Budget-2010-Indirect Tax Proposals

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.

Problems faced by exporters in availing refund of excess credit



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)

Details of goods/services exported on which refund of input credit is claimed

S.

No.

Details of shipping bill/ Bill

of export/export documents etc.

Details of input credit on which refund claimed

(1) (2) (3)
No. Date Date of export order Goods/ service exported Invoice No., date and Amount Name of service provider/ supplier of goods Service tax/

Central

Excise Regn. No. of service provider/ supplier of goods

Details of service/

goods

provided with classifi-

cation under FA 1994/

Central

Excise

Tariff

Service tax/

Central

Excise

duty payable

Date and details of payment made to service provider
1.
2.
Documents attached to evidence the

amount of service tax paid

Total export during the period for which refund is claimed Total domestic clearances during the period for which refund is claimed Total amount of input credit claimed as refund
(4) (5) (6) (7)

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

Advances Received are taxable under Service Tax

The Finance Act, 2005 has inserted Explanation 3 in Section 67 of the Act so as to clarify that the gross amount charged for taxable services shall include any amount received towards the taxable service received before, during or after provision of such service. This Explanation came in to effect from 16.06.2005. The ministry has since clarified as follows:-

(1) Amendments have been made in Section 65(105), Section 67 and rule 6 of Service Tax Rules, 1994 to link payment of Service tax with the receipt of payment for taxable services provided or advance payment received towards taxable service to be provided in future. When payments relatable to taxable service are received during the course of provision of service, service tax is liable to be paid to the extent of receipt of payment. In other words, a person is liable to pay the tax as soon as the consideration towards the taxable service is received.

(2) In case of continuous supply of services (Such as construction services where the payment is based on the percentage of completion of contract) which are provided for a period of time and the consideration (payment), the whole or part of it, is determined as payable, periodically from time to time, the services are treated as provided separately and successively each time the payment is due or each time the payment is received by the service provider.

(3) However, when advance payment is received for a service which is non taxable at the time of receipt of payment but becomes taxable during the course of provision of service, such payment would have to be apportioned appropriately between the two periods and that part of service provided on or after the service becomes taxable service, is only liable for service tax. Similarly, when payment is received on advance for service to be provided but subsequently the services are not actually provided, then in such cases service tax paid is liable to be refunded.

budget update 2009- Indirect Taxes

The Finance Minister has confirmed the introduction of the Goods and Services Tax (GST) by the targeted date of 1 April 2010. It will be a dual GST comprising of a Central GST and a State GST, whereby the Centre and the respective States will legislate, levy and administer the same. Another significant proposal is the role of the Authority for Advance Rulings (AAR) constituted under the Income Tax Act, 1961 to also act as an Authority for the purposes of Customs, Central Excise and Service Tax.

SERVICE TAX

  • Legal advice, consultancy or assistance (other than appearance in courts) provided by any entity (not being an individual) to be included in the list of services chargeable to service tax.
  • Cosmetic and plastic surgery services to be included in the list of services chargeable to service tax.
  • Services provided in relation to transport of goods by rail and transport of (i) coastal goods; and (ii) goods through inland water including national waterways to be included in the list of services chargeable to service tax.
  • “Business and auxiliary service” definition to be amended to provide exemption from services provided in relation to ‘excisable goods’ under excise, thus resulting in elimination of double taxation of such services.
  • Definition of “stock broker” to be amended to exclude sub-brokers.
  • Service providers who provide services that are taxable and are exempt and do not maintain separate accounts of inputs, to be required to pay an amount equal to 6% of the value of exempted services (reduced from 8%).
  • Exemption from service tax to be provided to inter-bank purchase and sale of foreign currency between scheduled banks.
  • Two of the taxable services, namely, “Transport of goods through road” and “Commission paid to foreign agents” to be exempted from the levy of service tax, if the exporter is liable to pay service tax on reverse charge basis. Thus, an exporter will not be required to first pay the tax and later claim refund in respect of these services. However, as the present cap of 10% on commission agency charges has been retained, the exporter will have to pay service tax on the amount of commission which is in excess of 10%.

