INSTITUTE FOR CORPORATE ACHIEVERS(ICA): Service tax rate of 14% shall come into effect only from a date to be notified

The Hon’ble President has given assent to the Finance Bill, 2015 on Thursday, May 14, 2015. Accordingly, the Finance Bill, 2015 now becomes Finance Act (No.20), 2015. However, it is to be noted here thatincrease in the rate of Service tax from 12.36% to flat 14% (Subsuming Education cess and Secondary & Higher Secondary Education cess) as was proposed in the Union Budget, 2015 will become effective only after the date to be notified and not effective from May 14, 2015.

Further pursuing with Mr. Narendra Modi’s Dream of Swachh Bharat, a new Chapter VI has been inserted in the Finance Bill, 2015 that contains a new levy of cess called the ‘Swachh Bharat Cess’ which may be levied on all or any of the taxable services at the rate of 2% of the value of such services.Hence, Service tax rate may increase from present 12.36% to 16% for specified services on which Swachh Bharat Cess is leviedfrom a date notified later.

Therefore, it is to be noted that Higher rate of Service tax from 12.36% to 14% and Swachh Bharat Cess of 2% will become effective onlyfrom the date to be notifiedand not from May 14, 2015. Further, the changes in Negative List of services will also come into effect from the date notified later.

We are summarizing hereunder the changes in Service tax that are effective from May 14, 2015 and the changes that will become effective only from the date to be notified later for easy digest:

PART I: CHANGES IN SERVICE TAX EFFECTIVE FROM MAY 14, 2015:

A: Changes under various Sections under the Finance Act, 1994 (“the Finance Act”)

Section 65B: Definitions of certain terms has been inserted [Section 65B(23A): ‘foreman of chit fund’, Section 65B(26A):‘Government’ and Section 65B(31A):‘lottery distributor or selling agent’];
Section 65B(44): Change in definition of ‘Service’:

Explanation 2 to Section 65B(44) of the Finance Act, defining the term ‘Service’ is amended to specifically state the intention of the legislature to levy Service tax on activities undertaken by Chit fund foremen in relation to Chit, and lottery distributors and selling agents, in relation to lotteries. [Lottery Distributor or Selling Agent needs to pay Service tax under Reverse Charge on services received from selling or marketing agents of lottery tickets]

Section 66F: Section 66F (1) prescribes that unless otherwise specified, reference to a service shall not include reference to any input service used for providing such services. An illustration has been incorporated in the stated Section to exemplify the scope of this provision in the following manner:

“The services by the Reserve Bank of India, being the main service within the meaning of clause (b) of section 66D, does not include any agency service provided or agreed to be provided by any bank to the Reserve Bank of India. Such agency service, being input service, used by the Reserve Bank of India for providing the main service, for which the consideration by way of fee or commission or any other amount is received by the agent bank, does not get excluded from the levy of service tax by virtue of inclusion of the main service in clause (b) of the negative list in section 66D and hence, such service is leviable to service tax.”

Section 67: Amendment in definition of the term ‘Consideration’to include:

any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed like Pure Agent.;
any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket..

Section 73: New sub-section (1B) inserted to provide that the Service tax amount self-assessed and declared in the return but not paid (either in part or full) shall be recovered under Section 87 thereof, without service of any notice under Section 73(1).Consequently,Rule 6(6A) of the Service Tax Rules, 1994 (“the Service Tax Rules”) has been omitted, which provided for recovery of Service tax self-assessed and declared in the return in the manner prescribed under Section 87 of the Finance Act as the same has been now been incorporated in Section 73 of the Finance Act

Further, Section 73(4A) has been omitted, which provides for reduced penalty up to 25% of Service tax liability, where during the course of any audit, investigation or verification, it is found that any Service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded but true and complete details of transaction are available on specified records.

Section 76: Rationalization of penal provisions in cases not involving fraud or collusion or wilful misstatement or suppression of facts or contravention of any provision of the Finance Act or Rules with the intent to evade payment of Service tax, in the following manner:

Ceiling of 10% of Service tax amount as penalty has been incorporated;
No penalty leviable if Service tax and interest is paid within 30 days of issuance of SCN under Section 73(1) of the Finance Actand proceedings in respect of such Service tax and interest shall be deemed to have been concluded;
Reduced penalty equal to 25% of the penalty (i.e. 2.5% of the Service tax liability) if the Service tax, interest and reduced penalty is paid within 30 days of receipt of the Adjudication Order; and
If the Service tax amount gets increased in any Appellate proceedings, then the penalty amount shall also stand modified accordingly, and benefit of reduced penalty (i.e. 25% of penalty imposed) shall be admissible if Service tax, interest and reduced penalty on such increased amount is paid within 30 days of such Appellate Orders.

