5th Knowledge Master Class

1. Presents
5th Knowledge Master Class
On
“Service Tax Law Simplified”
Conducted by
Dr. Sanjiv Agarwal
FCA, FCS
Wednesday,
20th March, 2013
Gurgaon © Dr. Sanjiv Agarwal
1

2. SESSION – I
Overview of
Taxation of Services and
Recent Changes
2

3. This Presentation Covers
• Economic Overview
• Overview of Taxation of Services – Past and Present
• GST – An Update
• Major Changes in 2012 -2013
• Changes in Budget 2013-14
• New Penal Provisions
• Power to Arrest
• Voluntary Compliance Encouragement Scheme, 2013
3

4. Indian Economy – An Overview
 India’s 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) 4

5.  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.
 Both education cesses will continue to be levied.
5

6. Share of Services in GDP
6

7. 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 7

8. Year No of new Total No of Total collection
services services (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 (A)
2013 - All 132697 (RE)
2014 - All 8
180141 (BE)

9. 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
9

10.  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.
10

11. 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.
11

12. Shift to Comprehensive Approach
 W.e.f. 1st July, 2012
 Finance Act, 2012 – A land mark Act to shift from positive
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.
12

13. Taxation of Services by Finance Act, 2012
All Services
(including declared Services
(-)
Specific Exclusions
(-)
Negative List Services
(-)
Exemptions
(=)
Taxable Services 13

14. New system 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.
14

15.  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, 2006
 Export of Service Rules, 2005
15

16. New Provisions in Service Tax
 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
16

17.  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
17

18. GST: A Common Tax
on
Goods Services
18

19.  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 elections
 No clear road map and commitment on time lines on GST
implementation
 Hope for consensus in next few months.
19

20.  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 empowered to raise rates in case of distress
 Revenue sharing mechanism to be rationalized
 A suitable GST rate?
 Need for drafting a GST Law by States and Centre
20

21.  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
21

22.  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 introduced
 Taxation 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 service or
bundled services.
22

23.  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.
 New Accounting Codes for payment of tax under new regime ( for
July – November 2012)
Tax Collection 00441089
Other Receipts 00441090
Penalties 00441093
Deduct Refunds 00441094
23

24. Restoration of Service Specific Accounting Codes
 Circular No. 165 dated 20.11.2012 /Notification 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 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 00441480
Interest 00441481
Penalty 00441485
24

25.  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.
 Criteria for Rs 10 lakh threshold exemption changed.
 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)
25

26. 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
 Last date 25th March, 2013; extended to 15th April, 2013
 To be uploaded on ACES portal by March, 2013 end
 To indicate capacity – as provider / under RCM / under partial RCM
 Filing of return for second half of 2012-13 to be notified later
26

27.  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.
 Definition of "process amounting to manufacture" will also include processes under
Medicinal and toilet preparations (Excise Duties) Act, 1955.
 Service Tax to be levied on all restaurants which are air conditioned. The condition of
liquor license done away with.
 Benefit of exemption to copyright on cinematography to be limited to films exhibited in
cinema halls.
 Existing exemption from Service Tax for low cost housing and single residential units to
continue.
27

28.  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)
 Retrospective exemption to Indian railways for services provided between 1st July, 2012
upto 28th February, 2013 to the extent notices have been issued.
 Where it is held that extended period of limitation u/s 73 is not sustainable for making
demands, Department's demand for normal period of 18 months shall be sustainable.
 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 (with carpet area of 2000 sq. ft. or more or value of Rs. 1 crore or
more).
28

29.  New provisions for revised punishments for offences u/s 89, make 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.
 Power to arrest provided u/s 91 where Service Tax default is more than Rs. 50 lakhs.
 Advance Ruling can be sought to ascertain eligibility of Cenvat Credit on input services
for a manufacturer of excisable goods. (w.e.f 1.3.2013)
 Resident public limited companies also allowed to seek advance ruling from Advance
Ruling Authority.
 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.
29

30.  In Cestat appeals, single member bench can hear and
dispose off appeals upto a monetary limit of Rs. 50
lakhs (previously Rs. 10 lakh).
 Mode of delivery of letters, orders etc will also include
speed post and approved courier agency.
 Voluntary Compliance Encouragement Scheme, 2013
(VCES) introduced as a onetime amnesty measure to
effect compliance and recovery and provide amnesty
from interest and penalties (last date 31.12.2013).
30

31. Section 78A Penalty for offences by director etc.
of a company
Section 89 Offences & penalties
Section 90 Cognizance of offences
Section 91 Power to attrest
Goes against non- adversarial tax policy of Government
31