CUSTOMS/ IMPORT DUTY

  • On packaged or canned software, an exemption of Additional or Countervailing Duty of Customs (CVD) to be provided on the portion of the value which represents the consideration for transfer of the right to use such value which represents the consideration for transfer of the right to use such software, subject to specified conditions.
  • A new section, section 26(A) to be introduced to the Customs Act, 1962, to provide for refund of import duty paid, on goods which are defective or not as per agreed specifications and which are returned by the buyer.
  • Provisions to be made for a High Court to condone delays in filing an appeal and filing cross objections beyond the prescribed period.
  • Section 9 of the Customs Tariff Act, 1975, to be amended retrospectively so as to extend the machinery provisions of the Customs Act, 1962, to CVD levied under this section.

CENTRAL EXCISE DUTY

  • The excise duty rate on items currently attracting 4% duty to be increased to 8% with certain exceptions such as specified food items, drugs and pharmaceutical products, medical equipment, etc.
  • High Courts to be empowered to condone delays for filing of appeals and memorandum of cross objections.
  • A manufacturer of both dutiable and exempted goods, who does not maintain separate accounts of inputs, to pay an amount equal to 5% of the total price of exempted goods (earlier 10%).
  • Chartered Accountants are now eligible for special audit as prescribed by section 14 A & 14AA

Contributed by Ca. Vinay Bhushan Sharma

Service tax on renting of immovable property

In a recent landmark judgment, in Home Solution Retail India Ltd. & Others vs. UOI & Others, the Delhi High Court has pronounced its judgment with regard to several writ petitions which had challenged the applicability of the levy of service tax on renting of immovable property.

The High Court has held that the taxable service in respect of renting of immovable property, as defined under the relevant Section 65(105)(zzzz) of the Finance Act 1994 thereof, was with regard to any service in relation to renting of property and was not on the renting of immovable property as such.

Consequently, the High Court has held that the levy of service tax on the renting of immovable property itself, in terms of the relevant notification issued consequent to the introduction of the taxable service, was ultra virus the provisions of the Act.

In arriving at its decision, the court has relied on the wordings of the particular taxable service in order to hold that since the activity of renting of immovable property was itself not a service, the expression ‘service in relation to renting of immovable property’, occurring in the definition of the taxable service, can only extend to services which are provided in relation to the renting of immovable property.

Accordingly, the Court distinguished the particular definition of service in relation to renting of immovable property from several other definitions in service tax law which were similarly worded and held that in those other definitions, the expression ‘in relation to’ itself referred to a service and consequently not only was the core service taxable but also the allied and ancillary services in relation thereto were also taxable.

The court illustrated this distinction by referring to the taxable service of dry cleaning where the expression was a service in relation to dry cleaning and held the activity of dry cleaning was itself also a service which was taxable therein. As opposed to this situation, the taxable service provided by a real estate agent, for instance, was a service in relation to real estate and since real estate was not a service, the definition could only extend to services in relation thereto.

On a similar analogy, the court came to the conclusion that in the present case, the renting of immovable property could not be construed as a service by itself and hence the taxable service in question could only extend to services in relation to renting of immovable property and not to the activity of renting itself.

In arriving at the aforesaid finding, the court has relied on the decision of the Supreme Court in T N Kalyana Mandapam Association Vs. UOI (2004) 5 SCC 632) which, interestingly enough, was relied upon both by the appellants, who had challenged the legality of the levy, as well as by the respondents i.e. Government of India. Based on a detailed consideration of the aforesaid judgment, the Delhi High Court has come to a determination that the decision of the Supreme Court supported the argument of the appellants and not that of the respondents.

With regard to the nature of the service tax itself, the High Court has held that it is a value added tax and the tax is a tax on value addition done by the service provider and it must have a connection with the service. Consequently, since the mere renting of immovable property does not entail any value addition, it could not be regarded as a service for that reason as well.

