Budget 2016 - Analysis of Key Service Tax Amendments: MAZARS

The Budget 2016 has disappointed many with no significant reliefs to the individual taxpayers and no significant reduction in the Corporate tax rates. Also, no concrete steps have been announced towards implementation of GST, which still remains a matter of speculation. Introduction of a new cess on taxable services is slightly surprising, since it was widely speculated that onset of GST would lead to consolidation of Indirect tax levies.

To sum up, this is a pro-poor budget, which shuns populism while tries to balance the key priorities of investment, growth and jobs, with one eye on the upcoming State elections. How far the Finance Minister succeeds in balancing these priorities would be known in the coming few months.

Rate of service tax

•The basic rate of service tax remains unchanged at 14 per cent with Swachh Bharat Cess leviable at 0.5 per cent.

Introduction of Krishi Kalyan Cess

•‘Krishi Kalyan Cess’ (‘KK Cess’) to be recovered as service tax at the rate of 0.50 per cent on the value of all taxable services introduced with effect from June 01, 2016, to finance and promote initiatives to improve agriculture.

•Cenvat credit of the KK Cess paid on input services shall be allowed to be utilized for payment of KK Cess on taxable output services.

Withdrawal of service tax exemptions

•Services pertaining to ‘original works’ in relation to construction, erection, commissioning or installation of monorail or metro under a contract entered on or after March 01, 2016 shall be taxed at an abated value of 40 per cent with effect from March 1, 2016.

•However, services pertaining to original works in relation to construction, erection, commissioning or installation of monorail or metro under a contract entered prior to March 01, 2016, on which appropriate stamp duty was paid, shall continue to remain exempt from service tax.

•Services pertaining to original works in relation to construction, erection, commissioning or installation of railways, also continue to be exempt from service tax.

•Legal services provided by a senior Advocate to an Advocate or Firm of Advocates and by a person represented on an Arbitral Tribunal to an Arbitral Tribunal shall be subject to service tax with effect from April 01, 2016. Service tax in respect of such services shall be paid by the provider of service.

•However, legal services provided by a Partnership Firm of Advocates or an individual Advocate to an Advocate or Partnership Firm of Advocates providing legal services, or to a non-business entity or a business entity with turnover up to Rs. 10 lakhs in the preceding financial year, continue to be exempt from service tax.

•Services provided by way of transport of passengers by ropeway, cable car or aerial tramway, with or without accompanied belongings, shall be subject to service tax with effect from April 01, 2016.

•Services by way of transportation of passengers by air conditioned stage carriage presently exempt from the levy of service tax in terms of the Negative List shall be subject to service tax at an abated value of 40 per cent, subject to non-availment of Cenvat credit, with effect from June 1, 2016.

•However, services by way of transportation of passengers by non-air conditioned stage carriage shall continue to remain exempt from the levy of service tax.

•Services provided by Shipping lines by way of transportation of goods by a vessel from outside India up to the Customs station in India shall be subject to service tax with effect from June 1, 2016. Service tax shall be levied under the reverse charge for the services provided by the Foreign Shipping lines, whereas the Indian Shipping lines will pay service tax under the forward charge.

•Indian Shipping lines may avail and utilize Cenvat credit of eligible inputs, capital goods and input services used for providing such taxable output services.

•Services provided by Indian Shipping lines by way of transportation of goods by a vessel from India to outside India made ‘zero-rated’ with Nil rate of service tax with effect from June 1, 2016.

•Such Shipping lines may avail Cenvat credit in respect of inputs and input services used in providing such services.

Service tax exemptions

Services pertaining to original works in relation to construction of housing projects under specified schemes mentioned below exempt from service tax w.e.f. March 1, 2016:

•Housing for All (HFA) (Urban) Mission / Pradhan Mantri Awas Yojna (‘PMAY’);

•Low cost houses up to a carpet area of 60 square metres per house for approved housing projects under the “Affordable Housing and Partnership” component of PMAY; and

•Low cost houses up to a carpet area of 60 square metres under any housing scheme of the State Government.

