Budget 2011-12 Some Critical Issues

1. Budget 2011-12Some Critical Issues V S Datey dateyvs@yahoo.com Website � http://www.dateyvs.com

2. Budget 2011-12 - Highlights Presented before Parliament on 28-2-2011 Major change is that service tax is payable w.e.f. 1-4-2011 on billing basis and not on receipt basis Interest rate for delayed payment increased from 13% to 18% Drastic changes in Cenvat Credit Rules

3. Excise � 1% levy The goods were �exempted goods� and not �non-excisable goods� upto 28-2-2011. Hence, no SSI exemption if turnover in 2009-10 was more than 4 crores Excise duty payable on stock as on 28-2-2011 (11.59.59 PM), if SSI exemption was not available

4. Point of Taxation Rules, 2011 Service tax would be payable on accrual basis, since the Point of Taxation Rules are effective from 1-4-2011 (optional on receipt basis upto 1-7-2011). As a thumb rule, issue of invoice or receipt of advance, whichever is earlier will be �Point of Taxation� in normal cases Invoice has to be issued within 14 days from completion of service, but if not issued, date of completion of service will be Point of Taxation

5. Services provided on continuous basis Continuous supply of services for continuous period exceeding three months � e.g. telephone, construction, insurance, AMC, renting Issue of invoice after completion of each event in terms of contract is date of completion of provision of service, except when payment was received in advance

6. If invoice not issued in case of continuous service You cannot delay issue of invoice, since if invoice is not issued within 14 days, date of completion of event will be �Point of Taxation� Major sufferer is construction industry. They have to review their present contracts and due dates of payments A �demand letter� can be �Invoice�

7. Change in rate of service tax If service is provided before change of rate, new rate will not apply but you have to ensure that invoice is issued before new rate becomes effective � same principle applies to new services also If service is provided after charge of rate, old rate will apply if payment was received prior to new rate. You have to ensure that invoice is raised before new rate is effective for the advance

8. Export of Service Service tax payable if payment not received in foreign exchange within period prescribed by RBI Presently, RBI generally allows 12 months for receipt of payment � Interest for 12 months payable as Point of Taxation will shift to earlier date Issue arguable since service tax is destination based tax

9. Point of Taxation when tax payable under reverse charge When service tax is payable under reverse charge, tax liability is after payment is made to service provider If payment not made within 6 months, service tax is payable with interest for 6 months since Point of Taxation will shift to earlier date Exception in case of Associated Enterprises, where tax payable on basis of book entry

10. Credit/Debit Note issued later If credit note is issued later, self adjustment is permissible Credit note for (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. No adjustment for bad debt

11. Services of Hotels Hotels, clubs, guest houses having declared tariff rate more than Rs 1,000 per day even if actual charged is less � service tax @ 5% Service tax on actual amount charged only No service tax on other charges like laundry, telephone, food, internet services etc. Off season rates can be considered

12. Services of AC Restaurants Services in air-conditioned restaurant having license to service liquor � abatement 70% i.e. service tax payable on 30% Can assessee claim deduction under Notification No. 12/2003-ST? If yes, nothing is left for tax Vat on service tax as per provisions of State Vat

13. Legal Services Legal services � arbitration services and legal services to business entity covered Levy on legal service is under challenge and Delhi HC has granted stay Argument is that Advocates are Officers of Court and they assist Court Other argument is that legal protection is the fundamental right of citizen and that service cannot be taxed

14. Discrimination In case of Legal Consultancy Services, the services in relation to advice, consultancy or assistance in any branch of law, the service is taxable only if provided by �Business Entity� (i.e. firm, LLP, HUF etc.), while in case of practicing CA/CWA/CS, these services are taxable even if provided by an individual In case of legal consultancy service, representational services before any court, tribunal or authority are taxable only if provided to business entity (firm, company, AOP, HUF, LLP), while in case of practicing CA/CWA/CS, these service are taxable even if provided to an individual.

15. Service tax on goods imported by air Air transport of goods shifted to rule 3(iii) of Import of Service Rules Hence, if air freight on imported goods is more than 20% of FOB value, service ts would be payable on such excess amount against reverse charge Credit can be taken of service tax paid

16. Services Consumed with SEZ Honeymoon with SEZ over � SEZ now step-child like EOU Export of SEZ Rules made applicable to provision of services to SEZ Ratio of export turnover to total turnover applicable when SEZ unit has operations outside the Zone � what about services received in initial period and SEZ developer?

17. Renting of Immovable Property P&H HC has upheld the validity. Stay of Delhi High Court has been vacated by Supreme Court Large bench of Delhi HC is hearing the matter. If landlord, better to pay service tax since statutory liability is on him

18. Penalty Provisions Impression is that 25% penalty is mandatory if objection raised during audit, even if service tax/duty with interest paid before SCN, even when there is no suppression of facts, fraud etc. Impression not correct though drafting of section 73(4A) is faulty

19. No notice if tax paid before SCN Section 73(3) of Finance Act, 1994 (as amended w.e.f. 8-5-2010) states that where any service tax is not paid or short paid or erroneously refunded, for any reason, the person may pay the tax with interest on the basis of his own ascertainment of such duty or on the basis of tax ascertained by the Central Excise Officer, before serving of notice on him and on receipt of such information, the Central Excise Officer shall not serve any notice under section 73(1) in respect of the amount so paid.

20. No penalty can be imposed if tax and interest paid before SCN Explanation 2 to section 73(3) specifically clarifies that no penalty shall be imposed under any of provisions of Finance Act, 1994 or rules made thereunder. This view has been confirmed in para 4.11 of TRU(II) DOF No. 334/3/2011-TRU dated 28-2-2011. Specific provisions prevails over general provision

21. Changes in favour of assessee Cenvat credit is available if service tax is paid under reverse charge on import of service under section 66A of Finance Act, 1994 Such amendments are rare No audit if value of services is upto 60 lakhs

22. Thanks Wish you best luck in deciphering the complicated provisions Queries and comments welcome � dateyvs@yahoo.com Website � http://www.dateyvs.com