Changes in service tax in June 2010

V S Datey

1. Budget 2010 provisions relating to service tax made effective on 1-7-2010

Finance Act, 2010 was passed on 8-5-2010 itself. As per past experience, it was expected that the provisions of service tax would be made effective from 1st June. However, after a long wait, all the provisions relating to service tax contained in Finance Act, 2010 have been made finally made effective from 1-7-2010.

1.1 No service tax on advance received prior to 1-7-2010 in respect of new services and services as per amended definition, if service provided after 1-7-2010

About 8 services have been made taxable w.e.f. 1-7-2010. In addition, scope of certain services like construction service, air transport service, port and airport service etc. have been expanded. In respect of the new services and also in respect of services as per amended definition, if any advance payment was received prior to 1-7-2010, for service to be provided after 1-7-2010, service tax will be fully exempted [Notification No. 36/2010-ST dated 28-6-2010].

This is a transitory provision. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

1.2 New services effective from 1-7-2010 ands their accounting codes

The new services effective from 1-7-2010 and their codes are given below. If any advance payment was received prior to 1-7-2010 for service to be provided after 1-7-2010 , service tax will not be payable [Notification No. 36/2010-ST dated 28-6-2010].

1.3 Eligibility of Dumpers or tippers as capital goods

Dumpers or tippers falling under chapter 87 are eligible as capital goods for Cenvat credit to providers of service of Site formation and clearance, excavation and earthmoving and demolition [section 65(105)(zzza)] and Mining of mineral, oil or gas services [section 65(105)(zzzy)], if these are registered in name of service provider and are used for providing taxable service (amendment w.e.f. 22-6-2010). Other service providers and manufacturers are not eligible.

1.4 Clean Energy Cess

A Clean Energy Cess has been imposed w.e.f. 1-7-2010, vide Finance Act, 2010, on gross quantity of raw coal, lignite and peat raised and despatched from a coal mine in India. This cess would be levied and collected as a duty of excise from coal mines. This cess would apply to imported coal as CVD. Tariff rate is Rs 100 but effective rate of duty is Rs 50 per ton. Education cess and SAHE cess is not payable on this cess. Any Cenvat credit cannot be utilised for paying this cess – Notification Nos 1 to 5 (Clean Energy Cess) dated 22-6-2010 and MF(DR) circular No. 354/72/2010-TRU dated 24-6-2010.

2. Expansion in scope of construction service to cover all services before obtaining completion certificate

In the Finance Act, 2010, an explanation has been added w.e.f. 1-7-2010 to definition of commercial or industrial construction and construction of residential complex, as follows -

Explanation.— For the purposes of this sub-clause, construction of a complex which is intended for sale, wholly or partly, by a builder or any person authorised by the builder before, during or after construction (except in cases for which no sum is received from or on behalf of the prospective buyer by the builder or a person authorised by the builder before the grant of completion certificate by the authority competent to issue such certificate under any law for the time being in force) shall be deemed to be service provided by the builder to the buyer.

In case of commercial or industrial construction service, the words used are ‘construction of a new building’ in place of ‘complex’. Otherwise the wording is identical.

Thus, by a ‘deeming provision’, an activity which is not ‘service’ as per Court decisions and CBE&C’s own earlier circulars will be a ‘deemed service’ for purpose of levy of service tax.

The explanation added is not a valuation provision.

Note that similar explanation has not been added to definition of works contract service.

Meaning of ‘authority competent to issue certificate’ - Government has issued MF(DR) order No. 1/2010 dated 22-6-2010 for ‘Removal of Difficulty’. The order is effective from 1-7-2010 and it clarifies as follows –

For the purposes of sub-clauses (zzq) and (zzzh) of clause (105) of section 65 of the Finance Act, the expression ‘authority competent’ includes, besides any Government authority,—

    (i)   architect registered with the Council of Architecture constituted under the Architects Act, 1972 (20 of 1972); or

   (ii)   chartered engineer registered with the Institution of Engineers (India); or

  (iii)   licensed surveyor of the respective local body of the city or town or village or development or planning authority;

who is authorised under any law for the time being in force, to issue a completion certificate in respect of residential or commercial or industrial complex, as a precondition for its occupation.

