Budget 2008 - Changes in Indirect Taxes at a Glance

Budget 2008 – Changes in Indirect Taxes

Budget 2008-09 and Finance Bill, 2008 was presented before Parliament on 29-2-2008. Highlights of changes are as follows –

Service Tax

Central Excise

Customs

1. Goods to include any article capable of being bought and sold

Section 2(d) of Central Excise Act defines Excisable Goods as ‘Goods specified in the Schedule to Central Excise Tariff Act, 1985 as being subject to a duty of excise and includes salt’.

An explanation is proposed to be added as follows - For the purposes of this clause, “goods” includes any article, material or substance which is capable of being bought and sold for a consideration and such goods shall be deemed to be marketable.’

This change  will be effective after Finance Bill, 2008 is passed by Parliament receives assent of President of India.

In UOI v. Delhi Cloth Mills - AIR 1963 SC 791 = 1963 (Suppl.) (1) SCR 586 = 1977 (1) ELT (J 177) (SC 5 member Constitution bench), it has been held that the item must be such that it is capable of being bought or sold. This is the test of ‘Marketability’. The goods must be known in the market. Unless this test of marketability is satisfied, duty cannot be levied as these will not be goods.

The intention of proposed amendment seems to be to get over the test of ‘marketability’. How far the amendment will help is doubtful, since the amendment itself uses the words ‘capable of being bought and sold’. This envisages ‘marketability’. Then, what is the distinction between ‘capable of being sold’ and ‘marketability’? That way, even moon is ‘capable of being bought and sold’. Will it be ‘goods’?.

2. Duty on basis of production capacity

Earlier, section 3A was introduced in Central Excise Act, providing for duty on basis of production capacity. The section was withdrawn. It is now proposed to bring the section back into operation. This will be used mainly in case of steel re-rolling mills and pan masala, where duty evasion is heavy.

3. Distribution of credit of input goods by office of service provider

Often invoices and bills in respect of inputs and capital goods are received at the head office while service is provided from some other place or site. In such case, the head office can distribute the credit of duty paid on such inputs and capital goods to the service provider by issuing an invoice. Such office will have to be registered with Central Excise and submit returns etc. similar to first stage dealer and second stage dealer [Rule 7A of Cenvat Credit Rules, inserted w.e.f. 1-4-2008].

4. Interest on pre-deposit if not refunded within three months

So far, there was no provision for payment of interest if pre-deposit of duty made for purpose of appeal is refunded late. Now, interest @ 6% will be payable if pre-deposit is not refunded within three months from date of order of Appellate Authority [proposed section 35FF to CEA].

5. Cenvat Credit when assessee provides both taxable and exempt services

Cenvat credit of inputs and input services is not available if final product/output service is exempt from excise duty/service tax. In case of manufacturer manufacturing both exempt and dutiable goods (or service provider providing taxable as well as exempt services), it may happen that same inputs/input services are used partly for manufacture of dutiable goods/taxable services and partly for exempted goods/services.

In such cases, the earlier rule 6 provided two options – (a) Forget about Cenvat credit of common inputs and input services (b) Pay 10% ‘amount’ on exempted goods and/or restrict Cenvat credit to 20% of service tax on output services.

Now, under new rule 6, the manufacturer/service provider has following three options w.e.f. 1-4-2008 –

(a)   Maintain separate accounts of receipt and use of inputs and input services used for exempted goods/exempted output services and take Cenvat credit only of inputs and input services used in dutiable goods and taxable output services . Rules [Rule 6(2) of Cenvat Credit Rules – same as earlier rule]

(b)   Pay amount equal to 10% of value of exempted goods (if he is ‘manufacturer’) and/or 8% of value of exempted services (if he is service provider), if he does not maintain separate accounts of inputs and input services  – Rule 6(3)(i) w.e.f. 1-4-2008.

(c)   Pay an ‘amount’ equal to proportionate Cenvat credit attributable to exempted final product/ exempted output services, if he does not maintain separate accounts of inputs and input services – Rule 6(3)(ii) w.e.f. 1-4-2008.

