Now all the assesses will be able to file their Service Tax return for the quarter April’2012 to June’ 2012, last due date of which is 25^th November, 2012. However, such facility is available in offline mode only i.e. through Excel Utility. Assesses will not be able to fill their ST-3 data online after logging into ACES website.

Provision of service is the taxable event for service tax although Point of Taxation Rules (POTR) governs the timing of tax. Usually the provider of service is liable to discharge service tax liability unless it is otherwise earmarked for recipient of service. It is comparatively easy to keep a track on service tax liability arises on income but to detect service tax liability under reverse charge basis one needs to give a deep dive in the expenditure statement of a business entity.

Position up to June 30, 2012

Import of any service and limited number of specified services such as insurance auxiliary service, sponsorship service, services pertaining to transportation of goods by road, service of distribution of mutualfundbymutualfund distributor or agent etc. were covered under recipient based service tax, popularly known as service tax paid under reverse charge basis. A close look of the then position revealed that apart from importation of service and Goods Transport Service (GTA) all other services covered under reverse charge basis have limited impact on the routine transactions of the business entities.Moreover,methods of computation of tax were also simple since limited conditions were attached to such computation.

Position from July 1, 2012 on wards

Services that are used by almost all the business entities on a regular basis, such as works contract, security service, car rental service, work force supply service etc are now under the coverage of reverse charge mechanism.

Top of it for some of the services such as Insurance Auxiliary, sponsorship service, services rendered by advocate etc. recipient is liable to pay full service tax and for other services such as car rental, supply of work force, works contract etc. recipient is liable to pay a portion of the tax.

Moreover  partial tax liability is also varies from service to service, e.g. car rental without abatement liability under reverse charge is 40% and with abatement liability is 100%, works contract liability under reverse charge is 50% whereas the same for supply of work force is 75%.

Not only that, one should, need to verify the status of the service provider and the service recipient, in other words, one need to enquirewhether the service provider is a corporate entity or not, whether service recipient is an individual or business entity or corporate entity before apply the rule of reverse tax mechanism to discharge the tax liability.

Manifolds challenges:

• Tracking of payments that are liable to tax under reverse charge basis.

Manual tracking of payments, which will trigger service tax exposure, is not possible for any sizable business operation. Accounting software is required to be upgraded by putting relevant patches that will help business entity to arrest the payments, vulnerable to service tax.

• Obtaining registration and compliance of law.

Business entities, which are purely in manufacturing/trading operation and were never before under the service tax net, may require to take fresh registration under service tax and require to comply the relevant provisions of the law, such as payment of tax, filing of return, facing service tax audit etc. Moreover, for appropriate discharge of service tax liability many factors such as nature of service, whether service vendor is availing abatement or whether service vendor is availing cenvat credit needs to be verified. Any short payment of tax will lead to payment of interest and penalty apart from litigation.

• Payment of tax in cash

Unique feature of service tax, paid under reverse charge mechanism is that the payment has to be made in cash. Business entity cannot touch the accumulated cenvatcredit to discharge the service tax liability. It will definitely have an impact on the cash flow specifically for that entity that does not have any (or less) service tax/excise duty appetite. It will certainly hit bottom line of the pure trading company since trading company does not have any service tax liability to set off the credit.

• No threshold limit

There is no shelter available to escape the service tax liability under reverse charge basis. Even for a payment of a   single rupee, business entity is required to discharge its service tax liability under reverse charge. It will cause immense hardship for small business entities that were enjoying tax shelter under the threshold limit regime.

• Eligibility of cenvat credit

In view of the amended definition of input service, eligibility of cenvat credit on service tax paid under reverse charge basis is required to be assessed case-to-case basis.

• Vendor classification

Applicability of service tax under reverse charge depends on the status of the vendor as well. Most of the cases if the provider of service is a corporate entity, payment of service tax under reverse charge mechanism will not be applicable. Master record of vendors is required to be configured accordingly to avoid compliance lapses.

• Handling of service tax audit.

Last but not the least is handling of service tax audit under the new tax regime.  Business entities are prone to commit error to comply such complex procedures. The department is also knows this and thus they will focus more on this area, which will eventually become breeding grounds for litigations.

Way forward:

• Review  of expenditure statement to identify payments, which will be liable to service tax under reverse charge basis.
• Analyse the impact of such payment on additional cash out flow, cenvat credit and profitability of the company.
• Explore solutions if any to minimise the impact.
• Upgrade accounting software to make it compatible to new changes.
• Closely monitor  Vendor  master file
• Conduct periodic internal review to ensure that the business entity is not in the wrong side of the law.
• Educate in house people who are dealing with payments.

Curtsy:  Ca. Subhasis Banerjee (subhasis@mukeshraj.com)

Service Tax is the most preferred subject for the draftsman and legislators for Budget 2012. The Service Tax legislation has attained the age of eighteen years this year. On the eve of attaining age of eighteen, The Finance Ministry has tried to rationalize the complete Service Tax law. Following are the major amendments proposed by Budget, 2012.

RATE OF SERVICE TAX:

The Service Tax rate has been enhanced form 10 % to 12 %. This amendment shall be applicable from the 1^st Day of April, 2012. The effective rate shall be 12.36% (inclusive of Education Cess at the rate of 2% and Secondary and Higher Education Cess at the rate of 1%). The net government earnings due to increase of service tax would be increased by Rs.18, 660/- Cores.

