“New Regime of Service Taxation in India”

1. Corporate Knowledge
Foundation
Presents
A Knowledge Workshop
On
“New Regime of Service Taxation in India”
Conducted by
Dr. Sanjiv Agarwal
FCA, FCS
Saturday,
14th July,2012
New Delhi © Dr. Sanjiv Agarwal
1

2. Corporate Knowledge
Foundation
SESSION - I
PARADIGM SHIFT IN TAXATION OF
SERVICES IN INDIA – AN OVERVIEW
&
MAJOR CHANGES IN SERVICE TAX LAW
BY The FINANCE ACT, 2012 - AT A
GLANCE 2

3. Corporate Knowledge
Foundation
This Presentation Covers
• Overview of Taxation of Services in India
• Selective Approach (Positive)
• Shift to Comprehensive approach (Negative)
• The future approach (Proposed GST)
3

4. Indian Economy – An overview
 India’s economy is the 11th largest economy in the world and the
second fastest growing even in today’s recession
 World is presently facing recession-II but Indian economy is still
better than comparable economies.
 Agriculture, services and industry are the major sector of India
an economy. Contribution of different sectors in March, 2012
was :
 Agriculture 19%
 Services 59%
 Industry 22%
to be contd…….
4

5. Brief Overview of Services /
Service Tax Share of
Services in GDP
Agricult ure
19%
Service
Sect or
Indust ry 59%
22%
GDP C O MPO S ITIO N IN MARC H, 2012
5

6. Share of services in GDP
tracked
Year % of GDP
 1950 15
 1970 33
 1980 36
 1994 40
 1995 41
 2000 47
 2005 53
 2010 57
 2012 59
In 2011-12, services have grown by 9.6 % which is more
than GDP growth rate 6

7. Growth in Tax GDP Ratio – Slow
but Steady
Years Tax GDP ratio
2003-04 9.2%
2007-08 11.9%
2009-10 9.7%
2010-11 10.3%
2011-12 10.1%
7

8. Power to Tax in India
 Central Government and the State Governments under Part XI of Indian
Constitution have power to levy taxes.
 Legislative power v Administrative power
 Legislative power has three lists:-
 Union list,
 States list and
 Concurrent list
 Administrative power – CBDT, CBEC
 Union list consists of 100 items -Parliament has exclusive power to levy
Tax.
 State list consists of 66 items -Individual states have exclusive authority to
levy Tax.
 Concurrent list consists of 47 items - both Governments can levy tax.
to be
contd……..
8

9. Power to Tax in India
 India has a two tier federal power to collect tax –
 the Union Government,
 the State Governments including urban/rural local
bodies
 Presently goods are liable to Vat / Excise / Customs duty
while taxable services attract service tax.
 Certain transactions subject to both - Vat and Service tax
 Efforts to revamp the direct tax structure - New direct tax
code (Income Tax Act, 1961 & Wealth Tax Act, 1957
would be scrapped) proposed
 Efforts to bring on a single indirect tax – GST proposed
9

10. Taxonomy of Indian
taxation
TAXATION POWERS OF UNION
 Income Tax – on income, except
agricultural income
 Excise Duty – on goods manufactured
 Custom Duty – on imports
 Service Tax – on specified services
 Central Sales Tax – on inter-state sale of goods
 Stamp Duty – on 10 specified instruments
to be contd…..
10

11. Service Tax in India (The Past)
 Introduced in India in 1994 as a simple, modest tax with
just three services.
 Service tax – an indirect tax.
 Approach to Service Tax – Selective as against
comprehensive one .
 Desirable from revenue, equity and economic view point.
 Governed by Finance Act, 1994 and a dozen of rules.
 Legislative dependence on other laws.
 Scattered and heterogeneous large mass of service
providers as well as wide spectrum of services.
 Jurisdictional application.
11

12. Growth of Service Tax
Year No of new services Total No of Total collection
services (Rs. in crore)
1994 3 3 407
2001 - 26 2612
2005* 13 72 14199
2008 7 103 51301
2010 3 112 58000
2012 0 120 95000
2013 - All 126000 (BE)
12

13. Service Tax in India (The Past)
Selective Approach to Service Tax
 Selective v. Comprehensive approach
 Taxation by choice
 Service not defined but taxable service defined.
 > 120 taxable services [section 65(105)]
 Resulted in distortions / prejudice
 Untapped tax potential
 Economically unjustified
13

14. Service Tax in India (The Past)
Selective Approach : Some Issues
 Classification of service – disputes
 Illogical definitions
 Problem defining each taxable service
 Inefficient tax administration
 Constitutional Challenges
 Services / deemed Services
 Valuation / abatement / reverse charge
14

