Service tax Budget 2017 Changes
V S Datey
Finance Bill 2017 was resented before Parliament by Finance Minister Shri Arun Jaitley on 1-2-2017. As was expected, there are no major charges in Central Excise and service tax, since GST is likely to be implemented w.e.f. 1-7-2017. Hence, present Central excise Law and Service tax law has very short life.
In fact, Government did not wait for budget and made many changes even prior to introduction of budget on 1-2-2017. The changes made on budget day and on eve of budget day are summarised below.
Exemptions from service tax
Some exemptions have been given. Some are with retrospective effect.
Services provided to Government for transportation of passengers to and from Regional Connectivity Scheme Airport – Services provided to Government for transport of passengers to and from Regional Connectivity Scheme Airport against consideration in form of Viability Gap Funding (VGF). This will be for one year from date of commencement of Regional Connectivity Scheme Airport notified by Ministry of Civil Aviation [Sr No. 23A inserted w.e.f. 2-2-2017]
Service of life insurance to defence personnel exempt w.e.f. 10-9-2004 – Services of Life Insurance Business provided or agreed to be provided by Army, Naval and Air force Group insurance Funds to members of Army, Naval and Air force under Group insurance scheme of Central Government [Sr No. 26C inserted w.e.f. 2-2-2017]. This exemption has been given retrospective effect from 10-9-2004 vide section 105 of Finance Act, 1994 inserted vide Finance Bill, 2017.
Services provided from outside India to Government or charitable organisations exempt except ocean freight and OIDAR service – Services from outside India to (a) Government or local authority or individual or charitable organisations other than business (b) entity providing charitable activities (c) person located in a non-taxable territory. However, the exemption shall not apply to –(i) online information and database access or retrieval services received by persons specified in clause (a) or (b); or (ii) services by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India in case of clause (c) [Sr No. 34 as amended w.e.f. 22-1-2017. The words in italics have been inserted by way of corrigendum issued on 18-1-2017. Words ‘or (b)0 added w.e.f. 30-1-2017]
One-time upfront payment for long term lease of industrial plots by State Development Corporations/Undertakings exempt from 1-6-2007 – One-time upfront payment made to State Government Industrial Development Corporations/Undertakings (called as premium, salami, cost, price, development charges or by any other name) for long term (30 years or more) lease of industrial plots is exempt. – Notification No. 41/2016-ST dated 22-9-2016. This exemption has been given retrospective effect from 1-6-2007 vide section 104 of Finance Act, 1994 inserted vide Finance Bill, 2017.
Services provided by business facilitator to banks in rural area – Services provided by business facilitator or a business correspondent to a banking company with respect to accounts in its rural area branch are exempt from service tax – – Sr No. 29(g) of Notification No. 25/2012-ST dated 20-6-2012 as amended w.e.f. 12-1-2017.
Service received from service provider in non-taxable territory to person in non-taxable territory exempt, except in case of ocean freight – Service received from a provider of service located in non-taxable territory to person located in non-taxable territory is exempt However, the exemption shall not apply to services by way of transportation of goods by a vessel from a place outside India upto the customs station of clearance in India – Sr No. 34(c) of Notification No. 25/2012-ST dated 20-6-2012 effective from 1-7-2012 as amended w.e.f. 22-1-2017.
If both service provider and service receiver are from outside India, normally, there is no question of service tax. However, service of ocean transport from out of India to Indian port is subject to service tax w.e.f. 1-6-2016. Hence, this specific provision has been made w.e.f. 22-1-2017.
The steamer agent will be liable to pay service tax as ‘person liable to pay service tax’.
Job work exemptions taken out of negative list and inserted in exemption notification
Job work of agriculture, printing, textile processing, diamonds and gemstones and also job work where principal manufacturer is paying excise duty, except job work of alcoholic liquor for human consumption. Further, job work of plating, heat treatment, coating or painting of parts of sewing machine or parts of cycle if aggregate value does not exceed Rs 150 lakhs. [Sr No. 30 of Notification No. 25/2012-ST dated 20-6-2012] (words in italics added w.e.f. 1-6-2015].
This entry is being amended w.e.f. passing of Finance Bill, 2017 to include any process amounting to manufacture or production excluding alcoholic liquor). This is because this item is being removed from negative list but exemption is continuing under an exemption notification.
Person liable to pay service tax in respect of services of inward ocean freight from out of India
In relation to services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India, the person in India who complies with sections 29, 30 or 38 read with section 148 of the Customs Act, 1962 with respect to such goods – rule 2(1)(d)(EEE) of Service Tax Rules inserted w.e.f. 22-1-2017.
