Union Budget 2011 - Service Tax Provisions

Union Budget - 2011

Service Tax

This year the Finance Bill for 2011 was announced with the usual hype and drama which has come to characterize the annual budgetary exercise. Reams and reams of newsprint are devoted by the newspapers reporting on this event. Every one competes on national television in giving you sound bytes on what they feel. In fact, nowadays, even a ten year old can give you an opinion on the budget rating it on “a scale from 1 to 10”.  So, today this event can be compared to a magic show, where like a conjuror pulling out things from his hat, the finance minister has to “wow” the audience. However, under  all the razzle dazzle,we  the general public often miss out on the fine print. In this article, let us try to understand the changes in the Service Tax provisions.

CHANGES IN SERVICE TAX RULES  (w.e.f. 1-4-2011) :

1)     Service Tax to be paid under a new hybrid system – Cash or accrual whichever is earlier. Earlier, Service tax was to be paid on receipts basis. However, for the first time, there is the introduction of accrual method of calculating service tax liability. Thus, Service tax is now to be paid after determining the date when a service is provided.

POINT OF TAXATION RULES (w.e.f. 1-4-2011) :

These are discussed in detail in a separate article. However, three dates have to be kept track of when determining the date when a service is provided.

1)     Date on which service is provided (or intended to be provided).

2)     Date of issue of invoice

3)     Date of receipt of payment.

In most cases, it is the earliest of the three dates. The exceptions to the above rule as well as the treatment of continuously rendered services are separately discussed (as mentioned earlier ) in the article on “Point of Taxation Rules-Draft”.

CHANGES IN SERVICE TAX RULES (contd.)

2)     Invoices have to be issued within 14 days from provision of service instead of completion of service. Earlier, the provision stated that the invoice had to be issued within 14 days from the date of completion of service or receipt of payment, whichever was earlier. However, now the invoice has to be issued on the provision of service or completion of milestones (in case of continuous services).

3)     Associated Enterprises :

The due date for deemed provision of service is the earliest of the following :-

i)                   Date on which payment has been made.

ii)                Date on which invoice has been issued.

iii)              Date on which debit or credit is made in books of account by the service provider (or service recipient in the case of import of service).

4)     Adjustment of excess service tax under rule 6(3).

There is a mechanism provided for claiming excess service tax paid on services which are not rendered, either fully or partially. This is through an adjustment in the subsequent period’s service tax liability. The condition is that the assessee should refund the value of services (which are not performed) and the service tax thereon to the client.

Now, there is a change in rule 6(3) to be effective from 1-4-2011. The credit can now be claimed where :-  

i)                   When the assessee receives the payment, the assessee should refund the value of services not rendered and the service tax amount thereon to the client.

OR

ii)                When the assessee has not received any payment, but has paid the service tax amount on issue of invoice, subject to credit note for the service tax amount being issued to the client.

However, even today there is no remedy (such as the one above) available in case of excess service tax paid due to :-

a)     Incorrect interpretations of law.

b)     Incorrect Valuation

c)       Wrong application of rate of tax

d)     Incorrect classification (category)

e)     Incorrect abatement

f)       Clerical errors (above Rs. 2,00,000/-)

5)     Adjustment of excess payment of Service tax (due to clerical errors/”simpliciter”) under rule 6(4A) and 6(4B).

There is an increase in the limit from Rs. 1 lakh to 2 lakhs in rules 6(4A)  and 6(4B). The assessee can claim credit in case of excess payment of service tax due to certain clerical errors. In the Finance bill 2011, this limit has been increased to Rs.2 lakhs.

This limit does not apply in cases, where service tax is paid in excess on account of delay in receiving details from branch offices. One need not emphasise that the assessee must be centrally registered as well.

6)     Service tax to be recovered on the basis of self assessment (viz., returns filed by assessee). This is a new sub rule 6A stating that in case any amount is shown as payable by an assessee in his return, it may be recovered on self assessment basis, without issuing any Show cause notice and/or adjudicating under section 73.

