BUDGET HIGHLIGHTS - 2013-14 - SERVICE TAX

BUDGET HIGHLIGHTS - 2013-14 - SERVICE TAX

By K P C Rao., LLB., FCMA., FCS.,

CMA (USA)., FIPA (Australia)

Practicing Company Secretary

kpcrao.india@gmail.com

Unlike the last Budget 2012-13 wherein significant amendments in the Service tax laws were proposed of which switch over to the concept of negative list based taxation was the major one; this time the Finance Minister has rather not meddled much and tried to bring in more stability to the new regime of taxation of services by adopting ‘carrot and stick approach’ to strengthen the enforcement mechanism by handing out more powers to his tax officials to go after evaders on one hand, and keeping the industry happy by leaving the Indirect taxes rates unchanged. These changes are discussed with the respective proposed amendments herein below:

a)     Rate of Service Tax

The Finance Minister has not only left the basic rates of Customs and Excise duties unchanged but also continued to tax services at the current rate of 12% (as well as Education Cess of 3% thereon) with a view to bring in stability in the Service tax regime. More so, having regard to the constraints Indian economy is going through including the battle against inflation and achieving the desired growth with inclusive development; there was hardly any room for raising the tax rates.

Thus, the effective rate of Service Tax would remain unchanged @12.36%.

b)     Service tax Voluntary Compliance Encouragement Scheme, 2013 – (One time breather?)

To encourage voluntary compliance and to broaden the tax base, it is proposed to provide a one-time amnesty by way of waiver of interest, penalty and immunity from prosecution to persons who may not have filed returns or filed returns (not disclosing true liability) for the period October 2007 to December 2012, if these persons opt for the Service tax Voluntary Compliance Encouragement Scheme, 2013 (“the Scheme”), pay the tax due as provided in the Scheme and comply with the other conditions mentioned therein, the details of which proposed to be inserted by way of a new Chapter i.e. Chapter VI of the Finance Act, 1994.

c)     Recovery mechanism further strengthened

Section 73(1) of the Finance Act, 1994 gives powers to the Central Excise Officer for recovery of short/ unpaid Service tax upto 18 months.

Further, the proviso to Section 73(1) allows the Officer to invoke extended period of limitation and travel back upto 5 years from the relevant date in case of fraud, collusion, willful mis-statement, suppression of facts or any other contravention with intent to evade payment of tax.

Therefore, in majority of cases where demands were raised, the Department alleged suppression of facts, and invoked extended period of limitation of 5 years. This has caused undue hardships to the Assessees.

On appeal against such Orders, the Tribunals and Courts have held that in case suppression of facts etc. is not established and the matter does not warrant invocation of the extended period, the Show Cause Notice itself is invalid and the resultant proceedings based on such notice are void. Thus, in such instances, the entire demand stands cancelled.

Therefore, in order to avoid loss of revenue to the Government in such cases, the Finance Minister following the suit of the Excise law, has proposed to insert a new Section 73(2A), to provide for a deeming fiction that such notice will be deemed to be notice issued under Section 73(1) covering the normal period of limitation of 18 months.

Consequently, demand relating to past period of at least 18 months would still survive even if suppression of facts etc. is not proved.

d)     Penalty also cast on Director, Manager, Secretary etc. for specified contraventions

To curb unethical practices and unlawful transactions by companies, the Finance Minister in addition to the already existing penal provisions, has gone a step ahead by inserting a new Section 78A which provides for personal liability of the Director, Manager, Secretary or other officer which may extend up to `1 lac if such person was knowingly concerned in case of the following contraventions:

(1)  Evasion of service tax; or

(2)  Issuance of invoice, bill or, as the case may be, a challan without provision of taxable service in violation of the rules made under the provisions of Chapter V; or

(3)  Availment and utilization of credit of taxes or duty without actual receipt of taxable service or excisable goods either fully or partially in violation of the rules made under the provisions of Chapter V; or

(4)  Failure to pay any amount collected as service tax to the credit of the Central Government beyond a period of six months from the date on which such payment becomes due.

e)     Maximum penalty for failure to obtain registration

The Finance Minister has provided a cap on the maximum penalty that can be imposed for failure to obtain registration, which hitherto was based on per day basis for the period of delay subject to minimum of ` 10,000/-.

This penalty has now been rationalized and henceforth the maximum penalty for such default would be restricted to ` 10,000/- irrespective of the actual period of delay.

f)      Parity in admitting appeal or filing cross-objections after the due date

Hitherto, only Departmental appeals or objections raised by the Department were allowed to be admitted after the expiry of the due date. This being prejudicial to the interest of the Assessees, the Finance Minister following the principles of fairness and equity in tax administration, has proposed to amend Section 86(5) of the Finance Act, 1994 to include even Assessee appeal to be filed after the due on showing sufficient cause.

g)     Power to arrest – Now one can be arrested even by an Excise Officer!

To further strengthen the enforcement of the Service tax law, and to act as deterrent for non-compliers, the Finance Minister has even brought into the legislative books, a new Section 91, which empowers Commissioner of Central Excise to authorize specified officer to arrest a person for certain offences including non-payment of collected Service tax.