Section 78: Rationalization of penal provisions relating to penalties in cases involving fraud or collusion or wilful misstatement or suppression of facts or contravention of any provision of the Finance Act or Rules with the intent to evade payment of Service tax, in the following manner:

Penalty shall be of 100% of Service tax amount. However, in respect of the cases where the details relating to such transactions are recorded in the specified record for the period beginning with the April 8, 2011 upto the date on which the Finance Bill, 2015 receives the assent of the President i.e. May 14, 2015 (both days inclusive), the penalty shall be 50% of the Service tax so determined;
Reduced penalty equal to 15% of the Service tax amount alleged in the SCN shall be levied if Service tax, interest and reduced penalty is paid within 30 days of issuance of SCN under Section 73(1) of the Finance Act. Further proceedings in respect of such Service tax, interest and penalty shall be deemed to be concluded;
Reduced penalty equal to 25% of the Service tax amount, determined by the Central Excise officer by an Adjudication Order, shall be levied if the Service tax, interest and reduced penalty is paid within 30 days of receipt of Order of the Central Excise Officer; and
If the Service tax amount gets modified in any Appellate proceedings, then the amount of penalty and the interest payable thereon shall stand modified accordingly, and after taking into account the amount of Service tax so modified, the person who is liable to pay such amount of Service tax, shall also be liable to pay the amount of penalty and interest so modified;
If the Service tax amount gets increased in any Appellate proceedings, then the penalty amount shall also stand modified accordingly, and benefit of reduced penalty (i.e. 25% of Service Tax) shall be admissible if Service tax, interest and reduced penalty on such increased amountis paid within 30 days of such Appellate Orders.

New Section 78B inserted after Section 78A: A new Section 78B has been inserted to prescribe transition provision in the following manner:

Amended provisions of Sections 76 and 78 of the Finance Act shall apply to cases where either no SCN is served, or SCN is served under Section 73(1)or proviso thereto but no Order has been issued under Section 73(2) thereof, before the date of enactment of the Finance Bill, 2015 (i.e. May 14, 2015); and
In cases where SCN has been issued but no Orderhas been issued under Section 73(2), before the date of enactment of the Finance Bill, 2015 (i.e. May 14, 2015), the period of 30 days for the purpose of closure of proceedings on the payment of Service tax and interest under clause (i) of the proviso to sub-section (1) of Section 76 or on the payment of Service tax, interest and penalty under clause (i) of the second proviso to sub-section (1) of Section 78, shall be counted from the date on which the Finance Bill, 2015 receives the assent of the President (i.e. May 14, 2015).

Section 80 omitted: Now, no waiver of penalty under Section 76 and 77 of the Finance Act, on Reasonable cause will be allowed.
Section 83: Certain changes have been made in the provisions relating to Settlement Commission under the Excise Act,which are made applicable to the Finance Act by virtue of Section 83 thereof.
Section 86: Amended to prescribe that remedy against the Order passed by the Ld. Commissioner (Appeals), in a matter involving rebate of Service tax on Input services, duty paid on Inputs, used in providing service which is exported, shall lie in terms of Section 35EE of the Central Excise Act, 1944 (“the Excise Act”) (i.e. Revision by the Central Government).

It is also provided that all appeals filed before the Hon’ble Tribunal after the date the Finance Act, 2012 came into effect (i.e. May 28, 2012) and pending on the date when the Finance Bill, 2015 receives assent of the President (i.e. May 14, 2015) shall be transferred and dealt in accordance with Section 35EE of the Excise Act.

Section 94: Clause (aa) of Section 94(2) has been substituted with “determination of the amount and value of taxable service, the manner thereof, and the circumstances and conditions under which an amount shall not be a consideration, under Section 67”.

PART II: CHANGES IN SERVICE TAX TO BE EFFECTIVE FROM DATE TO BE NOTIFIED:

A: Increase in rate of Service tax:

From 12.36% (including Education Cess and Secondary and Higher Education Cess) to flat 14%.The ‘Education Cess’ and ‘Secondary and Higher Education Cess’ shall be subsumed in the new Service tax rate.

Open Issues: Whether balance lying in ‘Education Cess’ and ‘Secondary and Higher Education Cess’ standing as on date of notification of change in rates will be allowed to be adjusted with Service tax liability as this is being denied in terms of Rule 3(7)(b) of the Cenvat Credit Rules, 2004(“the Credit Rules”),which requires clarification by the CBEC at the earliest.

Consequent to the upward revision in Service tax rate, the composition rate is proposed to be revised proportionately under Rule 6(7), 6(7A), 6(7B) and 6(7C) of the Service Tax Rules on specified services, namely,