Cenvat credit on capital goods – If capital goods are partly used for exempted goods and party for dutiable final products, entire Cenvat credit of duty paid on capital goods is available. Cenvat credit of duty on capital goods is not allowable only when it is exclusively used for manufacture of final products [rule 6(4)].

Some services eligible even if partly used for manufacture of exempted goods/output services – Rule 6(5) of Cenvat Credit Rule provides that in case of specified 16 services, full Cenvat credit of input service is available even if these services are partly used in manufacture of exempted final product/output services. Rule 6(5) has been given overriding effect over rule 6(1), 6(2) and 6(3).

This rule has not been amended even if rule 6(3) of Cenvat Credit Rules has been recast w.e.f. 1-4-2008. Hence, the effect is that in respect of these specified services, proportionate reversal is not required even after 1-4-2008.

No reversal or payment of amount in certain cases – Rule 6(6) states that provisions of rules 6(1) to 6(4) shall not apply to excisable goods removed to SEZ, EOU, EHTP, STP, UN agencies or for exports or removal of gold or silver arising in manufacture of copper or zinc by smelting. Thus, rule 6(6) has overriding effect over rules 6(1) to 6(4).

Meaning of exempted goods  - As per Rule 2(d) of Cenvat Credit Rules, 'exempted goods' means goods which are exempt from whole of duty of excise leviable thereon and includes goods which are chargeable to 'Nil' rate of duty. Thus, 'exempted goods' for purpose of Cenvat cover (a) Goods chargeable to 'Nil' duty as per Tariff and (b) Goods which are exempt by a notification issued under section 5A.

Meaning of ‘exempted services’  - As per rule 2(e) of Cenvat Credit Rules, “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act. For purpose of the definition of ‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted service’ for purpose of rule 6 (for example, giving of loan or construction of non-commercial building may be treated as ‘exempt service’).

6 Determination of  Cenvat credit attributable to exempted final product/exempted services

If assessee intends to pay amount on proportionate basis as per rule 6(3)(ii), the ‘amount’ is to be calculated as provided in rule 6(3A) of Cenvat Credit Rules. He has to pay ‘amount’ provisionally on monthly basis. At the year-end, he has to calculate exact amount and pay difference if any or adjust excess amount paid.

Principle behind the calculations – The mode of calculation is as follows –

Assessee should first take entire Cenvat credit of inputs and input services used in exempted as well as taxable final products and exempted as well as taxable services. Then, at the end of month, he should calculate Cenvat credit attributable to exempted final products and exempted services on provisional basis, as follows –

·          Inputs used for exempted final products (Based on his own Input/Output ratio, even in case of common inputs like consumables etc.), termed as ‘A’ as per rule 6(3A)(b)(i) plus

·          Inputs used for exempted services (On proportionate basis, based on ratio of  previous year),  to be calculated as per rule 6(3A)(b)(ii) plus

·          Input services used for exempted final products and exempted services (On proportionate basis based on ratio of previous year), to be calculated as per rule 6(3A)(b)(iii)

At end of the year, he should calculate the ratios on actual basis and make fresh calculations as per rule 6(3A)(c).

He should pay difference, if any, before 30th June.  If it is found that he had paid excess amount based on provisional ratio, he can adjust the difference himself by taking credit.

In the first year of production or provision of services, ratios of previous year are not available. In that case, the calculations need not be made for the whole year. However, calculations should be made after the year is over and amount attributable to Cenvat credit on exempted final products and exempted services should be calculated and paid [Rule 6(3A)(h)]

The basic idea behind the mode of calculations is sound and correct as per Vat principles. However, calculations are not easy and are prone to litigation.

There is no provision to calculate inputs used exclusively for exempted final products, when inputs are common. This has to be done on ratio basis only.

Calculation of ‘amount’ on provisional basis  - The manufacturer of goods or the provider of output service shall determine and pay, provisionally, for every month –

(i)                  the amount equivalent to CENVAT credit attributable to inputs used in or in elation to manufacture of exempted goods, denoted as A.

