I.C. Jain, Chairman, Banking,Finance & Taxation, IIA

It has always been an issue of debate whether Service Tax is really suitable for a developing nation like ours. The very concept of taxing services flows from the West, which is fully developed. In-spite of stiff opposition from all corners, the scope of services is being widened in our country every year. This year the Finance Minister has not only added a number of services to the service net, but has also made the compliance stringent and penal provisions tougher.

The rate of Service Tax has always been considered high and all service providers have been demanding a moderate rate but their appeals failed to appeal to the FM, who has retained the Service Tax rate @10%.  Not only this, a number of changes have been brought in Service Tax, which will adversely affect the MSME sector and above all the Aam Aadmi. The changes brought in Service tax were not spelt out in the Budget speech, but on fine reading they appear to have a wide impact on all. Some changes have been brought from 1st March, 2011, some from 1st April, 2011, some from the enactment of the Finance Act, 2011 while the others from the date of Notification.

It is often felt by the MSME Sector that knowledge of changes in Service Tax is not very relevant, but in fact in various stages of production, payments they do affect all sectors of industry, business, trade and profession. Moreover, they tax your pockets at all times as a consumer, service receiver and as a common man.

Changes made w.e.f 1st March, 2011.

1. Restriction of credit in case of payment of service tax on full value of some of services to the service provider in the case of works contract service (Notification 1/2011-ST).
   
2. Exemption to an organizer of business exhibitions held outside India (Notification No. 5/ST-2011).
   
3. An abatement of 75% from the taxable value is being provided for the purpose of levy of service tax under ‘Transport of goods through coastal and inland shipping’.  (Notification No. 16/2011-ST)
   
4. Exemption is being provided to ‘Works contract’ service provided for construction or completion and finishing of new residential complex under ‘Jawaharlal Nehru National Urban Renewal Mission’ and Rajiv Awaas Yojana’. (Notification No. 6/2011-ST)
   
5. Exemption is being provided to ‘Rashtriya Swasthya Bima Yojana’ under the ‘General insurance’ service. (Notification No. 7/2011-ST)
   
6. Exemption is being provided under ‘Works contract’ to services provided within a port or other port or an airport (Notification No. 10 & 11/2011-ST):
   
7. Changes made in valuation of taxable service in the case of Telecommunication services. (Notification No. 02/2011-ST)
   
8. A modified scheme is being introduced to refund service tax to SEZ units and developers and Notification No. 9/2009-ST is being superceded (Notification No.7/2011-ST):
   

Changes w.e.f 1st April 2011

1. Valuation in the case of Money Changing services (Notification no. 02/2011-ST):
   
2. Point of Taxation Rules, 2011 (Notification No. 18/2011-ST)
   Until today, service tax was levied on receipt basis. Thus, service tax was receipt based and the receipt was the point of taxation. But vide this budget, “Point of Taxation Rules, 2011” have been incorporated which have changed the chargeability of service tax receipt basis to accrual basis with effect from 1st April 2011. Thus, service tax will now be earliest of the Date on which service is provided or to be provided; or Date of invoice; or Date of payment.
   
3. Consequential to the introduction of the Point Of Taxation Rules, there are a few changes in the existing Service Tax Rules, 1994. (Notification No.03/2011-ST)
   
4. Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 are being amended so as to move some of the specified services from one category to another. (Notification 12, 13, 8 and 9/2011-ST)
   
5. Rate of service tax in the case of Transport of passengers by air. (Notification No.04/2011-ST)
   The rates of service tax on travel by air are being revised as follows:
   
   Economy class
   
   
   • Domestic travel
     10% of the gross value of the ticket or Rs.150 whichever is less
   • International travel
     10% of the gross value of the ticket or Rs.750 whichever is less

   Other than economy class
   10% of the gross value of the ticket

6. Rate of interest on delayed payment as well as excess collection has been increased from 13% to 18% vide Notification No. 15 and 16/2011-ST respectively.
   

 Amendment effective from date of enactment of Finance Act 2011.

