. Therefore this could impact transactions where SL acts as an intermediary for SAG to canvass certain service business and earns a service fee or any other consideration. EXPORT & SEZ The definition of export has been re-defined whereby it states that provision of any service provided or agreed to be provided shall be treated as export when the following five conditions are satisfied: o Provider of service is located in the taxable territory o Recipient of service is located outside India o Place of provision of service is outside India in terms of PPSR o Payment for such service is received in convertible FE o Rebate of service tax or duty paid on input services or inputs on providing such services is still available. The procedures for claiming service tax refund/exemption for any services provided to an SEZ, has remained unchanged, the benefit of refund of CENVAT credit on input and input services should be claimed by the service provider. Exemption to services provided to SEZ shall continue (subject to the condition that Form A-1 is provided by the SEZ customer). In addition, service provider shall be entitled to avail full credit of CENVAT credit in respect of inputs or input services used for providing services to SEZ. PROCEDURAL TIPS (W.E.F., 01.07.2012)

Earlier, all taxable services whenever provided or proposed to provide first time, needs to be endorsed in the registration certificate for the reasons all services were having different classification numbers (more than 120 in numbers), but now there in only one head / classification i.e. 65B(44) of the Finance Act, 1994. Since w.e.f., 01/07/2012, the definition of Service has been changed there is therefore absolute need to amend the existing service tax registration certificate with new service tax code i.e., Service as defined by Section 65B(44) read with Section 65B(51) of the Finance Act, 1944. The following declaration is to be given by the Rent-a-cab service provider to enable the recipient of services to pay ser-tax on reverse charge basis (w.e.f., 1.7.2012 as per point of taxation Rules) on car hiring services by considering the 60% abatement. I.e., if the service bill for car hire charges is Rs.100 then considering 60% abatement (subject to the declaration so given below in the bill of the service provider), the recipient need to pay ser-tax on the 40% i.e., 12.36% of 40% Declaration CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CC Rules, 2004 EXEMPTION BY MEGA NOTIFICATION In the negative list approach to Service Tax, so long as there was a negative list, it was logical and made sense. But apart from a long negative list of services based on Indias socio economic-political considerations, we do have a long list of exempted services (39 in number) by virtue of Notification No. 12/2012-ST dated 17.03.2012 and later superceded by Notification No. 25/2012-ST dated 20.6.2012, effective from 1.7.2012, which are exempt from levy of Service Tax. This notification termed as mega exemption notification by CBEC in its Letter No.

334/1/2012-TRU dated 17.03.2012 and Service Tax Guidance Note seeks to reduce the existing exemption notifications from 88 to 10 in number. This appears to be misleading as Notification No. 25/2012-ST itself contains 39 categories of exemptions which contain many sub clauses. Besides, this list can be further enlarged whenever considered necessary as against the negative list which can now be amended only in 2013. It is worth noting that most of the existing exemptions available in relation various taxable services as also the general exemptions have been retained in the mega exemption notification. There were certain exclusions in erstwhile provisions which now find place in exempted services or in negative list u/s 66D. From the point of view of taxation, there is no difference between a service listed in negative list and a service finding place in mega exemption notification. The only difference is that services in negative list are not at all taxable as they have been excluded from the meaning of service itself which is defined in section 65B(44). As against this, exempted services are services per se, but exempt from levy of Service Tax by way of Notification issued by the Central Government under delegated powers in terms of section 93(1). Also, amendments to negative list can be made only by Parliament by way of amendment to the Finance Act, 1994 whereas exemptions could be enlarged or curtailed on the basis of notification. List of Exempt Services (vide Notification No. 25/2012-ST dated 20.06.2012 w.e.f. 1.07.2012) 1. Services provided to United Nations or specified International Organizations; 2. Health care services provided by a clinical establishment, an authorized medical practitioner or para-medics; 3. Services by a veterinary clinic in relation to health care of animals or birds;

4. Services provided by an institution registered u/s 12AA of the Income Tax Act, by way of charitable activities; 5. Services of renting of religious place or conducting religious ceremonies; 6. Services provided by individual advocate/arbitrator to any person other than business entity; services provided by advocate to advocate; services provided by advocates and arbitral tribunals to business entities upto a turnover of Rs. 10 lakh in preceding financial year ; services provided by person represented on arbitral tribunal to an arbitral tribunal .

7. Services of technical testing and analysis of newly developed drugs etc, by an approved clinical research organization; 8. Service of training and coaching in recreational activities relating to arts, culture or sports; 9. Auxiliary education services and renting of property provided by educational institutions in respect of education exempt from tax including catering under mid-day meals scheme of government; 10. Services provided, to or by a specified educational institution, by way of transportation of students or staff or services in relation to admission; 11. Service to a recognized sports body:(i) individual as a player, referee etc. for participation in a tournament (ii) by another recognized sports body;

12. Sponsorship service for tournaments and championships organized by specified bodies; 13. Services of erection, installation, commissioning, completion, fitting out, construction, maintenance or alteration provided (i) to government or local authority or governmental authority in relation to specified structures like historical monuments, canal, dams etc.; (ii) in relation to specified structures like road, bridge, tunnel, etc.; (iii) in relation to works contract under JLNURM or Rajiv Awaas Yojana

