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OTHER CHANGES IN THE FINANCE ACT, 1994 ( from notified date only )

budget 2011 - issues in service tax and impact of recent proposals at ICAI, Ernakulam Branch on 15 th March, 2011 by CA.TONY.M.P. THRISSUR.

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OTHER CHANGES IN THE FINANCE ACT, 1994 ( from notified date only )

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  1. budget 2011 - issues in service tax and impact of recent proposalsatICAI, Ernakulam Branchon 15th March, 2011byCA.TONY.M.P.THRISSUR

  2. Budget 2011 – Service Tax Changes effective from……….Retrospective effect for some changes1st March, 20111st April, 2011The Date on which Finance Act gets passedThe notified date

  3. NEW SERVICES UNDER TAX NET……(From date to be notified)Restaurants Services – air conditioned restaurants that have license to serve liquor.(With 70% abatement, in effect 3% tax impact)Issues: already liable under VAT. Air conditioning at any part or at any time. Whether AC is used or not / liquor consumed or not – tax attracts !!! Mere sale of food not taxable (like pick up / home delivery) Abatement notification is yet to be notified

  4. NEW SERVICES UNDER TAX NET……(From date to be notified) Hotel accommodation service – tariff rent Rs. 1000 per day for temporary period (less than 3 months)( with 50% abatement, in effect 5% tax impact)Issues:- tax attracts if the stay is “continuous” for less than 3 months !!! Notification for exempting up to Rs. 1000 and notification for abatement is yet to be issued. what is taxable is “declared tariff” and not actual rent collected Not only room rent, but the gross taxable. state already collects luxury tax.

  5. SCOPE OF SOME EXISTING SERVICES EXPANDED(from notified date only)Vehicle repair services – Repairing of motor vehicle other than 3 wheeler autorikshaw or vehicle for goods carriage. (‘Authorized Center’ concept removed)Club or association service – services to ‘non members’ are also taxable.(maximum tax impact in this budget – restaurant, accommodation are also made taxable)

  6. SCOPE OF SOME EXISTING SERVICES EXPANDED(from notified date only)Hospital service– Clinical establishments and Consultant Doctors are liable. Diagnostic services are also taxable. (‘Clinical establishments’ means hospitals with central air conditioning and with more than 25 beds. Excludes Govt hospitals like primary health Center or ESIC. ( with 50% exemption, only 5% tax impact)Issues: tax is on the misery of the people. Likely to withdraw this service from tax net. Exemption notification yet to be issued.

  7. SCOPE OF SOME EXISTING SERVICES EXPANDED(from notified date only)Commercial training or coaching – expanded to include all coaching and training not recognized by law, irrespective of whether the institute is providing any other courses recognized by law.(exemptions for preschool and recognized qualification will come)Impact : exemption will move from institution to education.

  8. SCOPE OF SOME EXISTING SERVICES EXPANDED(from notified date only)Business Support Service– scope is widened to include ‘administrative assistance in any manner’)Life Insurance Service – expanded to include all services provided by life insurer including management of investments. (present compounding rate of 1% increased to 1.5%)

  9. SCOPE OF SOME EXISTING SERVICES EXPANDED(from notified date only)Legal Service– Advice, consultancy or assistance:-service provided by Busi. Entity to Busi. Entity – Taxable service provided by Busi. Entity to Ind – Now made Taxableservice provided by Ind to Busi. Entity- Not taxableservice provided by Ind to Ind – Not taxable.Representation Service:- service provided by Busi. Entity to Busi. Entity – Now made Taxable service provided by Busi. Entity to Ind – Not taxableservice provided by Ind to Busi. Entity- Now made taxableservice provided by Ind to Ind – Not taxable.Service provided by arbitrators to Business Entities- taxableIssues: representation service of CA exempted; advocate taxable !!! Legal service taxable, service provider need not be advocate

  10. OTHER CHANGES IN THE FINANCE ACT, 1994(from notified date only) Late fees u/s 70:for delay in filing ST3 returns havebeen increased from 2,000 to 20,000.( impact is on long duration delay.)Reduced Penalty u/s 73(IA) amended:During audit, if it was found that the details not disclosed to Department is otherwise available from records kept, penalty reduced to 1% per month with a maximum of 25% of tax as penalty, if tax, interest and penalty paid before issue of SCN

  11. OTHER CHANGES IN THE FINANCE ACT, 1994(from notified date only) Interest u/s 75:For delayed payment of tax, rate of interest @ 13% increased to 18% (wef 1.4.2011)( 3% reduction if the value of service doesn't exceed Rs. 60Lakhs in previous FY. )(Wef notified date only )Penalty u/s 76 halved:200 per Day 100 per Day2%  1%tax  half of tax.

  12. OTHER CHANGES IN THE FINANCE ACT, 1994(from notified date only)Penalty u/s 77:–Maximum penalty increasedfrom 5000 to 10000.(no change in daily rate of penalty)Penalty u/s 78 changed:-Penalty equal to tax only. If transaction are recorded-50% If paid within 30 days of order-25%(for small tax payer- 30 days to 90 days)

  13. OTHER CHANGES IN THE FINANCE ACT, 1994(from notified date only)Section 80 not applicable:-penalty u/s 76 and 77 still continues. Penalty u/s 78 only if transaction are captured in records.Power to Search premises u/s 82:-Earlier : Commissioner to AC/DC.Proposed : JC to Superintendent

  14. OTHER CHANGES IN THE FINANCE ACT, 1994(from notified date only)Prosecution re-introduced !! :–Reasons:-service without invoice.CENVAT taken without receipt.Maintain and supply false info.Non payment of collected tax for 6 months.Imprisonment: up to 3 years, if tax more than 50 lacs. Up to 1 year, in other cases. Only with approval of Chief Comm.

