“Service Tax Law Simplified”Session i

Presents5th Knowledge Master Class

On

“Service Tax Law Simplified”

Conducted byDr. Sanjiv Agarwal

FCA, FCS

Wednesday,20th March, 2013Gurgaon © Dr. Sanjiv

Agarwal

1

Corporate Knowledge Foundation

SESSION – I

Overview of

Taxation of Services and Recent

Changes

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This Presentation Covers

• Economic Overview

• Overview of Taxation of Services – Past and Present

• GST – An Update

• Major Changes in 2012 -2013

• Changes in Budget 2013-14

• New Penal Provisions

• Power to Arrest

• Voluntary Compliance Encouragement Scheme, 20133


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Indian Economy – An Overview

India’s economy is the 11th largest economy in the world and the third fastest growing even in today’s recession, after China and Indonesia (Present growth rate around 5.5%)

World is presently facing recession-II but Indian economy is still a growth economy

Inflation –food, lifestyle Agriculture, services and industry are the major

sectors of Indian economy. Contribution of different sectors in March, 2012 was :

Agriculture 19% Services 59% Industry 22%

(likely to be @ 64% in March, 2013)

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Indian GDP to grow about 5 percent in 2012-13 and growth expected at 6.1-6.7 percent in 2013-14

Tax Policy – clarity in tax Laws, stable tax regime, non-adversarial tax administration, fair mechanism for dispute resolution, independent judiciary

Need to raise tax – GDP ratio which is presently around 6-7 percent. Service Tax contributes 11.50 percent of the gross tax revenue Service sector growth @ 9%, much higher than the GDP growth

itself. Contribution of services sector in GDP at 64% including

construction sector. No change in Service Tax rates. No change in peak rates of customs and excise duties also. Both education cesses will continue to be levied.

Economy / Taxation – A Status

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Share of Services in GDP

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Growth in Tax GDP Ratio in India– Irratic and low

Years Tax GDP ratio

1990-91 10.1%

2003-04 9.2%

2007-08 11.9%

2009-10 9.7%

2010-11 10.4%

2011-12 9.9%

2012-13 7.0%*

* Expected

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Growth of Service TaxYear No of new

servicesTotal No of services

Total collection (Rs. in crore)

1994 3 3 407

2001 - 26 2612

2005 13 72 14199

2008 7 103 51301

2010 3 112 58000

2012 0 120 97509 (A)

2013 - All 132697 (RE)

2014 - All 180141 (BE)

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Taxonomy of Indian Taxation

TAXATION POWERS OF UNION Income Tax – on income, except agricultural income Excise Duty – on goods manufactured Custom Duty – on imports Service Tax – on specified services Central Sales Tax – on inter-state sale of

goods Stamp Duty – on 10 specified

instruments

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Service Tax in India (The Past)

Introduced in India in 1994 as a simple, modest tax with just three services.

Service tax – an indirect tax.Approach to Service Tax – Selective as against

comprehensive one.Desirable from revenue, equity and economic

view point.Governed by Finance Act, 1994 and a dozen of

rules. Legislative dependence on over 25 other laws.Scattered and heterogeneous large mass of

service providers as well as wide spectrum of services.

Jurisdictional application.

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Service Tax in India (The Past)

Selective Approach to Service Tax

Taxation by choice Service not defined but taxable service defined. > 120 taxable services [section 65(105)]Resulted in distortions / prejudice Untapped tax potential Economically unjustified Issues – Classification, Illogical definitions,

Constitutional challenges, deemed services etc.

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Service Tax – The Present

Shift to Comprehensive Approach

W.e.f. 1st July, 2012Finance Act, 2012 – A land mark Act to shift from

positive to negative approach.It took 18 years to shift from selective approach

(positive) to comprehensive approach (negative ) to tax services

All services to be taxed other than services specified in the negative list and exempted services – Section 66B.

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All Services(including declared Services

(-)

Specific Exclusions

(-)

Negative List Services

Exemptions

Taxable Services

(-)

Taxation of Services by Finance Act, 2012

(=)

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Service Tax – The Present

New system of taxation of services

Negative list (17 in number) specified through statutory provisions – Section 66D.

