News Bulletin >> September 2004

INDIRECT TAX UPDATE

Madhukar N Hiregange & Rajesh Kumar
FCA, DISA(ICAI) ACA, LLB

Highlights of the Changes in the Service Tax w.e.f. 10.09.2004

I. Education Cess

An Education Cess is being levied on service tax payable on taxable services. It shall be chargeable @ 2% of the service tax. The Cess paid on input services shall be available as credit for payment of Cess on the output services.

II. Rate and input credit

• Rate of service tax is being raised from 8% to 10%.
• Credit of service tax and excise duty is being extended across goods and services.

III. Service tax @ 10% is being imposed on the following services

1. Business Exhibition services
2. Airport services
3. Transport of goods by road( by a goods transport agency which issues consignment note, by what ever name called).
4. Transport of goods by air.
5. Survey and exploration of mineral
6. Opinion poll services
7. Intellectual property services other than copyright
8. Forward contract services
9. Pandal and shamiana services
10. Outdoor catering services
11. TV or radio programme production
12. Construction services of commercial or industrial building and civil structure
13. Travel agents (other than air / rail travel agents)

The portion of value of new taxable services (as highlighted above except transport of goods agency) received by service providers from the customer prior to 10th September is exempted -notification no 19/2004

IV. Issuing invoice or bill made mandatory for service provider / Credit Distributor:

Vide Notification 11/2004 ST, the changes is effected in the Service Tax Rules 1994 wherein it is required for every person providing taxable service to issue an invoice, a bill or as the case may be, a challan signed by such person or a person authorized by him in respect of taxable service provided or to be provided and such invoice, bill or, as the case may be, challan shall be serially numbered and shall contain following, namely:-

a. The name, address and the registration number of such person;
b. The name and address of the person receiving taxable service
c. Description, classification and value of taxable service provided or to be provided; and
d. The service tax payable thereon.

V. Interest on delayed service tax payment reduced to 13 %

VI. Output service provider, opting not to maintain separate account, can avail credit on the common input services or goods but can utilize credit only to the extent of 20% of amount of service tax payable(earlier it was 35%).

VII. Benefit of exemption Notification no 12/2003 as to deduction of value of materials sold in rendering the services is subjected to a condition that,

a. No credit of duty paid on inputs or capital goods has been taken; or
b. If such credit is taken, the amount equal to such credit availed should be reversed before the sale of such goods and material.

Note: This provisions can be expected to create a number of issues to the uninitiated assessee.

VIII. Extension of Exemption to certain activities as call centers.

• Notification no 8/2003 dated 20-6-2003 providing exemption for call center is amended to extend the scope of the exemption to include the service of contacting customers including prospective customers w.r.t. Sales, telemarketing, payments.
• Further the mode of communication is extended from telephone alone to leased lines, satellite links, fax, web chat
• Further also it added exemption to use of information systems for monitoring and recording information on behalf of another person.

IX. Changes under different categories of services

A. Intellectual property Rights:

• Exemption is provided under Notification No. 17/2004, to deduct the R&D Cess paid out of the service tax payable and pay the balance similar to the exemption provided under consulting engineer.

B. Shamiana and Pandal services:

• Shamiana and Pandal contractors are liable to pay service tax on 70% of the gross amount charged from the client by such contractor, where services of caterer is also rendered and charged.
• The condition as to non-deduction as to value of material sold as well as no credit on inputs and capital goods is also attached.

C. Out door Catering services:

• Exemption is given to the extent of 50% of the gross service tax payable with a condition that the such catering service is also included with supply of food(substantial and satisfying meal) and bill is inclusive of such food value. Further condition as to non availment of credit on the input and capital goods or claiming of deduction of value of goods sold is also imposed.
• Caterers located within hospitals & educational institutions and providing catering on railway trains exempted from service tax vide Notification 21/2004.

D. Construction services:

• Builders to pay service tax on 33% of gross amount charged for providing construction service with a condition that no deduction as to value of material sold as well as no credit on inputs and capital goods. Notification 15/2004.

