Budget 2014 - Impact Analysis for Indirect Taxes

Showing Direction towards Beginning of Good Days

The people of India have decisively voted for promise of Good Days Ahead from  NDA & its  Government  has used its First Budget prepared within just 45 days of coming to power  for  laying  down a broad policy indicator of the direction in which it wants to take this country in next five years. The steps announced  in this Budget are only the beginning of a journey towards a sustained growth of 7-8 per cent or above to be achieved within the next 3-4 years, which banks heavily on revival of growth in  manufacturing & infrastructure sector.

With view to create proper business climate for the growth of these sectors, important policy announcements have been made. GST which is one of the biggest tax reforms is likely to get introduced within 1 year. For the first time certain time frame is indicated for implementation of GST. Clarity on tax laws is sought to be introduced through setting of High Level Committee which will interact with industry for resolution  of dispute areas in such laws in a time bound manner. The Scheme of Advance Ruling is being extended to Resident Private Limited Companies.

Proposals in respect of Excise & Customs

To boost domestic manufacture as also to address the issue of inverted duties,  customs duty on certain industrial inputs, chemicals, parts of personal computers, TV sets has been reduced. Import duty on certain stainless steel, solar power  items is increased to protect domestic producers.

Minimization of harvest and post harvest losses of agricultural produce is an important measure for tackling food inflation and ensuring food security. The losses in fruits and vegetables are mainly due to lack of adequate processing capacity. To incentivize expansion of processing capacity excise duty on specified food processing and packaging machinery has been reduced from 10 percent to 6 percent.

Exemption from excise for supplies under International bidding has been extended to sub contractors who supply goods to main contractors of such bidding projects.

To compensate for this loss of revenue duties on certain   products such as cigarettes, pan masala , gutkha, cold drinks has been increased. Export duty on bauxite is being increased from 10% to 20%.

As for legislative changes certain changes appear to make life of tax payer difficult. Most important of such changes that gives harsh blow to tax payers is of fixing of time limit of six months for claiming credit of taxes paid on inputs, capital goods and services. Except for a brief spell after introduction of CENVAT (MODVAT) Credit scheme in 1984 such a time limit is prescribed for claiming credit. Credit could be claimed till now at any time after receipt of goods in the factory after receipt of invoice from service provider. With fixation of time limit, administrative lapses by staff in claiming credit can now prove to be very costly for the tax payers. It appears that unnecessary punishment is given to tax payers for technical lapses.

Rule 4(1) (for input credit) is being amended in order to fix a time limit of six months for availment of the CENVAT Credit. Accordingly credit can be taken only before expiry of 6 months from the date of supplier’s invoice or date of challan in case of payment under reverse charge. This amendment will be applicable for any credit availed after 1.9.14.

All tax payers should therefore undertake a drive to search purchase records to ascertain whether there are any unclaimed credits, so such documents will get recorded in CENVAT register with a view to stop avoidable loss.

A great professional opportunity also exists for Consultants to help tax payers getting out of potential loss situation.

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 . Credit can be taken after payment of service tax under reverse charge. However, the said change is not applicable in respect of partial reverse charge.

The proviso to Rule 4(7), in terms of which, the service recipient who has taken CENVAT credit on the basis of the receipt of the documents referred to rule 9(1) of the CCR, 2004 is required to reverse the credit if the payment is not made within 3 months of the date of the input invoice, etc. stands.

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 [Refer the newly inserted proviso to Rule 6(8)].

Rule 7 of the CENVAT Credit Rules, 2004, provides for the manner of distribution of common input service credit by the Input Service Distributor.  Now the amended Rule 7 allows distribution of input service credit to all units (which are operational in the current year) in the ratio of their turnover of the previous year/previous quarter as the case may be.

Rule 12A is being amended so as to disallow transfer of credit by a large taxpayer from one unit to another.

Secondly pre deposit of 17.5% (split in two stages of 7.5% & 10%) of tax demanded is prescribed for filing of Appeals (subject to ceiling of Rs. 10 Cr). However as a relief measure,  limitation of one year on the duration of stay is removed, so that when stay has been granted by Appeal Authorities, demand shall remain inoperative till appeal is decided.  Besides with the introduction of provision for mandatory stay on payment of pre deposit, wastage of time at the level of Appeal Authorities in dealing with stay matters will totally get eliminated. Today Hon'ble CESTAT has become a judicial forum for passing stay orders & main function of disposal of appeals on merits has become a secondary function. Anyone may see the cause list of any Bench of the CESTAT to notice the predominance of stay applications and miscellaneous applications. Provision for compulsory stay on payment of pre deposit will reduce the pending litigation significantly, especially at CESTAT stage.