Comment – In most of the places, the completion certificate is issued by Municipal authorities. I am not aware where an Architect or a Chartered Engineer or Licensed valuer is authorised by law to issue a completion certificate as precondition of occupation. Hence, it is not clear where this order will be applicable.

This amendment does not apply to works contract service - The explanation added to sections 65(105)(zzq) and 65(105)(zzzh) w.e.f. 1-7-2010 are in respect of construction service. There is no parallel amendment in definition of works contract service under section 65(105)(zzzza). Hence, legally, the amended definition will not apply to works contract service (However, if you fight and win, the victory may be short lived as there will be retrospective amendment in next budget).

2.1 Effect of the amendment  to definition of construction service

The effect of the amendment made w.e.f. 1-7-2010 is that the service tax will not apply only when a builder sales a ready flat or shop or industrial unit (gala) after Building completion certificate is obtained from competent authority (like Municipal Corporation, Municipality or other competent authority) and entire consideration is obtained only after building completion certificate is obtained.

In all other cases, the builder will be liable to pay the service tax. It is well known that in most of the cases, builder constructs buildings only on raising funds from prospective buyers. Further, even after building is completed and ready for occupation, there is delay in obtaining building completion certificate from the authorities (Now the delay will be more and ‘cost’ of obtaining the certificate will rise further).

Thus, practically in all cases, the builder/developer will be liable to pay service tax, except in case of few flats or shops or commercial galas, which he usually keeps for sale at a later date at higher prices. Even in this case, the builder will not be liable only if entire transaction (including receipt of money) takes place after obtaining ‘completion certificate’ from municipal or other competent authority.

2.2 Valuation for service tax on construction service

Principally, service tax is payable on value of taxable services. This is also clear from the fact that ‘preferential location and development of complex’ has been specified as a different taxable service.

Thus, if a service provider has proper costing records, it is permissible to calculate value of service and pay service tax on value of service @ 10.30%

If this is not feasible, then tax is payable @ 10.30% on 25%/33% of entire value including material (used by builder plus supplied free of cost by customer), but then Cenvat credit is not available, as explained below.

Any person providing taxable service of commercial or industrial construction or construction of residential complex (except completion and finishing services like glazing, plastering, painting, tiling, wood and metal joinery and carpentry, swimming pools, acoustic applications etc.) can opt to pay service tax as follows (w.e.f. 1-7-2010) – (a) on 33% of gross amount charged if the gross amount does not include value of land (b) on 25% of gross amount charged if the gross amount includes value of land (Till 1-7-2010, the 25% scheme was not available. Only 33% scheme was available).

This is at the option of service provider.

The ‘gross amount’ should include value of goods and materials supplied or provided or used. However, he can avail this concession only if - (a) He does not avail Cenvat of duty/service tax paid on inputs, input services and capital goods and (b) He does not avail benefit of Notification No. 12/2003-ST dated 20-6-2003. - Notification No. 1/2006-ST dated 1-3-2006 as amended w.e.f. 1-7-2010.

The partial exemption is available only if the gross amount charged includes value of goods and materials supplied or provided or used for providing such service (Explanation to Notification No. 1/2006-ST]. Thus, if the customer provides some material, its value will have to be added for purpose of payment of service tax.

This method is not available in case the service provider provides only completion and finishing services (as in such cases, material content will be much less).

This method is also not applicable if service is covered under ‘works contract service’.

Service tax on value of services instead of paying on 33%/25% of gross value - Payment of service tax on basis of 25%/33% of gross amount is optional to assessee. Thus, service provider can give break up of material cost and service charges. In such case, he will be liable to pay service tax only on the charges relating to ‘gross value of service’, plus profit attributable to that activity at full rate i.e. without abatement.

This is possible under rule 3(b) of Service Tax Valuation Rules.

In that case, the service provider can avail Cenvat credit of his input service tax and capital goods.

2.3 No service tax on advance received prior to 1-7-2010 in respect of services as per amended definition, if service provided after 1-7-2010

The definition of construction service has been amended w.e.f. 1-7-2010 as explained . In respect of service as per amended definition, if any advance payment was received prior to 1-7-2010, for service to be provided after 1-7-2010, service tax will be fully exempted [Notification No. 36/2010-ST dated 28-6-2010]. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

3. Exemptions

The major exemptions are summarised below.