(ii)                the amount of CENVAT credit attributable to inputs used for provision of exempted services (provisional) = (B/C) multiplied by D, where B denotes the total value of exempted services provided during the preceding financial year, C denotes the total value of dutiable goods manufactured and removed plus the total value of taxable services provided plus the total value of exempted services provided, during the preceding financial year and D denotes total CENVAT credit taken on inputs during the month minus A.

(iii)               the amount attributable to input services used in or in relation to manufacture of exempted goods or provision of exempted services (provisional) = (E/F) multiplied by G, where E denotes total value of exempted services provided plus the total value of exempted goods manufactured and removed during the preceding financial year, F denotes total value of taxable and exempted services provided, and total value of dutiable and exempted goods manufactured and removed, during the preceding financial year, and G denotes total CENVAT credit taken on input services during the month  [Rule 6(3A)(b) inserted w.e.f. 1-4-2008].

Calculation of ‘final amount’ after year end   - The manufacturer of goods or the provider of output service, shall determine finally the amount of CENVAT credit attributable to exempted goods and exempted services for the whole financial year in the manner as one calculated on provisional basis. [Rule 6(3A)(c) inserted w.e.f. 1-4-2008]. Calculations will be on basis of actual figures.

Payment of difference if short payment was made  - At the year end, the manufacturer of goods or the provider of output service, shall pay an amount equal to the difference between the aggregate amount determined as per rule 6(3A)(c)  and the aggregate amount determined and paid as per Rule 6(3A)(b), on or before the 30th June of the succeeding financial year, if the amount provisionally paid was lower than the amount finally determined at the year end [Rule 6(3A)(d) inserted w.e.f. 1-4-2008].

Interest payable if amount was short paid - In addition to the amount short-paid, the assessee will be liable to pay interest at the rate of twenty-four per cent per annum from the due date, i.e., 30th June till the date of payment, where the amount short-paid is not paid within the said due date [Rule 6(3A)(e) inserted w.e.f. 1-4-2008].

Thus, no interest is payable if difference is paid by 30th June of the following year.

Self adjustment of excess amount was paid - If at the year end, it is found that the amount provisionally paid was more than the amount finally determined, the manufacturer of goods or the provider of output service may adjust the excess amount on his own, by taking credit of such amount [Rule 6(3A)(f) inserted w.e.f. 1-4-2008].

If assessee did not manufacture dutiable goods or did not render taxable services in previous year  - If assessee does not manufacture dutiable final products or taxable output service in previous year, he can take credit but is not required to pay proportionate amount on provisional basis as provided in rule 6(3A)(b). However, at year end, he should pay amount on proportionate before 30th June [Rule 6(3A)(h) inserted w.e.f. 1-4-2008].

This rule applies in first year of production when ratios of previous year are not available. If the amount is not paid by 30^th June, interest is payable @ 24% June [Rule 6(3A)(i) inserted w.e.f. 1-4-2008].

7. Pharma Industry happy

Pharmaceutical industry was facing serious problems since many units were shifting to tax free areas like Uttakhand or Jammu and Kashmir. In this budget, excise duty on drugs has been reduced to 8%. Abatement on MRP is also good. Hence, considering availability of Cenvat and considering additional costs in going to remote areas, there is not much benefit in going to the backward areas.

8. Amendment to  definition of Input Service

Rule 2(l)(ii) which defines ‘input service’ is amended w.e.f. 1-4-2008 as follows, Input service” means any service –  (i) used by a provider of taxable service for providing an output service; or  (ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products, upto the place of removal; (The words ‘from the place of removal’ have been replaced by ‘, upto the place of removal’ w.e.f. 1-4-2008).

Till 31-3-2008, ‘clearance of final product from the place of removal’ was defined as ‘input service’. Now, w.e.f. 1-4-2008, ‘clearance of final products, upto the place of removal’. This is presumably done to avoid disputes regarding eligibility of Cenvat credit on ‘outward freight’.

In my view, this will not resolve the dispute.

