Service tax updates 4 th Service tax workshop 02 July 2011

Service tax updates4th Service tax workshop

02 July 2011

Service tax updatesPage 2

Service Tax - Point of Taxation Rules (POT)

► Point of Taxation Rules introduced w.e.f. 1 April 2011. Option to apply the Rules from 1 July 2011

► General Provisions: Liability to deposit Service tax to arise on earliest of the following:► Receipt of consideration for services; or► Raising of invoice for the services;► If the invoice is not issues within 14 days, then tax has to be paid on date of completion of

service

► Specific provisions relating to following are discussed in subsequent slide ► continuous services;► copyright and royalties;► export of services;► import of services; and ► import of service from AE

► Now, there would not be any specific provisions for transactions with AE, unless covered under

specific provisions


Nature of Service Point of Taxation

► Continuous Services (Contracts for > 3months or else

notified by Government)

► Earlier of:► Receipt of consideration for services;► Raising of invoice for the services;► If invoice is not issued within 14 days of completion of provision of

services, the date of completion of services► Completion of service would include any terms in the contract under

which the service receiver is required to make any payment to service provider

► Copyrights, Royalties etc: ► Earlier of: ► Receipt of consideration; or► Date of issue of invoice

► Export of Services ► Date of receipt of consideration ► If consideration not received within 1 year, then the POT is shifted to

general provisions

► Import of Services ► Date of receipt (payment) of consideration ► If consideration not paid within six months, then the POT is shifted to

general provisions

► Import of Services from AE ► For Service received from AE situated outside India earlier of: ► Date of payment; or► Date of Debit/ Credit in the books of account

Point of Taxation Rules (contd..)


POT Domestic- Comparison & impact

Scenario Prior to POT After Introduction of POT Impact

Continuous

Service: AE

Service Tax payable

upon earliest of

► Date of book entry

► Date of receipt of

payment

Service Tax payable upon

earliest of

►Date of issue of invoice

►Date on which payment/

advance is received

►Date of completion of service

when invoice not issued within

14 days of completion

► Date of completion includes

completion of event (end of

period/ milestone) in case of

continuous services

►Payment of Service Tax on

accrual basis

►POT same for AE & non AE

►Credit of Service Tax paid

available when credit note is

issued subsequently due to

re-negotiation on account of

deficient provision of service

or terms of contract

►Service Tax on provision of

taxable services payable

even in case of bad debts

►Contracts to be re-examined

for continuous services

►Invoicing needs to be

planned to avoid penalty

Other Service: AE

Continuous

Service: Non AE

Service Tax payable only

upon receipt of payment/

advance

Other Service: Non

AE



Continuous

Service: AE

Service Tax not

payable when

conditions of Export

Rules satisfied

Service Tax not payable when

conditions of Export Rules

satisfied plus payment received

within timeline prescribed by RBI

(one year)

If payment not received within one

year of ‘completion of service’,

Service Tax payable on earliest of

► Date of invoice

► Date of completion of service

when invoice not issued within

14 days of completion of

service

► Service Tax to be paid if

payment not received within

one year. Interest also

payable from due date

determined as per POT

► Rebate of the Service Tax

paid on exports can be

claimed in above scenario,

when payment is received

subsequently.

► No impact on calculation of

refunds

Other Service: AE

Continuous

Service: non AE

Other Service: non

AE

POT Export- Comparison & impact



Continuous

Service: AE

Service Tax payable upon

earliest of


► Date of payment

Service Tax payable upon earliest

of


► Date of payment

► No change

Other Service: AE

Continuous

Service: non AE

Service Tax payable when

payment for value of taxable

service made

► POT dependent on date of

payment to vendor

► If made within 6 months of

date of invoice – date of

payment

► If made after 6 months of

date of invoice –

► Date of invoice; if issued

within 14 days or

► Completion of service; if not

issued within 14 days

► Interest payable from

date of invoice or

completion of service

in case payment to

vendor not made

within 6 months

Other Service: non

AE

POT Import- Comparison & impact


Service Tax - Others

Service provided to SEZ

► All services received by an entity in a SEZ, which does not have any other DTA operations, will constitute “wholly consumed” services

► No service tax is required to be paid ab-initio if the same are meant to be “wholly consumed” within SEZ, including services liable to tax on reverse charge basis under section 66A

► Refund of the remaining services i.e. which are not wholly consumed shall be available on pro rata basis i.e. ratio of SEZ turnover to total turnover

► Suitable rule has been introduced in Cenvat Credit Rules, 2004 to to waive the requirements of rule 6 in case of services provided, without payment of tax, to a SEZ unit for its authorized operations



Introduction of new services

► Services in relation to serving foods and/or beverages provided by air conditioned restaurants

having license to serve alcohol

► Short term accommodation for continuous period of three months or less provided by a hotel,

inn, guesthouse, etc (when the declared tariff is INR 1000 or more)

Scope of existing taxable services expanded/amended

► Life insurance services to cover all services such as investment related services► Legal consultancy services, except services by individual to individual

► Representation service included► Arbitration services by arbitral tribunal included

► Commercial coaching services in relation to unrecognized courses

► Health services including services of centrally air conditioned clinics, visiting doctors, diagnostic

services provided with aid of medical equipment

► Club or association services provided to non-members



Reclassification of services under Export Rules and Import Rules (w.e.f. 1 April 2011)