14. Erection or Construction service in relation to original works pertaining to airport, port, railways or single residential unit etc.; 15. Service of temporary transfer or permitting use of copyrights relating to original literary, dramatic, musical, artistic works or cinematograph films; 16. Services by a performing artist in folk or classical art forms of (i) music, (ii) dance or (iii) theatre, excluding when provided as a brand ambassador; 17. Service of collecting or providing news by independent journalist/specified bodies; 18. Service of renting of a hotel, inn, guest house etc. meant for residential or lodging purposes, having declared tariff of a room below Rs. 1000 per day; 19. Restaurant services other than those having air conditioning facility and having licence to serve alcohol;

20. Service of transportation of specified goods by rail or vessel from one port in India to another port; 21. Services provided by GTA for transportation of fruits, vegetables etc. or where amount charged for transportation is upto a given monetary limit; 22. Services of giving on hire a means of transportation to State Transport Undertaking or GTA; 23. Services of transport of passengers:(i) by air embarking or terminating in specified eastern States of India; or

(ii) by a contract carriage excluding conducted tour or charter on hire; (iii) ropeway, cable car or air tramway 24. Services by way of motor vehicle parking to general public excluding leasing of space to an entity for providing such parking facility; 25. Specified services provided to government or local authority or governmental authority 26. Services of general insurance business provided under certain specified schemes; 27. Services provided by an incubatee subject to certain conditions; 28. Services by an unincorporated body or non profit entity registered under law to own members by way of reimbursement of charges or share of contribution subject to conditions;

29. Services provided by person in specified capacities such as sub broker, mutual fund agent, selling or marketing agent of lottery tickets, SIM cards, business facilitator or business correspondent, sub contractor etc. 30. Service of carrying out job work in relation to agriculture, printing, textile, diamonds/jewellery, cycle or sewing machines or any goods on which duty is paid by principal manufacturer; 31. Services by an organizer in respect of business exhibition held outsideIndia; 32. Service of making telephone calls from specified places like free telephone at airport and hospitals etc.

33. Services by way of slaughtering of bovine animals; 34. Services received from a service provider located in a non-taxable territory by any person for non-commercial purpose or by a Charitable Institution or to person located in non taxable territory. 35. Services of public libraries by way of lending of books, publication or any other knowledge enhancing content or material. 36. Services by Employees State Insurance Corporation (ESIC) to eligible person. 37. Services of transfer of going concern as a whole or independent part thereof. 38. Services of public conveniences such as provision of facilities of bath room, wash room,

lavatories, urinals or toilets.

39 Services by governmental authority in relation to any function as constitutionally entrusted to a municipality. DEEMED VALUE OF TAXABLE SERVICE - ABATEMENT Value of the following taxable services for the purpose of levy of service tax would be calculated at percentage specified in the Table subject to the relevant conditions specified

Sl. No. 1

Description of taxable service Financial leasing services including equipment leasing and hire purchase Transport of goods by rail Transport of passengers by rail Catering in a premises, including hotel, convention center, club, pandal, shamiana or any place specially arranged for organizing a function

Deemed value Existing % 10 (Nft 4/2006)

Proposed % 10

Conditions

Nil.

30 (Nft 1/2006) New levy

30

Nil.

30

Nil.

4.1

Convention center or mandap catering60 pandal or shamiana catering 70 (Nft 1/2006)

70

CENVAT credit on any goods classifiable under chapter 1 to 22 used for providing the taxable service is not allowed CENVAT credit on inputs and capital goods, not allowed

Transport of passengers by air

Upto 31.03.2012 Domestic travel maxRs. 150 International Travel maxRs. 750 (Nft 26/2010)

40

w.e.f. 01.04.2012 All Class Exemption 60% Levy of ST on 40% (Nft 6/2012) 6 Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes. Transport of goods by road by Goods Transport Agency 50 (Nft 1/2006) 60 CENVAT credit on inputs and capital goods, not allowed

25 (Nft 13/2008) Exempt (i) when gross amount charged on consignments not exceeding Rs.1500, or (ii) gross amount charged on individual consignment not exceeding Rs.750 (Nft 034/04)

25

No CENVAT credit

Services provided relation to chit

in

70 (Nft 1/2006) 40 (Nft 1/2006) 75 (Nft 1/2006) 25

70

No CENVAT credit No CENVAT credit

Renting of any motor vehicle designed to carry passengers Transport of goods in a vessel from one port in India to another (i)Services provided by a tour operator in relation

40

10

50

No CENVAT credit.

11

25

No Cenvat Credit

to a package tour (ii)Services by a tour operator in relation to a tour, solely of arranging or booking accommodation for any person in relation to a tour (iii) Services, other than services specified in (i) and (ii) above, provided to any person, by a tour operator in relation to a tour

(Nft 1/2006) 10 (Nft 1/2006) 10 No Cenvat Credit

40 (Nft 1/2006)

40

No Cenvat Credit

Prabhakar Tiwari Reg. No. 320409896/04/2009

Source: Internet.