CA Vishal Panjwani, FCA1 Malad Goregaon CPE Study Circle Held on Saturday, 28 th November, 2009 RECENT DEVELOPMENTS IN SERVICE TAX AND ISSUES IN CENVAT

CA Vishal Panjwani, FCA 1

Malad Goregaon CPE Study Circle Held on Saturday, 28th November, 2009

RECENT DEVELOPMENTS IN SERVICE TAX AND ISSUES IN CENVAT

CREDIT


PART 1 : Recent Amendments- Three new Services Introduced

1. Cosmetic and Plastic Surgery Services

2. Legal Consultancy Services 3. Transportation of coastal goods

and goods transported through National Waterways and inland water Services


1 – Cosmetic & Plastic Surgery Services Effective Date : 1st September, 2009 section 65(105)(zzzzk) – means any

service provided or to be provided to any person, by any other person, in relation to cosmetic surgery or plastic surgery, but does not include any surgery undertaken to restore or reconstruct anatomy or functions of body affected due to congenital defects, developmental abnormalities, degenerative diseases, injury or trauma


1 – Cosmetic & Plastic Surgery Services Definition includes Abdominoplasty

(tummy tuck), bletharoplasty (eyelid surgery), mammoplasty, buttock augmentation and lift, rhinoplasty (reshaping of nose), otoplasty (ear surgery), rhytidectomy (face lift), liposuction (removal of fat from the body), brow lift, cheek augmentation, facial implants, lip augmentation, forehead lift, cosmetic dental surgery, orthodontics, aesthetic dentistry, laser skin surfacing, etc.


1 – Cosmetic & Plastic Surgery Services

Important points – importance to be placed on the exact

definition of the words used in the definitions

No qualification of service provider is provided.

Valuation Rules to be kept in mind while calculating the ‘Cost of Service’ to identify cost of input services


1 – Cosmetic & Plastic Surgery ServicesExemptions - General exemption has been provided for Value of

Goods and materials sold by the service provider to the recipient of service during the course of providing any taxable service, provided that no Cenvat Credit has been taken on such goods and materials, or, if the Cenvat credit has been taken, such credit is paid before effecting the sale.

Other General / Standard exemptions applies like services to UN, SEZ, Diplomatic missions etc.

Export of services will also be exempted as per the standard conditions.

Threshold exemption upto Rs. 10 lakhs available


2 – Legal Consultancy Services Effective Date : 1st September, 2009 Section 65(105)(zzzzm) defines taxable service

as “any service provided or to be provided to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner”.

Provided that any service provided by way of appearance before any court, Tribunal or authority shall not amount to taxable service.

Explanation : For the purpose of this sub-clause, “business entity” includes an AOP, BOI, Company or firm, but does not include an individual


2 – Legal Consultancy Services

Important points – The service provider does not necessary

have to be an advocate or a qualified professional.

Services can relate to any branch of law. Valuation Rules to be kept in mind while

calculating the ‘Cost of Service’ Threshold exemption upto Rs. 10 lakhs

available


2 – Legal Consultancy ServicesExemptions – Individual advocates / legal consultants are not

covered. Individual clients are also exempted. Appearing before any court, tribunal or

authority not taxable. Other General / Standard exemptions applies

like services to UN, SEZ, Diplomatic missions etc.

Export of services will also be exempted as per the standard conditions


3 – Transportation of costal goods Effective Date : 1st September, 2009 Section 65 (105) (zzzzl) defines

taxable service as “any service provided or to be provided to any person, by any other person, in relation to transport of –

- coastal goods,- goods through national waterway; or- goods through inland water


3 – Transportation of costal goods

Important points – Valuation Rules to be kept in mind

while calculating the ‘Cost of Service’

Threshold exemption upto Rs. 10 lakhs available


3 – Transportation of costal goodsExemptions –

Other General / Standard exemptions applies like services to UN, SEZ, Diplomatic missions etc.

Export of services will also be exempted as per the standard conditions.

