Service Tax - Negative List

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_

9 t h E d i t i o n

1 5 J u l y 2 0 1 4

CA Pritam Mahure

This book is a compilation of key Service Tax Legal provisions (as applicable from 1 July 2012).

Relevant amendments have been shown in red colour/ track change. Also, Central Excise provisions which are applicable (vide sec. 83 of FA‘ 1994) to ST legislation are highlighted in green colour. For feedback/queries readers may write to capritam@gmail.com

Service Tax - Negative List

Regime CA Pritam Mahure

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2A. Determination of value of works contract ... 145

2B.Determination of value of service in relation to money changing ... 148

2C. Determination of value of supply of food ... 149

3.Manner of determination of value ... 150

4.Rejection of value ... 150

5.Inclusion in or exclusion ... 151

6.Cases in which the commission, costs, etc., will be included or excluded . 153 8. POINT OF TAXATION RULES, 2011 ... 156

1.Short title and commencement ... 156

2A. Date of payment ... 156

3.Determination of point of taxation ... 157

4.Determination of POT in case of change in effective rate of tax ... 158

5. Payment of tax in case of new services ... 159

7. Determination of POT in case of specified services or persons ... 159

8.Determination of point of taxation in case of copyrights, etc ... 160

8A. Determination of point of taxation in other cases ... 160

9.Transitional Provisions ... 160

9. PLACE OF PROVISION OF SERVICES RULES, 2012 ... 162

1. Short title, extent and commencement ... 162

3. Place of provision generally ... 165

4. Place of provision of performance based services ... 165

5. Place of provision of services relating to immovable property ... 166

6. Place of provision of services relating to events ... 166

7. Place of provision of services provided at more than one location ... 166

8. POPS where provider and recipient are located in taxable territory .... 166

9. Place of provision of specified services ... 167

10. Place of provision of goods transportation services ... 167

11. Place of provision of passenger transportation service ... 167

12. Place of provision of services provided on board a conveyance ... 168

13. Powers to notify ... 168

14. Order of application of rules... 168

10. CENVAT CREDIT RULES, 2004 ... 169

1.Short title, extent and commencement ... 169

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3.CENVAT credit ... 175

4.Conditions for allowing CENVAT credit ... 185

5. Refund of CENVAT Credit ... 190

5A.Refund of CENVAT credit to units in specified areas ... 191

5B. Refund of CENVAT credit ... 192

6.Obligation of a manufacturer and a provider of output service ... 192

7.Manner of distribution of credit by input service distributor ... 200

7A.Distribution of credit on inputs ... 201

8.Storage of input outside the factory of the manufacturer ... 202

9.Documents and accounts ... 202

9A.Information relating to principal inputs ... 206

10.Transfer of CENVAT credit ... 207

10A. Transfer of CENVAT credit of additional duty ... 207

11.Transitional provision ... 208

12.Special dispensation ... 210

12A. Procedure and facilities for large tax payer ... 210

12AAA. Power to impose restrictions in certain types of cases ... 214

13.Power of Central Government to notify ... 215

14.Recovery of CENVAT credit wrongly taken or erroneously refunded ... 215

15.Confiscation and penalty ... 215

15A. General penalty ... 216

16.Supplementary provision ... 216

11. SERVICE TAX VCES , 2013 ... 217

12. Service Tax Voluntary Compliance Encouragement Rules, 2013 ... 221

1. Short title and commencement ... 221

3. Registration ... 221

4. Form of declaration ... 221

5. Form of acknowledgment of declaration ... 221

6. Payment of tax dues ... 221

7. Form of acknowledgement of discharge ... 222

FORM VCES-2 ... 224

FORM VCES-3 ... 226

13. Notifications ... 227

14/2012 - Research & development cess ... 227

25/2012 - Mega exemption notification ... 228

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26/2012 - Abatement notification ... 246

27/2012 - Exemption for foreign diplomatic mission ... 254

29/2012 - Exemption on property tax paid ... 257

30/2012 - Reverse charge mechanism ... 259

31/2012 - Exemption to gta services for exporter ... 265

32/2012 - Exemption of services provided by tbi and ... 272

33/2012 - Exemption to small service providers ... 275

34/2012 - Rescinding of earlier 81 notifications ... 278

35/2012 - Earlier works contract composition scheme rescinded ... 282

28/2011 - Notified continuous supply of services ... 283

39/2012 - Rebate on inputs and input services ... 284

40/2012 - Exemption on services provided to sez operations ... 291

41/2012 - Rebate for service tax paid — new scheme ... 305

42/2012 - Exemption to service of commission agent ... 332

27/2012(ce) – Cenvat credit refund (rule 5) ... 339

43/2012 - Exemption to railways... 343

45/2012 – Rcm for directors and security services ... 344

46/2012 – STR amended for rcm for directors and security ... 345

47/2012 – Return due date ... 346

48/2012 - Amends ST-1 and Accounting codes re-notified ... 347

49/2012 - Exemption to Janashri and Aam Aadmi Bima Yojana ... 358

1/2013 - Amendment in Service Tax Rules, 1994 ... 359

2/2013 - Construction of Complex – Taxable value 25% or 30% ... 378

3/2013 - Mega Exemption Amended ... 379

4/2013 - Advance Ruling (Applicable for Public Company) ... 381

5/2013 - New ST-5, ST-6 and ST-7 notified ... 382

6/2013 - Focus Market Scheme ... 392

7/2013 - Focus Product Scheme ... 397

8/2013 - Vishes Krishi and Gram Udyog Yojana ... 400

9/2013 - Construction service – Change in abatement ... 402

10/2013 - Service Tax Voluntary Compliance Enco. Rules notified ... 403

11/2013 - Amends Not. No. 6/2013-ST ... 404

12/2013 - Special Economic Zone (SEZ) Developer / Unit ... 406

13/2013 – Amendment to Not. 25/2012 ... 416

1/1/2013 - AD-HOC EXEMPTION ... 417

12/2013 (CE) – Amendment in 3 (5A) of CCR ... 418

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14/2013 – Catering in canteen ... 419

