The Finance Minister has reiterated during his Budget speech that Goods and Service Tax Act (GST) will be brought into force from April 1, 2016. Though there are couple of constitutional issues such as amendment to the constitution itself since the Centre and State will have to share taxing rights which hitherto fall within the domain of either of them exclusively. A draft GST Bill is yet to be circulated for the industry and experts to understand as Indian GST will be a peculiar one comparing to various other countries and European Union. The central theme of GST is to ensure that any tax paid as far as possible should be available as credit against output tax liability so that cascading effect of taxes can be eliminated/ reduced. Since the Centre will also have rights to collect sales tax which is as of now the exclusive right of the States, the States are wary in giving up this right though to counter balance the States will have right to impose service tax which thus far is the exclusive right of the Center. Many states want certain key products like petroleum and liquor to be out of GST so that states will continue to tax them as these are major revenue yielders for them. Further, the bitter experience by the states in not being promptly paid the compensation on reduction of Central Sales Tax (CST) from 4 % to 2% by the Central Government made them uncooperative with the Center on GST as in the initial years also states are expected to lose revenue by implementing GST. Now that there is change of guard at Center and the promise made by the Fin Min that all CST compensation dues will be settled as early as possible, has made the states to sit across the table to discuss about GST. Though the GST will not be in its ideal form, it is still a welcome legislation as changes could be made on the go. Introduction of Value Added Tax (VAT) was another example where though the model VAT law prescribed by the then Central Government was not fully followed, VAT in some acceptable manner has been implemented by all states (except two).
Interestingly, all stakeholders i.e. the industry, central and state governments and people are supporting the introduction of GST as it is expected that the price of the goods and services will be reduced due to seamless tax credits. However, the devil is in the rate of GST that will be adopted. While for an ideal GST, the rate could be sub 20%, the government does not seem supportive of this and seems to have higher rates at 27% or 28%. Since a flat 27% - 28% will appear on all invoices though the value of the goods would have reduced, it is quite natural for consumers/ taxpayers to assume that it is a very high tax collection forgetting the fact that till now these taxes are hidden in the prices of the goods or services purchased. We have to only wait and see what happens to the Constitutional Amendment Bill which is expected to be introduced in this Budget session which is the genesis of game changer law, GST.
On Service Tax front, in order to gradually rope in the concepts of GST, service tax (ST) rate has been increased from 12.36% to 14% in this Budget and there will be no education cess of 3%. The central excise duty (CED) though has been increased only by few decimal points from 12.36% to 12.50% (with no further education cess) may end up in excess credit situation for manufacturers of goods who procure significant input services in relation to such manufacture. This issue previously arose when the CED was at 16% and the service tax was at 10% or 12% which resulted in excess credit accumulation which was later addressed by equalling CED and ST at 12% (plus cess). Strictly speaking, the ST will go up to 16% once the Swachh Bharat Cess (SB Cess) is introduced which is additional 2% cess on the value of taxable services over and above the 14% ST. SB cess is likely to be imposed on many if not on all services which will make the cost of several services dearer.
On Central Excise front, the rate has been increased from 12.36% to 12.50%. Couple of interesting and supportive amendments for 'Make in India' have been made in the Cenvat Credit Rules, 2004.
On Customs front, apart from other procedural amendments which are similar to service tax and central excise, the key issue of inverted duty structure has been addressed at least as far as 22 key items that are imported by Indian manufacturers.
INDIRECT TAX AMENDMENTS
Change in service tax rate
Keeping in mind GST, the rate of service tax (ST) has been increased from current 12.36% (inclusive of education cess) to 14% on the value of the taxable services. Education cess has been subsumed in this higher rate. This has been the highest rate of ST since its inception (1994).
In addition to ST of 14%, a new cess named as the Swachh Bharat (SB cess) will be imposed on the value of the taxable services on all or any of the taxable services. We have to see whether this cess is a blanket cess which will be applicable on all services or only to select services. If most of the services or all services suffer this cess then the overall ST rate inclusive this cess will be 16%.
The above rates shall come into force from a date to be notified by the Government. Until such time the current ST rates will be applicable.