CHANGES IN IMPORT AND EXPORT RULES (w.e.f. 1-4-2011):

Under the Export of Service Rules (and Import of Service Rules), there are 3 categories under which services can be classified.

They are :-

1)     Services relating to Immoveable Property

2)     Part-performance or Services which are performed in part at a particular location.

3)     Services which are based on the location of the recipient.

To qualify as exports, services relating to say immoveable property, the immoveable property must be located outside theb borders of India (viz, also including the Economic territorial zone).

There are some changes in categories of certain services from the performance based criterion to the recipient location criterion. This will result in these service providers being exporters of service in case the recipients are located outside India. The services are credit rating agency, market research agency, technical testing and analysis, transport of goods by aircraft, goods transport agency services, opinion poll agency, transport of goods by rail.

There are some other minor changes as well where health services and rail travel agent services are now classified under the performance based criteria.

Special services provided by a builder are also reclassified under the immovable property criteria, where it will be an export only if the property is outside India.

OTHER CHANGES (w.e.f. 1-4-2011) :

1)     Separate provisions for valuation in case of money changing services have been introduced.  A formula has been prescribed in cases, where RBI rates are not available. There is also a change in the rate of tax (viz. 0.1% instead of 0.25%) where the option of  % age of gross value is chosen. This will be separately discussed.

2i) Exemption/Reliefs/Clarifications for SEZ Units :

        A specific exemption is given to Units of SEZ where certain specified services (approved by approval committee of the SEZ) are “wholly consumed” within the SEZ. Service tax will not be chargeable on these services. However, the burden of proof to prove that these services are “wholly consumed” in the SEZ, is on the service provider.  A suitably worded declaration or undertaking from the SEZ Unit would be sufficient proof.

ii)In case of specified services which are not wholly consumed, service tax would be chargeable. However, a refund would be available to the SEZ Unit.

Conditions :-

The services are deemed to “wholly consumed”  for claiming exemption when the  :-

i)                   Services are classifiable under the immoveable property category (as per Export of Service rules)  viz., all services related to the property of Unit in the SEZ.

ii)                Services come under the part-performance category, eg., repairs and maintenance, etc. which are performed in the SEZ.

iii)              In case of other services (viz., falling in recipient location category), the Unit should not have any other business, etc. other than operations in the SEZ.

Note :-

Where services are shared for Domestic Tariff Area operations and for the SEZ Unit, they are not wholly consumed. Therefore, a refund would be available on a pro-rata basis. However, the time limit for claiming a refund has been increased from 6 months to 1 year.

One the major changes in the Service Tax provisions are in the case of penalties.

PENALTIES (w.e.f. date of enactment of  the Finance Bill 2011) :

1)     Penalty for late filing of Returns increased - Section 70.

For late filing of Service Tax Returns penalty is now Rs. 20,000/- as against Rs. 2,000/- which existed earlier.

2)     Harsher penalty levied where fraud, willful misstatement, suppression of facts are proven - Section 73

The old section had a 2 tier mechanism.

Details of Issue of Notice	Particulars of shortfall in Service Tax	Whether concealment of facts	Conditions for payment	Penalty limitation
No Show cause notice issued	Shortfall in Service Tax found either by assessee or by Service Tax officer .	No fraud, collusion, willful misstatement or suppression of facts, etc.	Service Tax + Interest to be paid.	No penalty and no issue of Show cause notice in case of payment made by assessee (and informed to him)
Show Cause notice issued.	Shortfall in Service Tax.	Existence of Fraud, collusion, willful misstatement or suppression of facts, etc.	Service Tax + interest + penalty paid within 30 days from receipt of notice.	Cap of 25% on penalty and interest payable by assessee. No further penalty  proceedings against the assessee if payment made and informed to officer.

     With effect from 1-4-2011, there will exist a 3 tier mechanism for  penalties due to short payment of service tax on account of the above reasons.