1. Amendment in penal provisions:
   
   • Sub-section (1A) of section 73 together with both the provisos to subsection (2) of section have been omitted. As a result, the benefit of reduction of penalty available in cases of fraud, collusion, etc. under proviso to section 73 (1A) shall not be available. Further, a new sub-section 4A is being inserted in section 73 to provide for reduced penalty in cases where during the course of audit, verification or investigation it is found that the transactions not reported to the department are available in the records or invoices. Moreover, penalty is being reduced to 1% per month of the tax amount for the duration of default upto a maximum of 25%, if assessee during the course of audit, verification or investigation pays the tax dues, together with interest and the reduced penalty.
   • Section 78 to revise the maximum penalty has been amended. Penalty will be hereafter mandatory and equal to tax evaded. If the transactions not reported to the department are available in the records or invoices, the penalty shall be 50% of the tax amount. Further, the penalty is being reduced to 25% of the tax amount, if the tax dues are paid within thirty days from the date of the order together with interest and reduced penalty. For assessees having a turnover of upto Rs.60 lakh in any of the years covered in the show cause notice or in the preceding year, the period of one month shall be revised to 90 days.
   • The power to waive penalty under section 80 has been amended. While penalties under section 76 and 77 are being retained, penalty under section 78 is being waived only in cases where the transactions are captured in the specified records. Further section 80 has not been amended so as to include penalty under section 73(4A) and therefore penalty under said section cannot be waived.
     
   • The penalty for delayed payment under section 76 has been reduced from 2% to 1% per month or Rs.100 per day, whichever is higher. Maximum penalty reduced to 50% of the tax amount.
     
   • The maximum penalty under section 77 has been increased from Rs.5,000 to Rs.10,000.
     
   • The maximum penalty for delay in filing of return under section 70 has been increased from Rs.2000 to Rs.20000.
     
   • Interest rate have been reduced by 3% for assessees with a turnover of upto Rs.60 lakh, both under section 73B and section 75
2. Reintroduction of the provisions relating to prosecution:
   The provisions relating to prosecution under section 89 shall apply in the following situations after the previous approval of the Chief Commissioner:
   
   • Provision of service without invoice;
   • Availment and utilization of Cenvat credit without receipt of inputs or input services;
   • Submitting false information; and
   • Non-payment of collected amount of service tax for a period of more than six months.
     
     Punishment
     
     • Offence involving service tax amount exceeding Rs. 50 Lakh, imprisonment for a term which may extend to 3 years but not less than 6 months.
     • In any other case, imprisonment for a term which may extend to one year.
     • In case of any subsequent offence, imprisonment for a term which may extend to 3 years but not less than 6 months.
3. Insertion of Section 88
   A new section 88 is being inserted so as to create first charge on the property of the defaulter for recovery of service tax dues from such defaulter subject to provisions of section 529A of the Companies Act, the Recovery of Debt due to Bank and Financial Institution Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.
4. Power to issue & execute Search warrant at lower levels
   Power to issue search warrant under section 82 has been given at the level of Joint Commissioner and the execution of such warrant at the level of Superintendent.
5. Retrospective Amendments:
   
   Exemption under ‘Club or association service’:
   
   Exemption from service tax on the membership fees under ‘Club or association service’ is being given to the associations or chambers representing industry or commerce for the period from 16.06.2005 to 31.03.2008. Thus assessee who has already paid the service tax for the said period are advised to file the refund claim.
   
   Exemption under ‘Tour Operator Services’:
   
   The exemption was granted to the tour operator having a contract carriage permit or a tourist vehicle permit for inter-state or intrastate transportation of passengers under Notification no. 20/2009-ST dated 07.07.2009. The Retrospective effect is being given to the said notification by exempting service tax for the period from 01.04.2000 to 06.07.2009. Thus assessee who has already paid the service tax for the said period are advised to file the refund claim.
   

Amendment effective from date to be notified after enactment of Finance Act 2011.

A. Introduction of New services:

1. Services provided by a restaurant:
   Statutory Definition:
   
   “(zzzzv) to any person, by a restaurant, by whatever name called, having the facility of air-conditioning in any part of the establishment, at any time during the financial year, which has licence to serve alcoholic beverages, in relation to serving of food or beverage, including alcoholic beverages or both, in its premises”
   
   Comments:
   
   Services provided in relation to serving of food or beverage by a restaurant shall be  brought into the tax net. The services relate to the use of restaurant space and furniture, air-conditioning, well-trained waiters, linen, cutlery and crockery, music, live or otherwise, or a dance floor. However, only restaurants fulfilling the following criteria are covered:
   
   The restaurant shall have the facility of air-conditioning in any part of the establishment. Such facility may be available for part of the financial year. The restaurant shall have the licence to serve alcoholic beverages. It must be noted that service tax is not only on serving of alcoholic beverage but also covers serving of food. During budget speech, the Finance Minister has announced 70% abatement in the said category.
   