15/ 2013- Amendment in SEZ Not. ... 420

16 /2013- E-payment (1 lac) ... 421

17/2013-Amendment to FMS Not. ... 422

01/2014 – Amendment in Mega Not. ... 423

02/2014 – ST – Governmental Authority definition ... 424

03/2014-ST – Forward contract sub-broker exemption ... 425

05/2014-ST – FMS Amendment ... 427

18/2013-C.E. (N.T.) –Rescinded later ... 428

01/2014-CE (NT) – CENVAT Credit amendment ... 429

02/2014-CE(N.T.) – Amends Rule 12 ... 430

05/2014 – CE (NT) – Rule 7 (ISD Amendment) ... 431

07/2014 – CE (NT) – Rescinds 18/2013 ... 432

09/2014-CE(N.T.) – CCR Amendment ... 433

11/2014–CE (N.T.) – Quarterly Return ... 434

12/2014–CE (NT)- Refund for Partial RCM service providers ... 436

13/2014–CE (N.T.) – Rescinds Not. No. 6/2012CE (NT) ... 441

15/2014 - CE(N.T.) – 12AAA introduced ... 442

06/2014-ST – Mega Not. amended ... 443

07/2014-ST – SEZ refund simplified ... 447

08/2014-ST – Abatement amended ... 450

09/2014-ST – RCM amended ... 453

10/2014-ST – RCM amended ... 455

11/2014-ST – Valuation Rules amended ... 457

12/2014-ST – Interest rates notified ... 458

13/2014-ST – POT amended ... 459

14/2014-ST – POPS amended ... 461

15/2014-ST –Advance Ruling for private company ... 463

21/2014-CE(NT) – CCR amendment ... 464

14. CIRCULARS ... 466

160/11/2012 - Applicablity of EC and SHEC ... 466

161/12/2012 – Accounting code for Negative List ... 468

163/14/2012 - Clarification on remittances ... 470

164/15/2012 – Clarification on vocational education ... 472

165/16/2012 - Circular on restoration of accounting codes ... 474

166/1/2013 –reminder letters for insurance policies ... 486

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167/2/2013 - Milk transportation by rail ... 487

969/03/2013-CX – CESTAT Appeal forms ... 488

168/3/2013 - Clarification on Pandal and Shamiyana ... 492

169/4/2013 - Clarification on VCES ... 494

170/5 /2013 - Clarification on VCES ... 496

171/6/2013 - Circular on Arrest and Bail ... 501

172/7/2013 – Education services – Clarification ... 505

173/8/2013 – Restaurant clarifications ... 508

174/9/2013 – VCES clarifications ... 510

175/01/2014 ST – RWA Clarification ... 513

176/2/2014 – ST – VCES Discharge and CENVAT ... 515

177/03/2014 – ST – Rice, paddy clarification ... 516

974/08/2013-CX - Arrest and Bail ... 517

178/4/2014-ST – ISD clarification ... 523

15. P O T R C I R C U L A R S ... 526

341/34/2010-TRU - POTR Clarifications ... 526

154/5/2012-ST – POTR clarification ... 530

155/6/2012-ST – POTR Clarifications ... 531

158/9/2012-ST – Change in Rate ... 532

162/13/2012 - Clarification on POTR... 533

1 6 . D R A F T C I R C U L A R ... 536

D r a f t c i r c u l a r o n s t a f f b e n e f i t s ... 536

Draft circular on service tax on air transport ... 542

17. INSTRUCTIONS/ ORDERS ... 545

instructions – Negative List Of Service Tax Regime ... 545

FILING OF ST-3 ... 548

Order 3/2012 - Due date for filing of Service Tax return ... 550

Service Tax Instruction ... 551

Order 2/2013 - ST-3 [30 April 2013] ... 553

Order 3/2013 - ST-3 [31 August 2013] ... 554

Order 4/2013 - ST-3 [10 September 2013] ... 555

F.No: 137/116/2012- E-payment 1 lacs ... 556

F. No. B1/19/2013-TRU (Pt.) - VCES... 558

F. No. 137/50/2013-VCES ... 560

F.No.275/05/2014-CX.8A – Validity of Stay ... 561

17/1/2012-CX.1 – Proposed amendment in Rule 6 of CCR ... 562

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18. Budget 2013 ... 564

Union FM –Budget Speech (Extracts) ... 564

TRU – Budget 2013 – Service Tax ... 568

Article – Budget 2013 – Changes in Service Tax – CA Pritam Mahure ... 571

Supply of food in restaurant, ‗sale‘ or ‗service‘? – CA Pritam Mahure ... 576

ST on Foreign Bank Charges ... 579

CEVAT Credit of ST paid under VCES ... 583

Applicability of VAT on flat ... 587

19. Interim Budget - 2014 ... 591

Service Tax - Budget 2014 changes ... 591

Economic Times - Service tax applicable on transport etc rice, cotton ... 593

Economic Times - Tax Tribunal Posts on Pause ... 595

Barter between Landowner and Developer – ‗Complex‘ construction ... 596

Applicability of Excise duty on Sales Tax Retention ... 601

Service Tax on Mid-day meal scheme ... 605

CENVAT Credit - ‗Interest‘ing issue ... 610

20. Budget 2014 ... 613

Budget 2014 – Key Service Tax changes in chronological order ... 613

Service Tax TRU letter ... 618

21. FAQ on VCES – CBEC ... 633

22. Education Guide – CBEC ... 645

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1. ABOUT THE BOOK FOREWORDS (7^th Edition)

The challenge of dissemination of a tax law in a cogent and lucid manner is nearly as huge as its making. Mr. Pritam Mahure in this book has attempted to meet the challenge with laurels coming very close to what could even be termed as a ―work of art‖.

