EXECUTIVE SUMMARY OF CHANGES EFFECTED BY THE BUDGET 2011

Changes in Cenvat Credit Rules as applicable to service provider – effective from 01.04.2011:

ü No credit of inputs on which the concessional rate of duty @ 1% is allowed to be paid under NN. 1/2011 SCE dated 01.03.2011.

ü Exempted service would now include,

• The definition of exempted service will include services on which exemption/abatement is taken and the said exemption / abatement is subject to the condition that no cenvat credit of duty on inputs and service tax paid on input service used for providing such service is availed.

• Trading – difference of sale and purchase price of the goods (though not clarified, it appears that gross profit after adjustment of opening and closing stock should be taken as trading margin, but without considering transportation etc, other cost of purchases)

ü Service tax leviable under section 66(A) in respect of import of services under reverse charge mechanism is added in the list of eligible credit under Rule 3 with retrospective effect from 18/04/2006.

ü No credit of any input or specified service allowed for construction of a building or a civil structure or laying for foundation of making of structure for support of capital goods. However, a input service provider (a contractor or sub-contractor) providing service would be eligible to take credit :

The specified services are :

• Commercial or Industrial Construction Service
• Construction of Complex Service
• Works Contract Service
• Port or other Port Service
• Airport Service
• Architect Service

ü Restriction in definition of input service :

The definition of input service remain same as earlier, however, credit of input service used for setting up of a factory, premises of provider of output service or an office relating to such factory for premises will not be allowed. However, credit of all these input services will be continued to be allowed if used in relation to modernization, renovation, or repairs of such premises.

In the definition the word, “such as” removed before the words, “accounting, auditing, financing……………” etc. Further, the words, “activities relating to business” removed giving rise to the controversy that whether these changes infact would have any impact. Others specifically allowed input services are advertisement or sales promotion, market research, storage upto the place of the removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal.

ü Certain specified services (general insurance, Rent-a-Cab, repairs etc to motor vehicles, supply of tangible goods) are not to be treated as input services if they relate to motor vehicles. However, the said exclusion is not applicable if the said motor vehicle is used for providing the following taxable services :

• Rent-a-Cab
• Tour Operator
• Supply of tangible goods
• Cargo handling
• Pandal shamiana
• Outdoor Catering
• Goods Transport Agency

ü Goods and services provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as leave or home travel concession used primarily for personal use or for consumption of any employee will not be regarded as input or input services to be eligible for Cenvat credit.

ü No Cenvat credit shall be taken on the duty or tax paid on any good and services that are not inputs or input services. Further, no credit shall be allowed or inputs used exclusively in or in relation to the manufacturer of exempted goods or for provision of exempted services and on input services used exclusively in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or provision of exempted service.

ü The definition of input is substituted and eligibility of goods under the substituted definition is tabulated below;

# free warranty means a warranty the value of which is included the price of final products and is not charged separately.

ü The definition of input service is substituted and eligibility of services under the substituted definition is tabulated below;

ü Allowability of Cenvat Credit of inputs or input services :

• § Take full credit of input or input services used for provision of output services excluding exempted services on the basis of maintenance of separate records of such one to one direct input or service

• In respect of common services the options are :

• Pay 5% of the value of exempted goods and exempted services,

• Take proportionate credit of inputs and input services used in proportion of the ratio of taxable services and total services including exempt service.

ü Provision relating to 100% exemption of 16 input services [Rule 6(5)] like Banking or Financial Service, Repairs & Maintenance Service, Security Service etc, even if it is partly used for providing exempt service is now removed.

ü Closing balance of Cenvat credit as on 31.03.2011 will not be affected and the same will be allowed to be utilized in subsequent period until exhausted.

ü In case of a banking company or NBFC or financial institution, Cenvat credit shall be allowed to the extent of 50% only.

ü In case of life insurance business and ULIPs, 20% of credit shall be allowed.

ü In case of Air Travel Agent’s Service, Life Insurance Service and Money Changing Service [Rule 6(7)(b) & 7(c)] wherein optional rate of tax is paid by the service provider, the value of taxable service shall be full value as applicable to the normal rate of tax as applied to the optional rate of tax paid by the service provider.