15. Service Tax - Today
Shift to Comprehensive approach
 W.e.f. 1 July 2012
 Finance Act, 2012 – A land mark Act to shift from
positive to negative approach.
 It took 18 years to shift from selective approach to
positive approach to tax services
 Section 65 (Definition of Taxable Service), 65A (Classification
of Taxable service), 66 (Charge of Section Tax) and 66A
(Charge of Service Tax on Services received from outside
India) have no application w.e.f. 01.07.2012. 15

16. Taxation of Services by Finance Act, 2012
All Services
(including declared Services
(-)
Specific Exclusions
(-)
Negative List Services
(-)
Exemptions
(=)
Taxable Services
16

17. Service Tax - Today
New system of taxation of services
 All services to be taxed other than services
specified in the negative list and exempted
services – Section 66B.
 Negative list (17 in number) specified through
statutory provisions – Section 66D.
 ‘Service’ defined for the first time.
 ‘Negative List’ and ‘declared services’ also
defined.
17

18. Service Tax provisions no longer
applicable (w.e.f. 1.7.2012)
 Section 65 Old definitions of Services / Taxable
Services
 Section 65A Classification of Services
 Section 66 Charge of Service Tax
 Section 66A Charge of Service Tax on Services
received from outside India.
 Import of Service Rules, 2006
 Export of Service Rules, 2005
18

19. New Provisions in Service Tax
 Section 66 B deals with charge of service tax
on the after Finance Act,
2012
 Section 66 C provides for determination of
place of provision of service.
 Section 66 D comprises of negative list of
services
 Section 66 E comprises of the services which
constitute declared services
 Section 66 F provide principles of interpretation
of specified description of services
or bundled services
19

20. The New Taxability Concept
SERVICE FOR A CONSIDERATION
9 DECLARED SERVICES
E: Employee
M: Money
A: Actionable claim E - MAGIC TEST
G: Goods
I: Immovable property
C: Court Fee
20

21. Taxable of Services w.e.f.
1.7.2012

All services Taxable
[section 65B (44)]
 Declared services Taxable
(section 66E)
 Services covered under Not Taxable
negative list of services
(section 66D)
 Services exempt under Mega Exempted
Notification No. 25/2012-ST
dated 20.6.2012
 Other specified Exemptions Exempted
21

22. Taxation of Services Post Finance
Act, 2012
22

23. What is Service
‘Service' has been defined in clause (44) of the new section
65B and means –
 any activity
 for consideration
 carried out by a person for another
 and includes a declared service (66E)
23

24. What is Service
 Activity must be for a consideration
 Activity – includes both activity as well as non-activity
 Consideration – includes both monetary and non
monetary consideration.
 Two persons are involved –
Service provider
Service receiver
 Only services provided by one person to another are
taxable
 Person – natural as well as artificial
24

25. What is Service
Activity
 Not defined in the Act
 In common understanding, activity includes –
 An act done
 A work done
 A deed done
 An operation carried out
 Execution of an act
 Provision of a facility etc.
 Activity could be active or passive and forbearance to act
 Agreeing to an obligation to refrain from an act or to tolerate an
act or a situation - listed as a declared service u/s 66E
25

26. What is Service
Activity for a Consideration
Activity should be carried out by a person for a
consideration
 Activity without consideration like-
 Donation
 Gifts
 Free charities
outside the ambit of service
 Charity for consideration would be service and
taxable unless otherwise exempted
26

27. What is Service
Consideration
 Means everything received or recoverable in return for a
provision of service which includes -
 Monetary payment
 Non-monetary payment
 Deferred consideration
 Under Indian Contract Act, 1872, Consideration means -
“When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or
abstains from doing, or promises to do or to abstain from
doing, something, such act or abstinence or promise is called a
consideration for the promise”
27

28. What is Service
Consideration
 Monetary consideration means any
consideration in form of Money.
 Includes not only cash but also cheques,
promissory note, bill of exchange, letter of
credit, draft, pay order, traveler’s cheques,
money order, postal or electronic remittance or
any such similar instrument
 Non- monetary consideration- money
equivalent
28

29. What is Service
Money- 65B (33)
"money" means legal tender, cheques, promissory note, bill of
exchange, letter of credit, draft, pay order, traveller cheques, money
order, postal or electronic remittance or any similar instrument but
shall not include any currency that is held for its numismatic value
Actionable Claim –Section 3 of Transfer of Property Act, 1882
• Claim to unsecured debts
• Claim to beneficial interest in movable property not in possession of
claimant
• Right to insurance claim
• Arrears of rent
29

30. What is Service
Tax on Money Remittance
 No service tax on foreign currency remitted to India from
overseas (Circular No.163 dated 10.7.2012)
 Amount of remittance comprises money
 Service excludes money transactions
 Even fee for remittance is not taxable (POPS)
 Sender of money outside India bank / company remitting
located outside India
 Fee charged by Indian bank - remitter located outside
India (not taxable as per POPS)
30

