Presents

6th Knowledge Master Class

On

Understanding Service Tax Law Nuances

Conducted by

Dr. Sanjiv AgarwalFCA, FCS

Wednesday,17th April, 2013Mumbai © Dr. Sanjiv

Agarwal

1

Corporate Knowledge Foundation

SESSION – I

SERVICE TAX

Overview

and

Recent Changes

2

Corporate Knowledge Foundation

This Presentation Covers

• Economic Overview

• Taxation of Services – Past and Present

• Major Changes in 2012 -2013

• Macro View of Budget – 2013 Proposals

• GST – An update

3

Service Tax Overview & Recent Changes

4

Indian Economy – An Overview

Indian 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)

5

Share of Services in GDP

6

Share of services in GDP tracked

Year % of GDP 1950 15 1970 33 1980 36 1994 40 1995 41 2000 47 2005 53 2010 57 2012 59

In 2011-12, services have grown by 9.6 % which is more than GDP growth rate

7

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.

Economy / Taxation – A Status

8

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

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

2013 - All 132697 (RE)131884 (A)

2014 - All 180141 (BE)

10

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

11

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.

12

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.

13

Service Tax – The Present

Shift to Comprehensive Approach

W.e.f. 1st July, 2012

Finance Act, 2012 – A land mark Act to shift from selective positive approach 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.

14

All Services(including declared Services

(-)

Specific Exclusions

(-)

Negative List Services

Exemptions

Taxable Services

(-)

Present Taxation of Services

(=)

15

Service Tax – The Present

New Law 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.

16

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

17

New Provisions in Service Tax under Negative List

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

18

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

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

19

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

20

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 services or bundled services.

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

21

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.

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.

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

22

Criteria for Rs 10 lakh threshold exemption changed to invoices

Time limit for appeal by assessees to Commissioner (Appeals)

reduced from 3 months to 2 months

Revision 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)

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

23

New Accounting Codes under new regime ( July – November 2012) Tax Collection 00441089 Other Receipts 00441090 Penalties 00441093 Deduct Refunds 00441094

Restoration of Service Specific Accounting Codes C. No. 165 dated 20.11.2012 / N. 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 to be

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

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

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

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 is available in offline mode Last date 25th March, 2013; extended to 15th April, 2013; further extended upto 30th

April 2013 vide Order No. 2/2013-ST, dated 12.4.2013 To indicate capacity – as provider / under RCM / under partial RCM Filing of return for second half of 2012-13 yet to be notified

24

25

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.

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

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)

Macro View of Budget – 2013 Proposals

26

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 and others (with carpet area of 2000 sq. ft. or more or value of Rs. 1 crore or more).

New provisions for revised punishments for offences u/s 89, making 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.

Macro View of Budget – 2013 Proposals

27

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

Resident public limited companies also allowed to seek advance ruling from Advance Ruling Authority (w.e.f 1.3.2013)

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.

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

Macro View of Budget – 2013 Proposals

28

Goods & Service Tax (The Future)

GST: A Common Tax on

Goods Services

29

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

30

Time to wrap up loose ends GST rate – band may be introduced Consensus required at Empowered Committee on GST to abolish

small taxes Agreement on dropping Dispute Settlement Body GST may be introduced in phases. States to decide / opt out States may be empowered to raise GST rates in case of distress Revenue sharing mechanism to be rationalized What could be a suitable GST rate? Need for drafting a GST Law by States and Centre Next meeting of Empowered Committee on 11-12 May at

Mussoorie Dual control not likely - to be controlled by Central / States based

on turnover Composition scheme likely, besides threshold exemption

GST : What Next

31