   
2. Short term accommodation:
   
   Statutory Definition:
   “(zzzzw) to any person by a hotel, inn, guest house, club or campsite, by whatever name called, for providing of accommodation for a continuous period of less than three months”
   
   Comments:
   Accommodation services provided by any hotel, inn, guest house, club or campsite for a continuous period of less than 3 months are covered by this category.
   
   It has been proposed as mentioned in the TRU letter that the levy shall be restricted only to those hotel, inn, guest house, club or campsite which have a declared tariff of Rs. 1000 per day or higher. Thus, if such hotel, inn, guest house, club or campsite has a declared tariff value of less than Rs. 1000 per day then it shall not be covered by this category. Further, it must be noted that the actual amount charged may be less than Rs. 1000. Also, during budget speech, an abatement of 50% has been announced in the said category.
   

B. Changes in definition of Existing services and other amendment.

1. Business Support Services.
   
   Current Status:
   The definition of the said category as given under section 65(104c) includes “operational assistance for marketing”.
   
   Amendment in brief:
   The words mentioned in the said definition “operational assistance for marketing” is proposed to be substituted with the words “operational or administrative assistance in any manner.”
   
   Implications: The said substitution attempts to spread the tax net to assistance for any sort of administrative activity related to business of the assessee & not restricting to merely marketing. Moreover, emphasis is placed on the word operational or administrative assistance of any kind. Due to the addition of the words “of any kind”, outsourcing of any operation or administrative activity related to the assessee’s business shall get covered.
   
   
2. Authorized Service Station’s Service:
   
   Current Status:
   
   i) Services provided by only “authorised” service stations are covered under the said category.
   ii) Service covers repairs, reconditioning or restoration.
   iii) Service provided to any motor car, light motor vehicle or two wheeled motor vehicle is taxable.
   
   Amendment in brief:
   
   i) Service provided by any person i.e. whether authorize service station or not are now proposed to be covered.
   ii) In addition to service in relation to repair, reconditioning, restoration, service in relation to decoration or any other similar activity are also proposed to be covered.
   iii) Services will now be applicable to all motor vehicles other than vehicles used for goods transport and three-wheeler scooter autorickshaw.
   
   Implications:
   
   Intention of the legislature is to recover service tax on all kind of service stations may it be authorized service station or non-authorized service station. Also, the scope has been expanded by including decoration service & by using the words “any other similar services”. Moreover, levy of service tax is now on all the vehicles except those as specifically excluded as stated above.
   
   
3. Health Services:
   
   Current Status:
   
   i) Only hospitals, nursing home & multi-specialty clinic are currently being covered under the said category.
   ii) Service tax is leviable only if such hospitals, nursing home & multispecialty clinic receive payment directly from Insurance companies or employees of any
   
   Business Entity
   
   iii) Services covered included check-up, preventive care & treatment.
   
   Amendment in brief:
   
   i) Hospitals, maternity home, nursing home, dispensary, clinic, sanatorium or any such institution having central air-conditioning & more than 25 beds (termed as ‘clinical establishment’) are now proposed to be covered under the said category.
   ii) The term ‘clinical establishments’ also include entities carrying out diagnostic tests of any kind or investigative services with the help of a laboratory or medical equipment.
   iii) Services covered include diagnosis, treatment or care for illness, disease, injury, deformity, abnormality or pregnancy in any system of medicine.
   iv)The taxable service definition also covers doctors providing the aforesaid services who are not an employee of any clinical establishment providing services for diagnosis, treatment or care for illness, disease, injury deformity, abnormality or pregnancy in any system of medicine.
   v) Specific exclusion has been granted to Government or local authority controlled establishments
   
   Implications:
   
    i) The scope of service has been enlarged considerably by including all kind of clinical establishments along with doctors as mentioned above.
   ii) Also, the scope has been expanded by removing the restriction on only check-up, preventive care & treatment activity as all sort of activities namely diagnosis,
   treatment or care for illness, disease, injury, deformity, abnormality or pregnancy in any system of medicine are covered.
   