Notification No. 30/2009-ST dt 31.8.2009 w.e.f. 1.9.2009 has been issued for exemptions to specific goods like foodstuffs, fertilizers, petroleum, yarn, jute, seeds, medicines & pharmaceutical products, relief materials for disasters, calamities, defence / military equipments, luggage of passengers, registered newspaper / magazines


OTHER RECENT AMENDMENTS 1. Notification No. 42/2009-ST dt. 12-11-2009 - grants

certain exemptions to service providers registered under “Business Auxiliary Services” for specified process during the course of manufacture of parts of cycles or sewing machines.

2. Notification No. 41/2009-ST dt. 23-10-2009 grant exemption to service providers registered under the category of “Works Contract Services” in respect of execution of works contract for canals, other than those primarily used for the purposes of commerce or industry. (Note – irrigation canals to be excluded whereas canals connecting 2 or more units of a manufacturing plant would continue to be taxable)


OTHER RECENT AMENDMENTS 3. Notification No. 40/2009-ST dt. 30-09-2009 grants

benefit of claim of refund to exporters on the component of service tax paid for services provided for transport of export goods through national waterway, inland water and coastal shipping.

4. Notification No. 39/2009-ST dt. 23-09-2009 grants exemptions to service providers registered under the category of “Business Auxiliary Services” for services rendered during the course of manufacture or processing of alcoholic beverages.

5. Notification No. 38/2009-ST dt. 23-09-2009 amends the Export of Service Rules 2005 by introducing “Export of Services (Second Amendment) Rules, 2009 to include the 3 new categories of services.


OTHER RECENT AMENDMENTS 6. Notification No. 37/2009-ST dt. 23-09-2009 amends

the Import of Service Rules 2006 by introducing “Taxation of Services (Provided from outside India and received in India) Second Amendment Rules, 2009. Basically this notification has been introduced for the 3 new categories of Services.

7. Notification No. 36/2009-ST dt. 9-09-2009 rescinds

notification no. 28/2009-ST dt 31.08.2009 which was in relation to grant of exemptions to certain goods being transported by rail

8. Notification No. 35/2009-ST dt. 3-09-2009 amends notification No. 16/2009-ST dt 7.07.2009. Basically 5 more organisations have been given exemption from service tax under the category of “Club or Association services” .



notification no. 1/2006-ST dt 1.03.2006 and further to that notification no 29/2009 to change the words of “transport of goods in containers by rail” to “transport of goods by rail”. Basically earlier only transport in “containers” were taxable, whereas now transport in any mode of railways will be taxable.

10. Notification No. 33/2009-ST dt. 1-09-2009 is also related to Transport of Goods by rails.

11. Notification No. 32/2009-ST dt. 1-09-2009 grants exemption to service providers registered under the category of “Business Auxiliary services” who are providing service to a client in relation to the manufacture of pharmaceutical products, medicines, perfumery, cosmetics or toilet preparations containing alcohol which are charged to excise duty under Medicinal and Toilet Preparations (Excise Duties) Act, 1955 from the whole of service tax.


OTHER RECENT AMENDMENTS 12. Notification No. 31/2009-ST dt. 1-09-2009 grants

exemption to service providers registered under the category of “Business Auxiliary services” who are providing services of Sub-Brokerage to a Stock Broker.

13. Notification No. 30/2009-ST dt. 31-08-2009 grants exemption in respect of transport of certain goods thru national waterway, inland water and coastal shipping (already discussed above).

14. Notification No. 24/2009-ST dt. 27-07-2009 grants exemption to service providers registered under the category of “Commercial or Industrial Construction Services” who are providing services in relation to management, maintenance or repairs of roads from the whole of service tax



the Composition Scheme for payment of Service Tax under “Works Contract Services” to include the value of all goods used in or in relation to the execution of the works contract whether supplied under any other contract for a consideration or otherwise and the value of all the services that are required to be provided for the execution of the works contract.