Amendment to Negative List (Section 66D of the FA Act, 1994)
Admission to amusement and entertainment events
Hitherto, services by way of admission to entertainment events or access to amusement facilities have been treated as exempt services i.e. no service tax is leviable on such services. One of the reasons being that entertainment duty falls in the State List i.e. only the State Governments can impose any kind of tax on them. However, given the recent Supreme Court judgment in Tata Sky Ltd and Madras High Court judgment that imposition of service tax on entertainments provided by Direct to Home (DTH) service providers do not conflict with state list and therefore, they are constitutionally valid has given space for the central government to impose tax on entertainment services as well. Still by applying 'aspects theory' these levies could be held constitutionally valid. However, the specific exemptions provided for admission to amusement parks, theme parks, water parks, etc. have now have been omitted and therefore, will be liable to service tax. Also, entry into entertainment events like music concerts, non-recognized sporting events, award functions, etc. are liable to service tax which were exempt under section 66D(j) of the Finance Act, 1994 (FA 1994). However, if the amount charged for the entertainment events (not amusement events) is less than INR 500 then they shall continue to be exempted from service tax. Further, admission to entertainment events like films, circus, recognized sporting events, dance, theatrical performances, etc will continue to be exempt under the Mega Exemption Notification No. 25/ 2012. This is mainly due to the fact that state governments specifically levy entertainment duty on them.
Service tax on manufacture of alcoholic liquor for human consumption
No service tax is being levied for manufacture of goods as they are liable to excise duty and that they pertain to goods. Under excise duty also no central excise duty is being imposed on manufacture of alcoholic liquor for human consumption as they fall under state list i.e. only state governments can impose state excise duty on manufacture of such liquor. Interestingly, now service tax is being imposed on manufacture (including manufacture by contract manufacturers and job workers) of such liquor where the service element being processes for production or manufacture of alcoholic liquor for human consumption. Necessary amendments are being made in the relevant provisions including the Mega Exemption Notification in this regard. We have to wait and watch this levy will be questioned before court of law to sustain its constitutional validity.
Services by Government or Local Authority
The alrady confusing and convoluted service tax provisions are being further complicated in the negative list. Section 66D is the negative list i.e. the list mentioned therein will not suffer service tax. Clause (a) deals with services provided by Government and Local Authority (GLA). In this clause there is an exception which means that the exception list is taxable as it is an exception to exception which is an inclusion! The last entry in the exception to exception was 'support services' provided by the GLA to business entities which was liable to tax. Now, the words 'support services' have been removed and replaced with 'any services' which in effect means any services provided by GLA to business entities is liable to service tax. To add to this, this 'any services' may have exemptions to it which means that those services will not be liable to services tax.
This is a classical example of why GST Act is required at the earliest to have a rationalized indirect tax laws!
Amendment to Mega Exemption Notification 25/ 2012
Withdrawal of exemptions
Various exemptions on services provided to the GLA, etc have been withdrawn and only selective services like construction, commissioning, erection, etc of historical monument, archaeological site, canal, dam, pipeline, conduit plant, etc have been exempted from service tax. Services of original works to an airport or port alone are being withdrawn. In the sense, any construction, commissioning of airports and ports are liable to service tax when provided to the GLA. Previously, they were exempt.
Services by provided by mutual fund (MF) agent to MF or assets management company (AMC) will be liable to service tax but under 100% reverse charge mechanism i.e. the MT and AMC are required to discharge the service tax liability on the services received.
The above amendments shall come into force from April 1, 2015.
Certain specific services which were hitherto liable to service tax have been exempt from service tax like exhibition of movie by theatre owner to the distributor, entry into museum, zoo, national park, goods transport agency services provided from place of removal of goods manufactured to a lands customs station, etc.
Services moved from Negative List (section 66D) to Mega Exemption Notification
Some of the services which are moved are: exhibition of films, circus, dance, recognized sporting events, concerts, pageants, musical sporting events, etc., not covered by above exemption where the consideration is not more than INR 500.
Since these services have been moved from the parent Act (FA, 1994) to the Notification, any amendment to them need not be made by amending the Act in the Parliament. Instead the Ministry of Finance can amend it unilaterally.
