India: Union Budget 2014 – Indirect Tax

Last Updated: 23 July 2014
Article by Karthik Ranganathan

Service Tax

Amendment to the Finance Act, 1994 (the Act) – New inclusions and exclusions from the ambit of service tax Radio taxis

Clause 39 of section 65B (Interpretations) of the Act has been amended (which defines metered cab) to carve out the service rendered by radio taxis (similar to call taxis). The reason being the Government wants to impose service tax on the services rendered by the radio taxis. Since metered cabs are statutorily exempted from service tax under section 66D (which deals with exempted services), the exclusion of radio taxi from the definition of metered cab will lose the exemption under section 66D and thereby making it liable to service tax.

However, the radio taxis can enjoy the same abatement as per Notification No. 26/ 2012 ST which is available to 'Renting of any motor vehicle designed to carry passengers'. The effect is that only 25% of the consideration received by the radio cabs will be liable to service tax provided no cenvat credit is availed on the inputs, input services and capital goods.

Print media

New definition of 'Print Media' has been included in section 65B. Print media means 'Book' and 'Newspaper' as defined in Press and Registration of Books Act, 1867. Now, only selling of space for advertisements in print media will be exempt under section 66D. The sale of space in any other type of medium will hereafter be liable to service tax. Previously, only advertisements broadcast by radio and television was liable service tax.

Amendment to the Mega Exemption Notification – 25/ 2012 ST Withdrawal of exemption

  • Services in relation to clinical research on human participants
  • Services in relation to air conditioned contract carriages like buses

Restriction of exemption

  • Services provided to Government or local authority or governmental authority
  • Services provided by Educational Institutions

New exemptions

  • Financial services received by RBI from global financial institutions in the course of management of foreign exchange reserves like external asset management, custodial services, securities lending services, etc. are now exempt in the hands of RBI which was liable to service tax under reverse charge mechanism under import of services. However, the services rendered by RBI are exempt under section 66D(b) of the Act.

Amendments pertaining to litigation Resident applicants before Advance Ruling

Advance Ruling is a procedure by which there will be absolute certainty for the taxpayers with regard to their tax liability on a proposed transaction. Unfortunately, the applicant before the Authority for Advance Ruling (AAR) could only be a non-resident, a resident who does business in India in tie-up with such non-resident (Joint Ventures) or a public limited company. This did not permit the advantage of having an advance ruling by a private limited company in India for a domestic transaction without a non-resident being involved.

Now under section 96A of the Act, private limited companies as per the Companies Act, 2013 and Indian company as per the Income-tax Act, 1961 (i.e. a company either incorporated in India or a foreign company who's management and control is wholly situated in India) have been notified to be eligible to apply to AAR for tax certainty on proposed transactions.

Pre-deposit

Section 83 of the Act borrows the contents of section 35F of the Central Excise Act, 1944. Section 35F deals with pre-deposit (i.e. deposit of duty demanded or penalty levied pending appeal before the Commissioner (Appeals) or CESTAT). Section 35F has been amended in this Budget by levying a cap of pre-deposit that has to be deposited by the assessee/ taxpayer for getting its appeal admitted before the concerned appellate authority. The proposed cap is 7.5% of the duty demanded/ penalty imposed/ both in case of appeal to Commissioner (Appeals) or CESTAT and 10% in case of second appeal to CESTAT. The upper limit of pre-deposit has been limited to INR 100 million (INR 10 crores).

This cap of pre-deposit will also be applicable in case of service tax appeals against the service tax demand/ penalty as contents of section 35F of the Central Excise Act, 1944 is mutatis mutandis applicable to section 83 of the Act.

Successor liability

In an important development to protect the interest of the revenue against the tax dues, section 87 of the Act (which deals with recovery of any dues to Central Government) has been amended by inserting a proviso to section 87(c) which is similar to the proviso in section 11 of the Central Excise Act, 1944. This proviso empowers the tax authorities to attach and sell the properties transferred by the service tax defaulter to its successor. In a way, it acts as a successor liability where the assets procured by the successor will act as charge against its seller's service tax liabilities.

The above is more so important in case of demergers, slump sale and amalgamations where the assets procured by the resulting company, the transferee and the amalgamated company, as the case may be, from the demerged company, the transferor and amalgamating company will act as a charge against service tax or other dues of the latter entities. The Reps and Warranties clauses in the relevant agreements have to be well ring-fenced to protect the interests of such successors.

Chargeability under service tax Reverse charge mechanism in case of directors of body corporate

Post 2012 under Notification No. 30/ 2012 ST, services provided by a director (other than a managing director) will be liable to service tax under reverse charge mechanism [as per section 68(2)] of the Act. In the sense, the company will be required to discharge the service tax liability of the director on any remuneration paid to him for his services.