Here again, the High Court has relied upon another decision of the Supreme Court, in All India Federation of Chartered Accountants Vs. UOI (2007) 7 SCC 527), which had held that just as excise duty was a tax on value addition in regard to goods, the service tax was a tax on value addition by rendition of services.

Accordingly, the Supreme Court, in that case, had distinguished property-based services and performance-based services and had arrived at a conclusion that the expression ‘in relation’, occurring in the various relevant definitions, needed to be construed in accordance with this principle of value addition.

The High Court h as, relying on the above decision, consequently come to the conclusion that the levy of service tax on the activity of renting of immovable property was ultra vires the relevant definition of the taxable service, as contained in the Finance Act, 1994.

While upholding the arguments contained in the writ petitions in regard to the above points, the High Court has held that it has therefore not been required to examine the alternate argument as contained in the petitions that the relevant definition, should it be construed as applicable to the activity of renting of immovable property as well, would be violative of the Constitution of India in that the Central Government could not, in terms thereof, impose a tax on land, as it was a State subject.

Hence, the decision is limited to the point that the taxable service as understood and interpreted through the relevant impugned notification and hence the tax so collected, was not in accordance with the statute and hence without basis in law and the decision is not with regard to whether or not the definition of taxable service itself is unconstitutional.

This judgment is applicable on an all India basis, as it is on a point of legality, and would have far reaching consequences for all and in particular for those who carry on business in rented premises and who do not have an output excise or a service tax liability so as to be able to offset this tax on rentals. The Retail Sector is thus a very major beneficiary, as the service tax on rentals is a very significant unrecovered tax cost for the sector. Further, the judgment has ramifications with regard to other taxable services as well since these are also similarly worded.

The Central Government is almost certain to file an appeal against the aforesaid judgment with the Supreme Court. It remains to be seen whether it will request a stay of the judgment in the interim and whether such a request would be granted. It is also possible that the Government may consider amending the provisions of the Finance Act, 1994, possibly with retrospective effect, in order to overcome the above judgment of the Delhi High Court. The picture will become clear in this regard in the near future.

However, until such time as these eventualities do not occur, taxpayers can take effective steps to avail the benefit of non payment of service tax on renting of immovable property. Several issues such as discontinuance of payment of tax for future period, filing of refund claims for past taxes paid on such rentals, for the period of one year and beyond, availment of CENVAT credits on such taxes, payment of such taxes to the Government, if already collected as such, the person entitled to file such claims will need to be addressed in detail, in order for the benefits to flow to tax payers.

Source: cainindia.org

Service Tax on Commercial Rent Held Unconstitutional (Delhi High Court)

“The Delhi High Court has on April 18, 2009 struck down the levy of service tax on renting ofimmovable property as “unconstitutional”.”

For_Immediate_Release:

The Delhi High Court has today struck down the levy of service tax on renting of immovableproperty as “unconstitutional”, while deciding 26 writ petitions of different petitioners, by acombined order. The division bench of the Delhi High Court comprised of Mr. Justice BadarDurrez Ahmed and Mr. Justice Rajiv Shakdher observed that service tax shall not be levied onrenting of immovable property.

Alishan Naqvee, Advocate, LexCounsel Law Offices, who represented his clients in two of thepetitions disposed off today, tells that the category of “renting of immovable property service”was introduced by the Finance Act of 2007. This, in effect brought renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course offurtherance of business and commerce, within the service tax net with effect from June 1,2007. This new levy severely impacted business models across India as most of the rentarrangements did not even stipulate it beforehand.

The businesses across India opted to en masse challenge the constitutionality of levy of servicetax on rent, on the primary grounds that renting does not involve any service, and the CentralGovernment is not empowered to tax consideration for transfer of rights in immovable property, being a state subject as per the Constitution of India. Few High Courts, including the High Court of Mumbai, Delhi, Gujarat, Andhra Pradesh, Kolkata and Chennai reportedlygranted interim reliefs to the petitioners from payment of service tax until final disposal of theirmatters. The stays were however granted subject to undertakings by the petitioners, mainlytenants, to deposit the service tax amount with the Government if the tax was ultimately heldconstitutional. The Delhi High Court however is the first High Court to deliver the final orderin the matter that would have persuasive value for the other High Courts.