Indirect tax reforms in recent years have been largely guided keeping in view the eventual goal of GST. The changes over the last couple of years in the areas of service tax are definitely precursors in that direction. A careful understanding and applicability of the new provisions will go a great length in helping our smooth transition towards GST.

Taxation of services based on Negative List, together with many other significant changes, in 2012 has refreshed the challenge of managing change once again.

Despite an elaborate effort to explain the new provisions by way of ―Education Guide‖ released by the Government, it still required considerable effort to carry out the task in the light of experience gained from its early applicability.

Service tax law by itself is not comprehensive and relies considerably on the provisions from other enactments. To put it in a user-friendly manner for the tax-payers and other practitioners is an enormous challenge.

I have noticed that Mr Pritam Mahure has taken immense pains to provide comprehensive coverage to the subject. It has been a pleasure for me to go through the subject once again, somewhat like watching a suspense movie all over again, knowing the ultimate truth, yet enjoying the nuances from time-to time.

V K Garg

Joint Secretary (Tax Research Unit) Department of Revenue

Central Board of Excise & Customs Ministry of Finance,

Government of India July 2013

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Special Thanks

- I would like to thank Shri J. C. Chaturvedi (DG, DGCEI) who had suggested me the idea to write this book on Service Tax

- I would like to thank Shri. Sunil Gabhawalla under whose able guidance I learnt Service Tax

- I would like to thank Shri. Rajan Choudhary (Addl. Commissioner of Service Tax, Pune) for his valuable feedback for the book and guidance

- Also, would like to thank Suresh Nair (Partner, Ernst & Young) for his valuable suggestions and expert guidance

- Also, I am grateful to Pratik Shah (Partner, SKP Business Consulting LLP) for his valuable suggestions and feedback

About the author

- CA Pritam Mahure practices in the field of Indirect Taxes (Service Tax, Excise and proposed GST) since more than a decade.

- Pritam has also authored book on ―GST – Supply Chain Perspective‖ for Confederation of Indian Industry (CII) - Pritam has conducted numerous session for:

o Corporates and industry

o Government officers (Central Excise and Service Tax Department, DGST etc),

o ASSOCHAM, CII, Marattha Chamber of Commerce and Industry (MCCIA), Deccan Chamber of Commerce (DCCIA), ICAI, GCM Worldwide etc.

- Pritam has also raised and represented industry specific issues before CBEC

- Pritam is also a faculty for ‗Indirect Tax‘ [CA/CS/CMA]

- Pritam also writes regularly at Economic Times, Deccan Herald, Taxindiaonline.com, Taxmann, Centax, Lexsite etc

- For suggestions/ feedback/ queries readers may feel free to revert at capritam@gmail.com/ +919920644648

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2. NEGATIVE LIST – IN A NUTSHELL A. In a nutshell

B. Negative vis-à-vis Positive list regime – A Comparative Analysis

Current provisions (Negative List)

Coverage Earlier provisions

(Positive List)

65B Definitions 65

66B Charging Section 66 and 66A

66C Determination of Place of

Provision of services

Export and Import Rules

66D Negative List Service specific

exclusions/ exemptions

66E Declared services 65 (105)

66F Interpretation Rules and

Bundled services

65A (covers classification only)

67 and Valuation Rules (Amended)

Valuation 67 and Valuation Rules

67A and POTR Date of determination tax rate, value and exchange Rate

POTR

25/2012-ST One mega notification Various notifications

C. Rules deleted/ substituted

SR Rules Particulars Rationale for deletion of rules

1 Taxation of Services (Provided from Outside India & Received in India) Rules, 2006

Deleted Introduction of ‗Place of Provision of Services Rules, 2012‘

2 Export of Services Rules, 2005 Deleted Introduction of ‗Place of Provision of Services Rules, 2012‘

3 Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007

Deleted Insertion of Rule 2A in the Service Tax Valuation Rules, 2006

1. Negative List Service is taxable unless

exempt

Applicable wef 1 July 2012

2. Positive List Service is exempt unless

taxable

Applicable upto 30 June 2012

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D. Key provisions and effective date

Provisions Particulars

Negative List regime Applicable w.e.f. 1 July 2012 Applicable rate of Service Tax 12.36%

Service tax returns - For the period for April 2014 to September 2014 returns to be filed before 25 October 2014

E. Abatement (Refer Not. No. 26/2012 and Valuation Rules)

SR Service Taxable

1 Goods Transport Agency (GTA) (any person who pays or is liable to pay freight either himself or through his agent for the transportation of such goods by road in a goods carriage) Provided that when such person is located in a non-taxable territory, the provider of such service shall be liable to pay service tax.