‘Service’ defined for the first time.‘Negative List’ and ‘declared services’ also

defined.

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Service Tax provisions no longer applicable (w.e.f.

1.7.2012)

Section 65 Old definitions of Services / Taxable Services

Section 65A Classification of Services Section 66 Charge of Service Tax Section 66A Charge of Service Tax on

Services received from outside India.

Import of Service Rules, 2006Export of Service Rules, 2005

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New Provisions in Service Tax

Section 66 B deals with charge of service tax on or after Finance Act, 2012

Section 66 C provides for determination of place of provision of service.

Section 66 D comprises of negative list of services

Section 66 E comprises of the services which constitute declared services

Section 66 F provide principles of interpretation of specified description of services or bundled services

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Taxable Services w.e.f. 1.7.2012

All services Taxable [section 65B (44)] Declared services Taxable (section 66E) Services covered under Not

Taxable negative list of services (section 66D) Services exempt under Mega Exempted Notification No. 25/2012-ST dated 20.6.2012 Other specified Exemptions Exempted

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Goods & Service Tax (The Future)

GST: A Common Tax on

Goods Services

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Need for Centre to compensate states for loss due to reduction in CST rate

Agreement on CST compensation - Rs 9000 crore provided in Budget

Petroleum products to be under GST; Alcoholic products to be outside GST

Constitutional Amendment Bill, 2011- Report of Standing Committee in this Budget session; further amendments to be made.

Not likely before 2014 LS electionsNo clear road map and commitment on time lines on

GST implementationHope for consensus in next few months.

GST –An Update

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Time to wrap up loose endsGST rate – band may be introducedConsensus required at Empowered Committee on

GST to abolish small taxesAgreement on dropping Dispute Settlement BodyGST may be introduced in phases. States to

decide / opt out States empowered to raise rates in case of distressRevenue sharing mechanism to be rationalizedA suitable GST rate?Need for drafting a GST Law by States and Centre

GST : What Next

Service Tax Law made shorter by about 40 percent Effective rate of Service Tax @ 12.36 percent w.e.f. 01.04.2012

including education cess.Definition of ‘service’ finds place in statutory provisions All services taxed including a set of services called ‘declared

services’Negative list of services containing 17 broad service categories out

of Service Tax ambit.Withdrawal of many existing exemptions / abetments or their

rationalization

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MAJOR CHANGES IN SERVICE TAX IN 2012-13 AT A GLANCE

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Place of provision of service rules determine the location of service and become be basis of taxation.

Withdrawal of export of service rules and import of service rules in view of place of provision of service rules coming into operation.

Concept of taxable territory and non- taxable territory introducedTaxation of Service to be determined by provision of service in

taxable territory and non taxable territory.Basis of charge of Service Tax shifted under new section 66B. Classification of service criteria replaced by new section 66F on

interpretation principles of specified description of service or bundled services.


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Under new reverse charge mechanism, onus of paying Service Tax will be shared by service provider and service receiver in case of specified services.

Service Tax on taxable services provided by service provider located in Jammu & Kashmir state liable under reverse charge.

New Accounting Codes for payment of tax under new regime ( for July – November 2012)

Tax Collection 00441089 Other Receipts 00441090 Penalties 00441093 Deduct Refunds 00441094


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Restoration of Service Specific Accounting Codes Circular No. 165 dated 20.11.2012 /Notification No. 48/2012-ST

dated 3.12.2012 No change in law ; only for statistical analysis New code created for penalty Registration obtained under the positive list approach continue

valid Registration under all taxable services to be amended online

under specific head of services For reverse charge, registration should be obtained as service

receiver under respective category. Accounting codes for residual entry

Service Tax 00441480Interest 00441481Penalty 00441485


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Change in valuation rules in relation to works contracts and outdoor catering / supply of food.

Payment of Service Tax on receipt basis for all service providers being individuals / firms / LLPs, if aggregate value of taxable services in previous year does not exceed Rs. 50 lakh.