31. What is Service
Person-65B(37)
"person" includes,––
• an individual,
• a Hindu undivided family,
• a company,
• a society,
• a limited liability partnership,
• a firm,
• an association of persons or body of individuals, whether
incorporated or not,
• Government,
• a local authority, or
• every artificial juridical person, not falling within any of the above
31

32. What is Service
Government – Not defined
 Section 3 (22) of General Clause Act,
1897
 Includes Central/State Government/ Union
Territory
 Actions taken in the name of President/
Governor
 Most of services provided by government
are in Negative List
32

33. What is Service
Local Authority - Section 65B(31)
 A Panchayat as referred to in clause (d) of article 243 of
the Constitution
 A Municipality as referred to in clause (e) of article 243P
of the Constitution
 A Municipal Committee and a District Board, legally
entitled to, or entrusted by the Government with, the
control or management of a municipal or local fund
 A Cantonment Board as defined in section 3 of the
Cantonments Act, 2006
 A regional council or a district council constituted under
the Sixth Schedule to the Constitution
 A development board constituted under article 371 of the
Constitution, or
 A regional council constituted under article 371A of the
Constitution. 33

34. What is Service
Governmental Authority (N. No. 25/2012-
ST)
 board/ Authority / other body
 established with > 90% participation
 of government control/ equity
 set up by Act of Parliament or State
Legislature
 to carry out any functions entrusted to
municipality u/s 243W of constitution
34

35. What is Service :
Exclusions
'Service' does not include -
 any activity that constitutes only a transfer in title of
goods or
immovable property by way of sale, gift or in any other manner
a transfer, delivery or supply of goods which is deemed to be a sale of
goods within the meaning of clause (29A) of article 366 of the
Constitution
 a transaction only in money or actionable claim
 a service provided by an employee to an employer in the course of the
employment.
 fees payable to a court or a tribunal set up under a law for the time being
in force 35

36. What is Service
This scope shall not apply to –
a) functions performed by M.P., M.L.A., Members of
Panchayats / Municipalities who receive any consideration
in performing the functions of that office as such member;
or
b) duties performed by any person who holds any post in
pursuance of the provisions of the Constitution in that
capacity; or
c) duties performed by any person as a Chairperson or a
Member or a Director in a body established by the Central
Government or State Government or local authority and
who is not deemed as an employee before the
commencement of this section.
36

37. What is Service
It may be noted that -
(a) an unincorporated association or a AOP and a member
thereof shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any
of his other establishment in a non-taxable territory shall be
treated as establishments of distinct persons.
(c) A person carrying on a business through a branch or agency
or representational office in any territory shall be treated as
having an establishment in that territory
37 37

38. Taxability of Services – Then & Now
Period Taxable Non Taxable
Prior to Finance Act, 2012
(upto 30.6.2012) • Taxable services • Exempt services
specified in section 65 • Service not covered
(105) under section 65 (105)
• Import of services under • Export of services
reverse charge
Post Finance Act, 2012
(w.e.f. 1.7.2012) • All services provided in • Services in Negative List
taxable territory • Exempt services
• Declared services • Services provided in non-
taxable territory (as per
POPS Rules)
38

39. MAJOR CHANGES IN SERVICE TAX
LAW BY The FINANCE ACT, 2012 - AT
A GLANCE
 Objective to widen tax base
 Service Tax law to be shorter by about 40 percent
 Effective rate of Service Tax shall be 12.36 percent w.e.f.
01.04.2012 including education cesses.
 Definition of ‘service’ finds place in statutory provisions
 All services to be taxed including a set of services called
‘declared services’
 Negative list of services containing 17 broad service
categories to be out of Service Tax ambit.
 Withdrawing of many existing exemptions / abetments or
their rationalization 39

40. MAJOR CHANGES IN SERVICE TAX
LAW BY The FINANCE ACT, 2012 - AT
A GLANCE
 Place of provision of supply rules will determine the location of service
and become be basis of taxation.
 Withdrawal of export of service rules and import of service rules in view of
place of supply of service rules coming into operation.
 Concept of taxable territory and non- taxable territory brought in
 Basis of charge of Service Tax shifted under new section 66B.
 Taxation of Service to be determined by provision of service in taxable
territory and non taxable territory.
 Classification of service criteria replaced by new section 66F on
interpretation principles of specified description of service or bundled
services.
40

41. MAJOR CHANGES IN SERVICE TAX
LAW BY The FINANCE ACT, 2012 - AT A
GLANCE
• Consequent upon change in service tax rates, there is change of service
tax rate in composition scheme and specified rates w.e.f. 1.4.2012
(Composition scheme withdrawn w.e.f 1.7.2012.
 Penalty wavier for arrears paid within specified time in respect of renting
of immovable property service.
 Retrospective exemption to road repairs and repairs etc of non
commercial government buildings.
 Under new reverse charge mechanism, onus of paying Service Tax will be
shared by service provider and service receiver in case of specified
services.
 Service Tax on taxable services provided by service provider located in
Jammu & Kashmir state liable under reverse charge.
to be contd….
41