•Services as mentioned below exempted with effect from April 1, 2016:

-Services provided by life insurance companies approved by Insurance Regulatory and Development Authority (‘IRDA’);

-Services provided by IRDA to insurers;

-Services provided by Employees’ Provident Fund Organization (EPFO) to employees;

-Regulatory services provided by Securities and Exchange Board of India (SEBI);

-Services provided by way of knowledge dissemination by National Centre for Cold Chain Development under Department of Agriculture, Cooperation and Farmer’s Welfare, Government of India;

-General insurance services provided under ‘Nirmaya’ Health Insurance Scheme launched by National Trust for the welfare of Persons with Cerebral Palsy, Mental Retardation and Multiple Disability;

-Services provided by Biotechnology Industry Research Assistance Council (BIRAC) approved biotechnology incubators;

-Services provided by way of skill / vocational training by training partners under Deen Dayal Upadhyay Grameen Kaushlya Yojana ;

-Services provided by assessing bodies empanelled centrally by Directorate General of Training, Ministry of Skill Development & Entrepreneurship; and

-Services provided by the Indian Institute of Managements (IIMs) by way of 2 year full time Post Graduate Program in Management (PGPM) and 5-year Integrated Program in Management and Fellowship program other than Executive Development programs.

•Exemptions from service tax are proposed to be restored till March 31, 2020 in respect of services of construction contracts relating to original works pertaining to Government schools, residential complex meant for self-use or use of employees, hospitals, airport, port, etc. provided to the Government, local authority or a Government authority under contracts entered into during period prior to February 29, 2016, with effect from the date of enactment of the Finance Bill.

•Retrospective exemption proposed to be extended to the services provided during the period July 1, 2012 to January 29, 2014 by way of construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation or alteration of canal, dam or other irrigation works to entities set up by Government or under an Act of Parliament with effect from the date of enactment of the Finance Bill.

•Accordingly, refund of service tax paid on such services during the aforesaid period shall be allowed with effect from the date of enactment of the Finance Bill.

Changes in the Point of Taxation Rules, 2011 (‘POT Rules’)

•Provisions created in the Finance Bill to empower the Government to make rules in the POT Rules with effect from the date of enactment of the Finance Bill, to determine the point in time when service is provided or agreed to be provided, or in other words, to determine the time when service tax liability becomes due.

•Further, the POT Rules are suitably amended to determine the point in respect of applicability of a ‘New Levy’ on existing services in the same manner as it is presently determined in respect of applicability of an existing levy to a ‘New service’ in terms of POT Rules. The amendment comes into effect from March 1, 2016.

Other changes in service tax

•Single premium annuity life insurance policies are to be taxed at 1.4 per cent of the amount of premium, for cases where the amount allocated for investment or savings on behalf of policy holders is not intimated to the policy holder at the time of providing such service with effect from April 1, 2016.

•Service tax on services provided by Mutual fund agent and distributor to a Mutual fund or Asset Management Company (AMC), presently taxed under the reverse charge, needs to be discharged by the service provider, with effect from April 1, 2016.

•Beneficial provisions are proposed to promote the concept of ‘One Person Company’ (OPC) whose aggregate value of services provided is up to Rs. 50 lakh in the previous financial year, by extending quarterly payment of service tax on receipt basis, w.e.f. April 1, 2016.

•The beneficial provision of quarterly payment of service tax is also extended to an HUF, w.e.f. April 1, 2016.

•Assignment of the Right to use the radio-frequency spectrum and subsequent transfers thereof by the Government subject to service tax as a ‘Declared service’, with effect from the date of enactment of the Finance Bill.

•IT software sold on a media on the basis of RSP exempted from the levy of service tax with effect from March 1, 2016, provided applicable duties of Central Excise or Countervailing duties have been paid thereon.

•Consequently, media recorded with customized IT Software, without bearing any RSP only, shall be leviable to service tax. 

The rates of abatements are proposed to be rationalized with effect from April 1, 2016 in respect of below:

•Transport of goods in containers by rail by any person other than Indian Railways to be taxed at an abated value of 40 per cent;

•Construction of residential complex, building, civil structure, or a part thereof proposed to be taxed at rationalized abated values of 30 per cent consistently for both low-end and high-end flats;

•Services provided by Goods Transport Agency in relation to transportation of used household goods to be taxed at an abated value of 40 per cent;

•Services provided by tour operator in respect of both packaged tour (including transportation, accommodation, food, etc.) and other packaged tour except for packaged tour in which services in relation to arranging or booking accommodation only are provided, to be taxed at uniform abated value of 30 per cent;

•The cost of fuel is to be added to the consideration charged for providing services by way of renting of motor-cab, for payment of service tax at abated value of 40 per cent; and

•Services provided by the Indian Railways to Container Train Operators (CTOs) in respect of haulage of their container train to be taxed at an abated value of 30 per cent with the eligibility to avail credit of input services, under ‘Transport of Goods by Rail’. 