Amendments Particulars

► Increase in ROI for late payment ► Rate increased from 13% to 18% per annum

► Increase in the amount of penalty for late filing in return

► Penalty increased from INR 2,000 to INR 20,000

► Amendment in Rule 6 (4B) (III) of Service Tax Rules 1994

► Adjustment amount increased from 1 Lakh to 2 Lakh. (Effective from date to be notified post enactment of Finance Bill)

► Amendment in the Export of services Rules, 2005 and Taxation of Services (Provided from outside India and received in India) Rule, 2006

► Shift of taxable services from one category to another (Market Research Services and Technical Testing and Analysis services now to be evaluated on recipient basis)

► Prosecution provisions reintroduced in Service Tax law

► Provisions trigger on:► Provision of services without invoice;► Availing and utilization of CENVAT Credit without receipt

of input or input services;► Submitting false information;► Non–payment of service tax collected, for a period of

more than 6 months


Amendment in the definition of ‘Input Service’ to specifically exclude the following items:

► Architect Services, Port Services, Commercial construction services, Airport Services, Works

Contract, Construction of complex used for:► Construction of a building or a civil structure or a part thereof;► Laying of foundation or making of structures for support of capital goods

► Rent a cab, General insurance of motor car, Repair reconditioning of motor car, Supply of motor car

as tangible goods

► Any services such as outdoor catering, beauty treatment, life/health insurance and plastic surgery,

membership of club used primarily for personal use or consumption of any employee

► The disallowance provision is attracted if the services are used for any prescribed activity

The amended definition of ‘input services’ does not cover the following which was covered under

erstwhile definition

► services in relation to setting up of premise of service provider;

► ‘activity relating to business’;

Cenvat Credit


Amendment in the definition of ‘Inputs’ to exclude the following items:

► construction of a building or a civil structure or a part thereof; or

► laying of foundation or making of structures for support of capital goods,

► Motor vehicles

► Goods used primarily for personal consumption or use of any employee

► capital goods except when used as parts or components in the manufacture of a final Product

Eligible cenvat credit could be reduced. This would have the following impact:

► Costs would increase

► Reduction in profit margin

► Require change in pricing

► System changes or process required to ensure no credit is availed on inadmissible input services

► Sale as scrap should be preferred over partial or full write off/ provision for inputs

Cenvat Credit


Impact for Telecom Operator and Tower Company

► Depending on support from the contractual terms and payment mechanism credit of service tax charged by contractor for:► making of tower as a support structure for capital goods will not be

available;► laying of foundation for tower will not be available ;► cabling and other installation service will be available

Amendment Particulars

► Accrual method of availment of credit

► Cenvat Credit to be availed once the bills/invoices/challans are received;

► If payment of value of input service not made within 3 months from the date of the invoice, reverse amount equal to the Cenvat credit availed on such input services;

► Subsequently, the Cenvat paid/ reverse may be availed again, once the payment for the service is made

► Rule 6(5) of the Cenvat Credit Rules 2004 - omitted w.ef. 1 April 2011

► 100% credit on 16 specified services not available

► Amendment in the provision for combination of services (Taxable and Non Taxable)

► ‘Trading’ activity to classify as exempted service.

► Option to maintain separate accounts only in respect to inputs (in such option, for input services proportionate method to be followed)

► 5% reversal of value of both exempt goods and exempt services if separate accounts are not maintained (earlier 6%). Only exempted value to be considered to reversal

► In case of proportionate reversal, methods prescribed for determining value of trading and abated services for reversal of Cenvat credit

► Writing off inputs or capital goods (before put to use) wholly or partially in the books of accounts

► Requirement of reversal of entire credit availed on write off of inputs and capital goods (before put to use)

► Amount to be debited in cenvat account by 5th of each month/ 31st March

► Accounting entry to be passed

Cenvat Credit – Others


Union Of India & Ors. Vs. M/S Ind-Swift Laboratories Ltd. (Supreme Court)

► Interest liability arises at the time of wrong availment of Cenvat credit ;

Commissioner of Central Excise, Pune I Versus Eaton Industries P. Ltd. - (CESTAT, MUMBAI)

► Relevant date of Export of service is ‘Date of receipt of payment’ and not the date of provision of

service

Latest Judgments


Laviability of Service tax in J&K

► The Service Tax law of the Central Government extends to entire India except to the State of J&K

► Difficulty in determining which services are taxable

► The State of J&K has levied tax on specified services (including Telecom services @ 8%) claiming

that the State has the power to levy Tax on such services

State J&K Act for Service Tax

Service ProviderService Recepient

Outside J&K Inside J&K

Outside J&K Yes No Mechanism to collect

Inside J&K Case to case No


Credit availment in respect of services provided in J&K

► Capital goods: If the capital goods are used for provision of taxable service, then allowed

► Inputs/ Input Services:

► Credit of inputs and input services used exclusively for provision of services in J&K cannot be

availed . In most cases, Service Tax would not be charged at all.

► Reversal of credit (under Rule 6 of Cenvat Credit Rules, 2004) to be made (in case of

centralized accounting)

State J&K Act for Service Tax

Thank You

Documents

Service tax updates 4 th Service tax workshop 02 July 2011