3.1 Air transport of passengers for domestic or international journey [Section 65(105)(zzzo)]

No service tax on advance received prior to 1-7-2010 in respect of services as per amended definition, if service provided after 1-7-2010 – The definition of air transport of passenger service has been amended w.e.f. 1-7-2010. In respect of service as per amended definition, if any advance payment was received prior to 1-7-2010, for service to be provided after 1-7-2010, service tax will be fully exempted [Notification No. 36/2010-ST dated 28-6-2010]. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

Relaxation in preparation of invoice – As per rule 4A(1), the invoice/challan/Bill should be signed by authorised person of provider of input services, should be serially numbered and should contain following details -

    (1)  Name, address and registration number of person providing taxable service

    (2)  Name and address of person receiving taxable service

    (3)  Description, classification and value of taxable service provided or to be provided and

    (4)  Service tax payable on the taxable service

The service provider shall issue an invoice within 14 days containing aforesaid prescribed details.

This provision is not practicable in case of service of air transport of passengers since usually only e-tickets are issued. Hence, it is provided that an invoice, a bill or as the case may be, challan [as required under rule 4A(1)] shall include ticket in any form by whatever name called and whether or not containing registration number of the service provider, classification of the service received and address of the service receiver but containing other information in such documents as required under rule 4A(1) [Fifth proviso to rule 4A(1) inserted w.e.f. 1-7-2010].

In other words, the document should contain serial number, name and address of service provider (airline), name of person receiving the service (passenger) and service tax payable on taxable service. Other details are not required [There is no relaxation in respect of ‘serial number’. It is not clear how airlines will be able to comply with this requirement].

Partial exemption in respect of all passengers – Service on air transport of passengers is as follows – (a) Rs 100 or 10% of gross value of ticket whichever is lower, in case of domestic travel and (b) Rs 500 or 10% of gross value of ticket whichever is lower in case of international journey in economy class. ‘Economy class in an aircraft’ means (i) where there is more than one class of travel, the class attracting the lowest standard fare; or (ii) where there is only one class of travel, that class. The condition is that the aircraft operator (service provider) should not avail any Cenvat credit for payment of this service tax [Notification No. 26/2010-ST dated 22-6-2010].

Full Exemption to transit passengers and employees of aircraft operator – There is full exemption from service tax on air transport of passengers in following cases – (a) transit passengers if the passenger does not pass through immigration and does not leave customs area and continues his journey to a place outside India and (b) Person employed or engaged by aircraft operator in any capacity on board the aircraft [Notification No. 25/2010-ST dated 22-6-2010].

Full exemption to passengers to and from North East – In case of passengers embarking on a journey originating or terminating in an airport located in the State of Arunachal Pradesh or Assam or Manipur or Meghalaya or Mizoram or Nagaland or Sikkim or Tripura or at Baghdogra located in West Bengal, there is full exemption from service tax on air transport of passengers [Notification No. 27/2010-ST dated 22-6-2010].

3.2 Cargo handling service [section 65(105)(zr)

Exemption to specified services provided within port, other port and airport - Taxable service provided by a cargo handling agency in port, other port or airport, in relation to, agricultural produce or goods intended to be stored in a cold storage is fully exempt, even if the service is classified as port, other port or airport service w.e.f. 1-7-2010 [Notification No. 41/2010-ST dated 28-6-2010].

3.3 Commercial or industrial construction service [section 65(105)(zzq)]

No service tax on advance received prior to 1-7-2010 in respect of services as per amended definition, if service provided after 1-7-2010 – The definition of commercial or industrial construction service has been amended w.e.f. 1-7-2010. In respect of service as per amended definition, if any advance payment was received prior to 1-7-2010, for service to be provided after 1-7-2010, service tax will be fully exempted [Notification No. 36/2010-ST dated 28-6-2010]. This is a transitory relief. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

Abatement for service provided within port, other port and airport – Commercial or industrial construction service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then abatement will be available and service tax will be payable on 25%/33%% of the gross amount charged if amount includes value of material, vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010 (25% if amount includes value of land and 33% if amount charged does not include value of land). The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

Exemption to all specified commercial or industrial construction service provided within port or other port? – Services of construction, repair, alteration and renovation of wharves, quays, docks, stages, jetties, piers and railways, falling with section 659105)(zzq)  will be fully exempt from service tax, if provided wholly within the port or other port [Notification No. 38/2010-ST dated 28-6-2010] [This exemption seems to be redundant, since if commercial or industrial construction service is provided wholly within port or other port, the service will be classified as port or other port service and hence cannot fall in clause 65(105)(zzq) at all].