25%

2 Transport of goods by rail 30%

3 Transport of passengers by rail 30%

4 Transport of goods in a vessel from one port in India to

another 50%¹

5 Transport of passengers by air 40%

6 Supply of food or any other article of human consumption or

any drink, in a restaurant / other premises 40%/

60%

7 Supply of food in convention centre, pandal, shamiana etc 70%

8 Accommodation in hotels, inns etc 60%

9 Renting of [any vehicle designed to carry passengers]² 40%

10 Package tour 25%

11 Booking accommodation 10%

12 Services other than 11 and 12 provided in relation to tour 40%

13 Financial leasing services including hire purchase 10%

1 40% wef 1 October 2014 vide Not. No. 8/2014-ST

2 Substituted as „motorcab‟ wef 1 October 2014 vide Not. No. 8/2014-ST

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14 Services in relation to chit³ 70%

15 ⁴Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate by the competent authority,- (a) for a residential unit satisfying both the following conditions, namely:–

(i) the carpet area of the unit is less than 2000 square feet;

and

(ii) the amount charged for the unit is less than rupees one crore;

(b) for other than the (a) above

25%

30%

16 Works contracts entered into for execution of original works 40%

17 Works contracts entered into for maintenance or repair or reconditioning or restoration or servicing of any goods

70%

18 For other works contracts, not covered under sr. no. 16 and 17 , including maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property,

60%⁵

F. Reverse Charge Mechanism (Refer Not. No. 30/2012-ST)

SR Service Service recipient % of ST payable

Provider Recipient 1 Provided by person who is

located in non-taxable territory and received by any person located in taxable territory

Any person⁶ Nil 100%

2 Works contract services by

individual, HUF, firm or AOP Body corporate 50% 50%

3 In a chit business, the subscription is tendered in any one of the forms of ‗money‘ as defined in section 65B(33). It would, therefore, be a transaction in money. So

considered, the transaction would fall within the exclusionary part of the definition of the word ‗service‘ as being merely a transaction in money…The notification

No.26/2012-ST dated 20.06.2012 issued by the Government of India, Ministry of Finance (Department of Revenue) is quashed to the extent of the entry in serial No.8 thereof. Delhi Chit Fund Association 2013-TIOL-331-HC-DEL-ST - SLP against High Court Order Dismissed by Supreme Court [UoI Vs Delhi Chit Fund Association 2014-TIOL-23-SC-ST]

4 Not. No. 9/2013-ST dated 8 May 2013

5 70% wef 1 October 2014 vide Not. No. 11/2014-ST

6 Exemption provided to certain persons vide Sr. No. 34 of Not. No. 25/2012-ST

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Page 14 of 805 3 Manpower supply for any

purposes or security services by individual, HUF, firm or AOP

Body corporate 25% 75%

4 Renting of vehicle to any person who is not engaged in the similar line of business to carry passenger by individual, HUF, firm or AOP

- With abatement - Without abatement

Body corporate

Nil

6050% 100%

4050⁷% 5 Support services⁸ by Government

and Local Authority (excluding renting and 66D (a) (i) to (iii)

Business entity Nil 100%

6 Provided or agreed to be provided by a director of a company to the said company (w.e.f. 7 August 2012 vide Not.

45/2012)

Body Corporate⁹ Nil 100%

7 Individual advocate Business entity¹⁰ Nil 100%

8 Arbitral Tribunal Business entity¹¹ Nil 100%

9 Sponsorship Body corporate or PF Nil 100%

7 Change effective from 1 October 2014 vide Not. No. 10/2014-ST

8 Para 4.1.7 of Education Guide: What is the meaning of ―support services‖

which appears to be a phrase of wide ambit?

Support services have been defined in section 65B of the Act as infrastructural, operational, administrative, logistic marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contract, renting of movable or immovable property, security, testing and analysis.

Thus services which are provided by government in terms of their sovereign right to business entities, and which are not substitutable in any manner by any private entity, are not support services e.g. grant of mining or licensing rights or audit of government entities established by a special law, which are required to be audited by CAG under section 18 of the Comptroller and Auditor-General‗s (Duties, Powers and Conditions of Service) Act, 1971 (such services are performed by CAG under the statue and cannot be performed by the business entity themselves and thus do not constitute support services.)

Para 4.1.8 of Education Guide: Will the services provided by Police or security agencies to PSUs or corporate entities or sports events held by private entities be taxable?

Yes. Services provided by government security agencies are covered by the main portion of the definition of support service as similar services can be provided by private entities. In any case it is also covered by the inclusive portion of the definition.

However the tax will be actually payable on reverse charge by the recipient.

9 Substituted for ‗company‘ from 11 July 2014 vide Not. No. 9/20141-ST

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10 GTA Company, P. Firm,

Factory, Society, excise registered assessee

Nil 100%

11 Insurance agent to insurance

companies Insurance business Nil 100%

12 In relation to service provided or agreed to be provided by a recovery agent¹²

Banking company or a financial institution or a non-banking

financial company

Nil 100%

G. Brief Note on Negative List regime¹³

What is the significance of the changes due to the new system of taxation?

Budget 2012 proposes to usher a paradigm shift in the manner services will be taxed in future. The transition involves shift from taxation of 119 service-specific descriptions to a new regime whereby all services will be taxed unless they are covered by any of the entries in the negative list or are otherwise exempted. The new system is a marked shift by way of comprehensive taxation of the entire service sector without getting into

complex issues of classification of services.

What is the broad the scheme of new taxation?

In the new system, service tax will be levied on all services provided in a taxable territory other than the services specified in the negative list. The key features of this system are as follows:

At the outset ‗service‘ has been defined in clause (44) of section65B of the Act.

Section 66B specifies the charge of service tax which is essentially that service tax shall be levied on all services provided or agreed to be provided in a taxable territory, other than services specified in the negative list.

The negative list of services is contained in section 66D of the Act.

Since provision of service in the taxable territory is an important ingredient of taxability, section 66C empowers the Central Government to make rules for determination of place of provision of service. Under these provisions the Place of Provision of Services Rules, 2012 have been made for which a separate and detailed guidance paper (GPB) has been issued.

To remove some ambiguities certain activities have been specifically defined by description as services and are referred as Declared Services (listed in section 66E).