Details of Issue of Notice/Adjudication order	Particulars of shortfall in Service Tax	Whether concealment of facts	Conditions for payment	Penalty limitation	Waiver
Adjudication Order issued.	Shortfall in Service Tax found during audit, investigation or verification.	Details of transaction are NOT available in “specified records” and  invoices are NOT maintained for verification. Deemed Existence of willful misstatement or suppression of facts, fraud, etc.	Penalty and Interest together equal to 1% per month for which default continues. Penalty 100% if payment is NOT made within 30 days of receipt of adjudication order(for tax audit assessees) –  and 90 days (for others)	Penalty – 100%.	No Waiver.  Show cause notice will be issued in case of non compliance with adjudication order.  No cap on penalty.
Adjudication Order issued.	Shortfall in Service Tax found during audit, investigation or verification.	There may or may not be willful misstatement or suppression of facts, fraud, etc. But, details are available in “specified records” and in their absence,  Invoices are atleast maintained for verification.	Penalty and Interest together equal to 1% per month for which default continues. If payment is NOT made within 30 days of receipt of adjudication order(for tax audit assessees) and 90 days (for others)	Cap of 50% on penalty, where details of payment given to Service Tax officer.	Reasonable cause acceptable when specified records are maintained.
Adjudication Order issued.	Shortfall in Service Tax found during audit, investigation or verification.	There may or may not be willful misstatement or suppression of facts, fraud, etc. But, details are available in “specified records” and in their absence,  Invoices are atleast maintained for verification.	Penalty and Interest together equal to 1% per month for which default continues. If payment is made within 30 days (for tax audit assessees) and 90 days (for others)	Cap of 25% on penalty, where details of payment given to Service Tax officer.	Reasonable cause acceptable when specified records are maintained.

Note : There seems to less scope for the issue of Show cause notices and greater emphasis on bringing the Service tax provisions in line with Income Tax act by introducing a more comprehensive mechanism to tackle concealment of income and also the introduction of an accrual based calculation of liability (as discussed in the earlier paragraphs). It appears to be a movement towards GST but causes more complexity in tax compliance.

3)     Penalty for following contraventions - Rs. 10,000/- per day + 200 per day for which default continues.

This penalty is applicable in case of failure to :-

1)     Register with Service Tax authorities within the due date on becoming liable.

2)     Maintain books of account.

3)     Make E-payment when mandatory.

4)     Issue invoices in prescribed format – Refer rule 4A of S.T. Rules.

5)     Account for an invoice.

6)     Contravention of rules (where no separate penalty is stipulated).

7)     Failure to appear in response to a summon or furnish information/produce documents.

4)     Prosecution under section 89.

Prosecution provisions are introduced with stringent measures for following offenses :-

1)     No invoice (as per the prescribed format) issued where necessary due to provision of taxable services or due to receipt of any taxable service (import of service). Here there will be difficulty in implementing in the case of import of services.

2)     Availing/utilizing credit without actually receiving any service or goods under cenvat rules.

3)     Non supply of information to authorities or supply of false information.

4)     Failure to pay Service Tax to the government beyond a period of six months from date of  liability.

       INTEREST PROVISIONS (w.e.f. 1-4-2011) :

       Section 75 :

1)     Increase in interest rate for late payment of tax from 13% to 18%.

2)     Relief to small taxpayers - Where the turnover of an assessee does not exceed 60 lakhs, a concessional rate of 15% is applicable against the rate of 18%.

Conclusion :-

The FM has been lauded for his budgetary proposals. But, there are a lot of far-reaching changes, all of which will result in additional revenue for the government, as a result of the increase in penalties, change in interest rates, changes relating to cenvat credit (discussed separately). So, this year, it seems the government’s attitude appears to be “Us haath de, Is haath le”. To sum it up, this budget seems to a step in the right direction as far as the FM is concerned.

This is the first in a series of articles on the Union Budget. While, we have not been able to cover all the changes in this article, we have attempted to give you a holistic view of the proposed changes. 

We will welcome your feedback.  Please mail us at :-

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PS - We will be covering the new services/increase in the coverage of services and exemptions in the next installment. We will also be bringing you more write-ups on the international finance and the Indian economy.