Exemption to all commercial or industrial construction service provided within airport? – Services of commercial or industrial construction, falling with section 659105)(zzq)  will be fully exempt from service tax, if provided wholly within the airport [Notification No. 42/2010-ST dated 28-6-2010] [This exemption seems to be redundant, since if commercial or industrial construction service is provided wholly within airport, the service will be classified as airport service and hence cannot fall in clause 65(105)(zzq) at all].

3.4 Construction of (Residential) Complex [section 65(105)(zzzh)]

No service tax on advance received prior to 1-7-2010 in respect of services as per amended definition, if service provided after 1-7-2010 – The definition of service has been amended w.e.f. 1-7-2010. In respect of service as per amended definition, if any advance payment was received prior to 1-7-2010, for service to be provided after 1-7-2010, service tax will be fully exempted [Notification No. 36/2010-ST dated 28-6-2010]. This provision applies only in respect of services covered under amended definition and not to those services which were already covered under earlier definition.

Exemption to construction service provided to JNNURM and Rajeev Awass Yojana – Construction of residential complex service provided to Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana is fully exempt from service tax [Notification No. 28/2010-ST dated 22-6-2010].

Abatement for service provided within port, other port and airport – Construction of complex service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then, abatement will be available and service tax will be payable on 25%/33%% of the gross amount charged if amount includes value of material, vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010 (25% if amount includes value of land and 33% if amount charged does not include value of land). The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

3.5 Erection, commissioning or installation services [Section 65(105)(zzd)]

Abatement for service provided within port, other port and airport – Erection, commissioning or installation service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then abatement will be available and service tax will be payable on 33% of the gross amount charged if amount includes value of material, vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010. The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

3.6 Port, other port  or airport services

Exemption to specified services provided within port/airport  - Following services provided within port or airport are fully exempt from service tax [Notification No. 31/2010-ST dated 22-6-2010].

    (i)   repair of ships or boats or vessels belonging to the Government of India including Navy or Coast Guard or Customs but does not include Government owned Public Sector Undertakings.

   (ii)   repair of ships or boats or vessels where such process of repair amounts to ‘manufacture’ and has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act, 1944.

  (iii)   supply of water.

  (iv)   supply of electricity.

   (v)   treatment of persons by a dispensary, hospital, nursing home or multi-specialty clinic (except cosmetic or plastic surgery service).

  (vi)   services provided by a school or centre to provide formal education other than those services provided by commercial coaching or training centre.

(vii)   services provided by fire service agencies.

                (viii)        pollution control services.

Certain services provided within port, other port and airport are completely exempt - Following services provided within port, other port and airport are fully exempt from service tax, vide Notification No. 41/2010-ST dated 28-6-2010, w.e.f. 1-7-2010  –

(i)   taxable service provided by a cargo handling agency in relation to, agricultural produce or goods intended to be stored in a cold storage.

(ii) taxable service provided by storage or warehouse keeper in relation to storage and warehousing of agricultural produce or any service provided for storage of or any service provided by a cold storage.

(iii) taxable service in relation to transport of export goods in an aircraft by an aircraft operator.

(iv) taxable service of site formation and clearance, excavation and earthmoving and demolition and such other similar activities.

Exemption to all specified commercial or industrial construction service provided within port, other port and airport? – Services of construction, repair, alteration and renovation of wharves, quays, docks, stages, jetties, piers and railways, falling with section 659105)(zzq)  will be fully exempt from service tax, if provided wholly within the port or other port [Notification No. 38/2010-ST dated 28-6-2010] [This exemption seems to be redundant, since if commercial or industrial construction service is provided wholly within other port, the service will be classified as port or other port service and hence cannot fall in clause 65(105)(zzq) at all].