In addition to the services specified in the negative list, certain exemptions have been given. Most of the exemptions are proposed to be consolidated in a single mega exemption for ease of reference.

12 Inserted from 11 July 2014 vide Not. No. 9/20141-ST

13 Relevant paras from TRU DOF No 334/1/2012-TRU dated 16 March 2012

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Principles have been laid down in section 66F of the Act for interpretation wherever services have to be treated differentially for any reason and also for determining the taxability of bundled services.

The system of valuation of services for levy of service tax and of availment and utilization of Cenvat credits essentially remains the same with only incidental changes required for the new system of taxation

What is service?

In the existing system, only the services specified in clause (105) of section 65 of the Finance Act, 1994 are taxed under the charging section 66. In the new system, all services, other than services specified in the negative list, provided or agreed to be provided in the taxable territory by a person to another would be taxed under section 66B. This Note explains the various ingredients and aspects of the definition of service.

Service‘ has been defined in clause (44) of the new section 65B and means – - any activity

- for consideration

- carried out by a person for another - and includes a declared service.

The said definition further provides that ‗Service‘ does not include –

- any activity that constitutes only a transfer in title of (i) goods or (ii) immovable property by way of sale, gift or in any other manner

- a transaction only in (iii) money or (iv) actionable claim

- any service provided by an employee to an employer in the course of the employment.

- fees payable to a court or a tribunal set up under a law for the time being in force There are three explanations appended to the definition of ‗service‘ which are dealt with in later part of this Guidance Note. Each of the ingredients bulleted above have been explained in the points below.

Taxability of service

The taxability of services or the charge of service tax has been specified in section 66B of the Act. To be a taxable a service should be –

- provided or agreed to be provided by a person to another - in the taxable territory

- and should not be specified in the negative list.

Provided in the taxable territory

- Taxable territory has been defined in section 65B of the Act as the territory to which the Act applies i.e the whole of territory of India other than the State of Jammu and Kashmir.

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- Detailed rules called the Place of Provision of Service Rules, 2012 have been made which determine the place of provision of service depending on the nature and description of service.

- Please refer to the Place of Provision of Service Rules, 2012

Rules of interpretation

Despite doing away with the service-specific descriptions, there will be some descriptions where some differential treatment will be available to a service or a class of services.

Section 66F lays down the principles of interpretation of specified descriptions of services and bundled services.

Principles for interpretation of specified descriptions of services

Although the negative list approach largely obviates the need for descriptions of services, such descriptions continue to exist in the following areas –

- In the negative list of services.

- In the declared list of services.

- In exemption notifications.

- In the Place of Provision of Service Rules, 2012 - In few other rules and notifications.

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3. EXISTING INDIRECT TAX SYSTEM IN INDIA

As per the Constitution of India, the taxing powers of the Central Government encompass taxes on income (except agricultural income), excise duty on goods manufactured in India (other than alcohol for human consumption), customs duty, inter-state sale of goods etc. The taxing powers of the State Governments include the power to tax agricultural income, excise duty on alcohol for human consumption, sales tax on intra-State sale of goods etc.

On a high level basis, indirect taxes in the country can be categorised in three baskets

- Central level indirect taxes : Customs duty, Excise duty, Service Tax etc - State level indirect taxes: VAT, Entry Tax, Purchase Tax etc

- Local level indirect taxes: Octroi etc

The following diagram captures the aforesaid:

Key features of specified indirect taxes:

SR Indirect Tax Key features

1 Customs duty - Customs duty is applicable on import of goods into India - Customs duty is payable by the importer

- Rate of Customs duty is specified in the Customs Tariff - Generic rate of Customs duty is 28.85% which comprises the

following:

C en tr al Gov er rn men t Customs duty Excise Duty Service Tax Central Sales Tax, Research & Dev. Cess

St at e G ov er nmen t VAT/Sales Tax Entry Tax, Purchase Tax, Entertainment

tax, Elect. duty Loc al T ax es Octroi / Local Body Tax

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a. Basic Customs Duty (generic rate is 10%)

b. Additional Duty of Customs in lieu of excise¹⁴ (generic rate is 12%)

c. Additional Duty of Customs in lieu of VAT¹⁵ (generic rate is 4%)

d. Education cess¹⁶ @ 3%

- Customs duty is levied and governed under the Customs Act, 1962 and the Rules made thereunder

2 Excise duty - Excise duty is applicable on ‗manufacture‘ of goods in India - ‗Manufacture‘ typically implies a process at end the end of which

a new and different article, having a distinctive name, character or use, emerges.

- Excise duty is payable by the manufacturer

- Rate of Excise duty is specified in the Excise Tariff

- Generic rate of Excise duty is 12.36% (including Cess 3%).

Further, certain goods are liable to concessional rate of Excise duty of (i.e. 2.06%, 6.18%)

- Excise duty is levied and governed under the Excise Act, 1944 and the Rules made thereunder

3 Service Tax - Service tax is applicable on provision of all services

- Service tax is not applicable on ‗Negative list¹⁷‘ services and certain exempt services¹⁸

- Service tax is payable by Service provider. However, in certain case service recipient is also liable to pay service tax¹⁹.