16. Notification No. 21 & 22/2009-ST dt. 7-07-2009 has been introduced for extending the applicability of service tax provisions to installations, structures and vessels in the entire Continental Shelf of India & Exclusive Economic Zones of India.


OTHER RECENT AMENDMENTS 17. Notification No. 20/2009-ST dt. 7-07-2009 has been

introduced for granting exemption to service providers registered under the category of “Tour Operator Services” for the transportation of passengers undertaken by private enterprises having “Contract Carriage Permits”

18. Notification No. 19/2009-ST dt. 7-07-2009 has been introduced for granting exemption to service providers registered under the category of “Banking & Financial Services” from service tax for foreign exchange broking services being provided to inter-bank purchase and sale of foreign currency between scheduled banks


OTHER IMPORTANT CHANGES – CENVAT CREDIT RULES Cenvat Credit Rules : Rule 6(3) of the Cenvat

Credit Rules, 2004 has being amended to prescribe that a provider of both taxable and exempted services, who does not maintain separate accounts of inputs, shall pay an amount equal to 6% of the value of exempted services instead of 8%. Effective date 7th July, 2009.

Cenvat Credit Rules : Rule 3(5B) of the Cenvat Credit Rules, 2004 is amended so as to provide that a service provider shall pay back the amount of credit taken on inputs / capital goods fully written off. Effective date 7th July, 2009.


SOME RECENT CIRCULARS 1. Circular No. 117/2009 dt. 30-10-2009 has been issued to clarify

that service tax is not chargeable on the service provided in respect of tour undertaken for carrying out Haj and Umrah Pilgrimage in Saudi Arabia by Indian pilgrims considering these as export of service, provided they fulfill the other conditions of export as provided in Export of Service Rules

2. Circular No. 116/2009 dt 15-09-2009 is regarding exemption of

Service Tax on construction of canals by Government Agencies

3. Circular No. 115/2009-ST dt 31-07-2009 has been issued to clarify that Commissions earned by Managing Directors / Directors (whole time or independent) will not be liable to service tax. However, if such Managing Directors / Directors are been compensated separately for “management or consultancy services” then such commission would be liable to Service Tax


SOME RECENT CIRCULARS 4. Circular No. F. No. 336/10/2009-TRU dt. 15-07-2009 is in relation to the

Judgement of Delhi High Court in respect of Service Tax on “Renting of Immovable property” states that –

With respect to the recent judgement of the Honourable High Court of Delhi in the matter of Home Solutions Retail India Ltd and Others Vs Union of India, wherein it is held (Para 36 of the order) that “section 65(105)(zzzz) does not in terms entail that the renting out of immovable property for use in the course of furtherance of business or commerce would be itself constitute a taxable service and be exigible to service tax”

It is understood that, consequent to the said judgement of the Honourable High Court of Delhi, many assesses have stopped paying service tax on the renting of immovable property for business or commerce.

In this regard, all the service tax formations are informed that the Department has filed an appeal against the said order of the Delhi High Court, and the dispute has not reached finality. Given the situation, service tax formations throughout the country, are instructed to take necessary action to safeguard revenue by either pursuing the taxpayer to pay up the service tax due or resort to means under law to protect the revenue


PART 2 : SERVICE TAX – CENVAT CREDIT RULES 1. Effective date for Cenvat is 10.09.2004. Cenvat is

available on Goods & Services.

2. There must be an ‘Output Service’ provided to the client/person for claiming Cenvat (ie. Only services which are mentioned u/s 65(105) are eligible).

3. Input Goods : Input goods means all goods except petrol / diesel for providing output service. If the goods are not used for providing output service then Cenvat is not available.

4. Capital Goods : Is also defined. In the case of motor vehicles the Cenvat can be taken only if the vehicles are used for providing specified services eg. Cargo Handling, Courrier, Outdoor Caterers, Pandal, Rent a cab, Tour operator, GTA


SERVICE TAX – CENVAT CREDIT RULES 5. Cenvat can be taken only on those input

goods & services which are relevant to providing ‘taxable Output services’ eg. A Beauty parlour cannot take Cenvat credit on tax paid on cement etc.

