Budget 2012 – Service Tax regime recast
By Kapil Sharma and Shivam Mehta
The Union Budget 2012 has brought about a paradigm shift in the existing Service Tax laws affecting not only tax payers but also tax authorities and other stake holders. The proposals in the Budget 2012 have something to offer to all including the Government and the industry at large. It is imperative for us to understand the major proposals in the budget which will contribute to creating an environment conducive to better compliance by the assessees and move ahead without hassles.
Budget 2012 has effected from 1-4-2012, an across-the-board increase in the base rate of Service Tax from 10% to 12% with a view to align it with the excise duty rates. The above increase in the rate is coupled with consequential upward revision in the tax rate for various composition schemes such as for works contract services, money changing and the like.
Besides the rate hike along with the proposed introduction of negative list which is seen as pre-cursor to GST, recently introduced Point of Taxation Rules are set to receive a face-lift. Talking of the changes in the Point of Taxation Rules, noteworthy amendments include merging the rule pertaining to continuous supply of services with the main rule and scrapping the beneficial rule permitting individual/firms to pay Service Tax on receipt basis for specified services. However, the issue of mis-match in the timing of introduction of the revised Point of Taxation Rules is being debated by stakeholders since the above changes have created a whole new set of confusion relating to point of taxation for continuous supply of services.
Change in concept of levy
One big-ticket change is the announcement to introduce a regime of taxing services based on the concept of negative list which is being described as “sound economic and prudent fiscal management” in the Budget Speech. It is expected that the proposal would address the basic issues of simplicity, certainty in the tax processes and optimizing compliances. The shift from the taxing services on selective basis to the concept of taxing all services except a few qualified services (negative list) is being seen as a preparation to usher Goods and Service Tax (GST) in a more familiar environment. The proposed regime defines the concept of service as an ‘activity for a consideration’, giving it widest amplitude to include negative act such as forbearance to an activity within its scope.
Absence of any announcement relating to time-lines for introduction of GST is disappointing even though the FM stated that drafting of model GST bill is underway and the IT infrastructure GST network is expected to be ready by August 2012.
With the change in the concept of levy along with other proposed changes being perceived as curtain-raiser to the advent of GST, in essence, how far the above objectives will be fulfilled considering the long list of exemptions and exclusions from the negative list and the uncertainty looming over introduction of GST remains a question.
The draft set of rules for determining the place of provision of service has been placed in public domain for discussion. The said rules propose to replace the existing Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006. The proposed rules are designed to define the place from where services are deemed to have been provided for restricting the levy of tax to the services rendered in the taxable territory. These rules are being modelled on OECD Guidelines for determining the place of supply of services and are primarily meant for persons dealing in cross border services.
As a general rule, a service is deemed to have been provided from the place where the recipient is located. The proposed rules also carve out exceptions to the above default rule to deal with the specified services such as those relating to performance, events, immovable property, transportation etc. The other proposed amendments include throwing more light on tax treatment of services provided within Jammu & Kashmir wherein it has been proposed that such services will not be liable to tax as J&K is not included within taxable territory.
Person liable for payment of tax - Reverse charge
Another notable introduction has been the proposal to revamp the reverse charge provisions to include a few other categories of taxable services within its sweep. A new twist pertains to the proposal to make, in respect of three specified services, both the service provider and recipient liable to pay Service Tax in specified proportion. It has been suggested that the fresh reverse charge mechanism has been conceived keeping in mind that there is a large set of registrants which collect tax but do not pay to the government kitty causing loss with no consequential benefit to the compliant section of society.
Talking of benevolent amendments, there have been quite a few retrospective amendments which are aimed at providing relief to the hapless assessee in specified cases. One such amendment pertains to penalty waiver on renting of immovable property services owing to non-payment of Service Tax which comes as a big relief to all the assessees who were facing uncertainties relating to tax on renting of immovable property. Certain exemptions and benefits which existed in the statute book only for part period have been given retrospective effect to remove the anomaly in so far as tax treatment is concerned. For instance, repair of roads was exempt from Service Tax from 2009 onwards, though repair service has been taxable from the year 2005. The current budget has extended the exemption relating to road repair for the earlier period commencing from 2005.
While the public at large is glued to the proposed amendment pertaining to negative list of services, a few amendments providing relief to many have gone un-noticed. These changes include simplified refund scheme introduced by substituting the entire Rule 5 of Cenvat Credit Rules, 2004, proposals to do away with prosecution for mere non-issuance of invoice and extending the facility of settlement to Service Tax, increase in the time limit for issuance of invoice to 30 days from 14 days, scrapping the monetary limit for adjustment of excess Service Tax paid and the like.
[The authors are Principal Associates, Lakshmikumaran & Sridharan, New Delhi]