Highlights of Budget 2011-12

Budget 2011-12 and Finance Bill 2011 were  presented before Parliament on 28-2-2011 at 11 AM by Hon. Finance Minister. Some changes relating  to Central excise and customs have become effective from 1-3-2011. Some changes were made effective from 1-4-2011.

Finance Act, 2011 has received assent of President on 8-4-2011 and statutory changes have become effective on 8-4-2011. Service tax on new services and expansion in definitions of taxable services has become effective from 1-5-2011.

1. Changes in Central Excise

Excise duty @ 1% or 5% on 130 items – As a step towards moving to GST, exemption in respect of 130 items has been withdrawn and excise duty of 5% has been imposed (total duty 5.15%) vide Notification No. 2/2011-CE dated 1-3-2011. If assessee does not avail Cenvat credit on his inputs, excise duty payable on these goods will be 1% vide Notification No. 1/2011-CE dated 1-3-2011. It is also clarified that if excise duty @ 1% is paid, buyer cannot avail Cenvat credit.

Excise duty on branded readymade garments and made up articles - Excise duty @ 10.30% has been imposed on branded readymade garments and made up articles, w.e.f. 1-3-2011. Provision has been made that brand name owner can pay excise duty, if he gets the goods manufactured from job workers.

Increase in interest rate – Interest payable on delayed payment of excise duty or wrong availment of Cenvat credit has been increased from 13% to 18% w.e.f. 1-4-2011.

Change in penalty provisions – Penalty provisions as contained in sections 11A and 11AC have been revamped. A separate category of penal provisions has been created in cases where there has been suppression of facts or wilful mis-statement or fraud but transactions were duly recorded by the assessee in the ‘specified records’. In such cases, penalty will be upto 50% of duty (against normal penalty of 100% of duty).

It is also provided that even if excise duty and interest is paid before issue of show cause notice, penalty @ 1% per month (maximum 25%) is imposable if the short payment was on account of suppression of facts, wilful misstatement or fraud.

Excise dues to be first charge on property of assessee – Excise duty,  interest, penalty and any other sum payable will have first charge on property of assessee.

2. Changes in Cenvat Credit Rules

Substantial changes have been made in Cenvat Credit Rules, 2004 w.e.f. 1-4-2011. The summary is as follows –

Inputs - Definition of input [rule 2(k)] has been amended. Construction material, goods for personal consumption of employees and goods which have no relation with ‘manufacture’ will not be eligible for Cenvat credit. Expenses beyond ‘place of removal’ will not be entitled to Cenvat credit.  Inputs relating to construction of factory or office, motor vehicles and personal use or consumption of employee will not be eligible for Cenvat credit.

Input Services - Definition of input services [rule 2(l)] have been completely revamped. Many input service which were hitherto eligible will not be eligible after 1-4-2011. Services relating to construction of factory or office, motor vehicles and personal use or consumption of employee will not be eligible for Cenvat credit.

Capital goods - Capital goods used outside the factory for generation of electricity for captive use within the factory will be eligible for Cenvat credit.  Services in relation to generation of electricity for captive use within the factory also eligible for Cenvat credit.

Partial write off of inputs - Rule 5B of Cenvat Credit Rules has been amended to provide that Cenvat credit will have to be reversed even if inputs are partially written off from books of account.

Restriction on Cenvat credit in case of ships brought for ship breaking - Cenvat credit of CVD paid on ship breaking will be restricted to 85%

Rule 6(5) omitted - Rule 6(5) allowed full Cenvat Credit in case of specified 16 input services, even when some services or some goods were exempt. This rule has been  withdrawn w.e.f. 1-4-2011. Thus, all services are now under 5% amount scheme or proportionate reversal scheme.

Manufacturers of exempted goods and taxable goods and exempted service and taxable services - Rule 6 applies where both exempted goods and taxable goods are manufactured or exempted and taxable services provided. In case of exempted services,  ‘amount’ payment reduced to 5% w.e.f. 1-4-2011.