6. Input Services are in two parts. Viz. Specific part and inclusive part.

7. Specific Part : There should be a direct nexus between the inputs and outputs.


SERVICE TAX – CENVAT CREDIT RULES 8. Inclusive Part : In addition to Specific Part, Input service

includes services in relation to – setting up modernization renovation or repairs of the premises of the output service provider or an office relating to such premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to accounting, auditing, financing, recruitment, quality control coaching and training, computer knowledge, credit rating share registry, security, inward transportation of inputs/capital goods and outward transportation upto the place of removal.

9. In addition to above inclusive services the definition is very vide and hence would also include other services such as telephone, commercial or industrial constructions service, CE, Architect, Interior & M&R services, Ad agency services, Market research, BAS, CA, BAFS, Manpower recruitment, testing, coaching, computer, credit rating, stock broker, security, GTA.


CENVAT CREDIT RULES – INPUT SERVICE DISTRIBUTOR INPUT SERVICE DISTRIBUTOR :

In many cases the service provider is providing output service from multiple units scatted at different locations. The input service may be received and used only in a particular unit but the payment therefore may be arranged by a centralized office.

Rule 2(m) defines ‘input service distributor’ means an office of the output service provider which receives invoices under rule 4A of the Service Tax Rules towards purchase of input services and issues invoice/bill/challan for the purpose of distributing the credit of service tax paid on the said services to the actual provider of output service (ie. the unit which provided the output service).


CENVAT CREDIT RULES – INPUT SERVICE DISTRIBUTOR Manner of Distribution of Credit :

Rule 7 authorises the input service distributor to distribute the service tax credit its units, subject to the following conditions –

1. The aggregate credit distributed in respect of a particular document for which payment is made by the input service distributor must not exceed the amount of service tax paid thereon. Distribution of tax credit must be made separately for each invoice which has been paid by the ISD.


CENVAT CREDIT RULES – INPUT SERVICE DISTRIBUTOR The ISD should not distribute the credit of service

tax attributable to ‘exempted services’.

Under Rule 7A, w.e.f 1.4.2008 a provider of output service shall be allowed to take credit on inputs and capital goods received, on the basis of any invoice or a bill or a challan issued by an office or premises of the said provider of output service, which receives invoices, issued in terms of the provisions of the Central Excise Rules, 2002 towards the purchase of inputs and capital goods. This is helpful for distribution of credit to multiple locations for single input services for multiple locations.


CENVAT CREDIT

Documents for taking Cenvat Credit.

Maintenance of Records.

Recovery of Credit / Refunds Allowed erroneously.


CENVAT CREDIT RULES

Rule 6(1) Rule 6(2) Rule 6(3) Rule 6(4) Rule 6(5)


CENVAT CREDIT RULES – Rule 6 Cenvat Credit Rules consists of mainly the

following sections : Rule 6(1) states that if the output of the service

provider is exempt or not taxable under law then he cannot take any Cenvat Credits.

Rule 6(2) states that the taxable output service provider to take Cenvat Credit should identify the input services on which service tax is paid for providing taxable output services ie. a one to one nexus is important. For such purposes, the taxable output service provider must provide and maintain separate sets of books of accounts for claim of credit. Under this rule there is no limit to the amount of Cenvat Credit Claim like under rule 6(3).


CENVAT CREDIT RULES – Rule 6

c) Rule 6(3) states that if the taxable output service provider cannot maintain separate sets of books of accounts or he cannot identify the nexus between input services and output services then a maximum Cenvat Credit of 20% of Service Tax payable (subject to availability) is available for set off

For eg : Service Tax payable Rs. 100/- Less: Set off available Rs. 60/-(but set off can be max 20% of 100)so max available Rs. 20/-(balance of 60-20 = 40 can be c/f to next period)Balance payable after set off Rs. 80/-

d) Rule 6(5) states that irrespective of whether the service provider follows rule 6(2) or 6(3) for computation of Cenvat, full credit will be allowable for 16 specified input services, if such input services are related to provide taxable output services. This Cenvat Credit is in addition to the above as per Rule 6(2) or rule 6(3)