In my view, the outward freight is in relation to business and in view of the words ‘such as’ in inclusive part of definition of ‘input service’, it is certainly covered in inclusive part of the definition. The words ‘from the place of removal’ in main part of the definition were only supporting this view.  Even if the words ‘from the place of removal’ have been changed to ‘upto the place of removal’ w.e.f. 1-4-2008, it will not make any difference, since the outward freight will any way get covered under ‘inclusive’ part of the definition.

9.  Refund of duty as well as interest

Section 11B of Central Excise Act so far did not make any provision for refund of interest. Now, a specific provision is being made for refund of interest, if found to be paid in excess.

10.  Any person collecting amount representing as ‘excise duty’ or ‘customs duty’ must pay it to Government

Section 11D(1) of CEA (corresponding section 28B of Customs Act and section 73A(1) of Finance Act, 1994 which contains provisions relating to service tax) state that every person who is liable to pay duty under Central Excise Act and Rules and has collected from buyer any amount in excess of the duty assessed or determined and paid on any excisable goods under CE Act or rules, representing as duty of excise; must pay the amount immediately (forthwith) to the credit of Central Government.

This section applies only to ‘person liable to pay duty’. It does not apply to others. Now, section 11D(1A) of CEA and section 28B(1) of Customs Act are proposed to be inserted, making it clear that the provision applies to ‘any person’. Thus, now the provision will apply to any person collecting any amount representing it as excise duty or Customs duty.

Corresponding change is being made in section 11DD of CEA for recovery of such amount.

This change  will be effective after Finance Bill, 2008 is passed by Parliament receives assent of President of India.

11. Departmental appeal in case of difference of opinion

Decision to file appeal against adjudication order passed by Commissioner is taken by Committee of two Chief Commissioners. If there is difference of opinion, the matter will be referred to CBE&C and if CBD&C is of the opinion that order passed by Commissioner is not legal and proper, Board will direct Commissioner to file appeal with Tribunal [proposed proviso to section 86(2) of Finance Act, 1994, section 129D(1) if Customs Act and section 35E(1) of Central Excise Act].

Decision to file appeal against order passed by Commissioner (Appeals) is taken by Committee of two Commissioners. If there is difference of opinion, the matter will be referred to jurisdictional Chief Commissioner and if jurisdictional Chief Commissioner is of the opinion that order passed by Commissioner (Appeals) is not legal and proper, jurisdictional Chief Commissioner will direct any Central Excise Officer to file appeal with Tribunal [proposed proviso to section 86(2A) of Finance Act, 1994, proviso to section 129A(2) of Customs Act and proviso to section 35B(2) of Central Excise Act ].

This change  will be effective after Finance Bill, 2008 is passed by Parliament receives assent of President of India.

12. Interest on pre-deposit if pre-deposit not refunded within three months

So far, there was no provision for payment of interest if pre-deposit of duty made for purpose of appeal is refunded late. Now proposed section 35FF of CEA provides that if an amount deposited by the appellant in pursuance of an order passed by the Commissioner (Appeals) or the Appellate Tribunal  under the first proviso to section 35F, is required to be refunded, interest @ 6% will be payable if pre-deposit is not refunded within three months from date of order of Appellate Authority.

This change  will be effective after Finance Bill, 2008 is passed by Parliament receives assent of President of India.

13. Mode of ascertainment of MRP if MRP not declared or incorrectly declared or obliterated

If (a) assessee clears goods without declaring the retail sale price on the packages of such goods; or (c) by declaring the retail sale price, which is not the retail sale price as required to be declared under the provisions of the Standards of Weights and Measures Act, 1976 (60 of 1976) or rules made thereunder or any other law for the time being in force ; or (c) by declaring the retail sale price but obliterates the same after their removal from the place of manufacture, the MRP will be determined as per Central Excise (Determination of Retail Sale Price of Excisable Goods) Rules, 2008 inserted w.e.f. 1-3-2008.