ü In case of Works Contract Service, where the tax is paid under the Composition Scheme, the value of taxable service shall be considered as applicable to the normal rate of tax as applied to the composition rate of tax paid by the service provider.

ü No reversal of Cenvat credit is required in case where service is provided to a SEZ unit or a developer without payment of service tax for the authorized operation in such SEZ.

ü Restriction in availment of Cenvat credit in certain situation :

Cenvat credit of service tax paid in respect of the following services is restricted to 40% where the input service provider has charged service tax on full value of services after availing cenvat credit on inputs.

• Erection, commissioning and installation
• Commercial or industrial construction
• Construction of residential complex

COMPUTATION OF AVAILMENT OF CENVAT CREDIT FROM 01.04.2011 UNDER DIFF. SITUATIONS

7.1 There is no change in the scope of the levy of these services. However the following changes have been made in the actual collection of tax:

a) A new rule (2B) has been introduced in the Service tax (Determination of Value) Rules, 2006 prescribing the value of the service in terms of Section 67 of the Act.

The value shall be as follows:

(i) The difference between the buying rate or the selling rate, as the case may be, and the RBI reference rate for that currency for that day multiplied by units of currency exchanged;

(ii) If RBI reference rate is not available the value shall be 1% of the value of money exchanged in Indian rupees;

(iii) When both the currencies are not Indian rupees, 1% of the lesser of the amounts receivable if the two currencies are converted at RBI reference rate.

b) The rate of composition under rule 6(7B) has been lowered from 0.25% to 0.1% of the gross amount of money exchanged. However, the proviso relating to paying tax on billed charges has been deleted. Thus now the assesse will have the option to pay tax @0.1% of gross amount exchanged or else at standard rated on the value of service in terms of rule 2B, as mentioned above.

5.1 A number of changes have been made in the Service Tax Rules to align the provisions consequent to the introduction of Point of Taxation Rules, 2011. A new rule 5B has been introduced to provide that the applicable rate of tax shall be the rate prevailing at the time when the services are deemed to have been provided.

5.2 It has also been provided that when an invoice has been issued or a payment received for a service which is not subsequently provided, the assessee may take the credit of the service tax earlier paid when the amount has been refunded by him to the recipient or by the issue of credit note, as the case may be.

5.3 The amount stated in rule 6(4B)(iii) for adjustment of excess amount paid by an assessee is being enhanced to Rs. 2 lakhs.

5.4 A new sub-rule 6A has been introduced in rule 6 to provide that if an amount of service tax has been self-assessed but not paid, the same shall be recoverable along with interest under section 87 of the Act. Thus, there shall be no need to resort to the requirements of section 73 for the recovery of such self-assessed amounts.

5.5 The composition rate in sub-rule 7B of rule 6 applicable to in relation to purchase or sale of foreign currency, including money changing, has been reduced from 0.25% to 0.1% and the Proviso has been deleted. Thus, in the case of these services, option of paying service tax on billed charges will not be available.

5.6 All these changes will come into effect from 01.04.2011.

4.1 The existing scheme relating to compliance has been proposed for a revamp wit h a view to strike a healthy balance between the interests of revenue and legitimate business and to promote voluntary compliance.

4.2 As a result a number of changes have been proposed with the following philosophy:

(i) Improve voluntary compliance by encouraging self-correction, wherever the deviations are unintentional omissions;

(ii) Reduced penalties may be imposed if the transactions are captured fully and truthfully in records and further abated if timely admission and payment is made;

(iii) Intentional and unrecorded violations should be dealt with severely with no concession whatsoever.

4.3 Thus the undue advantage obtained by carrying on surreptious activities at the cost of law-abiding business is sought to be neutralized. The revised system also encourages informed decision-making by the taxpayers at the early stages of investigation or verification by the Department. Changes proposed in the compliance mechanism are given in the following paragraphs.

4.4 The maximum penalty for delay in filing of return under section 70 is proposed to be increased from Rs.2,000/- to Rs.20,000/-. However, the existing rate of penalty is being retained under rule 7C of the Service Tax Rules, 1994. The maximum penalty is presently reached after a delay of 40 days. The new limit will impact only those who delay filing of return for longer durations.