Classification of services
Section 66F of the Act deals with classification of services which is by and large not so relevant under the negative list as majority of services are liable to service tax unlike the positive list where the services has to fall within the definition of taxable services. However, classification is still relevant for negative list, exemption, abatement, reverse charge liability, etc. Subsection (1) of section 66F states that unless otherwise mentioned a main service shall not include input services for providing such services. While this was ordinarily understood, the Government has given an illustration to it so that only the intended services enjoy the exemption, abatement, etc and not the services which aid them to provide such services. The illustration states, while services provided by Reserve Bank of India (RBI) is exempt under section 66D(b), the services of the other banks to the RBI to provide its services are not included in the exemption as they are not RBI. The consideration received by such support banks will be liable to service tax.
Reimbursable expenditure is includible in value of taxable services
The Delhi High Court in the case of Intercontinental Consultants and Technocrats Ltd held Rules 5(2) of the Service Tax (Valuation) Rules, 2006 as invalid and ultra vires the parent Act. Rule 5(1) read with Rule 5(2) of the Valuation Rules stated that any reimbursable expenses incurred by the service provider on behalf of the service recipient while providing taxable services is includible in the value of taxable services. This is the case even if there is no mark-up by the service provider on such expenses incurred. The Delhi HC struck this clause stating that the definition of 'consideration' in section 67 of the Act does not include reimbursable expenses and thus the Rule is ultra vires the statute.
To overcome this, an amendment has been made to the definition of 'consideration' to include reimbursable expenses.
This is a regressive amendment as many service providers in order to give value addition to the service recipients incur the expenses and then later recover them without any profit. Imposing service tax on such expenses will only increase the value of services especially in a case where the rate of service tax has been increased to 16%! The conditions and illustrations (8+4+4) to exclude such expenses from suffering service tax as mentioned on Rule 5(2) of the Valuation Rules is almost impossible to fulfil and therefore, all such expenses invariably will suffer service tax.
Recovery and Assessment
Issue of Show Cause Notice (SCN) dispensed with in certain cases
Section 73 of the FA, 1994 is the recovery provision which begins with issue of SCN to the service tax defaulter under subsection (1). In case of admitted service tax liability, a new subsection (1B) has been inserted to section 73 which states that service tax amount which has been self-assessed and declared but not been paid will be recovered under section 87 without resorting to issue of SCN under section 73(1). Section 87 deals with modes of recovery of service tax. Previously, this way of recovering was found under Rule 6(6A) of the STR, 1994. In order to give statutory authority to collect taxes, now what was under Rule 6(6A) has been brought under subsection (1B) of section 73.
Further, subsection (4A) of section 73 which levies penalty on non payment of service tax even while true and complete details are made available by person liable to pay service tax at the time of audit or investigation is being omitted. This is more onerous to the service tax department to ensure proper collection of service tax once full and true disclosure has been made by such persons.
Amendment to penalty provisions
Section 73 deals with penalty provisions in case of non-payment of service tax without intent to evade service tax. Previously the penalty paid had a maximum ceiling of 50% of the service tax to be paid. This percentage has been reduced to 10%. This means, in all cases of issue of SCN an automatic penalty of 10% of service tax will be imposed. However, if this amount is paid within 30 days of issue of SCN then such penalty will be waived. In case of penalty imposed by way of an order of service tax authority then if such service tax, interest and penalty are paid within 30 days of issue of such order then the penalty is reduced to 25% of penalty imposed.
In case of imposition of penalty for wilful intent to evade service tax then the automatic penalty is 100% which will be imposed under section 78. If such service tax, interest and penalty are paid within 30 days from issue of SCN then penalty is reduced to 15%. Again, if such penalty is imposed by way of an order by service tax authority then if it is paid within 30 days then the penalty is reduced to 25% of the service tax payable.
Section 80 of the Act which deals with waiver of penalty if reasonable cause is shown by the person liable to pay service tax. Now, this section has been omitted. This means that even if there is reasonable cause from not paying service tax on time, he may be required to pay penalty. The only situation by which he can avoid penalty is by paying the said amount in SCN within a period of 30 days. Therefore, now payment of service tax promptly is mandatory to avoid penalties even in cases where there are reasonable excuses from non-payment of service tax within stipulated time.
1. Transport of goods by rail, roads or vessels had differing abatement in the Notification 26/ 2012 with different conditions on the availment of cenvat credit on inputs, input services and capital goods. Now this has been rationalized that regardless of the mode of transport of goods/ passengers in the above three transportation, the abatement is 30% (i.e. service tax is required to be paid only on 30% of the value of such services) provided no cenvat credit is taken on inputs, input services and capital goods.