14. Mode of calculation of excise duty when goods cleared by EOU in DTA

Duty on clearances of goods to Domestic Tariff Area from Export Oriented Units, Software Technology Parks, Electronic Hardware Technology Parks etc. has been changed from 25% of aggregate of customs duties to 50% of the basic customs duty plus excise duty payable on like goods w.e.f. 1-3-2008.

As per proviso to section 3 of Central Excise Act, excise duty payable is equal to customs duty on like articles imported into India. As per Sr No. 2 of notification No. 23/2003-CE dated 31-3-2003 (as amended w.e.f. 1-3-2006), the duty payable is to be calculated as if (a) customs duty is reduced to 50%  and (b) Special duty of 4% u/s 3(5) of Customs Tariff Act is not payable. However, if goods cleared in DTA are exempt from Vat, this special additional duty will be payable.

If Assessable value =Rs. 10,000, Basic customs duty = 10%; basic excise duty = 16%, education cess is 2%, secondary and higher education cess is 1%, the duty calculation will be as follows –

(Note – The general objection to above mode of calculations is that education cess and SAH education cess is calculated thrice which is incorrect. However, what has to be remembered is that first we have to calculate duty under section 3 of CEA, which is equal to customs duty with reduced rate of 25% and then calculate education cess and SAH education cess of excise duty as usual).

15.  Other changes proposed in Customs Act

This change  will be effective after Finance Bill, 2008 is passed by Parliament receives assent of President of India.

16. Tax on new Services

Following new services are proposed to be taxed. The tax will be effective from a date to be notified [expected by June 2008].

16.1 Information Technology Software Service

“Information technology software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment  [proposed section 65(53a)]

Any service provided or to be provided  to any person, by any other person in relation to information technology software for use in the course, or furtherance, of business or commerce, including,— (i) development of information technology software, (ii) study, analysis, design and programming of information technology software, (iii) adaptation, upgradation, enhancement, implementation and other similar services related to information technology software, (iv) providing advice, consultancy and assistance on matters related to information technology software, including conducting feasibility studies on implementation of a system, specifications for a database design, guidance and assistance during the startup phase of a new system, specifications to secure a database, advice on proprietary information technology software (v) acquiring the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell information technology software and right to use software components for the creation of and inclusion in other information technology software products (vi) acquiring the right to use information technology software supplied electronically, is a taxable service [proposed section 65(105)(zzzze)]

Departmental clarification – CBE&C TRU letter F. No.334/1/2008-TRU dated 29-1-2008 clarifies as follows -

 4.1.2 Software consists of carrier medium such as CD, Floppy and coded data. Softwares are categorized as “normal software” and “specific software”. Normalised software is mass market product generally available in packaged form off the shelf in retail outlets. Specific software is tailored to the specific requirement of the customer and is known as customized software.

4.1.3 Packaged software sold off the shelf, being treated as goods, is leviable to excise duty @ 8%. In this budget, it has been increased from 8% to 12% vide notification No. 12/2008-CE dated 01.03.2008. Number of IT services and IT enabled services (ITeS) are already leviable to service tax under various taxable services:

·        • Consulting engineer’s service - advice, consultancy or technical assistance in the discipline of hardware engineering [section 65(105)(g)].

·        • Management or business consultant’s service - procurement and management of information technology resources [section 65(65)].

·        • Management, maintenance or repair service - maintenance of software, both packaged and customized and hardware [section 65(64)].

·        • Banking and other financial services - ‘provision and transfer of information and data processing’ [section 65(12)].

·        • Business support service - various outsourced IT and IT enabled services [section 65(105)(zzzq)].

·        • Business auxiliary service - services provided on behalf of the client such as call centres [section 65(19)].

4.1.4 IT software services provided for use in business or commerce are covered under the scope of the proposed service. Said services provided for use, other than in business or commerce, such as services provided to individuals for personal use, continue to be outside the scope of service tax levy. Service tax paid shall be available as input credit under Cenvat credit Scheme.

4.1.5 Software and upgrades of software are also supplied electronically, known as digital delivery. Taxation is to be neutral and should not depend on forms of delivery. Such supply of IT software electronically shall be covered within the scope of the proposed service.