- Rate of Service Tax is 12.36% (including Cess 3%). Further, for certain services abatement is provided²⁰

- Service tax is levied and governed under the Finance Act, 1994 and the Rules made thereunder

4 Research and Development Cess

- Research and Development (R&D) cess is applicable on import of technology through foreign collaborator

- The rate of R&D cess is 5%

- R&D cess is levied and governed under Research and

Development Cess Act, 1986 and the Rules made thereunder 5 VAT/ Sales Tax - VAT / Sales tax is applicable on sale of goods within a State

- VAT is payable by the seller

- Rate of VAT is State specific. Rate of VAT is specified the VAT schedule of the State

- Typically, the rate of VAT varies from 0% to 15%

- VAT is levied and governed under the State specific VAT Act and the Rules made thereunder

6 CST - CST is applicable on inter –State sale of goods - CST is payable by the seller

- Rate of CST is 2% provided the buyer issues C form. If the buyer doesn‘t issue C form then CST is applicable at the rate equal to rate of VAT in the State from which goods are sold - CST is levied and governed under The Central Sales Tax Act,

1956 and the Rules made thereunder

14 Also known as Counter-Veiling Duty/ CVD

15 Also known as Special Additional Duty of Customs / SACD

16 Education cess @ 2% plus Secondary and Higher Education cess @ 1%

17 Negative List of services comprises of 17 services and is specified under Section 66D of Finance Act, 1994

18 Exemption is provided to 39 services vide Not. No. 25/2012-ST

19 Situations where service recipient is liable to pay ST (as recipient of service) is specified in Not. No. 30/2012-ST

20 Abatement to various services is specified under Not. No. 26/2012-ST and Service Tax (Determination of Value of Services) Rules, 2006

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7 Entry Tax - Entry tax is applicable on entry of specified goods in the State for sale, use or consumption

- Entry tax is levied by various States in India

- Entry tax is levied and governed under State specific Entry Tax Act and the Rules made thereunder

8 Octroi / Local

Body Tax (LBT) - Octroi is levied by the Municipal Corporation on entry of

specified goods in their jurisdiction for sale, use or consumption - Octroi is levied by various Municipal Corporations in the State of

Maharashtra (such as Mumbai, Thane, Pune etc) - Octroi is levied and governed under Rules made by the

Municipal Corporations

- LBT is proposed to be introduced by substituting Octroi.

9 Purchase Tax - Purchase tax is applicable on purchase of specified goods - Purchase Tax is a major source of revenue for Punjab and

Haryana

- In Punjab, Purchase Tax is levied under Punjab Value Added Tax Act, 2005

- Its pertinent to note that in 2012, Maharashtra has also introduced Purchase Tax on cotton and oil seeds

10 Entertainment

tax - Entertainment tax is applicable on movie tickets, commercial shows etc

- Entertainment tax is levied by the State Governments - The rate of entertainment tax varies from 0% to 110%²¹ - This source of revenue has grown with the advent of Pay

Television Services in India. Since, entertainment is being provided through the services such as Broadcasting Services, DTH Services, Pay TV Services, Cable Services, etc. The component of entertainment is intrinsically intertwined in the transaction of service, that it cannot be separated from the whole transaction. Given the nature of transaction of service, it is being subjected to tax by the Union and the State

governments both²²

Current Indirect tax implications on various transactions

A transaction in an economy can be one of the following type:

a. Transaction in goods:

o Trading (i.e. buying and subsequently selling the goods) o Manufacturing and subsequently selling of goods

b. Transaction is services (such as provision of logistics services, advisory services, courier services etc)

c. Transaction involving both goods and services (i.e. works contract such as contract for construction of compound wall wherein material alongwith labour is provided by the contractor)

d.Transaction in immovable property

e. Other transactions (such as employment, grants etc)

21 Source www.filmtvguildindia.org

22 Source www.en.wikipedia.org

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Transactions in an economy are subject to indirect taxes. We have given below the typical indirect tax implications on the aforesaid transactions:

SR Activity Tax applicable

1 Trading – Sale to a customer located in same State (Intra- State sale)

Value Added Tax²³ (VAT) would be applicable on the sale to the customer

2 Trading – Sale to a customer located in different State (inter-State sale)

Central Sales Tax (CST) would be applicable on the customer sale to the customer

3 Manufacturing and

subsequently intra-State sale of goods

- Excise duty on manufacture of goods - VAT on sale of goods

4 Manufacturing and

subsequently inter-State sale of goods

- Excise duty on manufacture of goods - CST on sale of goods

5 Provision of services Service Tax²⁴ 6 Works contracts (i.e.

transaction involving both goods and services)

- VAT on ‗goods‘ portion in works contract - Service Tax on ‗service‘ portion in the

works contract 7 Transaction of sale of an

completed²⁵ immovable property

Stamp duty

8 Other transactions (such as

employment, donation etc) Income from salary, donation etc is subject matter of Income Tax

Apart from the aforesaid taxes, certain States and Municipal Corporations also levy Entry Tax, Octroi for entry of goods for consumption/ sale in their

respective jurisdiction.

From the aforesaid discussion, it can be observed from the above that currently the indirect tax system in the India is governed by the ‗taxable events‘ (such as manufacture, sale, provision of service etc). However, this approach to levy and collect indirect tax has its own limitations and it results in inefficiency in certain cases due to non-availability of input tax credit.

23 Also known as Sales tax

24 However, certain specified services such as entertainment, advertisement etc may be liable to State VAT

25 W.e.f. 1 July 2010, Service tax has been made applicable on sale of property before completion certificate is received for the same.

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4. SERVICE TAX — STATUTORY PROVISIONS

SECTIONS 64 TO 96-I (CHAPTERS V and VA) OF THE FINANCE ACT, 1994 PROVIDING FOR SERVICE TAX)

SECTION 64. Extent, commencement and application. —

(1) This Chapter extends to the whole of India except the State of Jammu and Kashmir.

(2) It shall come into force on such date as the Central Government may, by notification in the Official Gazette, appoint.

(3) It shall apply to taxable services provided on or after the commencement of this Chapter.

65B. Interpretations²⁶.