  15. OTHER CHANGES(from 01-03-2011)WC Composition schemeInput service tax credit restricted to 40% of the tax paid for the following input services if tax has been paid on full value of service after availing CENVAT Credit on inputs:-1. Erection, Commissioning & Installation.2. Commercial or industrial Construction.3. Construction of residential Complex.(Notification 1/ 2011)

  16. OTHER CHANGES(from 01-04-2011)Money Changing Service:-> present compounding rate down from 0.25% to 0.1%. (rule6(7B) of ST Rules)-> Option to pay tax as follows:- ( in valuation rules, 2B) a) value = RBI reference rate less buy/ sell rate. b) if RBI rate not available, value = 1% on gross INR. C) if exchanged is not INR, value = 1% on lower of them in INR using RBI ref rate. (Notification 2/ 2011 and 3/2011)

  17. OTHER CHANGESTelecommunication service:-> Gross amount received from the subscriber by the telegraph authority is liable to pay tax and not what paid by the distributor. (As a result recharge coupons, prepaid cards etc. taxable at full value.)-> Only a clarificatory amendment. (WEF 01.3.2011-Notif: 3/2011)

  18. OTHER CHANGESTransport of passengers by airline:-> Business Class travel: 10.3% tax. Economy Class – Domestic: 150 per ticket. Economy Class – Internatl: 750 per ticket. (wef 1.4.2011) (heavy tax on tourism – airline, hotel, restaurants etc )Business Exhibition:-> Business exhibition held outside India exempted.

  19. OTHER CHANGESWorks Contract Service:-> Construction of new residential complex and completion and finishing services provided under JNNURM/RAY exempted. (wef 1-3-2011)General Insurance Service:-> Insurance under Rashtriya Swasthya Bima Yojana exempted. (wef 1-3-2011)

  20. OTHER CHANGESTransport service received in India:-> Transportation of goods by road, rail and by air from one place to the other (both outside India) exempted from tax, if provided to person located in India. (wef: 1-4-2011)Transport of goods by air Service:-> Value of air freight included in value for customs duty is exempted. (wef 1-4-2011)

  21. OTHER CHANGESWorks Contract Service:-> Works Contract service, classified under airport service, exempted if it is wholly provided within airport. (wef: 1-3-2011) -> Work contract services wholly provided in port exempted. (wef 1-3-2011)

  22. OTHER CHANGESTransport of goods through water:-> abatement @ 25 % introduced. (wef: 1-3-2011)Services provided to SEZ developer/Unit-> New Notification issued. -> Service provided fully exempted by “refund mode” only. -> Services “wholly consumed within SEZ” fully exempted directly. -> The Export of Services Rules are used to determine whether service is “wholly consumed within SEZ” (wef 1-3-2011)

  23. Point of Taxation Rules, 2011:-> Liability to pay tax arises on “receipt or accrual basis, whichever comes earlier” basis. ( changes made in STR)-> Advance received is taxable on receipt basis.-> In reverse charge mechanism (service recipient liable), tax liability arises on receipt of invoice or payment made whichever comes first.-> In the case of new services made taxable, no tax if invoice raised and amount received before tax levied. Similarly, no tax if amount received and invoice issued within 14 days of receipt. (WEF 01.4.2011-Notif: 18/2011)

  24. -> Taxability on earliest of following;- Service provided or to be provided; Raising of invoice; Receipt of income. -> Taxability on the basis of services “to be provided” will make services liable for tax even if it is not provided. -> Example:- audit work should have been completed on 30th Sept, 2011, but it was not completed on that date – tax liability arises on 30-9-2011. Example:- At year end provision for audit fees made in books by client. Taxability?? Example:- what about a builder who failed to meet the deadlines in the construction agreement ??? -> Maintenance of books becomes complicated.

  25. Changes in Service Tax Rules, 1994.:-> Liability to pay service tax arises on accrual / invoice / receipt basis. ( ‘point of taxation Rules’ introduced)-> If Advance received or invoice raised, but service not provided, excess tax paid can be taken as credit provided the amount was refunded/credit note issued. What about invoice raised, service provided fully, and service tax also paid, but no/part payment received??-> Self adjustment of excess tax paid can be set off upto Rs. 2 lakhs (earlier Rs. 1 lakh). (WEF 01.4.2011-Notif: 3/2011)

  26. Retrospective amendments (in favour of tax payers !!!!):-> Club or Association Service: ‘membership fees’ collected by association or chambers of commerce or industry exempted wref 16-06-2005 to 31-03-2008 -> Tour operator Service:Transportation of passengers by tour operators having contract carriage permit is exempted wref 01-04-2000 till 06-07-2009

  27. Concessions to small service providers (turnover less than Rs. 60 lakhs):-> No audit: for individuals and sole proprietorship concerns. -> Interest rate:3% less for all.-> More time to pay tax, for reduced penalty:- 90 days time instead of 30 days for all tax payers.

  28. Changes in CENVAT Credit Rules, 2004:(wef 01.04.2011)-> The definition of following terms changes:-input, input services, capital goods, exempted goods exempted services.-> ‘Exempted services’ includes trading.-> Tax payable under rule 6(3)(1) reduced from 6% to 5%.

  29. Changes in CENVAT Credit Rules, 2004:(wef 01.04.2011)-> Banking Company to pay 50 % of CENVAT availed every month.->Insurance Company to pay 20 % of CENVAT availed every month.-> Full credit for 17 services withdrawn (rule 6(5)).-> Tax paid on Import of services u/s 66A, eligible for credit (wref 18.04.2006) -> CENVAT Credit continues on payment basis.

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