Consequent to the change of rate of service, following amendments also been proposed:

Works Contract Services: The composition rate for the works contract services has been increased in proportion to the increased in general rate. The composition rate under the works contract scheme is being proposed to increase from 4% to 4.8%.

Services in relation to purchase and sale of foreign currency including money changing: Raising the existing rates proportionately by 20%;

Services of promotion, marketing, organizing or in any manner assisting in organizing lottery: Raising the specified amounts proportionately to Rs 7,000 and 11,000.

Other Proposal to amend the Service Tax rate (Specific Services):

Life insurance service: Where the entire premium is not towards risk cover, the first year’s premium shall be taxed at the rate of three per cent. While subsequent premium shall attract tax at the rate of 1.5 per cent. Availment of full CENVAT Credit is being allowed.

Transport of passengers embarking in India for domestic and international journey by air: The dual rate structure of maximum service tax of INR 150/- and INR 750/- in case of economy class travel is being replaced by an ad valorem rate of twelve per cent, with abatement of sixty per cent. This abatement shall be available subject to the condition that no credit on inputs and capital goods is taken

Effective Date:

The enhanced rate of service tax i.e. 12.36% shall be applicable from the 1^st day of April, 2012.

NEGATIVE LIST OF SERVICES:

The Union Budget proposes that all services will come under the ambit of Service Tax unless specified in the Negative List or which are otherwise exempted by a specific exemption notification. Negative List will comprise the list following services.

1. Services provided to the United Nations or a specified international organization;

2. Health care services by a clinical establishment, an authorized medical practitioner or    Para-medics;

3. Services by a veterinary clinic in relation to health care of animals or birds;

4. Services by an entity registered under section 12AA of the Income tax Act, 1961 by way of charitable activities;

5. Services by a person by way of-

(a) Renting of precincts of a religious place meant for general public; or

(b) Conduct of any religious ceremony;

6. Services provided to any person other than a business entity by -

(a) An individual as an advocate; or

(b) A person represented on and as arbitral tribunals;

7. 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;

8.  Services by way of training or coaching in recreational activities relating to arts, culture or    sports;

9. Services provided-

(a) To an educational institution by way of catering under any centrally assisted mid – day meals scheme sponsored by Government;

(b) to or by an institution in relation to educational services, where the educational services  are exempt from the levy of service tax, by way of  transportation of students or staff;

(c) to or by an institution in relation to educational services, where the educational services are exempt from the levy of service tax, by way of  services in relation to admission to such education;

10. Services provided to a recognized sports body by-

(a) An individual as a player, referee, umpire, coach or manager for participation in a tournament or championship organized by a recognized sports body;

(b) Another recognized sports body;

11. Services by way of sponsorship of tournaments or championships organized,-

(a) By a national sports federation, or its affiliated federations, where the participating teams or individuals represent any district, state or zone;

(b) by Association of Indian Universities, Inter-University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India, Special Olympics Bharat;

(c) By Central Civil Services Cultural and Sports Board;

(d) As part of national games, by Indian Olympic Association; or

(e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme;12. Services provided to  the  Government or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of -

(a) a civil structure or  any other  original works meant predominantly for a nonindustrial or non-commercial use;

(b) a historical monument, archaeological site or remains of  national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958);

(c) a structure meant predominantly for use  as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment;

(d) canal, dam or other irrigation works;

(e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii) sewerage  treatment or disposal; or

(f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Finance Act;

13.       Services provided by way of erection, construction, maintenance, repair, alteration,  renovation or restoration of,-

(a) Road, bridge, tunnel, or terminal for road transportation for use by general public;

(b) Building owned by an entity registered under section 12 AA of the Income tax Act, and meant predominantly for religious use by general public;

(c) pollution control or effluent treatment plant, except located as a part of a factory;or

(d) electric crematorium;

14.       Services by way of erection or construction of original works pertaining to,-

(a) airport, port or railways;

(b) single residential unit otherwise as a part of a residential complex;

(c) low- cost houses up to a carpet area of 60 square meters per house in a housing project approved by competent authority empowered under the ‘Scheme of Affordable Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India;

(d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or

(e) mechanized food grain handling system, machinery or equipment for units  processing  agricultural produce as food stuff excluding alcoholic beverages;

15.       Temporary transfer or permitting the use or enjoyment of a copyright covered under clause (a) or (b) of sub-section (1) of section 13 of the Indian Copyright Act, 1957, relating to original literary, dramatic, musical, artistic works or cinematograph films;

16.       Services by a performing artist in folk or classical art forms of (i) music, or (ii) dance, or (iii) theatre, excluding services provided by such artist as a brand ambassador;

17.       Services by way of collecting or providing news by an independent journalist, Press Trust of India or United News of India;

18.       Services by way of renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent;

19.       Services provided in relation to serving of food or beverages by a restaurant, eating joint or a  mess, other than those having the facility of air-conditioning or central air heating in any part of the establishment, at any time during the year, and which has a license to serve alcoholic beverages;

20.       Services by way of transportation by rail or a vessel  from one port  in India to another  of the following goods -

(a) petroleum and petroleum products falling under Chapter heading 2710 and  2711 of the First Schedule to the Central Excise Tariff Act, 1985

(b) relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap;

(c) defense  or military equipment’s;

(d) postal mail, mail bags or household effects;

(e) newspaper or magazines registered with Registrar of Newspapers;

(f) railway equipment’s or materials;

(g) agricultural produce;

(h) foodstuff including flours, tea, coffee, jiggery, sugar, milk products, salt and

edible oil, excluding alcoholic beverages; or

(i) chemical fertilizer and oilcakes;