In this Chapter, unless the context otherwise requires,-

(1) "actionable claim" shall have the meaning assigned to it in section 3 of the Transfer of Property Act, 1882 (4 of 1882.);

(2) "advertisement" means any form of presentation for promotion of, or bringing awareness about, any event, idea, immovable property, person, service, goods or actionable claim through newspaper, television, radio or any other means but does not include any presentation made in person;

(3) "agriculture" means the cultivation of plants and rearing of all life-forms of animals, except the rearing of horses, for food, fibre, fuel, raw material or other similar products;

(4) "agricultural extension" means application of scientific research and knowledge to agricultural practices through farmer education or training²⁷;

26 Applicable wef 1 July 2012 vide Not. No. 19/2012-ST dated 5 June 2012

27 From the language it may be stated that the exemption is restricted to ‗Application of scientific research and knowledge to agricultural practices through farmer education or training‘. The term farmer precedes ‗education or training‘. Herein the context in which the term ‗education or training‘ is used needs to be understood. Typically, the farmers in India are either illiterate or less educated. Thus, a knowledge sharing platform, per-se, which adds knowledge and thus ‗educate or train‘ the farmers would become eligible. Further, the exemption is available for ‗application of Scientific research and knowledge to agricultural practices‘. Thus, in case scientific research,

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(5) "agricultural produce" means any produce of agriculture on which either no further processing is done or such processing is done as is usually done by a cultivator or producer which does not alter its essential characteristics but makes it marketable for primary market²⁸;

(6) "Agricultural Produce Marketing Committee or Board" means any committee or board constituted under a State law for the time being in force for the purpose of regulating the marketing of agricultural produce;

(7) "aircraft" has the meaning assigned to it in clause (1) of section 2 of the Aircraft Act, 1934 (22 of 1934.);

(8) "airport" has the meaning assigned to it in clause (b) of section 2 of the Airports Authority of India Act, 1994 (55 of 1994.);

(9) "amusement facility" means a facility where fun or recreation is provided by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks, theme parks or such other places but does not include a place within such facility where other services are provided;

knowledge, know-how etc about agricultural practices etc is shared with the farmers for application in farm then the same will be eligible for exemption.

28 The Finance Act 1994 exempts storage or warehousing of ‗agricultural produce‘. In this context, question had arisen as to whether ‗rice‘ is an ‗agricultural produce‘ or not? In this regard, the H‘ble Finance Minister had vide letter dated 9 November 2013 had clarified that ‗paddy‘ is an ‗agricultural produce‘ but ‗rice‘ is not since it is subject to processing (de-husking etc) and it will not qualify as ‗agricultural produce‘ and thus its storage, warehousing etc will be liable to service tax. Now, as a relief, vide Notification No. 4/2014-ST dated 17 February 2014, the Finance Ministry has exempted storage or warehousing, loading, unloading, packing of ‗rice‘ from service tax.

However, this Notification is half-hearted as the exemption is provided but it will be applicable for period from 17 February 2014 onwards (i.e. prospective), thus implying that the Government considers this service was taxable prior to 17 February 2014.

This leads to a paradox as the Government thinks the storage, warehousing etc of ‗rice‘

as exempt with effect from 17 February 2014 onwards but taxable prior to 17 February 2014. Though the interpretation of the Finance Ministry that ‗rice‘ is not an ‗agricultural produce‘ is itself doubtful still the warehousing industry may receive notices asking them to pay service tax for the period prior to 17 February 2014. In our view, it is of atmost importance that the aforesaid services are exempted retrospectively.

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(10) "Appellate Tribunal" means the Customs, Excise and Service Tax Appellate Tribunal constituted under section 129 of the Customs Act, 1962 (52 of 1962.);

(11) "approved vocational education course" means,-

(i) a course run by an industrial training institute or an industrial training centre affiliated to the National Council for Vocational Training or State Council for Vocational Training²⁹ offering courses in designated trades notified under the Apprentices Act, 1961 (52 of 1961.); or

(ii) a Modular Employable Skill Course, approved by the National Council of Vocational Training, run by a person registered with the Directorate General of Employment and Training, Union Ministry of Labour and Employment; or (iii) a course run by an institute affiliated to the National Skill Development

Corporation set up by the Government of India;³⁰

(12) "assessee" means a person liable to pay tax and includes his agent;

(13) "associated enterprise" shall have the meaning assigned to it in section 92A of the Income-tax Act, 1961 (43 of 1961.);

(14) "authorised dealer of foreign exchange" shall have the meaning assigned to "authorised person" in clause (c) of section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999.);

(15) "betting or gambling" means putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the

outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring;

(16) "Board" means the Central Board of Excise and Customs constituted under the Central Boards of Revenue Act, 1963 (54 of 1963.);

(17) "business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession;

29 Applicable from 10 May 2013

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(18) "Central Electricity Authority" means the authority constituted under section 3 of the Electricity (Supply) Act, 1948 (54 of 1948.);

(19) "Central Transmission Utility" shall have the meaning assigned to it in clause (10) of section 2 of the Electricity Act, 2003 (36 of 2003.);

(20) "courier agency" means any person engaged in the door-to-door transportation of time-sensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles;

(21) "customs station" shall have the meaning assigned to it in clause (13) of section 2 of the Customs Act, 1962 (52 of 1962.);

(22) "declared service" means any activity carried out by a person for another person for consideration and declared as such under section 66E;

(23) "electricity transmission or distribution utility" means the Central Electricity Authority; a State Electricity Board; the Central Transmission Utility or a State Transmission Utility notified under the Electricity Act, 2003 (36 of 2003.); or a distribution or transmission licensee under the said Act, or any other entity entrusted with such function by the Central Government or, as the case may be, the State Government;