Criteria for Rs 10 lakh threshold exemption changed. Time limit for appeal by assessees to Commissioner (Appeals)

reduced from 3 months to 2 monthsRevision Application Authority and Settlement Commission

provisions made applicable to service tax.Special Audit of Service tax assesses by CAs /CWAs Recovery of tax dues – legal smartness (Circular dated

1.1.2013)



Quarterly Service Tax Returns

April to June, 2012 N. No. 47/2012-ST dated 28.09.2012 – for April to June 2012, quarterly return

prescribed. Order No. 3/2012 - last date of return was extended upto 25.11.2012

July to October, 2012

N. No. 1/2013-ST, dated 22.02.2013

Circular No. 137 dated 22.02.2013 / Order No. 1 New ST-3 Form Last date 25th March, 2013; extended to 15th April, 2013 To be uploaded on ACES portal by March, 2013 end To indicate capacity – as provider / under RCM / under partial RCM Filing of return for second half of 2012-13 to be notified later

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Stability in negative list maintained with only a few changes.

Vocational courses offered by institutes affiliated to the State Council of Vocational Training and testing activities in relation to agriculture and agriculture produce to be in the negative list.

Definition of "process amounting to manufacture" will also include processes under Medicinal and toilet preparations (Excise Duties) Act, 1955.

Service Tax to be levied on all restaurants which are air conditioned. The condition of liquor license done away with.

Benefit of exemption to copyright on cinematography to be limited to films exhibited in cinema halls.

Existing exemption from Service Tax for low cost housing and single residential units to continue.

Changes in Budget 2013-14 (Finance Bill,2013)

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Certain exemptions curtailed / withdrawn in relation to auxiliary education service and renting by educational institutes, transportation of goods by railway / vessel, vehicle parking to general public, repair or maintenance of government aircrafts, charitable activities etc. (w.e.f. 1.4.2013)

Retrospective exemption to Indian railways for services provided between 1st July, 2012 upto 28th February, 2013 to the extent notices have been issued.

Where it is held that extended period of limitation u/s 73 is not sustainable for making demands, Department's demand for normal period of 18 months shall be sustainable.

Penalty u/s 77(a) (in case of non-registration) shall be restricted to a maximum of Rs. 10,000.

Abatement reduced w.e.f. 1.3.2013 from 75% to 70% in case of luxury apartments / residential complexes (with carpet area of 2000 sq. ft. or more or value of Rs. 1 crore or more).


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New provisions for revised punishments for offences u/s 89, make certain offences cognizable and others non cognizable and bailable.

New Section 78A inserted to impose penalty on directors and officials of company for specified willful actions / offences.

Power to arrest provided u/s 91 where Service Tax default is more than Rs. 50 lakhs.

Advance Ruling can be sought to ascertain eligibility of Cenvat Credit on input services for a manufacturer of excisable goods. (w.e.f 1.3.2013)

Resident public limited companies also allowed to seek advance ruling from Advance Ruling Authority.

Stay orders of CESTAT to have a maximum period of 365 days (180+185) upto which stay granted will be operational even when assessee is not at fault.; Stay to get vacated after 365 days.


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In Cestat appeals, single member bench can hear and dispose off appeals upto a monetary limit of Rs. 50 lakhs (previously Rs. 10 lakh).

Mode of delivery of letters, orders etc will also include speed post and approved courier agency.

Voluntary Compliance Encouragement Scheme, 2013 (VCES) introduced as a onetime amnesty measure to effect compliance and recovery and provide amnesty from interest and penalties (last date 31.12.2013).


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Section 78A Penalty for offences by director etc. of a company

Section 89 Offences & penalties

Section 90 Cognizance of offences

Section 91 Power to attrest

Goes against non- adversarial tax policy of Government

Penal Provisions

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Penalty for offences by Company officials (Section 78A)

To impose penalty for contraventions / violations by Company

Penalty may extend up to Rs. one lakhPenalty on any director, manager, secretary

or officer of CompanyIncharge / responsible to Company for

conduct of business of CompanyIf knowingly involved in specified

contraventions


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Specified Contraventions -Evasion of Service TaxIssuance of bill / Invoice / challan without

provision of service in violation of rules.Availment and utilization of credit of taxes /duties

without actual receipt of services /goods either fully or partially.