The detailed order of the Delhi High Court is expected to be available within the next couple ofworking days. One issue that needs to be seen is whether the Delhi High Court has expresslylimited the applicability of its judgment to its territorial jurisdiction. Notably, while grantinginterim orders, the Delhi High Court had expressed that the stays would be operative within theterritorial jurisdiction of the Court.

Consequently, a number of petitioners, having operations in multiple states, were constrainedto knock at the doors of the other High Courts.

To avoid multiplicity of litigation, the Union of India preferred a transfer petition to the Supreme Court of India seeking transfer of all writ petitions pending before different HighCourts of India, to the Delhi High Court for single window adjudication.

It is open for the Government to prefer an appeal before the Supreme Court of India, challenging the decision of the Delhi High Court. The judgment however delivers great relief to the business by helping liquidity in the current times.

Imposition of service tax on Builders – Clarification

Sale of Residential Houses: CBEC Clarified that – any service provided by a seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax.

Circular No. 108/02/2009

F. No. 137/12/2006-CX.4

Government of India

Ministry of Finance

Department of Revenue

Central Board of Excise and Customs

New Delhi, dated 29th January 2009

 

Construction of residential complex was brought under service tax w.e.f.01.06.2005. Doubts have arisen regarding the applicability of service tax in a case where developer / builder/promoter enters into an agreement, with the ultimate owner for selling a dwelling unit in a residential complex at any stage of construction (or even prior to that) and who makes construction linked payment. The ‘Construction of Complex’ service has been defined under Section 65 (105)(zzzh) of the Finance Act as “any service provided or to be provided to any person, by any other person, in relation to construction of a complex”. The ‘Construction of Complex’ includes construction of a ‘new residential complex’. For this purpose, ‘residential complex’ means any complex of a building or buildings, having more than twelve residential units. A complex constructed by a person directly engaging any other person for designing or planning of the layout, and the construction of such complex intended for personal use as residence by such person has been excluded from the ambit of service tax.

2. A view has been expressed that once an agreement of sale is entered into with the buyer for a unit in a residential complex, he becomes the owner of the residential unit and subsequent activity of a builder for construction of residential unit is a service of ‘construction of residential complex’ to the customer and hence service tax would be applicable to it. A contrary view has been expressed arguing that where a buyer makes construction linked payment after entering into agreement to sell, the nature of transaction is not a service but that of a sale. Where a buyer enters into an agreement to get a fully constructed residential unit, the transaction of sale is completed only after complete construction of the residential unit. Till the completion of the construction activity, the property belongs to the builder or promoter and any service provided by him towards construction is in the nature of self service. It has also been argued that even if it is taken that service is provided to the customer, a single residential unit bought by the individual customer would not fall in the definition of ‘residential complex’ as defined for the purposes of levy of service tax and hence construction of it would not attract service tax.

3. The matter has been examined by the Board. Generally, the initial agreement between the promoters / builders / developers and the ultimate owner is in the nature of ‘agreement to sell’. Such a case, as per the provisions of the Transfer of Property Act, does not by itself create any interest in or charge on such property. The property remains under the ownership of the seller (in the instant case, the promoters/builders/developers). It is only after the completion of the construction and full payment of the agreed sum that a sale deed is executed and only then the ownership of the property gets transferred to the ultimate owner. Therefore, any service provided by such seller in connection with the construction of residential complex till the execution of such sale deed would be in the nature of ‘self-service’ and consequently would not attract service tax. Further, if the ultimate owner enters into a contract for construction of a residential complex with a promoter / builder / developer, who himself provides service of design, planning and construction; and after such construction the ultimate owner receives such property for his personal use, then such activity would not be subjected to service tax, because this case would fall under the exclusion provided in the definition of ‘residential complex’. However, in both these situations, if services of any person like contractor, designer or a similar service provider are received, then such a person would be liable to pay service tax.