Abatement in respect of services provided within port, other port or airport - Abatement has been provided in respect of following services provided within the port, other port or airport, vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010. The abatement is subject to condition that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be availed. Needless to mention, the abatement scheme is at the option of service provider –

3.7 Rent-a-cab service [Section 65(105)(o)]

Abatement for service provided within port, other port and airport - Rent-a-cab service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then abatement will be available and service tax will be payable on 40% of the gross amount charged vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010. The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

3.8 Site formation, clearance, excavation service [section 65(105)(zzza)

Exemption to service provided within port, other port or airport - Taxable service of site formation and clearance, excavation and earthmoving and demolition and such other similar activities provided wholly within port, other port and airport are fully exempt, even if the service is classified as port, other port or airport service w.e.f. 1-7-2010 [Notification No. 41/2010-ST dated 28-6-2010].

3.9 Sponsorship Service [section 65(105)(zzzn)]

Exemption to sponsorship of certain tournaments or championships - Sponsorship of following tournaments or championships has been fully exempted from service tax [Notification No. 30/2010-ST dated 22-6-2010].

    (i)   tournaments or championships organized by any of the National Sports Federations or Federations affiliated to such National Sports Federations, where the participating teams or individuals represent any District, State or Zone.

   (ii)   tournaments or championships organized by Association of Indian Universities - Inter-University Sports Board, School Games Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India (for the physically challenged), Special Olympics Bharat (for the mentally challenged).

  (iii)   tournaments or championships organized by the Central Civil Services Cultural and Sports Board.

  (iv)   tournaments or championships organized as part of National Games, by the Indian Olympic Association.

   (v)   tournaments or championships organized under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme.

3.10 Storage and warehousing service [section 65(105)(zza)]

Exemption to service provided within port, other port or airport - Taxable service provided by storage or warehouse keeper, within port, other port or airport, in relation to storage and warehousing of agricultural produce or any service provided for storage of or any service provided by a cold storage is fully exempt, even if the service is classified as port, other port or airport service w.e.f. 1-7-2010 [Notification No. 41/2010-ST dated 28-6-2010]

3.11 Transmission and distribution of electricity

Service of transmission of electricity has been exempted w.e.f. 27-2-2010 – Notification No. 11/2010-ST dated 27-2-2010.

Service of distribution of electricity has been exempted vide Notification No. 32/2010-ST dated 22-6-2010.

3.12 Transport of goods by air service [section 65(105)(zzn)]

Exemption to service of transport of export goods - Taxable service in relation to transport of export goods in an aircraft by an aircraft operator, provided in port, other port or airport is fully exempt from service tax, even if the service is classified as airport service w.e.f. 1-7-2010  [Notification No. 41/2010-ST dated 28-6-2010].

3.13 Transport of goods by rail in container [Section 65(105)(zzzp)]

Service tax on transport of all goods by rail is now expected to be made effective only on 1-1-2011. Till then, existing provision i.e. service tax is payable only in case of rail transport in containers by other than Indian railways will continue.

Abatement for service provided within port, other port and airport – Rail transport in container service provided wholly within port, other port or airport will be classified as port, other port or airport service respectively w.e.f. 1-7-2010. Even then abatement will be available and service tax will be payable on 30% of the gross amount charged vide Notification No. 1/2006-ST dated 1-3-2006, as amended w.e.f. 1-7-2010. The condition is that no Cenvat credit should be availed and benefit of Notification No. 12/2003-ST should not be claimed.

3.14 Transport of goods by road service [Section 65(105)(zzn)

Abatement to GTA service provided within port, other port or airport – Goods Transport Agency (GTA) service provided within port, other port or airport will be classified as port, other port or airport service w.e.f. 1-7-2010. Even then, abatement will be available and tax is payable on 25% of amount [Notification No. 1/2006-ST dated 1-3-2006 as amended w.e.f. 1-7-2010] (In fact, this item i.e. Sr No. 6 was omitted from Notification No. 1/2006-ST w.e.f. 1-3-2008. Thus, amendment has been made to an item which was omitted long ago!).

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