The abatements for payment of service tax rationalized with effect from April 1, 2016, by allowing Cenvat credit of input services in respect of below:

•Transport of passengers by rail at the abated value of 30 per cent, as presently applicable;

•Transport of goods, other than in containers, by rail at the abated value of 30 %, as presently applicable; and,

•Transport of goods by vessel at the abated value of 30 per cent, as presently applicable.

Amendments in the Cenvat Credit Rules, 2004 (‘Credit Rules’) with effect from April 01, 2016

•Defnition of Capital goods widened to include:

-Wagons of sub-heading 8606 92 of the Central Excise Tariff Act, 1985 (‘CETA’); and

-Equipments and appliances used in an office located within a factory.

•Cenvat credit in respect of inputs and capital goods used for pumping of water for captive use in the factory allowed even where such capital goods are installed outside the factory.

•Cenvat credit in respect of all capital goods having value up to Rs. 10,000 per piece allowed in the year of receipt as ‘inputs’.

•Manufacturer of the final products, sending inputs or partially processed inputs outside his factory to a job-worker, can clear the same on payment of duty within an extended period of three years instead of earlier allowed period of one year.

•Cenvat credit of service tax paid in respect of assignment of the right to use the radio-frequency spectrum and subsequent transfers thereof by the Government shall be spread over the period of time for which the rights have been assigned.

In case of subsequent assignment of such right by the original assignee during the period of assignment, the original assignee shall be eligible to avail the balance Cenvat credit in the same financial year provided that such balance does not exceed the amount of service tax payable on the consideration charged by him from the sub-assignee.

However, Cenvat credit of annual or monthly user charges payable in respect of the assignment of the right to use natural resources shall be allowed in the same financial year.

•Input Service distributor (‘ISD’) allowed to distribute Cenvat credit even to an outsourced manufacturing unit, which is defined to mean either a job-worker required to pay duty on goods manufactured for the ISD or a manufacturer manufacturing goods for the ISD bearing the ISD’s brand name, subject to the maintenance of separate accounts by the outsourced manufacturing unit in respect of such Cenvat credit received and utilization only to the extent for payment of duty on goods manufactured for ISD.

•Provisions inserted to enable manufacturers for maintaining a common warehouse for inputs and distribute credits to the individual manufacturing units by following the ‘dealer registration’ compliances prescribed under the Central Excise laws.

•The Cenvat credit of Basic Excise duty can be utilized for payment of NCCD on all goods, other than the mobile phones.

•However, with effect from March 1, 2016, the credit of only NCCD can be utilized for the payment of NCCD.

•Rule 6 of the Credit Rules in relation to reversal of Cenvat credit in respect of inputs and input services used in manufacture of exempted goods or for provision of exempted services is simplified as follows:

-Cenvat credit in respect of inputs and input services exclusively used in manufacturing exempt goods or provision of exempted services, specifically disallowed;

-Full credit allowed in respect of input or input services used exclusively towards non-exempted goods or services;

-Cenvat credit of inputs and input services used for providing an activity which is not a ‘service’ to be reversed; 

-‘Common credits’ after the above disallowances / reversals, need to be reduced for the credits attributable to the exempted turnover by using the prescribed formula in the ratio of exempt turnover to the total turnover; 

-The present practice of reversals of such credits based on the previous financial year’s turnover with the adjustments by the month of June of the succeeding financial year continues; and

-Banks and other financial institutions may reverse Cenvat credit attributable to exempt output services in terms of formula provided in the Rules, in addition to the existing option of reversing the 50 per cent credits.

•Time limit for filing refund claim in respect of export of services shall be before the expiry of one year from the date of:

-Receipt of payment in convertible foreign exchange, where provision of service has been completed before such receipt; or

-Issue of invoice, where payment for the service had been received prior to the date of issue of the invoice.

 

 

 

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