Further, so far, provisions about reversal of Cenvat credit were not clear in cases like (a) trade goods (b) Value of exempted  service to be considered  where service tax is paid under abatement scheme or composition scheme. Now, clear provisions have been made for these issues.

Payment of ‘amount’ means Cenvat credit not taken - Rule 6(3D) (inserted w.e.f. 1-4-2011) states that payment of ‘amount’ under rule 6(3) means Cenvat credit is not taken for purpose of an exemption notification where exemption is granted on condition that no Cenvat on input and input services is availed.

Overriding provisions - In respect of banking service [section 65(105)(zm)], the Bank or NBFC is required to pay ‘amount’ equal to 50% of Cenvat Credit availed on inputs and input services [Rule 6(3B) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011]. In respect of general insurance services [section 65(105)(zx)] and life insurance service [section 65(105)(zzzza)], ‘amount’ payable is equal to 20% of Cenvat credit availed on inputs and input services in the month [Rule 6(3C) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011].

No reversal of Cenvat if service provided to SEZ unit or developer - No reversal or payment of amount if services provided to SEZ unit or developer [Rule 6(6A) inserted w.e.f. 1-4-2011]

3. Change in Customs Law

Introduction of self assessment – One major change is that self assessment has been introduced in customs w.e.f. 8-4-2011.  It is trust based compliance management. Provision has been made for provisional assessment.  Customs officer will verify assessment and examine goods on selective basis. Subsequently, audit can be conducted either at customs office or at premises of importer or exporter – Section 17 of Customs Act.

Time limit for filing refund claim – Time limit for filing refund claim has been uniformly increased to one year from present limit of 6 months – section 27 of Customs Act.

Penalty provisions revamped – Penalty provisions have been revamped. Lower penalty has been provided where assessee pays customs duty short paid with interest on his own – section 28 of Customs Act.

Electronic submission of documents – Electronic submission of Bill of Entry and Shipping Bill has been made mandatory. Permission of Commissioner of Customs would be required to file these documents manually – Sections 46 and 50 of Customs Act.

Release of seized goods and documents – Seized goods and documents can be released by adjudicating authority on submission of bond and security – section 110A of Customs Act [so far, permission of Commissioner of Customs was required].

Customs dues to be first charge on property of assessee – Customs duty,  interest, penalty and any other sum payable will have first charge on property of assessee – section 142A of Customs Act.

Income tax exemptions to SEZ Units and Developers curtailed – SEZ Units and Developers will be subject to Minimum Alternate Tax (MAT) from Financial Year 2011-12. They will also be subject to Dividend Distribution Tax w.e.f. 1-6-2011. Exemption from TDS granted to Offshore Banking Unit (OBU) has been withdrawn w.e.f. 1-6-2011.

Goods cleared by SEZ to DTA exempt from Special CVD – Goods cleared from SEZ to DTA will be exempt from special CVD of 4% if Vat/sales tax is payable on them (Till 1-3-2011, the exemption was only to goods ‘manufactured or produced’ within SEZ).

Increase in interest rate – Interest payable on delayed payment of customs duty has been increased from 13% to 18% w.e.f. 1-4-2011.

Export duty on iron ore lumps and fines – The export duty has been increased to 20%.

Simplification is project imports – Requirement of security deposit has been replaced by a bank guarantee of maximum ` one crore.

4. Service tax

Major changes have been made in service tax.