21.       Services provided by a goods transport agency by way of transportation of -

(a) fruits, vegetables, eggs, milk, food grains or pulses in a goods carriage;

(b) goods where gross amount charged on a consignment transported in a single goods carriage does not exceed one thousand five hundred rupees; or

(c) goods, where gross amount charged for transportation of all such goods for a single consignee in the goods carriage does not exceed rupees seven hundred fifty;

22.       Services by way of giving on hire -

(a) to a state transport undertaking, a motor vehicle meant to carry more than twelve passengers; or

(b) to a goods transport agency, a means of transportation of goods;

23.       Transport of passengers, with or without accompanied belongings, by -

(a) air, embarking or terminating in an airport located in the state of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Baghdogra located in West Bengal; or

(b) a contract carriage for the transportation of passengers, excluding tourism, conducted tour, charter or hire;24. Services by way of motor vehicle parking to general public excluding leasing of space to an entity for providing such parking facility;

25.       Services provided to the Government or a local authority by way of -

(a) repair of a ship, boat or vessel;

(b) effluents and sewerage treatment;

(c) waste collection or disposal;

(d) storage, treatment or testing of water for drinking purposes; or

(e) transport of water by pipeline or conduit for drinking purposes;

26.       Services of general insurance business provided under following schemes -

(a) Hut Insurance Scheme;

(b) Cattle Insurance under Swarnajaynti Gram Swarozgar Yojna (earlier known as  Integrated Rural Development  Programme);

(c) Scheme for Insurance of Tribals;

(d) Janata Personal Accident Policy and Gramin Accident Policy;

(e) Group Personal Accident Policy for Self-Employed Women;

(f) Agricultural Pumpset and Failed Well Insurance;

(g) premia collected on export credit insurance;

(h) Weather Based Crop Insurance Scheme or the Modified National Agricultural  Insurance Scheme, approved by the Government of India and implemented by the Ministry of Agriculture;

(i) Jan Arogya Bima Policy;

(j) National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana);

(k) Pilot Scheme on Seed Crop Insurance;

(l) Central Sector Scheme on Cattle Insurance;

(m) Universal Health Insurance Scheme;

(n) Rashtriya Swasthya Bima Yojana; or

(o) Coconut Palm Insurance Scheme; 27. Services provided by an incubatee up to a total business turnover of fifty lakh rupees in a financial year subject to the following conditions, namely:-

(a)        the total business turnover had not exceeded fifty lakh rupees during the preceding financial year; and

(b)        a period of three years has not lapsed  from the date of entering  into an agreement as an incubatee;

28.       Service by an unincorporated body or an entity registered as a society to own members by way of reimbursement of charges or share of contribution -

(a) as a trade union;

(b) for the provision of exempt services by the entity to third persons; or

(c) up to an amount of five thousand rupees per month per member for sourcing of goods or services from a third person for the common use of its members in a housing society or a residential complex;

29.       Services by the following persons in respective capacities -

(a) a sub-broker or an authorized person to a stock broker;

(b) an authorized person to a member of a commodity exchange;

(c) a mutual fund agent or distributor to mutual fund or asset management company

for distribution or marketing of mutual fund;

(d) a selling or marketing agent of lottery tickets to a distributer or a selling agent;

(e) a selling agent or a distributer of SIM cards or recharge coupon vouchers; or

(f) a business facilitator or a business correspondent to a banking company or an insurance company in a rural area;

30.       Carrying out an intermediate production process as job work in relation to -

(a) agriculture, printing or textile processing;

(b) cut and polished diamonds and gemstones; or plain and studded jewellery of gold and other precious metals, falling under Chapter 71 of the Central Excise Tariff Act ,1985 (5 of 1986);

(c) any goods on which appropriate duty is payable by the principal manufacturer; or(d) processes of  electroplating, zinc plating, anodizing, heat treatment, powder  coating, painting including spray painting or auto black, during the course of manufacture of parts of cycles or sewing machines up to an aggregate value of taxable service of the specified processes of  one hundred and fifty lakh rupees in a financial year subject to the condition that such  aggregate value had not exceeded  one hundred and fifty lakh rupees during the preceding financial year;

31.       Services by an organizer to any person in respect of a business exhibition held

outside India;

32.       Services by way of making telephone calls from -

(a) departmentally run public telephones;

(b) guaranteed public telephones operating only for local calls; or

(c) free telephone at airport and hospitals where no bills are being issued;

33.       Services by way of slaughtering of bovine animals;

34.       Services received from a service provider located in a non- taxable territory by -

(a) the  Government,  a  local authority or  an  individual in  relation to any purpose other than industry, business or commerce; or

(b) an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for the purposes of providing charitable activities.

EXPORT of SERVICE RULES:

Provision of service to be qualified as export if following requirements have to be fulfilled:

The Service Provider is located in Taxable Territory.

Service Recipient is located outside India

Service provided is a service other than in the negative list

The Place of provision of the service is outside India.

The payment is received in convertible foreign exchange.

CENVAT CREDIT RULES, 2004:

Removal of Capital Goods after being used:

A manufacturer or service provider need to pay an amount equal to the CENVAT Credit taken on capital good reduced by the percentage  points calculated  by straight line method  for each quarter of a year or part thereof from the date of taking the CENVAT Credit

Capital Goods other than computers and commuters peripherals: 2.5% for each quarter;

Computers and Computer Peripherals: First Year: 10% Second Year: 8% Third Year: 5% and Fourth and Fifth Year: 1% (on quarterly basis).