Air Travel Agent: From “0.6%” and “1.2 %”, to “0.7 per cent.” and “1.4 per cent of Basic fares in the case of domestic bookings and international bookings respectively.
Life insurance service: From “3%” and “1.5%”, to “3.5%” of the premium charged from policy holder in the first year and “1.75% in the subsequent year”.
Money changing service provided by banks or authorized dealers:
- From “0.12%” to “0.14%” of gross amount of currency exchanged for an amount upto Rs.1,00,000/-subject to minimum amount of “Rs. 35”which was “Rs. 30 earlier or;
- From “Rs. 120 and 0.06%” to “Rs. 140 and 0.07%” of gross amount of currency exchanged for an amount exceeding Rs.1,00,000/- upto Rs. 10,00,000/ or;
- From “Rs. 660 and 0.012%” to “Rs. 770 and 0.014%” of gross amount of currency exchanged for an amount exceeding Rs.10,00,000/- subject to maximum amount of Rs. 7000/- which was Rs. 6000/- earlier
Service provided by lottery distributor and selling agent:
- Guaranteed price payout is more than 80%: Rs. 8200/- (earlier Rs. 7000/-) on every Rs. 10,00,000/- (or part of Rs. 10,00,000/-) of aggregate face value of lottery tickets printed by organizing State for a draw or
- Guaranteed price payout is less than 80%: Rs. 12,800/- (earlier Rs.11,000/-) on every Rs. 10,00,000/- (or part of Rs. 10,00,000/-) of aggregate face value of lottery tickets printed by organizing State for a draw.

B: Swachh Bharat Cess – Enabling Provision

An enabling provision is being made to empower the Central Government to impose a Swachh Bharat Cess (“SB Cess”) on all or any taxable services at a rate of 2% on the value of all or any taxable services. The proceeds from this Cess would be utilized for Swachh Bharat initiatives.

The Government will specify the categories of taxable services on which SB Cess would be leviable.

Open issues:

What all services are going to be covered under the levy of SB Cess?

In the absence of clearly defined provisions, it is likely that the SB Cess may re-ignite the tussle on ‘classification’ of services.

Whether Cenvat credit of SB Cess would be available or not because there are no amendments proposed in the Credit Rules?

C: Changes in relation to the Negative List – Section 66D of the Finance Act

Section 66D(a): Under clause (iv), the words ‘support services’ has been substituted by the words ‘any service’.

Accordingly, after such amendment, all services provided by the Government or local authority to a Business Entity would be exigible to Service tax, except for the services that are specifically exempted, or covered by any another entry in the Negative List.

Consequently, the term ‘support’ has been omitted from the Rule 2(1)(d)(i)(E) of the Service Tax Rules, which provides for liability of service receiver to pay Service tax under Reverse Charge in relation to support services provided or agreed to be provided by Government or Local authority with certain exceptions.

Further, in paragraph I, clause (A) sub clause (iv) Item Cunder Notification No. 30/2012-ST dated June 20, 2012 (Reverse Charge Mechanism), the term ‘support’ has been omitted for services provided or agreed to be provided by Government or Local authorityvide Notification No. 7/2015-ST dated March 1, 2015. Thus, now any services provided by the Government or Local authority to a Business Entity would be exigible to Service tax under Reverse Charge, except for the services that are specifically exempted, or covered by any another entry in the Negative List.

Section 66D(f): Services by way of carrying out any processes for production or manufacture of alcoholic liquor for human consumption brought under the Service tax net.
Section 66D(i): Explanation inserted whereby the expression “betting, gambling or lottery” shall not include the activity as specified in substituted explanation 2 to Clause (44) of Section 65B of the Finance Act.
Section 66D(j): Omitted, which covers‘admission to entertainment event or access to amusement facilities’.

Consequently, Service tax to be levied on the services provided by way of access to amusement facility such as rides, bowling alleys, amusement arcades, water parks, theme parks, etc;

Service tax also to be levied on services by way of admission to entertainment event of concerts, non-recognized sporting events, pageants, music concerts and award functions, if the amount charged for admission is more than Rs. 500.

Whereas services by way of admission to exhibition of the cinematographic film, circus, dance, or theatrical performances including drama, ballets or recognized sporting events shall continue to be exempt; [Read with the Notification No. 6/2015-ST dated March 1, 2015 vide which changes has been made in the Mega Exemption List of Services]

Consequent to the changes in the Negative List of services, definition of following terms has been omitted/ amended in Section 65B of the Finance Act:

Definitions of certain terms omitted [Section 65B(9): ‘amusement facility’, Section 65B(24): ‘entertainment event’ and Section 65B(49): ‘support services’ has been omitted;]
Definitions of certain terms amended [Section 65B(40): ‘process amounting to manufacture or production of goods’ excluding alcoholic liquors for human consumption]

D: Changes in Mega Exemption Notification No. No. 25/2012-ST dated June 20, 2012 vide Notification No. 6/2015-ST dated March 1, 2015 (effective from the date to be notified)

Entry 30: Service tax would be levied on services by way of carrying out of intermediate production process of alcoholic liquor for human consumption on job work, consequent to imposition of Service tax on services by way of manufacture of alcoholic liquor for human consumption.

New Exemption:

Entry 47: Services by way of right to admission to:

exhibition of cinematographic film, circus, dance, or theatrical performances including drama or ballet;
recognized sporting events;
award functions, concerts, pageants, musical performances or any sporting events other than recognized sporting event, where the consideration for such admission is upto Rs. 500 per person

[This exemption will be effective from the date to be notified for amendments being made in the Negative List, concerning the service by way of admission to entertainment events.]