4.1.6 With the proposed levy on IT software services, information technology related services will get covered comprehensively.

4.1.7 Following consequential amendments in other taxable services are also being made:

·        • At present, ‘Information technology service’ is specifically excluded from the scope of Business auxiliary service [section 65(105)(zzb)]. Consequent on the proposed IT software service, information technology services get covered comprehensively for the purpose of levy of service tax and, therefore, specific exclusion of ‘Information technology service’ under Business auxiliary service is being deleted.

·        • To include ‘testing and analysis of IT software’ services under Technical testing and analysis service [section 65(105)(zzh)].

·        • To include ‘Certification of IT software’ services under Technical inspection and certification service [section 65(105)(zzi)].

·        • To clarify as removal of doubts that ‘Management, maintenance or repair of properties’ includes Management, maintenance or repair of IT software [section 65(105)(zzg)]. Maintenance of packaged software (being goods) is also leviable to service tax under the said service.

·        • Services provided in relation to advice, consultancy and assistance on matters related to IT software shall be leviable to service tax under the IT software service. Consulting engineer’s service [section 65(105)(g)] in the discipline of computer hardware engineering is leviable to service tax whereas consulting engineer’s service in the discipline of computer software engineering is not leviable to service tax by way of specific exclusion. Specific exclusion of ‘consultancy in the discipline of computer software engineering’ from the scope of ‘consulting engineer’s service’ is not necessary and, therefore, being deleted.

16.2  Management of Investment under ULIP Scheme

Any service provided or to be provided to a policy holder, by an insurer carrying on life insurance business, in relation to management of investment, under unit linked insurance business, commonly known as Unit Linked Insurance Plan (ULIP) scheme, is a ‘taxable service’. Explanation.— For the purposes of this sub-clause,— (i) management of segregated fund of unit linked insurance business by the insurer shall be deemed to be the service provided by the insurer to the policy holder in relation to management of investment under unit linked insurance business; and (ii) the gross amount charged by the insurer from the policy holder for the said services provided or to be provided shall be equivalent to the difference between,— (a) premium paid by the policy holder for the Unit Linked Insurance Plan policy and (b) the sum of premium paid for or attributable to risk cover, whether for life, health or other specified purposes, and the amount segregated for actual investment. Illustration - Total premium paid for the Unit Linked Insurance Plan policy = Rs.100, Risk premium = Rs. 10, Amount actually invested = Rs. 85.  Gross amount charged for the service provided = Rs. 5 [100-(10+85)] (iii) in addition to the amount referred to in clause (ii), the gross amount charged shall include any amount charged subsequently, whether or not periodically, by the insurer from the policy holder in relation to management of investment under unit linked insurance business [proposed section 65(105)(zzzzf)].

Departmental clarification – CBE&C TRU letter F. No.334/1/2008-TRU dated 29-1-2008 clarifies as follows -

4.2.1 Unit-Linked Insurance Plan (ULIP) is an insurance product offered by life insurance companies combining both risk cover and benefits of investment. ULIP being a combination product, premium amount paid under ULIP consists of risk premium and investment component. Risk premium may be for life or health or any other authorized purposes. Unlike in the case of traditional life insurance policies, policyholder of ULIP can choose portfolios for investment with different investment aims such as low, medium and high-risk category or combination thereof. ULIP enables the policyholder to take part in the scheme collectively and becoming the beneficiary like mutual funds. The investment risk is borne by the

ULIP policyholder.

4.2.2 The fund available for investment is known as segregated fund. Insurance companies charge from the policyholder, initially and periodically, various charges, in addition to risk premium, relating to management of the segregated fund under various names, such as, premium allocation charges, fund management fees, fund switching charges, surrender charges etc. These are consideration for providing services relating to investment management.

4.2.3 The proposed service enables levy of service tax on services provided in relation to management of the investment portion of ULIP premium also known as segregated fund. Consideration for management of the segregated fund shall be computed as the difference between the total premium paid and the sum of premium for risk cover plus amount of segregated fund. Service tax is liable to be paid as and when an amount is charged from the policyholder.

