Government of India
Ministry of Finance
Department of Revenue
(Tax Research Unit)
V. K. Garg
Joint Secretary (Tax Research Unit)
Telephone No. 011-23093027
Fax No. 011-23093037
D. O. F. No 334/1/2012-TRU
New Delhi, dated 16th March, 2012.
Subject: Union Budget 2012: Changes in Service Tax-reg.
It is said that in matters relating to taxes, questions rarely change, but the answers do. Budget 2012 has, however, changed a number of questions relating to service tax.
2. No more will the most often-asked question "which taxable service is being provided?" be relevant; no more will an exporter be asked whether an input service has been used in export to claim a Cenvat refund; and no more will a host of questions confront a tax-payer filing his new one page return.
3. Budgetary changes relating to service tax this year are aimed at addressing a number of basic issues: simplicity and certainty in tax processes, neutrality of business to tax by mitigating cascading, encouraging exports, optimizing compliance. And these are largely driven by the desire to create the required setting for the eventual launch of GST in a far more familiar environment.
4. Clauses 143 to 145 of the Finance Bill, 2012 cover the legislative changes relating to Service Tax. Changes have also been made in the rules as well as exemptions. A number of other changes are slated to be introduced in subordinate legislation at the time the legislative provisions are operationalized.
5. These changes can be broadly captured as follows:
A. Rate changes:
1. The rate of service tax is being restored to the statutory rate of 12% - same as goods-and Notification No. 8/2009-ST dated February 24, 2009 reducing the rate to 10% has been rescinded effective April 1, 2012.
2. Consequent changes have also been made in composition rates as follows:
i For life insurance: 3% for the first year premiums while retaining the rate @1.5% for the subsequent years(simultaneously restoring full Cenvat credit);
ii Money changing: raising the existing rates proportionately by 20%;
iii Distributor or selling agent of lotteries: Raising the specified amounts proportionately and suitably rounded off to Rs 7,000 and 11,000;
iv For works contracts from 4% to 4.8%.
3. The rate for Cenvat reversal for exempt services has been revised likewise from 5% to 6% in Rule 6(3) of Cenvat Credit Rules (CCR), 2004.
4. The dual tax structure for air transportation: partly specific, partly ad valorem - is being replaced with a uniform ad-valorem levy at standard rate with an abatement of 60% on all sectors and all classes.
5. All these changes will be effective April 1, 2012.
B. Taxation of services:
B.1. Negative List:
1. There is paradigm shift in the way services are proposed to be taxed in future. Taxation will be based on what is popularly known as "Negative List of Services".
2. In simple words, it means that if an activity meets the characteristics of a "service" it is taxable unless specified in the Negative list, comprising 17 heads listed in proposed new section 66D, or otherwise exempted by a notification issued under section 93 of the Act. Most of the 88 exemptions at present will be either rescinded, being no more needed, or modified in some manner, or merged in a mega notification, leaving the final tally of exemptions to just 10.
3. The word "service" is defined in clause (44) of the new section 65B. This will also include certain activities that have been specified as declared services in section 66E. Most of these declared services are presently taxed as positive list.
4. The new charging section is contained in section 66B and levies taxes on all services, other than those in the negative list, provided or agreed to be provided in the taxable territory by one person to another.
5. The entire concept, including the key to understanding the various dimensions of the new taxation, together with answers to possible questions, is contained in a detailed draft Guidance Paper: A (GPA for short) and is attached as Annexure A to this letter. The negative list, the mega-exemption notification and list of other exemptions, being retained, are a part of GPA as Exhibits "A1", "A2" and "A3" respectively.
6. On the coming into force of the new provisions, the earlier provisions contained in sections 65, 65A, 66, 66A will cease to apply but will remain relevant in respect of services provided prior to the coming into force of the new provisions.
B.2. Place of Provision of Services Rules, 2012:
7. An important component of the proposed changes is the introduction of the Place of Provision of Services Rules, 2012, which have been released for comments and feedback for the time being. Another draft Guidance Paper-B, or GPB for short, has also been issued explaining all the various aspects relating to these rules and is attached as Annexure B.
8. The new rules will replace the existing Export of Services Rules, 2005 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. Rule 5 of the export rules will be incorporated in Service Tax Rules.
B.3. Other related changes:
9. The transition to Negative List will require a number of other changes, in particular, movement away from service-specific provisions in rules and notifications. Many other changes are also being timed with the introduction of negative list, including most of the new exemptions. These changes are as follows:
B. 3(I). Service Tax Rules
10. Besides complying with some revised drafting needs due to negative list, the rules will need changes in respect of person liable to pay tax: to provide for recipient persons relating to services provided to business entities by government, advocates or arbitrators, change in services provided from non-taxable territory, some changes to services provided by GTA and the deletion of all those services that are now exempt e.g. mutual funds agents and distributers.
11. Since the Export Rules will cease to apply, the required provisions will be incorporated in Service Tax Rules. A transaction will qualify as export when it meets following requirements:
i The service provider is located in Taxable territory;
ii Service recipient is located outside India;
iii Service provided is a service other than in the negative list.
iv The Place of Provision of the service is outside India; and
v The payment is received in convertible foreign exchange
B. 3(II). Valuation Rules
12. Negative list will require movement away from service-specific provisions. As such, the abatements under Notification 1/2006-ST and composition rate under the Works Contract (composition scheme for payment of service tax) Rules, 2007 will need some reformulations.
13. A new valuation rule is being introduced to substitute the Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007. The value of the Works Contract is proposed to be redefined, as follows: 4
i As at present, first determination will be the value of service being the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose;
ii If value of goods is not intimated to State VAT, the assessees can still calculate the actual value of goods and the same will be relevant to deduce the value of the service involved in the works contract;
iii If the value is not so deduced, and not merely as an option, the value shall be specified percentage of the total value as follows:
a. for original works: 40% of the total amount;
b. other contracts: 60% of the total amount;
c. for contracts involving construction of complex or building for sale where any part of the consideration is received before the completion of the building: 25% of the total amount
14. Original works will include all new constructions and all types of additions and alterations to abandoned or damaged structures to make them workable.
15. The total amount will be gross amount plus the value of any material supplied under the same contract or any other contract.
16. The input tax credit on goods forming part of the property on which VAT is payable shall not be available as they are not used in the provision of service, which is totally independent of the deemed sale. However taxes paid on capital goods and input services will be available including in respect of iii.c of para 13 above.
17. Likewise a new Rule 2C is being introduced, for determination of value of taxable service involved in supply of food and drinks in a restaurant or as outdoor catering. The value is being adjusted such that the industry is able to utilize credit on capital goods, specified inputs (other than chapter 1 to 22 i.e. foods and beverages) and input services. Thus the taxable portion is being raised but the move is expected to be business-friendly.
18. The revised taxable portion shall be as follows: S. No
Description of service
Existing taxable portion
Proposed taxable portion
Service portion in the supply of food or any other article of human consumption or drink at a restaurant
S. No.1 provided from a premises elsewhere(outdoor catering)