Refund of CENVAT Credit:

Refund provision is being rationalized further. The refund shall be based on the proportion of extort turnover of goods and services and total turnover.  The major change is the definition of the Export turnover.

Export Turnover means: Payment received during the relevant period for export services + Export services whose provision has been completed for which payment has been received in advance in any period prior to the relevant period – Advance received for export services for which the provision of service has not been completed during the relevant period.

Transfer of CENVAT Credit: The unutilized CENVAT Credit of Special Additional Duty can be transferred from one registered unit to other registered unit of the manufacturer or service provider. 

Renting of Immovable Property (Penalty Waived): In view of Judicial precedent Retailers Association of India Vs. Union of India, it is proposed that penalty may be waived for tax payers who pay the eservice due on the renting of immovable property services within six months from the date of Bill come into force. (Section 80A).

Point of Taxation in case of Small Service Provider: Individuals and Partnership Firms who are having service receipts less than fifty lacs may pay service tax liability on receipt basis. Necessary amendments have been introduced in the Service Tax Rules.

OTHER IMPORTANT PROPOSED AMENDMENTS:

The statutory limit of days to raise invoice has been enhanced from 14 days to 30 days.

Special audit provision on the similar lines with Central Excise, Commission of Service Tax can now appoint chartered accountant or Cost accountant to provide audit report of the service provider.

New Service Tax Return i.e. EST – 1 shall be introduced for service provider and manufacturer.

F. No. 137/120/2011 – Service Tax

Government of India Ministry of Finance Department of Revenue (Central Board of Excise & Customs)

New Delhi dated the 13th December 2011

ORDER NO. 2 /2011 – Service Tax

In exercise of the powers conferred by Rule 4(1A) of the Service Tax Rules 1994, Central Board of Excise and Customs hereby specifies the following documents that are required to be submitted by the person who has made an application for registration under Rule 4(1) of the Rules ibid:

(a) Copy of Permanent Account Number (PAN)

(b) Proof of Residence

(c) Constitution of the Applicant.

(d) Power of Attorney in respect of authorised person (s).

2. It is further stated that the above documents must be submitted to the concerned authority within a period of 15 days from the date of filing of the application for registration. Failure to do so would lead to rejection of the registration application.

3. It is also clarified that the time limit of seven days from date of receipt of application or intimation under Rule 4(5A), within which the registration is to be granted by the Superintendent of Central Excise or Service Tax, as referred to in Rule 4(5) shall be reckoned from the date the application for registration is complete in all respects.

(Deepankar Aron) Director (Service Tax)

For more detail visit our website: http://www.mukeshraj.com/service-tax.html

One major change made in service tax effective from 01-04-2011 is the introduction of Point of Taxation Rules, 2011 to (a) introduce the provisions relating to payment of service tax on accrual basis instead of receipt basis and (b) to specify date relevant for determining rate of service tax.

So far the provision was that service tax was payable on receipt basis i.e. on receipt of payment of the invoice or bill from the customer or receipt of advance, whichever is earlier. Now w.e.f.  01-04-2011, service tax will be payable on billing basis and not on ‘receipt of payment’ basis i.e. on accrual basis and not cash basis (option has been granted to assessee to continue payment on receipt basis upto 30-06-2011, if they so desire).

1. The basic exemption limit in the case of individuals increased from Rs.1.60 lacs to Rs.1.80 lacs. However, there is no increase in basic exemption limit in the case of Resident Women who is below 60 years at any time during the previous year.
2. The qualifying age limit for senior citizens has been lowered from 65 years to 60 years and  increased the current exemption limit under two categories
3. Category -1 – Age of Individual – 60 years or more but less than 80 years at any time during the previous year. The basic exemption limit is increased from Rs.2.40 lacs to Rs.2.50 lacs
4. Category – 2 –   Age of Individual beyond 80 years or more at any time during the previous year. The basic exemption limit is Rs.5.00 lacs.
5. In the case of domestic companies the surcharge has been reduced from Rs.7.5% to 5%
6. In the companies other than domestic companies the surcharge has been reduced from 2.5% to 2%
7. The definition of charitable purpose u/s 2 (15) includes “the advancement of any other object of general public utility”. The monetary limit in respect of such activities has been enhanced from Rs.10.00 lacs Rs.25.00 lacs.
8. The amount paid by an assessee as an employer by way of contribution towards pension scheme, as referred to in sec 80CCD(2) on account of an employee to the extent it doesn’t exceed 10% of the salary of employee in the previous year, shall be allowed as a deduction u/s 36 in computing the income under the head profit and gains of business or profession.
9. The Indian company which receives foreign dividend from foreign subsidiary company such dividend is taxable at the 15% as against 30% plus applicable surcharge.
10. The rate of MAT is increased to 18.5% from the existing rate of 18% of such book profit.
11. Minimum Alternative Tax has been introduced for Limited Liability Partnership (LLP) in line with MAT on companies with effect from the Assessment Year 2012 – 2013.
12. The Government  exempts assessees having no other income other than salary from furnishing the return of income by notification. The proposed amendment shall be effective from 1^st June, 2011.
13. It is proposed to omit the requirement of quoting of Documentary Identification Number in notices / order / correspondences issued by Income tax department.
14. The SEZ developers are required to pay dividend distribution tax on dividends declared / distributed on or after 1^st June, 2011.
15. The deduction u/s 80CCF to investment in notified long term infrastructure bonds extended for the A.Y. 2012-13 also.
16. Liaison offices of a company will be required to file Annual Information in the prescribed form with in the 60 days from the end of the financial year.
17. The tax holiday for power sector has been extended for further period of one year i.e. upto 31.03.2012.