42. MAJOR CHANGES IN SERVICE TAX
LAW BY The FINANCE ACT, 2012 - AT
A GLANCE
 Change in valuation rules in relation to works contracts and outdoor
catering / supply of food.
 Provision introduced for date of determination of value of service, tax rate
and rate of exchange.
 Payment of Service Tax on receipt basis for all service providers being
individuals / firms / LLPs, if aggregate value of taxable services in previous
year does not exceed Rs. 50 lakh.
 Criteria for Rs 10 lakh threshold exemption changed.
 Time limit for appeal by assessees to Commissioner (Appeals) reduced
from 3 months to 2 months
• Revision Application Authority and Settlement Commission provisions
made applicable to service tax.
• Special Audit of Service tax assesses by CAs /CWAs .
42

43. Goods & Service Tax
(The Future)
GST: A Common Tax
on
Goods Services
43

44. Pre-requisites for migrating to a GST
regime
• Setting up of empowered committee for GST (like VAT) which can steer the road
map into action - done
• Broaden the tax base for excise duty (presently 40% comes from petroleum
products) – being done
• Finishing area based and product based exemptions – being done
• Rationalization of concessions and exemptions including that on exports – being
done
• Expanding service tax to almost all services – now proposed
• Common/unified tax rate for goods and services which may be ideally, revenue
neutral (a suitable GST rate) – dual tax proposed
• Avoiding or minimizing differential tax rates – under discussions
• Abolition of other small taxes - under discussions
• Abolition of CST in a phased manner - being done
• Power to levy service tax on select/agreed services to States - under discussions
• Issue of inter-State services and goods movement vis-à-vis levy of duty or tax to
be sorted out - under discussions
• Revenue sharing mechanism to be rationalized - under discussions
44

45. GST - Journey so far
 Feb, 2006 : First time introduced concept of GST and announced the date of its
implementation in 2010
 Jan. 2007: First GST study by ASSOCHAM released by Dr. Shome
 Feb. 2007: F.M. Announced introduction of GST from 1 April 2010 in Budget
 April 2007 : CST phase out started - CST reduced to 3%, currently 1%
 May 2007: Joint Working Group formed by EC
 Nov. 2007: Joint Working Group submits report
 April 2008 : Empowered Committee (EC) finalizes views on GST Structure
 July 2009: FM announces commitment to bring GST from April 2010
 Consultation on inter-state services in progress
to be contd……
45

46. GST - Journey so far
Budget 2010
 To achieve the roll out of GST by April 2011
 Revamping of indirect tax administration at centre/ states
internal work processes based on use of information technology
- massive information technology (IT) platform
 Project ACES- ‘Automation of Central Excise and Service Tax’
rolled out
 Rate of service tax retained at ten per cent
 States to revamp their internal work processes
to be contd……
46

47. GST - Journey so far
Budget 2011
 non-committal on timing and roll out but the Government
introduced Constitutional Amendment Bill, 2011
 overall amendments targeted towards moving close to
harmonize with GST regime in future
 major highlights of budget discussions/proposals on GST –
 DTC and GST to mark a water shed
 Decisions on GST to be taken in concert with the
states
 Areas of divergence between centre and states
narrowed
 Drafting of model legislation for central and state
GST underway
to be contd……
47

48. GST - Journey so far
 Establishment of IT infrastructure in process (GST
network)
 NSDL selected as technology partner for GST
 Tax rates maintained at same level of 10% to stay
on course towards ST
 Certain central excise rates changed to prepare
the ground for transition to GST by reducing
number of exemptions
 Nominal central excise duty of 1% imposed on 130
items, no Cenvat credit allowed on such items.
 In service tax, proposals aimed to achieve a close
fit between the present service tax regime and
GST. 48

49. GST - Journey so far
Budget 2012
 No announcement on GST rollout date
 GST to be implemented in consultation with the States at the earliest
 GST network (GSTN) likely to be in place from August, 2012
 GSTN to implement common PAN based registration, return filing and
processing of payments for centre and all states on a shared platform.
 Bringing closer of Service Tax and Central Excise for transition to GST
 Drafting of model legislation for CGST and SGST under progress.
 Common forms for Service Tax and Central Excise registration and return
proposed.
 Place of Supply Rules, 2012 to trigger debate to assess issues that may
arise in taxation of inter state services for eventual launch of GST.
49

50. The Journey – beginning
of end…….
Past Now
Future
Past Now Future
National GST Dual GST ???????
…or end of beginning !!
50