Service Tax - Budget 2009

Madhukar N Hiregange , Last updated: 07 July 2009
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Service Tax: Budget- 2009 Highlights

By Madhukar N Hiregange, FCA, DISA

& Sudhir V S, B.com ACA

Direction of IDT

The FM stated that as advised by Kuatilya 3000 years back he would make the law certain and equitable. The speech itself dispelled any such objective. The fine print has entirely erased that as an empty set of words. Many of the measures have actually counterproductive to reforms. The positive changes are those which have attained finality at the hand of the Tribunal / Supreme Court. The administrators have more powers and only when electronic governance come in full is relief visible on the horizon.

We take a look at the provisions proposed / amended.

Budget Snap Shots

Three New Services in tax net (including Doctors and Advocate partially)
Expansion of tax net in two service
Stock exchanged Sub-Broker excluded form tax net
Works Contract Service Composition Scheme to include value of material provided by Recipient.
Refund to Exporters reformed
Exemption to certain association
Exemption to Tour Operator
Extension of territorial jurisdiction.
CENVAT reversal in case of provision/write off.
Retrospective amendment to ITSS and GTA exemption notification
Change in mechanism in revision of orders by commissioner
Advance Ruling by Income Tax Act

New Services in tax net

The Finance Bill 2009 (No.2) has proposed to add three services in the tax net as under

Transport of coastal goods and goods through National Waterways and Inland Water
Cosmetic and plastic surgery service
Legal consultancy service.

Transportation of goods through National Waterways and Inland Water

This service aims at taxing any service provider or to be provided by any person to any other person in relation to transportation of the under mentioned

coastal goods or
goods through national waterway; or
goods through inland water or

Note: This is good move to see that the entire transport sector is in.

The costal goods means goods transported in a vessel from one port in India to another (other than imported goods) as given under section 2(7) of the Customs Act, 1962.

Cosmetic and plastic surgery service

This services aims at taxing any service provided or to be provided in relation to cosmetic surgery or plastic surgery. However this service does not intended to tax surgeries undertaken to restore or reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, degenerative diseases, injury or trauma. Generally these processes could be undertaken to correct impairment caused by burns, fractures or congenital abnormalities like cleft lip etc. TRU circular also provides the indicative surgeries that can be taxed under this service listed as under
1. Buttock augmentation and lift;
2. Rhinoplasty (reshaping of nose);
3. Otoplasty (ear surgery);
4. Rhytidectomy (face lift);
5. Liposuction (removal of fat from the body);
6. Brow lift;
7. Cheek augmentation;
8. Facial implants;
9. Lip augmentation;
10. Forehead lift;
11. Cosmetic dental surgery;
12. Orthodontics;
13. Aesthetic dentistry;
14. Laser skin surfacing

Note: This year finally the medical profession is in with surgeons who make us look good. A multi billion dollar industry. A lever into the health sector. More expected in time to come.

Legal Consultancy Service

This service aims at taxing any service provided or to be provided to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law. For the purpose of this service business entity includes an association of persons, body of individuals, company or firm. Individual here is excluded, However if the individual providing the service from his proprietor concern can be excluded has to be examined. This service excludes any service provided by way of appearance before any court; tribunal or authority shall not amount to taxable service. This service is wide enough to cover not only advocates but also any person (entity) providing such service.

It is very important to highlight here is Chartered Accountants/Cost Accountants/Company Secretary are exempted for any service provided in relation to representing the client before any statutory authority in the course of proceedings initiated under any law for the time being in force. Therefore the services such as reply to show cause notice, collection of facts or preparation of statements for the purpose of the notice etc are also exempted along with the appearance fee. However this service excludes only appearance fee and not other services.

The table below provides the various situations and their taxability.

Sl. No.	Service provider	Service Receiver	Taxability
1.	Individual	Entity	Non-taxable
2.	Entity	Individual	Non-taxable
3.	Individual	Individual	Non-taxable
3.	Entity	Entity	Taxable

Note: Whether professionals would be coverfe3d under the phrase business entity is a question which maybe bandied about very soon. Advocates coming inot the net may cause many unscrupulous public servants also in soup.

Extension in the existing service

Transportation by Indian Railways

Finance Bill 2009 (No.2) intends to tax by amending the “transportation by rail in container service” to extend the scope of taxable service beyond transportation in a container by a person other than Indian Railways. In other words goods transported by Indian railways in any form are now intended to be taxable with this finance bill.