Such power to arrest any person was hitherto not provided in the Finance Act, 1994.

h)     Increased term of imprisonment on specified offences

Section 89(1) which provides for the specified offences which are punishable with imprisonment and the enforcement mechanism is proposed to be tightened further to ensure proper compliance of the law.

i)       Expansion in the scope of Negative List

With the onset of Negative List based taxation of services being implemented from the last year’s Budget,   this new concept has widened the tax base significantly by bringing into the tax net many untapped sectors and has stepped up the fiscal revenues from the services sector of India.

However, keeping in view policy requirements, international practices and socio-economic factors playing an important role in the development of the country, the following further services are proposed to be included in the Negative List i.e. not liable to Service tax:

(1)  Vocational courses offered by institutes affiliated to the State Council of Vocational Training;

(2)  Processes on which duties of Excise are leviable under Medicinal and Toilet Preparations (Excise Duties) Act, 1955;

(3)  All testing activities in relation to agricultural produce.

j)       Threshold Limit of Exemption

The current Threshold Limit of exemption for small service providers is proposed to be continued at ` 10 lacs per year.

k)     Review of Exemptions

The Finance Minister has proposed to rationalize the following exemptions:

(1)  Charitable organizations:

So far charitable organizations registered under Section 12AA of the Income tax Act, 1961 were exempt from payment of Service tax in respect of the activities of advancement of any other object of general public utility upto the value of ` 25 lacs per year.

However, effective from 1st April 2013, even such charitable organizations would be covered by the threshold exemption of ` 10 lacs per year.

(2)  Restaurants:

Hitherto, restaurants serving food and beverages were exempted from payment of Service tax, on the condition that it does not have facility of air-conditioning or air-heating and does not have license to serve alcoholic beverages.

Realizing that the distinction as regards ‘license to serve liquor’ was artificial, with effect from 1st April, 2013 Service tax will be leviable on taxable service provided in restaurants with air-conditioning or central air heating in any part of the establishment at any time during the year.

(3)  Transport of goods by road, rail or vessel  (nothing has been specified as to the nature of amendment proposed as yet)

l)       Withdrawal of Exemptions

The following exemptions are proposed to be withdrawn, effective from 1st April 2013:

(1)  Services provided by an educational institution by way of renting of immovable property.

(2)  Temporary transfer or permitting the use or enjoyment of a copyright relating to cinematographic films. So far, this service was fully exempt. However, from 1st April 2013 onwards, the exemption will be restricted to exhibition of cinematograph films in a cinema hall or a cinema theatre.

(3)  Services by way of vehicle parking to general public.

(4)  Services provided to Government, a Local Authority or a Governmental Authority, by way of repair or maintenance of aircraft.

m)   Special Exemption for service provided by Indian Railways

Section 99 is proposed to be inserted to provide retrospective exemption to the Indian Railways on the Service tax leviable on various taxable services provided by them during the period prior to the 1st day of July 2012, to the extent show cause notices have been issued upto the 28th day of February 2013.

n)     Rationalization of Abatement on Construction services

Currently, the taxable service of construction which is a declared service under clause (b) of Section 66E of the Finance Act, 1994 is eligible for an abatement of 75% from the value, provided the value of land is included gross amount charged to the buyer. Thus, the taxable portion of construction service is restricted to 25% of the value.

This change will come into effect from the 1st March, 2013.

o)     Advance Ruling Parity in admitting appeal or filing cross-objections after the due date

It is proposed to extend the scope of advance ruling to resident public limited companies as well, which was hitherto not available. A Notification to this effect would be issued separately.

p)     No clear road map for Goods and Services Tax (‘GST’)

The Finance Minister in his Speech last year had given a clear indication of roll – out of GST on the cards in the immediate future considering the introduction of Negative List approach coupled with other amendments including a statement that ‘Goods and Services Tax Network(GSTN) will become operational by August 2012’.

In his Speech this year though the Finance Minister has proposed to set-apart a sum of ` 9,000 crores as Central Sales Tax compensation for the states, and urged them to help the centre in roll-out of GST, he did not announce a road map for implementation thereof, as the support of the states is very critical for these ambitious reforms.

More so, he did not announce a deadline as was expected, and also did not effect any changes in the Indirect tax reforms that suggest a progress towards GST in the short term.

Conclusion

Though Union Budget 2013-14 may be missing the much needed ignition or spark to put the markets on fire, it certainly attempt to address the issues that concerns of fiscal discipline, consolidation, inflation, other macroeconomic measures and also trying to keep the basic tax structure unchanged. Without affecting one and all on tax front, the Finance Minister has been able to enhance the plan allocation in major areas and take up many socio economic schemes, besides pressing the trigger for industrial growth and investment.

On Indirect taxes side, while there is no change in peak rates of customs, excise and service tax, the hike in rates of few items like SUVs, imported vehicles, cigarettes etc. Not much of tinkering has been done in Service Tax structure but given the level of non-compliance in Service Tax, a scheme has been announced as an amnesty scheme whereby defaulting assessees can file Service Tax returns for five year period since October, 2007 and pay taxes so as to save on interest and penalties. On Goods and Service Tax, though the Finance Minister has showed his serious concern, once again he missed out on the clear road map.

[Published in the 'CIRCUIT' monthly Journal of ICAI, Hyderabad during April, 2013 ]