(24) "entertainment event" means an event or a performance which is intended to provide recreation, pastime, fun or enjoyment, by way of exhibition of cinematographic film, circus, concerts, sporting event, pageants, award functions, dance, musical or theatrical performances including drama, ballets or any such event or programme;

(25) "goods" means every kind of movable property other than actionable claim and money; and includes securities³¹, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

31 ‗Securities‘ is included in the definition of ‗goods‘ so as to exclude the same from the definition of ‗service‘ (as ‗service‘ excludes transaction in ‗goods‘)

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(26) "goods transport agency" means any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called³²;

(27) "India" means,-

(a) the territory of the Union as referred to in clauses (2) and (3) of article 1 of the Constitution;

(b) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976.);

(c) the seabed and the subsoil underlying the territorial waters;

(d) the air space above its territory and territorial waters; and

(e) the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof;

(28) "information technology software" means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment;

(29) "inland waterway" means national waterways as defined in clause (h) of section 2 of the Inland Waterways Authority of India Act, 1985 (82 of 1985.) or other waterway on any inland water, as defined in clause (b) of section 2 of the Inland Vessels Act, 1917 (1 of 1917.);

(30) "interest" means interest payable in any manner in respect of any moneys borrowed or debt incurred (including a deposit, claim or other similar right or obligation) but does not include any service fee or other charges in respect of the moneys borrowed or debt incurred or in respect of any credit facility which has been utilised;

32 In the case of U P State Sugar Corp Ltd [2011 (24) S.T.R. 423 (Tri - Del)] the Tribunal prima-facie held that as no proforma for Consignment Note is prescribed hence issue of formal Consignment Note not mandatory for levy of Service tax [Stay case]

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(31) "local authority" means-

(a) a Panchayat as referred to in clause (d) of article 243 of the Constitution;

(b) a Municipality as referred to in clause (e) of article 243P of the Constitution;

(c) a Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund;

(d) a Cantonment Board as defined in section 3 of the Cantonments Act, 2006 (41 of 2006.);

(e) a regional council or a district council constituted under the Sixth Schedule to the Constitution;

(f) a development board constituted under article 371 of the Constitution;

or

(g) a regional council constituted under article 371A of the Constitution;

(32) "metered cab" means any contract carriage on which an automatic device, of the type and make approved under the relevant rules by the State Transport Authority, is fitted which indicates reading of the fare chargeable at any moment and that is charged accordingly under the conditions of its permit issued under the Motor Vehicles Act, 1988 (59 of 1988.) and the rules made thereunder but does not include radio taxi³³;

(33) "money" means legal tender, cheque, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheque, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic value;

(34) "negative list" means the services which are listed in section 66D;

(35) "non-taxable territory" means the territory which is outside the taxable territory³⁴;

(36) "notification" means notification published in the Official Gazette and the expressions "notify'' and "notified" shall be construed accordingly;

(37) "person³⁵" includes,-

33 With effect from date to be notified

34 Non-taxable territory would mean Jammu & Kashmir and rest of the world

35 It may be noted that in the Positive List Regime (i.e. upto 30 June 2012) the term 'person' was not defined in the Finance Act, 1994 or Rules made thereunder. Thus upto 30.06.2012 the definition of the term ―person‖ as defined in the General Clauses

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(i) an individual,

(ii) a Hindu undivided family, (iii) a company,

(iv) a society,

(v) a limited liability partnership, (vi) a firm,

(vii) an association of persons or body of individuals, whether incorporated or not,

(viii) Government, (ix) a local authority, or

(x) every artificial juridical person, not falling within any of the preceding sub-clauses;

(38) "port" has the meaning assigned to it in clause (q) of section 2 of the Major Port Trusts Act, 1963 (38 of 1963.) or in clause (4) of section 3 of the Indian Ports Act, 1908 (15 of 1908.);

(39) "prescribed" means prescribed by rules made under this Chapter;

(39a) ―print media‖ means,—

(i) ―book‖ as defined in sub-section (1) of section 1 of the Press and Registration of Books Act, 1867, but does not include business directories, yellow pages and trade catalogues which are primarily meant for commercial purposes;

(ii) ―newspaper‖ as defined in sub-section (1) of section 1 of the Press and Registration of Books Act, 1867³⁶

(40) "process amounting to manufacture or production of goods³⁷"

means a process on which duties of excise are leviable under section 3 of the Central Excise Act, 1944 (1 of 1944) or the Medicinal and Toilet Preparations (Excise Duties) Act,1955³⁸ or any process amounting to

Act, 1897 should be referred to, which defines the term ―person‖ as Sec.3 (42)

"person" shall include any company or association or body of individuals, whether incorporated or not; However, from 1.07.2012 as the term ‗person‘ is specifically defined ,it should be referred.

36 With effect from date to be notified

37 Business Support Services - Processes amounting to manufacture - Same activity cannot be considered as manufacturing and subjected to Excise levy and also considered as service and subjected to Service Tax – Jubilant Industries Limited [2013 (9) TMI 358 - CESTAT NEW DELHI]

Service Tax - Negative List

9 t h E d i t i o n

CA Pritam Mahure

Service Tax - Negative List

Regime CA Pritam Mahure

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contents

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Key features of specified indirect taxes:

C en tr al Gov er rn men t Customs duty Excise Duty Service Tax Central Sales Tax, Research & Dev. Cess

St at e G ov er nmen t VAT/Sales Tax Entry Tax, Purchase Tax, Entertainment

tax, Elect. duty Loc al T ax es Octroi / Local Body Tax

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Current Indirect tax implications on various transactions

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