Note: This could lead to a little of inflation but a good move considering that GST will be in place.

Manufacture of non-excisable goods

Production or processing of goods for or on behalf of a client was covered under Business Auxiliary service. However the service/process that amounts to manufacture in terms of provision of central excise was excluded. Earlier the product like liquor which is not excisable goods (Subject to state excise) was not taxable if the process was amounting to manufacture. In this finance bill it is proposed to amend this service to exclude only excisable goods that amounts to manufacture. Therefore the non-excisable goods that are manufactured for or on behalf of the client attract service tax.

Note: The cenvat credit on the machinery and input services set off could be something which the liquor industry would look forward for.

Amendment to existing service

Sub-Stock Broker Service exempted

Finance Bill 2009 (No.2) has proposed to amend the stock broker service to exclude the taxable service provided by a sub-broker form the tax net. This amendment is proposed in view of the SEBI regulation that only the main broker can issue the contract note, so main broker collects the commission and pays the tax on the same, then passes some share as agreed to the sub-contractors which is now exempted from the tax net. TRU circular has also clarified that such consideration received by the sub-contract are also not taxable under Business Auxiliary Service)

Information technology software service

Information technology software service taxed “acquiring the right to use the information technology software ….” Now Finance Bill 2009 (No.2) proposes to amend the same to “providing right to use….” This change is proposed to be amended with effect from 16.05.2008.

Amendment to Finance Act

Changes in Revision of Order by Commissioner

The provision of revision of order by commissioner of Central Excise is provided in section 84 of the Finance Act

The highlights of the existing provision is listed as under

a. The CCE may call for the records and make enquiry and can pass the order as he deems fit

b. Opportunity of being head has to be provided to assessee in case the order is prejudice to the interest of the assessee

c. CCE has to communicate the order passed to assessee, adjudicating authority and Board

d. CCE cannot pass order, which is pending before CCE (Appeals)

e. Time limit of passing the order is within 2 years from the date of impugned order.

The highlights of the proposed section is as under

a. CCE may of his own motion call for and examine the record for the purpose of satisfying himself as to the legality or propriety of any such decision or order

b. CCE may by order to apply to the CCE (Appeals) for the determination of such points arising out of the decision or order as may be specified by the CCE his order

c. Time limit of passing the order is within three months from the date of impugned order

d. Application made to CCE (Appeals) shall be adjudicated as a normal appeal

Appeal to Tribunal

In view the proposed amendment to the provision of revision of orders by CCE, it is proposed that order passed by CCE under section 84 cannot be appealed to CESTAT

Comment: In the existing provision, assessee either could have filed appeal before CEE(Appeals) or revision application before CCE. Now in the proposed the relief for the order passed by the adjudication authority is only with CCE (Appeals)

Power to make rules

Section 94 has been amended to extend the power of Central Government to make rules the date for determination of rate of service tax and the place of provision of taxable service.

Comment: This amendment prompts that the department may shortly come up with rules pertaining to date of determination of rate of service tax and also for the place of provision of taxable service.

Power to remove difficulty

Section 95 of the Finance Act provides powers to remover difficulty in implementing the new service have been amended to include Finance (No.2) Act 2009.

Advance Ruling

Section 96A (a) has been amended to changed the Advance Ruling Authority to that of the Income Tax Act.

Retrospective effect for Notification

Notification 1/2009-ST dated 05.01.2009 provided exemption for the certain service provided to GTA. This notification has been given retrospective effect for clearing the pending cases and also refund for the service tax paid is also provided.

Notifications

Exemption for certain association

Notification has been issued to specifically exempt certain association from tax net. The taxable service under clubs and associations provided by the specified associations are not taxable with effect from 07.07.2009 till 31.03.2010.

(Refer Notification 16/2009-ST dated 07.07.2009)

Refund of service tax for exporters

Notification 41/2007-ST as amended provided exemption of service tax by way of a refund to certain input services that are used by the exporter for exporting the goods. This notification has aimed at providing better procedure and facilitates refund easily.

(Refer Notification 17/2009-ST dated 07.07.2009)

Note: The reality is that not 41/2007 has been made a little more easy. Too many conditions still on. Practically the difficulty is only reduced not done away with.