SERVICE TAX

1. The following two new services have been proposed
   1. Services by air conditioned restaurants having licence to serve liquor; and
   2. short term accommodation hotels / inns / clubs / guest houses etc.

1. The monetary limit for adjustment of excess service tax paid is increased from Rs. 1.00 lacs to Rs.2.00 lacs.
2. The penalty for delayed payment of service tax u/s 76 has been reduced from 2% to 1% per month or Rs.100 per day whichever is higher.
3. The maximum penalty reduced to 50% of the tax.
4. The rate of interest is reduced by 3% for assesses with turnover of upto 60 lacs.
5. The maximum penalty for delay in filing of return increased from Rs.2,000 to Rs.20,000

Courtesy: CA. Naveen ND Gupta

Circular No. 128/10/2010-ST, dated 24-8-2010

It has been brought to the notice of the Board that the following confusions/disputes prevail with respect to long term works contracts which were entered into prior to 01.06.2007 (when the taxable service, namely, Works contract came into effect) and were continued beyond that date:

(i)             While prior to the said date services like Construction; Erection, commissioning or installation; Repair services were classifiable under respective taxable services even if they were in the nature of works contract, whether the classification of these activities would undergo a change?

(ii)            Whether in such cases of continuing contracts, the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007 under Notification No. 32/2007-ST dated 22/05/2007 would be applicable?

2.         The matter has been examined.  As regards the classification, with effect from 01.06.2007 when the new service ‘Works Contract’ service was made effective, classification of aforesaid services would undergo a change in case of long term contracts even though part of the service was classified under the respective taxable service prior to 01.06.2007.   This is because ‘works contract’ describes the nature of the activity more specifically and, therefore, as per the provisions of section 65A of the Finance Act, 1994, it would be the appropriate classification for the part of the service provided after that date.

3.         As regards applicability of composition scheme, the material fact would be whether such a contract satisfies rule 3 (3) of the Works Contract (Composition Scheme for payment of Service Tax) Rules, 2007.  This provision casts an obligation for exercising an option to choose the scheme prior to payment of service tax in respect of a particular works contract.  Once such an option is made, it is applicable for the entire contract and cannot be altered.   Therefore, in case a contract where the provision of service commenced prior to 01.06.2007 and any payment of service tax was made under the respective taxable service before 01.06.2007, the said condition under rule 3(3) was not satisfied and thus no portion of that contract would be eligible for composition scheme.   On the other hand, even if the provision of service commenced before 01.06.2007 but no payment of service tax was made till the taxpayer opted for the composition scheme after its coming into effect from 01.06.2007, such contracts would be eligible for opting of the composition scheme.

4.         The Board’s previous Circular No. 98/1/2008-ST dated 04.01.2008 and the ratio of judgement of the High Court of Andhra Pradesh in the matter of M/s. Nagarjuna Construction Company Limited vs. Government of India (Writ Petition No. 6558/2008, dated 7-6-2010) are in line with the above interpretation.

5.         Trade Notice/Public Notice may be issued accordingly.

The Hon’ble Delhi High Court in the aforesaid Writ Petition filed by Home Solutions Retail Ltd. has granted a stay from recovery of Service tax under the newly amended taxing entry of “Renting of Immovable Property service”, which amendment was made retrospective w.e.f. 01.06.2007 by the Finance Act, 2010.

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Indirect Taxes

Custom & Excise.

• The standard rate on all non-petroleum products enhanced from 8 per cent to 10 per cent ad valorem.

• The specific rates of duty applicable to portland cement and cement clinker also adjusted upwards proportionately. Similarly, the ad valorem component of excise duty on large cars, multi-utility vehicles and sports-utility vehicles increased by 2 percentage points to 22 per cent.

• Restore the basic duty of 5 per cent on crude petroleum; 7.5 per cent on diesel and petrol and 10 per cent on other refined products. Central Excise duty on petrol and diesel enhanced by Re.1 per litre each.

• Some structural changes in the excise duty on cigarettes, cigars and cigarillos to be made coupled with some increase in rates. Excise duty on all non-smoking tobacco such as scented tobacco, snuff, chewing tobacco etc to be enhanced. Compounded levy scheme for chewing tobacco and branded unmanufactured tobacco based on the capacity of pouch packing machines to be introduced.

Agriculture & Related Sectors

• Provide project import status with a concessional import duty of 5 per cent for the setting up of mechanised handling systems and pallet racking systems in ‘mandis’ or warehouses for food grains and sugar as well as full exemption from service tax for the installation and commissioning of such equipment.

• Provide project import status at a concessional customs duty of 5 per cent with full exemption from service tax to the initial setting up and expansion of Cold storage, cold room including farm pre-coolers for preservation or storage of agriculture and related sectors produce ; and Processing units for such produce.

• Provide full exemption from customs duty to refrigeration units required for the manufacture of refrigerated vans or trucks.

• Provide concessional customs duty of 5 per cent to specified agricultural machinery not manufactured in India;

• Provide central excise exemption to specified equipment for preservation, storage and processing of agriculture and related sectors and exemption from service tax to the storage and warehousing of their produce; and

• Provide full exemption from excise duty to trailers and semi-trailers used in agriculture.

• Concessional import duty to specified machinery for use in the plantation sector to be, extended up to March 31, 2011 along with a CVD exemption.