Person in charge of vessel is liable to comply with sections 29,30 and 38 of Customs Act, 1962 [filing import and export manifest or report]. He can appoint an agent for this purpose [usually termed as steamer agent]. The Agent is liable to pay liabilities of Principal as per section 148 of Customs Act, 1962.
Reverse charge in case of Services of inward ocean freight from out of India – If contract for sea transport is entered into by Indian importer with Indian shipping company for transporting goods from out of India to Indian port, the Indian shipping company is liable to pay service tax as forward charge.
If Indian importers directly enters into a contract with foreign shipping company, then the Indian importer is liable to pay service tax under reverse charge.
If the contract of Indian importer with foreign supplier is on CIF basis, then sea freight is paid by foreign person who is exporting goods from his country to India. In such case, the service tax is payable by steamer agent.
Aggregator not liable to pay service tax on hotel booking service
Aggregator is not liable in case of booking of hotels if payment is made by customer directly to hotel – rule 2(1)(aa) of Service Tax Rules as amended w.e.f. 22-1-2017.
However, he will be liable to pay service tax on commission received by him from hotel.
Retrospective amendment of composition scheme of works contract to clarify that total amount includes value of land
Rule 2A of Service Tax (determination of Value) Rules, 2016 provided that total amount’ shall include value of goods. However, the rule did not provide that the ‘total amount’ should include land or undivided share of land. In many states, contract with builder is for total value including value of land or undivided share of land. However, in some Sothern States, two agreements are executed – one for undivided share of land and other for construction. Builders in those states where not including value of undivided share of land while calculating 40% of total value of contract.
Now, a retrospective amendment has been made w.e.f. 1-7-2010 to clarify that ‘total amount’ will include value of undivided share of land.
Now, valuation done in Northern States and Southern States is on equal footing.
However, the policy of Central Government has been consistent that no retrospective amendment shall be made. This amendment is against that declared policy of Central Government, though it cannot be said to be unfair.
Provisions of R&D cess are being omitted
The R&D Cess is being omitted vide Finance Bill, 2017. Thus, after the Finance Bill, 2017 is passed and receives assent of President (expected in March 2017), there will be no R&D cess. Hence, question of its deduction will not arise in service tax payable on technology related or IPR services.
Increase in service tax liability of tour operators
Provisions relating to tour operator have been altered w.e.d. 22-1-2017.
Tax payable on 60% of value in case tours w.e.f. 22-1-2017- Service tax is payable on 60% of bill amount w.e.f. 22-1-2017. The bill issued for this purpose indicates that it is inclusive of charges of accommodation and transportation required for such a tour and the amount charged in the bill is the gross amount charged for such a tour including the charges of accommodation and transportation required for such a tour. Cenvat credit of all input services is available but Cenvat credit of input goods is not available – Sr No. 11 of Notification No. 26/2012-ST dated 20-6-2012 as amended w.e.f. 22-1-2017.
Tax payable was on 30% in case of package tours or other tours during 1-4-2016 to 22-1-2017 – In case of a package tour service tax is payable on 25% of amount charged. This exemption is available only if – (a) Tour operator does not avail Cenvat of duty/tax paid on inputs, capital goods and input service other than input service of a tour operator and (b) The bill issued indicates that it is inclusive of charges for package tour [The service tax was payable on 25% of value in case of package tours and 40% in case of other tours. Now it is uniformly on 30% of value] – Sr No. 11(ii) of Notification No. 26/2012-ST dated 20-6-2012 as existing during 1-4-2016 to 22-1-2017]
[The words ‘’other than input service of tour operator’ have been added w.e.f. 1-10-2014. Till 1-10-2014, the tour operator could not avail any Cenvat credit at all if he availed the abatement scheme of 25%].
Cenvat Credit eligibility of tour operator services – Till 1-10-2014, service tax was payable by tour operator on 25%/40%/10% of value, subject to condition of non-availment of Cenvat credit, as per Sr. No. 11 of Notification No. 26/2012-ST dated 20-6-2012.
This was proving problematic as in this trade, sub-contracting or outsourcing of work is common. If such tour operator service is outsourced and if the sub-contractor charges service tax on 10%/25%/40% value, it was becoming cost to the main service provider. Thus, (official) sub-contracting was becoming an unviable proposition in this trade.
Luckily this problem was realised by Government. W.e.f. 1-10-2014, Cenvat credit on input service of tour operator was available. Cenvat credit of any other input services was not available Cenvat credit on inputs and capital goods not available. Thus, if a tour operator engages a motor cab, maxi cab or contract carriage, the service tax charged by provider of motor cab, maxi cab or contract carriage service was not available to the tour operator i.e. it would be cost to the tour operator.