4.5 The provisions of section 73 (1A) and both the Provisos of section 73 (2) are proposed for deletion. As a result, the benefit of reduced penalty shall not be available in cases of fraud, mis-statement, suppression, collusion etc. in the ordinary course.

However, revised benefit will be available under the new sub-section 4A of section 73 in situations where the true and complete account of transactions is otherwise available in the specified records and the assessee during the course of audit, verification or  investigation pays the tax dues, together with interest and the reduced penalty. It is clarified that the assessee can also avail this benefit on his own also. The extent of penalty is being further reduced to 1% per month of the tax amount for the duration of default, with an upper ceiling of 25% of the tax amount.

4.6 Interest rate for delayed payment of service tax is being increased to 18% per annum, effective 01.04.2011 (Notification 15/2011-ST). A concession of 3% has been  proposed in the Bill for tax-payers whose turnover during any of the years covered in the notice or the preceding financial year is below Rs 60 lakh.

4.7 Penalty for failure to pay tax under section 76 is being halved.

4.8 The maximum penalty under section 77 for contravention of various provisions is proposed to be increased from Rs.5000/- to Rs.10000/-. However, the daily rate of  penalty, wherever applicable, is being retained.

4.9 Penalty under Section 78 is being altered from upto twice the amount of tax to an amount equal to the tax. Moreover, in situations where the taxpayer has captured the true and complete information in the specified records, penalty shall be 50% of the tax amount.

The latter penalty (only) shall be further reduced to 25% if the tax dues are paid within a period of one month together with interest and reduced penalty. For assessees with turnover upto Rs.60 lakh the period of one month shall be increased to ninety days.

4.10 Section 80 is being amended by substituting section 78 with the words “proviso to section 78” and thus the power to waive penalty shall be available only in cases where the  information is captured properly in the specified records.

4.11 The revised position relating to penalties and their mitigation or waiver is summed up in the following table (portion in italics being the changes):

4.12 Power to issue search warrant under section 82 is proposed at the level of Joint

Commissioner and the execution of search warrant at the level of Superintendent.

4.13 Provisions relating to prosecution are proposed to be re-introduced and shall apply in the following situations:

(i) Provision of service without issue of invoice;

(ii) Availment and utilization of Cenvat credit without actual receipt of inputs

or input services;

(iii) Maintaining false books of accounts or failure to supply any information or

submitting false information;

(iv) Non-payment of amount collected as service tax for a period of more than

six months.

4.14 There shall be no power of arrest and the prosecution can be launched only with

the approval of Chief Commissioner.

A number of existing services are being modified or substituted as follows:

3.1 Authorized Service Station Services [section 65 (105) (zo)]: The existing service is being replaced with a new definition to cover all persons and all motor vehicles other than those meant for goods carriage or three wheeler auto rickshaw.

3.2 Life Insurance Service [section 65 (105) (zx)]: The scope of this service is proposed to be expanded to cover all services, including in relation to management of investments.

3.3 Commercial Training or Coaching Service [section 65 (105) (zzc)]: The scope of the service is proposed to be expanded to include all coaching and training that is not recognized by law irrespective of whether the institute is providing any other course(s) recognized by law.

3.4 Club or Association Service [section 65 (105) (zzze)]: The scope of the service is proposed to be expanded to include service provided to non-members as well.

3.5 Business Support Service [section 65 (105) (zzzq)]: The scope of the service is being expanded to include operational or administrative assistance of any kind.

3.6 Services by legal professionals [section 65 (105) (zzzzm)]: The scope of the existing service is being expanded to include:

(i) Services of advice, consultancy or assistance provided by a business entity to individuals as well;

(ii) Representational services provided by any person to a business entity; and

(iii) Services provided by arbitrators to business entities.

Services provided by individuals to other individual will remain outside the levy.