CENVAT CREDIT RULES UNDER SERVICE TAX w.e.f. 01.04.2008 W.e.f. 01.04.08 the new Cenvat Credit Rules

have been introduced. There is NO CHANGE in the above Rules 6(1), 6(2) and 6(5). HOWEVER, Rules 6(3) which dealt with a maximum Cenvat availment of 20% has now been completely modified and also Rule 6(3A) has been introduced which read as follows :

Rule 6 (3) : Notwithstanding anything contained in sub-rules (1) and (2), the manufacturer of goods or the provider of output service, opting not to maintain separate accounts, shall follow either of the following options, as applicable to him namely :-


CENVAT CREDIT RULES UNDER SERVICE TAX w.e.f. 01.04.2008 1. the manufacturer of goods shall pay an

amount equal to 10% of the value of exempted goods and the provider of output service shall pay an amount equal to 8% of the value of the exempted services; or (now 6% w.e.f. 7.07.2009)

2. the manufacturer of goods or the provider of output service shall pay an amount equivalent to the CENVAT credit attributable to inputs and input services used in, or in relation to, the manufacture of exempted goods or for provision of exempted services subject to the conditions and procedure specified in sub-rule (3A).


CENVAT CREDIT RULES UNDER SERVICE TAX w.e.f. 01.04.2008 Rule 6 (3A) : For determination and payment of amount

payable under clause (ii) of sub-rule (3), the manufacturer of goods or the provider or output service shall follow the following procedure and conditions, namely :-

while exercising this option, the manufacturer of goods or the provider or output service shall intimate in writing to the Superintendent of Central Excise giving the following particulars, namely :-

- name, address and registration No. of the manufacturer of goods or provider of output service;

- date from which the option under this clause is exercised or proposed to be exercised;

- description of dutiable goods or taxable services;- description of exempted goods or exempted services;- CENVAT credit of inputs and input services lying in balance as

on the date of exercising the option under this condition


CENVAT CREDIT RULES UNDER SERVICE TAX w.e.f. 01.04.2008

Rule 4 – No CENVAT credit shall be allowed on capital goods which are used exclusively in the manufacture of exempted goods or in providing exempted services, other than the final products which are exempt from the whole of the duty of excise leviable thereon under any notification where exemption is granted based upon the value or quantity of clearances made in a financial year.


CENVAT CREDIT RULES UNDER SERVICE TAX w.e.f. 01.04.2008 FORMAT FOR CALCULATION OF SERVICE TAX

LIABILITY W.E.F. 01.04.08.Total Revenue

1,700,000Service Tax payable @ 12.36%ie. ST @ 12% 204,000Add:2% Education Cess 4,080Add:1% Higher Education Cess 2,040

210,120

Less:Credit claimed u/r 6(3) 54,250Less:Credit claimed u/r 6(5)-100% category 155,870

210,120Net Payable : -



B/f Cenvat as on 1.4.08 U/r 6(3) 50,000Add: Cenvat available during the monthSay total amount is Rs. 25,000 To calculate pro-rata –Service Taxable Revenue 17 lakhs (17%)Non Service Taxable Revenue 83 lakhs (83%)Total revenue 100 lakhs (100%)From above we can see that 17% of revenue is

taxable so 17% of Rs. 25,000/- can be claimed only ie. Rs. 4,250/-.

Total Cenvat available will be Rs. 50,000 + Rs. 4,250/- = Rs. 54,250/-



B/f Cenvat as on 1.4.08 U/r 6(5) 2,50,000

Add: Cenvat available during the monthSay total amount is 15,000

Total available Cenvat u/r 6(5) 2,65,000

Less: Claimed 1,55,870

Balance credit c/f 1,09,130


Malad Goregaon CPE Study Circle Held on Saturday, 28th November, 2009

Thank You