Exemption to exporters

Exporters are exempted from paying service tax on the goods transport agency service and business auxiliary service (Commission paid to person outside India) in relation to exported goods subject to conditions and procedure specified. In both the cases exporter himself is the person liable to pay tax in terms of Rule 2(1)(d) of the Service Tax Rules, 1994

(Refer Notification 18/2009-ST dated 07.07.2009)

Comment: Earlier both 17/2009 & 18/2009 was clubbed in 41/2007-ST notification itself, in order to avoid confusion the said notifications is bifurcated into two. The both notification there is exemption provided for Transport of goods by road, it is very important to note that there are mutually exclusive. However 18/2009 provides exemption form paying service tax and in case the service tax is paid notwithstanding the same then the exporter can avail refund vide notification 17/2009-ST. This could be disadvantageous for commission payments above 1%.

Exemption to Schedule bank

This notification provides exemption for the taxable service provided by one schedule bank to another schedule bank falling under “Banking and other Financial Service” and “Forex Service”.

(Refer Notification 19/2009-ST dated 07.07.2009)

Comment: This notification has no great impact for the reason that in the absence of this notification the banks were eligible for CENVAT credit which had no implication for either of the banks. On the other had this notification may have some implication of Rule 6 of CENVAT credit Rules, 2004 for availing other credit by the Bank because of this notification.

Exemption to Tour Operator Service

The notification provides exemption from payment of service tax by a tour operator having a contract carriage permit for inter-state or intrastate transportation of passengers, conducted tours, charter or hire service. (excluding tourism)

(Refer Notification 20/2009-ST dated 07.07.2009)

Amendment to territorial jurisdiction

Notification No. 1/2002-ST has been amended to extend the provisions of Chapter V of the Finance Act, 1994 to installations, structures and vessels in the entire Continental Shelf of India and Exclusive Economic Zone of India. Therefore services provided to or from SI and EEZ of India would be covered within the ambit of the provisions relating to service tax.

(refer Notification No. 21/2009-ST dated 07.07.2009)

Amendment to Import of Service rules

The Taxation of Service (Provided from outside India and received in India) Rules 2006 commonly known as import of service rules has been amended to extend the definition of India to include installations, structures and vessels in the entire Continental Shelf of India and Exclusive Economic Zone of India.

(refer Notification 22/2009-ST dated 07.07.2009)

Amendment to Composition Scheme

Any person providing works contract service could have opted for payment of special composition rate of 4.12% instead of the normal rates. Explanation to Rule 3 of Works Contract (Composition scheme for payment of service tax) Rules 2007 provide the valuation for the purpose of charging service tax on such value. This explanation has been amended to included the following

a. the value of all goods used in or in relation to the execution of the works contract, whether supplied under any other contract for a consideration or otherwise; and

b. the value of all the services that are required to be provided for the execution of the works contract;

c. the charges for obtaining machinery and tools used in the execution of the said works contract

The valuation shall exclude

a. the value added tax or sales tax as the case may be paid on transfer of property in goods involved; and

b. the cost of machinery and tools used in the execution of the said works contract.

However valuation under this notification shall be applicable only in case of contract entered/payments received after 07.07.2009.

(refer Notification 23/2009-ST dated 07.07.2009)

Note: The option of valuation under Rule 2A of the Service Tax (Determination of Value) Rules, 2006 which is equal to notification 2/2003 needs to be examined for future contracts. Works contractor would probably stop going for the composition.

CENVAT reversal in case of write off

Rule 3(5B) of the CENVAT credit Rules, 2004 has been amended to give effect to the provision in case the value of any input, or capital goods before being put to use on which CENVAT Credit has been taken is written off fully or where any provision to write off fully has been made in the books of account, then the Service provider shall pay an amount equivalent to the CENVAT credit taken in respect of the said input or capital goods. Earlier this rule was restricted to manufacturer only.

(refer Notification 16/2009-CE(NT) dated 07.07.2009)

Note: This appears to be unjust as removal is at 2.5% per quarter reduction.

Reversal in case of taxable and non-taxable service

The Rule 6 provides for reversal of the credit in case the service provider is providing both taxable and non-taxable service. One of the options in case of non-maintenance of separate records is reversal of 8% of the non-taxable turnover. This has been reduced to 6% with effect from 07.07.2009

(refer Notification 16/2009-CE(NT) dated 07.07.2009)

(For any queries or clarification mail to vssudhir@gmail.com)