Illustration - (a) Total ULIP premium : Rs.100 (b) Premium for risk cover : Rs.10 (c) Segregated fund for investment : Rs.85 (d) Gross amount charged for the : Rs.5 [100 – (10 + 85)] management of segregated fund (e) Service tax @ 12% : Re 0.60 [ 12% of 5 ]

4.2.4 It may be noted that in the case of ULIP, risk premium attributable to risk cover is taxed under ‘Insurance service’ and management of investment is taxed under the proposed taxable service.

16.3 Stock Exchange Service

Any service provided or to be provided to any person, by a recognised stock exchange in relation to assisting, regulating or controlling the business of buying, selling or dealing in securities and includes services provided in relation to trading, processing, clearing and settlement of transactions in securities, is a ‘taxable service’ [proposed section 65(105)(zzzzg)].

Departmental clarification – CBE&C TRU letter F. No.334/1/2008-TRU dated 29-1-2008 clarifies as follows -

 4.3.1 Stock exchanges such as National Stock exchange, Bombay Stock Exchange are providing services to their members relating to transaction of securities for a consideration. Similarly, commodity exchanges such as Multi Commodity Exchange of India and National Commodities and Derivatives Exchange of India provide services relating to trading in goods and forward contracts. These bodies are regulated by Securities Contract (Regulation) Act, 1956 and the Forward Contracts (Regulation) Act, 1952. Stock exchanges and commodity exchanges also perform the duties and functions of processing and clearing of transactions either by themselves or by transferring such duties and functions to processing and clearing houses including Clearing Corporation.

4.3.2 It is proposed to levy service tax on services provided by recognised stock exchanges, recognised associations and registered associations commonly known as commodity exchanges and processing and clearing houses.

4.3.3 Large number of intermediation services relating to capital market are already leviable to service tax. Service tax paid is available as input credit under Cenvat Credit Scheme.

16.4 Commodity Exchange Service

Any service provided or to be provided to any person, by a recognised association or a registered association in relation to assisting, regulating or controlling the business of the sale or purchase of any goods or forward contracts and includes services provided in relation to trading, processing, clearing and settlement of transactions in goods or forward contracts, is a ‘taxable service’  [proposed section 65(105)(zzzzh)].

Departmental clarification – CBE&C TRU letter F. No.334/1/2008-TRU dated 29-1-2008 clarifies as follows -

4.3.1 Stock exchanges such as National Stock exchange, Bombay Stock Exchange are providing services to their members relating to transaction of securities for a consideration. Similarly, commodity exchanges such as Multi Commodity Exchange of India and National Commodities and Derivatives Exchange of India provide services relating to trading in goods and forward contracts. These bodies are regulated by Securities Contract (Regulation) Act, 1956 and the Forward Contracts (Regulation) Act, 1952. Stock exchanges and commodity exchanges also perform the duties and functions of processing and clearing of transactions either by themselves or by transferring such duties and functions to processing and clearing houses including Clearing Corporation.

4.3.2 It is proposed to levy service tax on services provided by recognised stock exchanges, recognised associations and registered associations commonly known as commodity exchanges and processing and clearing houses.

4.3.3 Large number of intermediation services relating to capital market are already leviable to service tax. Service tax paid is available as input credit under Cenvat Credit Scheme.

16.5 Clearing house service

Any service provided or to be provided to any person, by a processing and clearing house in relation to processing, clearing and settlement of transactions in securities, goods or forward contracts including any other matter incidental to, or connected with, such securities, goods and forward contracts, is a ‘taxable service’ [proposed section 65(105)(zzzzi)].

“Processing and clearing house” means any person including the clearing corporation authorised or assigned by a recognised stock exchange, recognised association or a registered association to perform the duties and functions of a clearing house in relation to,— (i) the periodical settlement of contracts for, or relating to, the sale or purchase of securities, goods or forward contracts and differences thereunder (ii) the delivery of, and payment for, securities, goods or forward contracts (iii) any other matter