32. Penalty for offences by Company officials (Section 78A)
 To impose penalty for contraventions / violations by
Company
 Penalty may extend up to Rs. one lakh
 Penalty on any director, manager, secretary or officer
of Company
 Incharge / responsible to Company for conduct of
business of Company
 If knowingly involved in specified contraventions
32

33. Penalty for offences by Company officials (Section 78A)
Specified Contraventions -
 Evasion of Service Tax
 Issuance of bill / Invoice / challan without provision of
service in violation of rules.
 Availment and utilization of credit of taxes /duties
without actual receipt of services /goods either fully or
partially.
 Failure to pay amount collected as service tax to the
credit of Central Government beyond 6 months of the
due date
33

34. Penalty for offences by Company officials (Section 78A)
Personal Penalty
 Till now, there was no provision in the Finance
Act, 1994 to levy personal penalty (also legally held)
 There can be no penalty on directors /officers /
manager / secretary of non-company assessees
34

35. Offences & Penalties (Section 89)
 Punishment to whoever commits any offence
a) Knowingly evades payment of Service Tax
b) Wrongly avails / utilizes credit of taxes
c) Maintains false books of accounts/ supplies false information
d) Collects tax but fails to pay within 6 months of due date
Contd…..
35

36. Offences & Penalties (Section 89)
 For (a), (b) and (c), amount > Rs. 50 lakhs –
imprisonment from 6 months to 3 years
 For (d), if amount > Rs. 50 lakh – imprisonment from
6 months to 7 years
 For any other offences– imprisonment upto 1 year
 For second or subsequent conviction
 (a), (b), (c), other offences – imprisonment upto 3 years
 (d) – imprisonment upto 7 years
36

37. Cognizance of Offences (Section 90)
 Cognizable Offences
Failure to deposit service tax collected where amount
exceeds Rs. 50 lakhs
 Non-Cognizable and Bailable Offences
All offences except cognizable offences as above
 Detailed instructions to be issued
(Similar provisions existed prior to 16.10.1998)
37

38. Power to Arrest (Section 91)
 Provides power to arrest
 Covers all classes of assessees
 Empowers Commissioner of Central Excise
 He may authorize any officer not below the rank of Superintendent to arrest
 Who can be arrested – any person as per Section 89
 Trigger for arrest – offences – as per Section 89(1)
 Arrests to be made in terms of Code of Criminal Procedure, 1973 (CCP)
 For Cognizable offences
 Grounds of arrest to be informed to such person
 Produced before Magistrate with in 24 hours
 Asstt. / Deputy Commissioner empowered to release an arrested person on bail in case of
non -cognizable / bailable offences
 To have same powers as officer -in -charge of Police Station in terms of Section 436 of
CCP
38

39. Changes in Budget 2013-14
(Finance Bill, 2013)
Power to Arrest (Section 91)
Impact
 Punitive punishments measures
 Possible harassment of small service providers (sole
proprietors etc.)
 But tax amount of Rs. 50 lakhs provides a breather
 May improve compliances
 Regressive
 Increase litigation
 Need to distinguish between willful and genuine defaluts
39

40. 40

41. 41

42. 42

43. Voluntary Compliance Encouragement Scheme, 2013 (VCES)
 Chapter VI (Clause 94-104 of Finance Bill, 2013)
 17 lakh assessees, 7 lakh returns filed
 Stop filers / non-filers
 Only a one time scheme
 To chase assessees not possible
 Hope to collect reasonable money
 Action & consequences
 Truthful declaration of service tax dues service 1.10.2007 upto 31.12.2012
by defaulter as on 1.03.2013
 Payment of due tax in 1 or 2 installments
 Interest , penalties and other consequences waived
 Not applicable to period before 1.10.2007 or after 31.12.2012
 Not applicable to cases involved search, audit, investigation, SCN or
summon issued cases as on 1. 03. 2013
43

44. Voluntary Compliance Encouragement Scheme, 2013 (VCES)
 Pay at least half of tax before, 31st December, 2013
 Pay balance by
 30th June, 2014 without interest
 31st December 2014 with interest w.e.f. 1.07.2014
 Dues for period after 31st December, 2012 to be settled as per
present Law
 No refund of amount paid under VCES
 Tax dues declared but not paid – to be recovered as per Law
 False declaration to be rejected - reason to believe, notice to be
served
 No action after one year from date of declaration
 Once acknowledgement is issued - no reopening permissible
44