2. Previously the abatement for airfares was 40% regardless of the class. Now a distinction has been made to this entry in Notification 26/ 2012 that for economy class the abatement continues to be at 40% and for other than economy class (business class), the abatement is 60% i.e. ST is required to be paid on 60% value of services. This will make travel by higher classes costlier.
Amendment to Service Tax Rules (STR)
A new concept of aggregator has been introduced to facilitate easy collection of service tax from a single platform in case of online services provided by such aggregators. Aggregator is being defined in Rule 2(1)(aa) of STR, 1994 to mean a person who owns or manages a web based software application who connects a customer to a service provider who provides services under the brand name of the aggregator. For example, www.cleartrip.com connects various airliners, hotels, etc with potential customers. For the value of services provided by the airliners, etc, the aggregator is required to pay service tax if the aggregator's webpage was used to connect the service provider and the service recipient. But for this model, the airliners were required to pay service tax on their services provided now.
An entry has been made in Notification 30/ 2012 which deals with reverse charge mechanism where the aggregator is required to pay 100% service tax on such services provided by the airliners, etc.
Reverse charge mechanism
Previously manpower supply and security services were under partial reverse charge mechanism where the body corporate receiving such services was required to pay 75% and provider of such services if individual, HUF or partnership firm was required to pay 25%. Now in order to alleviate the difficulty of individuals, HUF and firms, the body corporates are required to pay entire service tax of 100% under reverse charge mechanism.
Cenvat Credit Rules
1. Cenvat credit in case of input services can be availed by the service recipient as an when the document mentioned in Rule 9 of Cenvat Credit Rules, 2004 (CCR) is received by such service recipient. As far as reverse charge mechanism where the recipient of service is required to pay service tax, as per first proviso to Rule 4(7) of CCR he/ she will be entitled only when both the service tax is paid to the department and also the value of the services provided is paid to the service provider. The second condition that the invoice of service provider has to be settled to avail cenvat credit even if service tax is discharged by the service recipient was an unwanted condition as the obligation to settle in invoice is a contractual obligation. Now an amendment has been made removing this condition of settling the invoice to the service provider. Now, cenvat credit can be availed by recipient of service once he pays the service tax on the invoice to the service tax department regardless the invoice amount is paid to the service provider.
2. In July 2014 Budget, the same Fin Min introduced an onerous condition to avail cenvat credit that it should be availed within a period of six months on the inputs or input services by the manufacturer and service providers. Failing which, the cenvat credit would be lost. Availing here means making an entry in the books of account of the availer or to take credit in the next service tax or central excise return to be filed. This was a short period and invited a lot of criticism. Now this period of six months has been enhanced to one year.
Notification 42/ 2012 is being rescinded due to change in Place of Provision of Service Rules, 2012 (PPS Rules). In the previous Budget the location of intermediary was the criterion to determine whether such services are provided within the taxable territory. In cases where the intermediary i.e. commission agent located outside India who facilitate sale of goods exported from India, then due to amendment to PPS Rules, the commission received is not liable to service tax in India as the place of provision of such services is outside taxable territory i.e. location of the commission agent. Notification 42/ 2012 exempted such services from service tax if certain conditions were fulfilled by the exporter as such services where treated as import of services. Now this Notification is being withdrawn keeping in mind the change made to PPS Rules.
Rate of Central Excise Duty (CED)
The CED has been increased from current 12.36% to 12.50%. The education cess has been abolished. The overall CED payable now is 12.50% i.e. the cess is subsumed within this higher rate.
Various notifications have been issued especially under section 5A of the Central Excise Act (CE Act) exempting various goods from CED and imposing differential duties.
Penalty and Recovery provisions
In line with service tax, similar amendments have been made in Central Excise Act also with regard to penalty provisions. Section 11AC which deals with penalty provisions. Mandatory 10% penalty and waiver of such penalty on payment within stipulated time (30 days) as mentioned above in service tax has also been made under Central Excise Act.
This includes both penalty leviable in situations where there is no intention to evade CED and with intention to evade duty.
Certain amendments have been made to section 11A in cases where the extended period of limitation to issue SCN (five years but usually one year time) on non-payment or short payment, etc of duty is found by the CE authorities at the time of audit or investigation has been omitted.