   
4. Commercial Training or Coaching Service:
   
   Current Status:
   
   The term “commercial training or coaching centre” specifically excludes preschool coaching centre or any establishment imparting education recognized by law.
   
   Amendment in brief:
   
   The exclusion granted to such establishments have now been removed from the definition of the term “commercial training or coaching centre”.
   
   Implications:
   
   Currently, institutes which are engaged in providing recognized as well as unrecognized courses are getting the exemption benefit even for unrecognized courses, because such establishments get excluded from the definition of “commercial training or coaching centre” itself. Now, owing to the proposed amendment, such institutes will be covered under the term “commercial training or coaching centre”. It has been specified in the TRU letter that specific exemption will be given to preschool coaching and training and to coaching or training relating to educational qualifications that are recognized by law. Thus, any institute providing unrecognized course will get covered under such category henceforth.
   
   
5. Club or Association:
   
   Current Status:
   
   The definition of the term “club or association” included persons providing services, facilities or advantages for a subscription or any other amount, to its members
   
   Amendment in brief:
   
   It has been proposed to substitute the words “to its members” by “primarily to its members”
   
   Implications:
   
   Currently, members & their guests are covered under the said category as it is service provided to members. However, due to the said amendment, even nonmembers will get covered under the said category as the service is being primarily provided to members.
   
   
6. Legal Consultancy Service:
   
   Current Status:
   
   i) Services provided by any business entity to any other business entity is only covered
   ii) Services by way of appearance before any Court, Tribunal or authority are specifically excluded.
   
   Amendment in brief:
   
   i) Services provided by business entity to any person are proposed to be taxed.
   ii) Services provided by any person to any business entity by way of appearance before any Court, Tribunal or authority will now be covered under the definition of
   taxable service.
   iii) Also, services provided by arbitral tribunal to any business entity are proposed to be included in the scope of the taxable service.
   
   Implications:
   
    Earlier, only services received by business entity were covered. However, now the scope of the service has been increased considerably by including services received by any person & services provided by arbitral tribunal. Further, services provided by way of appearance before any Court, Tribunal or authority shall also be included in the taxable service.
   
   
7. Life Insurance Services:
   
   Current Status:
   
   The taxable service definition specifies that only service provided in relation to the risk cover in life insurance is covered.
   
   Amendment in brief:
   
   The words “in relation to risk cover in life insurance” have been removed from the definition of taxable service as provided under clause 65(105)(zx).
   
   Implications:
   
   Earlier, only premium towards risk cover was covered under the said category. However, owing to the proposed amendment, entire premium i.e. towards risk cover & investment management will be taxable now. It must be noted that the entire premium excluding risk cover is not invested. Some portion is set aside as commission, deduction towards mortality etc. It is proposed (as given in the TRU letter) that if such break-up is indicated in the document issued to the policy holder, then service tax is to be levied on such charges in addition to premium towards risk cover. However, in case such break-up is not indicated then an option will be given to pay tax @ 1.5% of the gross amount of premium.
   

CONCLUSION

The changes made in Service Tax will adversely affect the Hotel/Restaurant industry, the Health Sector, the Commercial Coaching sector, the Insurance sector, the unauthorized Automobile Service Centres, Clubs & Associations and above all- the common man. The increase in Service Tax on Air Travel shall also be burdensome to all. The Industry & Commerce Associations shall become taxable from 01-04-2008 and this is indeed deplorable. These associations are doing a yeoman service for the development and sustainability of trade and industry. The Government’s intention to tax the medical services including diagnostics is unwarranted as it will burden all sectors of the society.  It is undisputed that the Government hospitals are inadequate and ill equipped and the private sector alone is bridging the gap by providing medical facilities at competitive prices. This should be encouraged and service tax on medical services should not be imposed.  The unfettered power of Search, the power to impose higher Penalties, the revival of Prosecution shall increase highhandedness & corruption in the Service Tax Department leading to harassment of tax payers.  The assessees henceforth are likely to be penalized on technical and venial breaches. This will not only increase litigation but shall also dampen the confidence of the law abiding taxpayer. Overall the Service Tax proposals for the Budget 2011 shall increase the cost of living by burdening the rich, middleclass and the poor alike.