To detect duty evasion an Information Authority is newly created under Excise like Income tax to which information has to be supplied by other agencies and government departments.  E-payment is being made mandatory for all tax payers subject to certain exceptions. Mandatory penalty at 1 % p.m. has been introduced in case of default  in payment of duty.

The Central Excise Valuation (Determination of Price of Excisable Goods) Rules, 2000 is being amended so as to provide that in cases where excisable goods are sold at a price below the manufacturing cost and profit and there is no additional consideration flowing from the buyer to the assessee directly or from a third person on behalf of the buyer, value for the assessment of duty shall be deemed to be the transaction value.

Generally speaking changes in rates of duty take effect immediately & legislative changes would come into effect only upon the enactment of the Finance (No.2) Bill, 2014. Following table showing relevant notifications may be referred for specific information.

Proposals relating to Service Tax

Part A –Proposal made applicable immediately i.e. from 11.7.14

Changes in the Mega Exemption List of Services Vide Notification No. 6/2014-ST Dated. 11-7-2014 amending Notification No. 25/2012-ST Dated. 20-6-2012 (Effective From 11-7-2014):-

Entry 2B:  For safe disposal of medical and clinical wastes, services provided by common bio- medical waste treatment facilities exempted.

Entry 7: Exemption withdrawn 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.

Entry 9: Concept of ‘auxiliary educational services’ has been omitted and only the following services received by eligible educational institutions are exempted from service tax:

(i) transportation of students, faculty and staff of the eligible educational institution;

(ii) catering service including any mid-day meals scheme sponsored by the Government;

(iii) security or cleaning or house-keeping services in such educational institution;

(iv) 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 No. 25/2012-ST Dated. 20-6-2012 as institutions providing educational services specified in the negative list.

At present under Sr. No. 9 Para 1 of Notification 25/2012-Service Tax dated 20th June, 2012, an exemption is given from service tax to services by way of, auxiliary educational services and renting of immovable property, provided to or by an educational institution in respect of education exempted from service tax.

As per Clause (f) of Para 2 of this Notification, “auxiliary educational services” means any services relating to imparting any skill, knowledge, education or development of course content or any other knowledge enhancement activity, whether for the students or the faculty, or any other services which educational institutions ordinarily carry out themselves but may obtain as outsourced services from any other person, including services relating to admission to such institution, conduct of examination, catering for the students under any mid-day meals scheme sponsored by Government, or transportation of students, faculty or staff of such institution

An important aspect of this Notification was that it exempted services provided to an Institution also in addition to services provided by such an Institution.  Thus services connected with education for a degree recognised by law, even if outsourced to other agencies were non taxable in the hands of such agencies, if conditions of Notifications are satisfied.

Furthermore, the exemption hitherto available to services provided by way of renting of immovable property to educational institutions stands withdrawn.

Entry 18: Service by way of renting of a hotel, inn, guest house, club or campsite or other commercial places meant for residential or lodging purposes, having a declared tariff of a unit of accommodation below rupees one thousand per day or equivalent is exempt from Service tax i.e. Exemption not available if declared tariff > Rs. 1,000/- Per day irrespective of fact whether for commercial purpose or not. Hence, this exemption, upto the specified threshold level, is available to any entity providing service by way of accommodation, including dharmashalas or ashram or such other entities. Tax base has been widened by removal of term ‘other commercial places’.

Entry. No. 20 and 21: Exemption provided on Transport of organic manure by vessel, rail or road (by GTA) by amending entries at. Therefore, organic manure will be on par with fertilizer which is already exempted.

Entry. No. 20 & 21 and 40: Exemption provided on Services by way of loading, unloading, packing, storage or warehousing, transport by vessel, rail or road (GTA), of cotton, ginned or baled

Entry 23: Presently service of passenger transportation by a contract carriage 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, with immediate effect. 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%.

Entry 25: 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 would not be extendable to other services such as consultancy, designing, etc., not directly connected with these specified services.