Entry 5A of the above said Notification uses the word 'company' and therefore, in case of directors of other body corporates, if any, will be personally liable to discharge the service tax liability on the remuneration received by them. To avoid hardship in the hands of such directors, similar reverse charge mechanism will be applicable to such body corporates as per amended Rule 2(1)(d)(i)(EE) of the Service Tax Rules, 1994 and corresponding changes have been made to the above said Notification.

Reverse charge mechanism has been introduced for services provided by Recovery Agents to banks, financial institutions and NBFC. In the sense, the banks, etc. as the case may be will be required to pay service tax on the services received by them from recovery agents.

Aspects relating to Cenvat Credit and service tax Condition to pay invoice amount discharged under reverse charge mechanism

Proviso to sub-rule (7) of Rule 4 of the Cenvat Credit Rules, 2004 allows the service recipient to take cenvat credit under reverse charge mechanism on or after the day on which the invoice raised by the service provider is paid including the service tax on it.

Now this requirement to pay the invoice amount to the service provider to avail cenvat credit has been omitted. It may be noted that the service recipient in order to claim cenvat credit under reverse charge mechanism is still required to pay the service tax component in the invoice raised to the service tax department. It is only upon paying the service tax component, the recipient will be in a position to claim cenvat credit of it.

The amendment seems to be logical since the consideration to be paid by the service recipient to the service provider is a contractual obligation which may have flexible terms. Connecting the payment of service consideration to avail cenvat credit seems to be onerous on the part of the service recipient if he has already discharged service tax liability to the department under reverse charge mechanism.

Re-credit of cenvat credit in case of export of services

The exporter of service is entitled to claim cenvat credit on the inputs, input services and capital goods even while he is not required to pay any output service tax liability as export of service is not an exempt service. Therefore, cenvat credit on inputs, etc. is available.

For the purpose of claiming credit by such exporter of service, he has to realize his invoice amount in foreign currency from his foreign service recipient. Failing which, the exporter of service is required to reverse the cenvat credit availed by him on inputs, etc.

However, the time limit to realize the export value of service as per Foreign Exchange Management (Export of Goods & Services) Regulations, 2000 is 12 months as per regulation 9. In order to be in line with this Regulation, the service tax law is now amended that the export proceeds could be realized within 12 months until such time no reversal of cenvat credit is required.

Time limit to claim cenvat credit on inputs and input services

As per Rule 4(1) of the Cenvat Credit Rules, 2004, the cenvat credit in respect of inputs may be taken immediately on receipt of the inputs in the factory of the manufacturer or the premises of the service provider. In case of input services, Rule 4(7) states that cenvat credit can be availed on or after the day on which the invoice, etc. are received.

Now a time limit has been fixed to claim credit which should be within six months from the date of receipt of the invoice, etc. New proviso to Rule 4(1) has been introduced to this effect.

Amendment to Point of Taxation Rules, 2011

The point of taxation i.e. the time at which the service tax has to be paid. The Point of Taxation Rules, 2011 prescribes three time periods which will be treated as point of taxation i.e. when the invoice is raised (if not raised within 14 days of provision of service will be deemed to be raised), when any advance is received by the service provider or the date on which the service is completed, whichever is earlier.

In case of liability to pay service tax under reverse charge mechanism, Rule 7 states that the point of taxation shall be six months from the date of invoice.

This extended period of six months gives undue benefit to the service recipients under reverse charge mechanism. In order to limit this benefit, the law is now being amended under Rule 7 of the said Rules that service tax has to be discharged under reverse charge mechanism when the invoice is actually paid by the service recipient or on the first day after three months from the date of invoice.

Central Excise Supreme Court's judgment in Fiat India has been overturned?

The Supreme Court in 2013 held that for the purpose of Assessable Value (AV) in central excise if the manufacturer/ assessee clears the manufactured goods from his factory at a price less than the manufacturing cost, then central excise duty has to be paid on the cost of manufacture which shall be treated as the AV. This was not well received by the manufacturing industry especially during situations of distress sale i.e. loss sales where the sale price is less the cost of manufacture.

As a welcome move to boost the limping manufacturing industry, a proviso has been introduced to Rule 6 of the Central Excise Valuation Rules, 2000 that when the assessee sells goods less than the manufacturing cost and no further consideration flows directly or indirectly from the buyer to the seller/ assessee then the transaction value shall be treated as the AV.

Interestingly, under service tax law, the concept that the cost of provision of service (which is similar to cost of manufacture in CE) shall be treated as the AV if AV is not determinable is found in Rule 3(b) of the Service Tax Valuation Rules, 2006 which states that in case the AV is not determinable then the consideration for service shall not be less than the cost of provision of such taxable service.

Amendments pertaining to litigation Pre-deposit

Same as mentioned in Service Tax analysis.

Resident applicants before Advance Ruling

Same as mentioned in Service Tax analysis.

Customs Amendments pertaining to litigation Pre-deposit

Same as mentioned in Service Tax analysis.

Resident applicants before Advance Ruling

Same as mentioned in Service Tax analysis.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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