Failure to pay amount collected as service tax to the credit of Central Government beyond 6 months of the due date


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Personal Penalty

Till now, there was no provision in the Finance Act, 1994 to levy personal penalty (also legally held)

There can be no penalty on directors /officers / manager / secretary of non-company assessees

Changes in Budget 2013-14 (Finance Bill, 2013)

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Offences & Penalties (Section 89)

Punishment to whoever commits any offencea) Knowingly evades payment of Service Taxb) Wrongly avails / utilizes credit of taxesc) Maintains false books of accounts/ supplies false

informationd) Collects tax but fails to pay within 6 months of due date

Contd…..


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Offences & Penalties (Section 89)

For (a), (b) and (c), amount > Rs. 50 lakhs – imprisonment from 6 months to 3 years

For (d), if amount > Rs. 50 lakh – imprisonment from 6 months to 7 years

For any other offences– imprisonment upto 1 yearFor second or subsequent conviction

(a), (b), (c), other offences – imprisonment upto 3 years

(d) – imprisonment upto 7 years


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Cognizance of Offences (Section 90)

Cognizable Offences Failure to deposit service tax collected where amount exceeds Rs. 50 lakhs

Non-Cognizable and Bailable OffencesAll offences except cognizable offences as above

Detailed instructions to be issued(Similar provisions existed prior to 16.10.1998)


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Power to Arrest (Section 91)

Provides power to arrest Covers all classes of assessees Empowers Commissioner of Central Excise He may authorize any officer not below the rank of Superintendent to arrest Who can be arrested – any person as per Section 89 Trigger for arrest – offences – as per Section 89(1) Arrests to be made in terms of Code of Criminal Procedure, 1973 (CCP) For Cognizable offences

Grounds of arrest to be informed to such person Produced before Magistrate with in 24 hours

Asstt. / Deputy Commissioner empowered to release an arrested person on bail in case of non -cognizable / bailable offences

To have same powers as officer -in -charge of Police Station in terms of Section 436 of CCP


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Power to Arrest (Section 91)ImpactPunitive punishments measuresPossible harassment of small service providers

(sole proprietors etc.)But tax amount of Rs. 50 lakhs provides a breatherMay improve compliances Regressive Increase litigationNeed to distinguish between willful and genuine

defaluts

Changes in Budget 2013-14

(Finance Bill, 2013)

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Voluntary Compliance Encouragement Scheme, 2013 (VCES) Chapter VI (Clause 94-104 of Finance Bill, 2013) 17 lakh assessees, 7 lakh returns filed Stop filers / non-filers Only a one time scheme To chase assessees not possible Hope to collect reasonable money Action & consequences

Truthful declaration of service tax dues service 1.10.2007 upto 31.12.2012 by defaulter as on 1.03.2013

Payment of due tax in 1 or 2 installments Interest , penalties and other consequences waived

Not applicable to period before 1.10.2007 or after 31.12.2012 Not applicable to cases involved search, audit, investigation, SCN

or summon issued cases as on 1. 03. 2013

Changes in Budget 2013-14 (Finance

Bill, 2013)

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Voluntary Compliance Encouragement Scheme, 2013 (VCES)Pay at least half of tax before, 31st December, 2013Pay balance by

30th June, 2014 without interest 31st December 2014 with interest w.e.f. 1.07.2014

Dues for period after 31st December, 2012 to be settled as per present Law

No refund of amount paid under VCES Tax dues declared but not paid – to be recovered as per LawFalse declaration to be rejected - reason to believe, notice to

be servedNo action after one year from date of declarationOnce acknowledgement is issued - no reopening permissible


“Service Tax Law Simplified”Session i

Education

taxable territory

service providers

service tax

indian economy

negative list

taxable services

service rules

service receiver