• To exempt the testing and certification of agricultural seeds from service tax.

• The transportation by road of cereals, and pulses to be exempted from service tax. Transportation by rail to remain exempt.

• To ease the cash flow position for small-scale manufacturers, they would be permitted to take full credit of Central Excise duty paid on capital goods in a single installment in the year of their receipt. Secondly, they would be permitted to pay Central Excise duty on a quarterly, rather than monthly, basis.

Environment

• To build the corpus of the National Clean Energy Fund, clean energy cess on coal produced in India at a nominal rate of Rs.50 per tonne to be levied. This cess will also apply on imported coal.

• Provide a concessional customs duty of 5 per cent to machinery, instruments, equipment and appliances etc. required for the initial setting up of photovoltaic and solar thermal power generating units and also exempt them from Central Excise duty. Ground source heat pumps used to tap geo-thermal energy to be exempted from basic customs duty and special additional duty.

• Exempt a few more specified inputs required for the manufacture of rotor blades for wind energy generators from Central Excise duty.

• Central Excise duty on LED lights reduced from 8 per cent to 4 per cent at par with Compact Fluorescent Lamps.

• To remedy the difficulty faced by manufacturers of electric cars and vehicles in neutralising the duty paid on their inputs and components, a nominal duty of 4 per cent on such vehicles imposed. Some critical parts or sub-assemblies of such vehicles exempted from basic customs duty and special additional duty subject to actual user condition. These parts would also enjoy a concessional CVD of 4 %.

• A concessional excise duty of 4 per cent provided to “soleckshaw”, a product developed by CSIR to replace manually-operated rickshaws. Its key parts and components to be exempted from customs duty.

• Import of compostable polymer exempted from basic customs duty.

Infrastructure

• Project import status to ‘Monorail projects for urban transport’ at a concessional basic duty of 5 per cent granted.

• To allow resale of specified machinery for road construction projects on payment of import duty at depreciated value.

• To encourage the domestic manufacture of mobile phones accessories, exemptions from basic, CVD and special additional duties are now being extended to parts of battery chargers and hands-free headphones. The validity of the exemption from special additional duty is being extended till March 31, 2011.

Medical Sector

• Uniform, concessional basic duty of 5 per cent, CVD of 4 per cent with full exemption from special additional duty prescribed on all medical equipments. A concessional basic duty of 5 per cent is being prescribed on parts and accessories for the manufacture of such equipment while they would be exempt from CVD and special additional duty.

• Full exemption currently available to medical equipment and devices such as assistive devices, rehabilitation aids etc. retained. The concession available to Government hospitals or hospitals set up under a statute also retained.

• Specified inputs for the manufacture of orthopaedic implants exempted from import duty.

Infotainment

• To address the difficulties experienced by film industry in importing digital masters of films for duplication or distribution loaded on electronic medium vis-à-vis those imported on cinematographic film, owing to a differential customs duty structure, customs duty to be charged only on the value of the carrier medium. The same dispensation would apply to music and gaming software imported for duplication. In all such cases the value representing the transfer of intellectual property rights would be subjected to service tax.

• Provide project import status at a concessional customs duty of 5 per cent with full exemption from special additional duty to the initial setting up “Digital Head End” equipment by multi-service operators.

Precious Metals

• Rates on precious metals indexed as follows:

: On gold and platinum from Rs.200 per 10 grams to Rs.300 per 10 grams

: On silver from Rs.1,000 per kg to Rs.1,500 per kg.

• Basic customs on Rhodium – a precious metal used for polishing jewellery reduced to 2 per cent.

• Basic customs duty on gold ore and concentrates reduced from 2 per cent ad valorem to a specific duty of Rs.140 per 10 grams of gold content with full exemption from special additional duty. Further, the excise duty on refined gold made from such ore or concentrate reduced from 8 per cent to a specific duty of Rs.280 per 10 grams.

Other Proposals

• Full exemption from import duty available to specified inputs or raw materials required for the manufacture of sports goods expanded to cover a few more items.

• Basic customs duty on one of key components in production of micro-wave ovens, namely magnetrons, reduced from 10 per cent to 5 per cent.

• Value limit of Rs. 1 lakh per annum on duty-free import of commercial samples as personal baggage enhanced to Rs. 3 lakh per annum.

• Complete exemption from special additional duty provided to goods imported in a pre-packaged form for retail sale. This would also cover mobile phones, watches and ready-made garments even when they are not imported in pre-packaged form. The refund-based exemption is also being retained for cases not covered by the new dispensation.

• Toy balloons fully exempted from Central Excise duty.

• Reduction in basic customs duty on long pepper from 70 per cent to 30 per cent;

• Reduction in basic customs duty on asafoetida from 30 per cent to 20 per cent;

• Reduction in central excise duty on replaceable kits for household type water filters other than those based on RO technology to 4 per cent;

• Reduction in central excise duty on corrugated boxes and cartons from 8 per cent to 4 per cent;

• Reduction in central excise duty on latex rubber thread from 8 per cent to 4 percent; and

• Reduction in excise duty on goods covered under the Medicinal and Toilet Preparations Act from 16 per cent to 10 per cent.

• Proposals relating to customs and central excise are estimated to result in a net revenue gain of Rs. 43,500 crore for the year.

Service Tax

• Rate of tax on services retained at 10 per cent to pave the way forward for GST.

• Certain services, hitherto untaxed, to be brought within the purview of the servicetax levy. These to be notified separately.