In cases where the non-payment or short payment of duty has been mentioned by the taxpayer (assessee) in his periodic returns then resort to section 11A to recover such duties is not required. Rather the manner of recovery will be prescribed in the Rules. In service tax such dues will be recovered under section 87 of the FA Act, 1994.
Cenvat Credit Rules, 2004 (CCR) – Notification 6/ 2015 - Central Excise (Non Tariff)
The following key amendments have been made to CCR:
- In order to enlarge the scope of availing cenvat credit in situations where job workers are engaged by the principal manufacturer (PM) or output service provider (OSP), if such inputs are directly sent to the premises of the job worker at the direction of the PM or OSP, then the PM or the OSP as the case may be will be entitled to take cenvat credit on such inputs. Rule 4(1) of CCR. Previously, such goods have to first reach the PM or OSP to avail cenvat credit and then would be sent to job worker. Now this amendment encourages and facilitates the logistics of moving inputs to the job workers involved. Similar amendments have also been made to capital goods under Rule 4(2)(a) of CCR.
- As explained under service tax update, the period to claim cenvat credit for inputs and input services has been increased from six months to one year.
- An important amendment to Rule 4(5)(a) of the CCR has been made
in case of sending inputs and capital goods to job worker and the
PM and OSP taking cenvat credit. Amendment has been made to
facilitate such job worker to send to another job worker and so on.
However, on condition that such inputs have to be received by PM
and OSP within a period of 180 days from the date of sending to
first job worker. With regard to capital goods, this period of 180
days has been extended to two years to allow job worker to
manufacture the required goods. However, in case of capital goods
the capital goods cannot be sent to another job worker unlike
Further to facilitate the logistics part the PM and OSP can arrange such inputs and capital goods to be sent directly to the job worker and the period of 180 days and two years will be reckoned from the date of receipt by the job worker.
This is a welcome move especially when the government is encouraging 'Make in India' initiative.
- For the purpose of exempted goods which are relevant for Rule 6 which deals with restriction of availment of cenvat credit on manufacture of exempt goods and/ or exempt services, non excisable goods are also included. In the sense, even in case of manufacture of non excisable goods, cenvat credit cannot be taken as per Rule 6 as these are treated as exempt goods. Non excisable goods are those goods which do not find place in the First Schedule to the Central Excise Tariff Act (CETA) and are now treated as exempt goods. On the other hand, exempt goods are those goods which are exempt from CED through a notification or where the rate of duty against such goods in the CETA is Nil.
- Rule 14 of the CCR deals with a situation when cenvat credit has been wrongly availed and utilized. Only if both availment and utilization are done by the assessee, this Rule can be invoked to recover the wrongly availed cenvat credit along with interest under section 11A and 11AA and section 73 and 75 of CE Act and FA, 1994 respectively. In order to broaden the invocation of this Rule, now it has been substituted with new rule that in cases where only wrong availment has been done but no utilization, only section 11A and 73 will be applicable as the case may be. In cases where utilization has also happened then interest under section 11AA and 75 can be imposed respectively.
- Higher penalty rates are being imposed under Rule 15 of CCR for wrong availment of cenvat credit on inputs, capital goods and input services in line with the amended provisions under CE Act and FA, 1994 in addition to the confiscation of such goods.
Amendments to Central Excise Rules
Amendments have been made with regard to electronic registration and record maintenance in electronic forms vide Notifications 7/ 2015 and 8/ 2015 Central Excise (Non Tariff)
Rate of Customs Duty
The Base Customs Duty (BCD) remains to be at 10%.
Inverted duty structure was a problem for manufacturers who import raw materials since the output central excise duty on manufacture of goods utilizing such imported raw materials was much lower. In order to address this issue, on 22 key items the BCD and Special Additional Duty (SAD) which is imposed under section 3(5) of the Customs Tariff Act to offset sales tax has been either reduced or made Nil rate. This is a welcome move as the accumulated cenvat credit on SAD (as no credit can be taken on BCD) was a cost to such manufacturers making the final product costlier or had such credits accumulated without having a chance to utilize them.
Recovery and assessment
The amendments made to FA Act, 1994 and CE Act have been mutatis mutandis made to Customs laws also with regard to penalty, interest and recovery provisions.
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.