Now, w.e.f. 22-1-2017, Cenvat credit of all input services is available but service tax is payable on 60% of bill amount (against earlier 30%].
Service tax when only room booking service is provided
In case where only room booking service was provided, service tax was payable on 10% of value if amount charged in bill was inclusive of charges of accommodation as per – Sr No. 11(i) of Notification No. 26/2012-ST dated 20-6-2012 as existing upto 22-1-2017.
Now, this entry has been omitted w.e.f. 22-1-2017.
Really, mere room booking service is not a tour operator service at all.
However, now, w.e.f. 22-1-2017, if the tour operator charges total amount including charges for accommodation, he will be liable to pay service tax on 60% of value. He can take input tax credit of service tax charged to him by the hotel.
For this purpose, the hotel will have to raise invoice in name of tour operator and not in name of the customer who is staying in hotel.
If the tour operator provides web based service of hotel booking as aggregator and if the customer makes direct payment to the hotel, then tour operator will not be liable to pay any service tax w.e.f. 22-1-2017.
Aggregator providing hotel booking services is not liable to pay service tax in case of hotel booking if payment is made by customer directly to hotel – amendment w.e.f. 22-1-2017. Of course, he is liable to pay service tax on commission received by him from hotel.
Indian service provider providing room booking service for hotel abroad – If an Indian tour operator provides services to an Indian customer for booking hotel room outside India and collects entire room rent, he will be liable to pay service tax on 60% of value.
Tour operator out of India providing room booking service to Indian customer – If a tour operator out of India provides web based room booking service to Indian customer for room in hotel outside India, this will be OIDAR service (Online information and database access or retrieval service). If the foreign tour operator has representative in India, such representative is liable to pay service tax. If the foreign tour operator does not have any representative in India, he is expected to register and pay service tax. However, it is highly doubtful if he will do so, as the Indian tax authorities have no control over him.
‘Value’ would include interest on deposits, loans or advances in case of Banks, FI and NBFC for rule 6(3) and 6(3A) of Cenvat Credit Rules
Explanation I (3) to rule 3(D) of Cenvat Credit Rules states that for purpose of rule 6(3) and rule 6(3A) of Cenvat Credit Rules, ‘value’ shall not include value of services by way of extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount.
This exclusion is actually meant for manufacturers and service providers occasionally giving loans or making deposits. Hence, a proviso has been added w.e.f. 2-2-2017 that this clause shall not apply to a banking company, financial institution and NBFC engaged in providing services by way of extending deposits, loans or advances.
Really, this is only a clarificatory amendment and should apply retrospectively, though the amendment does not specifically say so.
Permission to grant transfer of Cenvat credit from one factory to another
As per Rules 10(1) and 10(2) of Cenvat Credit Rules. if a manufacturer shifts his factory to another site or provider of output services shifts his business or a manufacturer/service provider transfers his factory/business on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of factory to a joint venture, the manufacturer/service provider can transfer unutilised Cenvat credit to the transferred / sold / merged / leased or amalgamated factory/business
On receipt of application for transfer of credit under rule 10 of Cenvat Credit Rules, Assistant/Deputy Commissioner shall grant permission within three months, provided requirements of rule 10(3) regarding transfer of stock, WIP and capital goods to new site are satisfied.
This period can be extended for further period upto maximum six months by Principal Commissioner/Commissioner for reasons to be recorded in writing – rule 10(4) of Cenvat Credit Rules, inserted w.e.f. 2-2-2017 [so far there was no specific time limit for granting permission].
In fact, there is case law that the rule does not require specific approval from AC/DC for transfer of such credit. However, on basis of this sub-rule, it can be said that such approval is indeed required.
Amendments to provisions relating to Advance Ruling w.e.f. March 2017
Following changes are proposed in Finance Bill, 2017 – (a) Application fees payable for advance ruling will be Rs 10,000 [earlier, fees payable wre Rs 2,500] (b) Advance Ruling Authority should pronounce its ruling in six months from receipt of date of application (earlier limit was ninety days) (c) Existing applications before Advance Ruling (Central Excise, Customs and Service Tax) Authority should be transferred to Authority constituted under section 245-O of Income Tax Act.
Similar changes are made in customs and central excise also.
These charges will be effective from the date the Bill is passed and gets assent of President of India (around end of March, 2017).
The changes are made to align provisions in excise, customs and service tax with income tax as Advance Authority under Income Tax is also Authority for Advance Ruling under indirect taxes.