• Process of refund of accumulated credit to exporters of services, especially in the area of Information Technology and Business Process Outsourcing, made easy by making necessary changes in the definition of export of services and procedures.

• Accredited news agencies which provide news feed online that meet certain criteria, exempted from service tax.

• Proposals relating to service tax are estimated to result in a net revenue gain of Rs 3,000 crore for the year.

• Proposals on direct taxes estimated to result in a revenue loss of Rs. 26,000 crore for the year.

• Proposals relating to Indirect Taxes estimated to result in a net revenue gain of Rs.46,500 crore for the year. Taking into account the concessions being given in the tax proposals and measures taken to mobilise additional resources, the net revenue gain is estimated to be Rs. 20,500 crore for the year.



Circular No. 120/01/2010-ST

F.No.354/268/2009-TRU

Government of India

Ministry of Finance

Department of Revenue

(Tax Research Unit)

*****

New Delhi dated the 19th January, 2010.

To

All Chief Commissioners of Central Excise,

All Chief Commissioners of Customs,

All Chief Commissioners of Customs &Central Excise,

Director General of Service Tax,

All Commissioners of Service Tax,

Commissioner (Service Tax), CBEC.

Madam/Sir,

Subject:  Problems faced by exporters in availing refund of excess credit – regarding

CENVAT Credit Rules, 2004 permit taking of credit of inputs and input services which are used for providing output services or output goods.   In order to zero-rate the exports, Rule 5 of CENVAT Credit Rules, 2004 provides that such accumulated credit can be refunded to the exporter subject to stipulated conditions. Notification No. 5/2006-CE (NT) dated 14.03.2006 provides the conditions, safeguards and limitations for obtaining refund of such credit.

2.         It has been represented by the exporters of services (mainly the call centres or the BPOs) that they are facing difficulties in getting refund under the said notification.  In order to ascertain the causes for such delay a number of meetings were held with the refund sanctioning authorities.  During these meetings the officers pointed out the following legal/procedural impediments partly responsible for such delays:

(a)     The major reason causing delay in granting refunds as well as rejecting the claims is that as per the wordings of the notification, refund is permitted of duties/taxes paid only on such inputs/input services which are either used in the manufacture of export goods or used in providing the output services exported.  As against this, the phrases used in the CENVAT Credit Rules permit credit of services used “whether directly or indirectly, in or in relation to the manufacture of final product” or “for providing output service”.   The field formations tend to take the view that for eligibility of refund, the nexus between inputs or input services and the final goods/services has to be closer and more direct than that is required for taking credit.  Many refund claims are being rejected on this ground.

(b)     Even if a nexus is considered acceptable, the officers processing the refund claims find it difficult to co-relate goods or services covered under a particular invoice with a specific consignment of export goods or specific instance of export of service.

(c)     As per the notification, the claims are to be filed quarterly.  For large exporters, the procurement of inputs/input services in a quarter is substantial resulting in each refund claim being accompanied with hundreds of invoices.  Verification of these documents with corroborative documents showing exports (such as export invoices, bank certificates, shipping bills) consumes a long time;

(d)     Though the notification prescribes that refund claims should be filed quarterly in a financial year, it is not clear whether the refund is eligible only of that credit which is accumulated during the said quarter or the accumulated credit of the past period can also be refunded; and

(e)     In certain cases, the invoices accompanying the refund claim are incomplete in as much as either the description of service or its classification is not mentioned.  In some cases, even the name of the receiver of the inputs/input services is also not mentioned.

3.         The matter has been examined.  At the outset it is necessary to understand that the entire purpose of Notification No. 5/2006-CX (NT) is to refund the accumulated input credit to exporters and zero-rate the exports.  Accumulated credit and delayed sanction of refund causes cash flow problems for the exporters.   Therefore, the sanctioning authorities are directed to dispose of the refund claims expeditiously based on the following clarifications to the issues raised in paragraph 2 above.

3.1       Use of different phrases in rules and notification [para 2(a)]:

3.1.1   The primary objection indicated by the field formations is that the language of Notification No. 5/2006-CX (NT) permits refund only for such services that are used in providing output services.  In other words, the view being taken is that to be eligible for refund, input services should be directly used in the output service exported.   As regards the extent of nexus between the inputs/input services and the export goods/services, it must be borne in mind that the purpose is to refund the credit that has already been taken. There cannot be different yardsticks for establishing the nexus for taking of credit and for refund of credit.  Even if different phrases are used under different rules of CENVAT Credit Rules, they have to be construed in a harmonious manner.  To elaborate, the definition of input services for manufacturer of goods, as given in Rule 2 (l) (ii) of CENVAT Credit Rules, 2004, includes within its ambit all services used “in or in relation to the manufacture of final products” and includes services used “directly or indirectly”. Similarly Rule 2 (l) (i) of CENVAT Credit Rules also gives wide scope to the input services for provider of output services by including in its ambit services “used….for providing an output service”.   Similar is the case for inputs.