3.7 Services provided by clinical establishments [section 65 (105) (zzzzo)]: The existing levy on health services is proposed to be replaced as follows:

(i) Any service provided by a clinical establishment having the facility of central air conditioning in any part of the establishment and more than 25 beds for in-patient treatment at any time of the year;

(ii) Diagnostic services provided by a clinical establishment with the aid of laboratory or medical equipment; and

(iii) Health-related services provided by doctors, not being employees, providing health-related services from the premises of a clinical establishment.

Clause [Section 65(9) and Section 65(105) (zo)]

Current Presently, Service Tax is levied on services provided or to be provided by an authorized service station, in relation to any service, repair,reconditioning or restoration of motor cars, light motor vehicles or two-wheeled motor vehicles in any manner.

new scope •

The definition of ‘authorized service station’ is proposed to be omitted as the same becomes redundant and hence services provided by any Garage person to any person for repair of any kind for motor vehicle is covered.Car decoration and other simialr service is also covered Note: earlier scope covered only car service station authorised by car manufacturers and now all service providers e.g.Car Repair garages are covered

Effective date after budget passing at parliament, date will be announced

Notification No. 18/2011 – Service Tax dated 1st March, 2011 (as amended by Notification No.25/2011)

G.S.R. (E).- In exercise of the powers conferred under clause (a) and clause (hhh) of subsection

(2) of section 94 of the Finance Act, 1994, the Central Government hereby makes the following rules for the purpose of collection of service tax and determination of rate of service tax,

namely,-

1. Short title and commencement.-(1) These rules shall be called the Point of Taxation Rules, 2011.

(2) They shall come into force on the 1st day of April, 2011. (option to select  01.07.2011)

2. Definitions.- In these rules, unless the context otherwise requires,-

(a) “Act” means the Finance Act, 1994 (32 of 1994);

(b) “associated enterprises” shall have the meaning assigned to it in section 92A of the Income

Tax Act, 1961 (43 of 1961);

(c) “continuous supply of service” means any service which is provided, or to be provided continuously, under a contract, for a period exceeding three months, or where the Central Government, by a notification in the Official Gazette, prescribes provision of a particular service to be a continuous supply of service, whether or not subject to any condition;

(d) “invoice” means the invoice referred to in rule 4A of the Service Tax Rules, 1994 and shall

include any document as referred to in the said rule;

(e) “point of taxation” means the point in time when a service shall be deemed to have been

provided;

(f) “taxable service” means a service which is subjected to service tax, whether or not the same

is fully exempt by the Central Government under Section 93 of the Act;

“3. Determination of point of taxation.- For the purposes of these rules, unless otherwise provided, ‘point of taxation’ shall be,-

(a) the time when the invoice for the service provided or to be provided is issued:

Provided that where the invoice is not issued within fourteen days of the completion of the provision of the service, the point of taxation shall be date of such completion.

(b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.

Explanation .- For the purpose of this rule, wherever any advance by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.”.

4. Determination of point of taxation in case of change of rate of tax.- Notwithstanding anything

contained in rule 3, the point of taxation in cases where there is a “change in effective rate of tax” in respect of a service, shall be determined in the following manner, namely:-

(a) in case a taxable service has been provided before the “change in effective rate of tax”,-

(i) where the invoice for the same has been issued and the payment received after the

“change in effective rate of tax”, the point of taxation shall be date of payment or issuing of invoice,whichever is earlier; or

(ii) where the invoice has also been issued prior to “change in effective rate of tax” but the payment is received after the “change in effective rate of tax”, the point of taxation shall be the date of issuing of invoice; or

(iii) where the payment is also received before the “change in effective rate of tax”, but the invoice for the same has been issued after the “change in effective rate of tax”, the point of taxation shall be the date of payment;

(b) in case a taxable service has been provided after the “change in effective rate of tax”,-

(i) where the payment for the invoice is also made after the “change in effective rate of tax” but the invoice has been issued prior to the change of tax rate, the point of taxation shall be

the date of payment; or

(ii) where the invoice has been issued and the payment for the invoice received before

the “change in effective rate of tax”, the point of taxation shall be the date of receipt of payment or

date of issuance of invoice, whichever is earlier; or

(iii) where the invoice has also been raised after the “change in effective rate of tax” but the payment has been received before the “change in effective rate of tax”, the point of taxation shall be date of issuing of invoice.