E. Tour Operators services:

• Benefit of exemption Notification no 39/97 providing for exemption of 60% of gross service tax payable for package tour made with a condition that,
(i) No credit of duty paid on inputs or capital goods should be taken
(ii) And also no deduction as to value of materials sold should be claimed under notification No.12/2003 - ST dated 20.6.2003

However it is important to note that credit on the input services is still available.

• Benefit of exemption Notification no 40/97 providing for exemption of 90% of gross service tax payable available, with the similar condition as above.
• Benefit of exemption Notification no 2/2004 providing for exemption of 60% of gross service tax payable for services other than package tour also added with the condition of non-availment of credit on goods and deduction of goods as explained above.

F. Management consultancy services

• Under Management Consultancy service, new notification is issued No. 16/2004 providing exemption to services rendered by such consultant w.r.t. to ERP software system.

G. Life insurance business

• Exemption from service tax granted to life insurance business vide notification No. 9/2002 ST dated 01.08.2002 is withdrawn making the life insurer liable to pay service tax.
• In cases where there is a combined premium as to risk cover of life insurance and other and do not have a separation of such amount in any of the documents issued by the insurer to the policy holder, then an option is provided under the rules either to pay 1% of the gross premium collected towards risk cover risk of life insurance instead of 10%.

H. Consulting engineer services:

• The definition of taxable service w.r.t. consulting engineer services is changed to exclude the advice, consultancy and technical assistance rendered by a consulting engineer towards computer hardware and software.
• Consequent to such exclusion earlier notification no.4/99, which was providing exemption to software consultancy has been withdrawn. Notification No. 23/2004

I. Business auxiliary services:

• The definition of business auxiliary services is extended to include the following services within its scope

a. Procurement of goods or services, which are inputs for the client; or
b. Production of goods on behalf of the client; or
c. Provision of services on behalf of the client;
d. Service incidental or auxiliary to any activities above including the earlier services which was already specified.

• However vide Exemption Notification the said changes is nullified to individuals rendering the new extended services. That means the changes will not effect the individuals.
• Further exemption from this extension is also provided to the above services rendered in relation to agriculture, printing, textile processing or education.

J. Banking and financial services:

• The scope of financial services with regard to persons rendering is extended to cover the services provided by body corporate and commercial concern.
• The scope of financial services with regard to services also extended to cover the services like lending; issue of pay order, demand draft, cheque, letter of credit and bill of exchange; providing bank guarantee, over draft facility, bill discounting facility, safe deposit locker, safe vaults; operation of bank accounts;
• Service provided by banks to government in relation to collection of any duties or taxes is exempted vide notification No. 13/2004

K. Commercial and training services:

• The exemption notification providing exemption to Vocational, recreational and computer training institutes which was valid upto 30.06.2004 was not extended. However the new exemption notification effective 10.09.2004 is put in place again providing exemption to vocational and recreational training institute but no exemption is provided to computer training institute.

L. Erection, Commissioning and installation services:

• The scope of services is extended to include erection also.
• Consequently changes is made in the exemption notification also to provide exemption to erection charges.
• Further also a notification provides for exemption with regard to services of erection provided prior to 10.09.2004
• The notification which was providing exemption to the extent of 67% where the erection and commissioning was also including supply of goods was made conditional as to non-availment of credit on inputs and capital goods and non-claiming deduction on value of goods sold.

M. Convention services:

• The exemption for convention services providing for exemption of 40% is not made conditional as to non-availment of credit on inputs and capital goods and non-claiming deduction on value of goods sold.

N. Mandap keeper services:

• Benefit of exemption Notification No 21/97 providing exemption to the extent of 40% to mandap keeper providing catering is made subject to condition of non-availment of credit on inputs and capital goods and non-claiming deduction on value of goods sold.
• Similarly the benefit of exemption Notification no 12/2001 providing exemption to the extent of 40% to hotels providing mandap keeper services is attached with the similar condition said above.

O. Rent-a-cab scheme:

• The exemption of 60% provided to them under Notification No 9/2004 is also subjected to a condition as to non-deduction as to value of material sold as well as no credit on inputs and capital goods.