3.1.2   Therefore, the phrase, “used in” mentioned in Notification No. 5/2006-CX (NT) to show the nexus also needs to be interpreted in a harmonious manner.   The following test can be used to see whether sufficient nexus exists.  In case the absence of such input/input service adversely impacts the quality and efficiency of the provision of service exported, it should be considered as eligible input or input service.   In the case of BPOs/call centres, the services directly relatable to their export business are renting of premises; right to use software; maintenance and repair of equipment; telecommunication facilities; etc.   Further, in the instant example, services like outdoor catering or rent-a-cab for pick-up and dropping of its employees to office would also be eligible for credit on account of the fact that these offices run on 24 x 7 basis and transportation and provision of food to the employees are necessary pre-requisites which the employer has to provide to its employees to ensure that output service is provided efficiently. Similarly, since BPOs/call centres require a large manpower, service tax paid on manpower recruitment agency would also be eligible both for taking the credit and the refund thereof.  On the other hand, activities like event management, such as company-sponsored dinners/picnics/tours, flower arrangements, mandap keepers, hydrant sprinkler systems (that is, services which can be called as recreational or used for beautification of premises), rest houses etc. prima facie would not appear to impact the efficiency in providing the output services, unless adequate justification is shown regarding their need.

3.2       One-to-one co-relation between inputs and outputs and scrutiny of voluminous record [para 2(b) & (c) above]:

3.2.1   Similar problem of co-relation and scrutiny of large number of documents was being faced in another scheme [Notification No. 41/2007-ST dated 06.10.2007] which grants refund of service tax paid on services used by an exporter after the goods have been removed from the factory.  In Budget 2009, the scheme was simplified by making a provision of self-certification [Notification No. 17/2009-ST] whereunder an exporter or his Chartered Accountant is required to certify the invoices about the co-relation and the nexus between the inputs/input services and the exports.  The exporters are also advised to provide a duly certified list of invoices.  The departmental officers are only required to make a basic scrutiny of the documents and, if found in order, sanction the refund within one month.  The reports from the field show that this has improved the process of grant of refund considerably.  It has, therefore, been decided that similar scheme should be followed for refund of CENVAT credit under notification No. 5/2006-CE (NT).  The procedure prescribed herein should be followed in all cases including the pending claims with immediate effect.

3.2.2   Procedure: The exporter should, alongwith the refund claim, file a declaration containing the following details:

(Rs. in lakh)

The declaration should be certified by a person authorized by the Board of Directors (in the case of a limited company) or the proprietor/partner (in case of firms/partnerships) if the amount of refund claimed is less than Rs.5 lakh in a quarter.  In case the refund claim is in excess of Rs.5 lakh, the declaration should also be certified by the Chartered Accountant who audits the annual accounts of the exporter for the purposes of Companies Act, 1956 (1 of 1956) or the Income Tax Act, 1961 (43 of 1961), as the case may be.

The Assistant or Deputy Commissioner may, after verification of the fact that the input credit has been correctly claimed, sanction the refund on the basis of the declaration.  In case there is a doubt about the correctness of the claim of CENVAT credit on any service, the undisputed amount may be refunded and the balance claim may be decided after following the dispute settlement process.

3.3        Quarterly refund claims [para 2(d) above]:

As regards the quarterly filing of refund claims and its applicability, since no bar is provided in the notification, there should not be any objection in allowing refund of credit of the past period in subsequent quarters.  It is possible that during certain quarters, there may not be any exports and therefore the exporter does not file any claim.  However, he receives inputs/input services during this period.  To illustrate, an exporter may avail of Rs.1 crore as input credit in the April – June quarter.  However, no exports may be made in this quarter, so no refund is claimed.  The input credit is thus carried over to the July-September quarter, when exports of Rs.50 lakh and domestic clearances of Rs.25 lakh are made.  The exporter should be permitted a refund of Rs.66 lakh (as his export turnover is 66% of the total turnover in the quarter) from the Cenvat credit of Rs.1 crore availed in April-June quarter.  The illustration prescribed under para 5 of the Appendix to the notification should be viewed in this light.  However, in case of service providers exporting 100% of their services, such disputes should not arise and refund of CENVAT credit, irrespective of when he has taken the credit, should be granted if otherwise in order.    Such exporters may be asked to file a declaration to the effect that they are exporting 100% of their services, and, only if it is noticed subsequently that the exporter had provided services domestically, the proportional refund to such extent can be demanded from him.

3.4       Incomplete invoices [para 2(e) above]:

In case of incomplete invoices, the department should take a liberal view in view of various judicial pronouncements by Courts.  It had earlier been prescribed in circular No.106/09/2008-ST dated 11.12.2008 that the invoices/challans/bills should be complete in all respect.  This circular was issued with reference to notification No.41/2007 dated 06.10.2007 as specific services eligible for refund under the notification has been specified.  Thus, a stricter requirement exists under the said notification for ascertaining the actual service which has been used in the export of goods.  In the case of refund under Rule 5, (i) so far as the nature of the service which has been received by the exporter can be ascertained; (ii) tax paid therein is clearly mentioned; and (iii) other details as required under rule 4(a) are mentioned, the refund should be allowed if the input service has a nexus with the service/goods exported as discussed earlier.  In any case, the suggested Chartered Accountant’s certificate should clearly bring out the nature of the service and this will assist the officer in taking a decision.

4.         The instructions contained in this circular should be implemented with immediate effect and the pending claims may be disposed of accordingly.   It is expected that with the clarifications provided and liberalization of procedure, most of the impediments to smooth and expeditious disposal of exporters’ claims for refund of accumulated credit would be removed.   The Board, therefore, expects that the concerned refund sanctioning authorities should decide all claims of exporters within 30 days of their receipt as has been prescribed in notification No. 17/2009-ST.  Any lapse in this regard would be viewed seriously.    In case of any doubt, an immediate reference may be made to the Board.

Yours faithfully,

(Roopam Kapoor)

Officer on Special Duty (TRU)

Tel: 23095590