Entry 26A: Exemption available for specified micro insurance schemes approved by IRDA expanded to cover all life micro-insurance schemes where the sum assured does not exceed Rs. 50, 000/- per life insured.

Entry 41: 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.

Entry 42: Exemption available on services provided by the Indian tour operators to foreign tourists in relation to tours wholly conducted outside India.

Changes in the Service Tax Rules, 1994 Vide Notification No. 9/2014-ST Dated. 11-7-2014 (Effective From 11-7-2014 Unless Otherwise Stated):-

Service provided or agreed to be provided by a Director of a Company or body corporate to the said company or the body corporate has been brought under the Reverse Charge Mechanism. Service receiver, who is a body corporate, will be the person liable to pay Service tax.

Services provided by Recovery Agents to Banks, Financial Institutions and NBFCs has also been brought under the Reverse Charge Mechanism.

Service of transportation of passenger by air-conditioned contract carriages is taxable with immediate effect, as stated earlier.

Part B- Changes effective from a date to be notified after the enactment of the Finance (No. 2) Bill, 2014

1. Following services will be taxable.

(i) Services of sale of space for advertisement on hoardings, out-of-home media,on film screen in theatres, bill boards, conveyances, buildings, cell phones, ATMs, tickets, commercial publications, aerial advertisement website etc. excluding such sale of space for advertisement in print media.

(ii) Services provided by Radio taxis or radio cabs whether air conditioned or non-air conditioned.

“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).

Abatement presently available to rent-a-cab service would also be made available to radio taxi service.

2. Government will prescribe rules for determination of rate of exchange for calculation of taxable value in respect of certain services. [Explanation to section 67A]

Part C  Changes effective from 01-10-2014

1. In Rule 2A of Service Tax (Determination of Value) Rules, 2006, category ‘B' and ‘C' of works contract are proposed to be merged into one single category, with percentage of service portion as 70%. Thus only two rates at 40% & 70% will remain as percentages for abatement.

2. Variable rates of Interest: To encourage prompt payment of service tax, it is being proposed to introduce interest rates which would vary on the extent of delay. (Notification No. 12/2014-ST]. Slab wise rates of interest p.a. shall be as under.

For delay up to six months, 18% for first six months, for period of delay more than six months till one year 24% for that period and for period of delay more than one year, 30 per cent. for period  beyond one year.

This new interest rate regime will become operational only on 1st October 2014. In other words, upto 1st October, 2014, the rate of interest of 18%, presently applicable, will continue to apply. The variable interest rates will apply only on or after 1st October, 2014.

3. The definition of intermediary is being amended to include the intermediary of goods in its scope. Accordingly, with effect from 1.10.2014, 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. (Notification 14/2014-ST)

At present an agent who is marketing/assisting in supplying the goods of parent company was not considered as an “intermediary”, based upon the definition of "intermediary" and the Guidance Note (para 5.9.6) issued on 20 June 2012 by the Department. Based on this interpretation, the POPS was considered to be applicable  under Rule 3 being non taxable due to location of service recipient i.e. outside India. The CENVAT credit lying unutilised was then eligible to be claimed as refund as an export benefit. At present, refund of service tax is currently being claimed by the industry who are the marketing/support arm of overseas parent company in India. Now, it appears, on the basis of the changes in the definition of ‘intermediary', the place of provision of service for intermediary for goods would be the location of service provider i.e. in India. Accordingly, from 1 October 2014 services provided by commission agents (for both goods and services) will be liable to service tax.

This change will have a far reaching effect on the intermediaries in India. Liability of services provided to overseas entity being POPS in India would be enormous. Previous claims already processed may also be relooked due to the said change. This would open gate to various litigations unless clarified by the Government.  

4. The first Proviso to rule 7 of the Point of Taxation Rules (POTR) is being amended to provide that point of taxation in respect of reverse charge will be the payment date or the first day that occurs immediately after a period of three months from the date of invoice, whichever is earlier. This amendment will apply only to invoices issued after 1st October, 2014. A transition rule is being prescribed (new rule 10 of POTR). (Noti. 13/2014-ST)

5. E-payment of Service tax has been made mandatory with effect from October 1, 2014. Relaxation from e-payment may be allowed by the Deputy Commissioner/ Asst. Commissioner on case to case basis.

Notifications from 6/14 to 15/14 issued under service tax may be referred for specific provisions.

By: Mukund Abhyankar