“Explanation.- For the purposes of this rule, “change in effective rate of tax” shall include a change in the portion of value on which tax is payable in terms of a notification issued under the provisions of Finance Act, 1994 or rules made thereunder.”.

5. Payment of tax in cases of new services.- Where a service, not being a service covered by rule 6,

is taxed for the first time, then, –

(a) no tax shall be payable to the extent the invoice has been issued and the payment received

against such invoice before such service became taxable;

(b) no tax shall be payable if the payment has been received before the service becomes taxable

and invoice has been issued within the period referred to in rule 4A of the Service Tax Rules,

1994.

“6. Determination of point of taxation in case of continuous supply of service.-Notwithstanding anything contained in rules 3,4 or 8, in case of continuous supply of service, the `point of taxation’ shall be,-

(a) the time when the invoice for the service provided or to be provided is issued:

Provided that where the invoice is not issued within fourteen days of the completion of the provision of the service, the point of taxation shall be date of such completion.

(b) in a case, where the person providing the service, receives a payment before the time specified in clause (a), the time, when he receives such payment, to the extent of such payment.

Explanation 1. – For the purpose of this rule, where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the service receiver to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service.

Explanation 2.- For the purpose of this rule, wherever any advance, by whatever name known, is received by the service provider towards the provision of taxable service, the point of taxation shall be the date of receipt of each such advance.”.

“7. Determination of point of taxation in case of specified services or persons.-Notwithstanding anything contained in these rules, the point of taxation in respect of,-

(a) the services covered by sub-rule (1) of rule 3 of Export of Services Rules, 2005;

(b) the persons required to pay tax as recipients under the rules made in this regard in respect of services notified under sub-section (2) of section 68 of the Finance Act, 1994;

(c) individuals or proprietary firms or partnership firms providing taxable services referred to in sub-clauses (p), (q), (s), (t), (u), (za), (zzzzm) of clause (105) of section 65 of the Finance Act, 1994,shall be the date on which payment is received or made, as the case may be:

Provided that in case of services referred to in clause (a), where payment is not received within the period specified by the Reserve Bank of India, the point of taxation shall be determined, as if this rule does not exist.

Provided further that in case of services referred to in clause (b) where the payment is not made within a period of six months of the date of invoice, the point of taxation shall be determined as if this rule does not exist.

Provided also that in case of “associated enterprises”, where the person providing the service is located outside India, the point of taxation shall be the date of credit in the books of account of the person receiving the service or date of making the payment whichever is earlier.

8. Determination of point of taxation in case of copyrights, etc. .- In respect of royalties and

payments pertaining to copyrights, trademarks, designs or patents, where the whole amount of the

consideration for the provision of service is not ascertainable at the time when service was performed,

and subsequently the use or the benefit of these services by a person other than the provider gives rise

to any payment of consideration, the service shall be treated as having been provided each time when

a payment in respect of such use or the benefit is received by the provider in respect thereof, or an

invoice is issued by the provider, whichever is earlier.

“9. Transitional Provisions.- Nothing contained in this sub-rule shall be applicable,-

(i) where the provision of service is completed; or

(ii) where invoices are issued prior to the date on which these rules come into force.

Provided that services for which provision is completed on or before 30^th day of June, 2011 or where the invoices are issued upto the 30^th day of June, 2011, the point of taxation shall, at the option of the taxpayer, be the date on which the payment is received or made as the case may be.”.

[ F.No. 334/3/2011 – TRU]

Notification No.28/2011 – Service Tax

G.S.R. (E).- In exercise of the powers conferred under clause (a) and clause (hhh) of sub-section (2) of section 94 the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), read with clause (c) of rule (2) of the Point of Taxation Rules, 2011(hereinafter referred to as the said rules), the Central Government hereby notifies that the provision of taxable services referred to in clauses (zzq), (zzzh), (zzzx), (zzzu) and (zzzza) of section 65(105) of the Finance Act, shall be treated as continuous supply of service, for the purpose of the said rules.

[F. No. 334/3/ 2011 – TRU]

(SAMAR NANDA)

Under Secretary to the Government of India