4. All pending cases may be disposed of accordingly. Any decision by the Advance Ruling Authority in a specific case, which is contrary to the foregoing views, would have limited application to that case only. In case any difficulty is faced in implementing these instructions, the same may be brought to the notice of the undersigned.

F. NO. 137/12/2006-CX.4

(Gautam Bhattacharya)

Commissioner (Service T

Changes in Service Tax Return

CBEC issued Notification No.31/2008, incorporated certain changes in Service Tax Return to give effect of the amendment initiated through Finance Act 2008. The changes will be applicable for the Service Tax Return to be filed for the first half of Financial Year 2008-09. Due date for the same is 25th October 2008. Now, the assesses will have to submit the following additional details in their Service Tax Return:

  1. Details of any Advance Tax Paid of Service Tax under Rule 6(IA).
  2. Details of Adjustment for Advance tax earlier paid.
  3. Details of option availed under new Rule 6(3) CENVAT Credit Rules 2004, i.e. either paying 8% of exempted services or using CENVAT on Prorata Basis.
  4. Details of Exempted Goods cleared or Exempted Services rendered through a new entry 5AA.
  5. Apart from this, the code for the new service become taxable after this Finance Act 2008 has been added in the instruction to Service Tax Return form.

Service tax on renting of immovable property

The activity of renting immovable properties for commercial use is taxable with effect from 1st June 2007.

What is Renting of immovable property

Renting of immovable property includes renting, letting, licensing or other similar arrangement of immovable property for use in the course of furtherance of business or commerce. “For the use of furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple use buildings.

Who are liable to pay service tax

Every person who is providing taxable services for more than Rs.1,000,000 in any financial year (from 1st April to 31sty March) is liable for tax. As service tax is an indirect tax so payer can collect the tax from the service recipient. In case immovable property the owner is the service provider and tenant is a service recipient. If the service provider is located in India, he is the person responsible for paying the service tax, irrespective of whether he has collected the service tax from the receiver. However where the service provider is located outside India and the service receiver is located in India, then the service receiver will treated as the service provider and service receiver is the person liable for paying service tax.

Properties are not liable for service tax

i. Renting of immovable property by a religious body or to a religious body
ii. Renting of immovable property to an educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching center.
iii. Land used for educational, sports, circus, entertainment and parking purpose and
iv. Building used solely for residential purpose and building used for accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.

General exemptions

a) Services provided to the united nations or an international organisation declared by the central government
b) Services provided to a developer of Special Economic Zone (SEZ) or a unit of a Special Economic Zone which satisfy prescribed conditions.
c) Services provided for official use of a foreign diplomatic mission or consular post in India/ Service provided for personal use of family member of diplomatic agents or career consular officers posted in foreign diplomatic mission or consular posted in India.

Real Estate Developer liable to Service Tax on Residential Construction

Authority for Advance Rulings vide a ruling pronounced on 7th April 2008 has ruled that a Real Estate Developer who is booking, constructing and selling residential units on land owned by him is liable to service tax.

  • Though the rulings of the Authority are binding only on the applicant and the service tax department; but since the issue has been settled in favour of service tax department; all the Builders and Real Estate Developers who are not paying service tax on construction of residential flats and units are going to be slapped the demands of service tax. Majority of the Builders are neither charging nor paying any service tax on construction and sale of residential flats. The costs of residential flats and units are also going to witness a hike due to service tax liability. This may lead to a further slowdown in Real Estate market.
  • The applicant is a developer of residential housing projects in Gujarat. As per the proposed activities No.1 & 2, the residential units will be constructed either on its own or through a contractor and the residential units so constructed will be sold to third parties. The applicant will book the residential unit after taking a booking amount and the total cost of the residential house will be specified to the buyers at the time of booking.
  • The proposed activities no. 3 & 4 consist of sale of plots of land inside the complex to the prospective buyers who will also enter into works contract with the applicant for the construction of residential units. Under the proposed activity no.4 the applicant will for the purpose of executing the contract with the buyer enter into works contract with Contractors.