4.1 New services

Service tax on these new services is effective from 1-5-2011.

l  Hotels, clubs, guest houses having declared tariff rate more than Rs 1,000 per day even if actual charge was less – service tax @ 5%

l  Services in air-conditioned restaurant having license to service liquor – abatement 70% i.e. service tax payable on 30%

4.2 Expansion of existing services

Changes are effective from 1-5-2011.

l  Providing any operational or administrative assistance will be Business Support Service.

l  Legal services – arbitration services covered. Representational services provided by any person to a business entity now taxable. However, no daring to touch individual advocates.

l  Commercial coaching now covers all courses which are not recognised by law, even if conducted by recognised Institutes.

l  All vehicle repair services except goods transport vehicles and auto-rickshaws will be taxable (so far only authorised service stations were covered).

l  Services provided by clubs to non-members are now taxable.

4.3 Point of taxation Rules

Major change is that service tax would be payable on billing basis, and not on receipt basis, w.e.f. 1-4-2011.

Basic principle in Point of Taxation Rules is that service tax is payable when service is provided,  bill is made or advance is received, whichever is earlier, w.e.f. 1-4-2011.

Change in service tax rate - Receipt of advance or issue of bill, whichever is earlier is relevant. Hence, if advance was received and service tax rate changes later, differential tax is neither payable nor refundable.

Imposition of tax on new services - No service tax will be payable on new services if these were provided before imposition tax, if invoice is raised within 14 days.

Continuous supply of service - Continuous supply of services means provided for continuous period of three months – e.g. telephone, construction, insurance, AMC. In case of continuous service, due dates of payment as per contract will be point of taxation, except when payment was received or bill was raised before due date

Adjustment of service tax on basis of credit note issued – Service tax is payable on billing basis. The service provider may not receive full payment. In such cases, he can issue credit note in following situations – (a) if service is not provided partly or fully or (b) amount of invoice is re-negotiated due to deficient provision of service or any terms contained in the contract. After credit note, assessee can take self credit of excess service tax paid by him when he had issued the invoice/Bill/Challan.

4.4 Services provided to SEZ

Export of SEZ Rules are made applicable to provision of services to SEZ to determine whether the service is wholly consumed within SEZ. Three categories of services as applicable in case of Export of Services will apply to SEZ also.

In other cases, refund application will have to be filed. When SEZ unit or developer has operations outside the Zone, refund will be in ratio of export turnover divided by  total turnover. This provision is not practicable in case of SEZ developers as they have no exports. Even in case of SEZ units, the ratio cannot apply in case of  services received in initial period of construction and operations since at that time, there are no exports.

4.5 Service tax when goods are imported by air

W.e.f. 1-4-2011, goods transport by air service is classifiable under rule 3(iii) of Import of Service. Hence, it will be ‘import of service’ if service is received in India. However, if goods are imported by air, service tax on transport of goods has been partially exempted w.e.f. 1-4-2011. The exemption is available to the extent of air freight included in assessable value under section 14 of Customs Act [Notification No. 9/2011-ST dated 1-3-2011]

In case of air freight, fright to the extent of 20% of FOB value is includible in assessable value for customs duty. Thus, balance air freight will be subject to service tax. In my view, service tax will be payable even if air freight is paid by foreign exporter.

4.6 Other changes in service tax

Increase in interest rate – Interest payable on delayed payment of service tax or wrong availment of Cenvat credit has been increased from 13% to 18% w.e.f. 1-4-2011 [Really, interest can be only compensatory. 18% interest rates appears to be semi-penal].

Change in penalty provisions – Penalty provisions as contained in sections 76 to 80 of Finance Act, 1994 have been revamped. A separate category of penal provisions has been created inn cases where there has been suppression of facts or wilful mis-statement or fraud but transactions were duly recorded by the assessee in the ‘specified records’.

It is provided that even if service tax  and interest is paid before issue of show cause notice, penalty @ 1% per month (maximum 25%) is imposable if the short payment was on account of suppression of facts, wilful misstatement or fraud.

Benefits to small service providers – There will be no audit if turnover is upto Rs 60 lakhs per annum. Interest rate applicable to them would be 15% instead of normal 18%.

Provision for prosecution – Provision has been made for prosecution of offenses under service tax provisions.  However, there is no power of arrest under service tax provisions.

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