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Key Changes in Service Tax & Cenvat Credit Rules

March 17, 2017[2017] 78 taxmann.com 67 (Article)
601 Views

Abhay Desai

FCA, LL.B., D.I.S.A.
  No definite date given for GST implementation

Changes in Service Tax

1. Rate of service tax remains unchanged

2. Retrospective amendment to Valuation Rules for construction works contract

  Hon. Delhi High Court in the case of Suresh Kumar Bansal v. Union of India [2016] 70 taxmann.com 55 (Delhi), dated 03.06.2016 has held that Rule 2A of Service Tax (Determination of Value) Rules, 2006 shall not apply when the consideration for a composite works contract includes the value of land and, hence, such contracts shall not be liable to service tax. Hon. High Court reasoned that service tax is on value of service. As Rule 2A(i) as well as Rule 2A(ii) do not provide for exclusion of value of land, the mechanism for deriving the value of service fails and, hence, no service tax shall be payable when the contract includes value of land.
  It is proposed to retrospectively amend the said Rule w.e.f. 01.07.2010 to provide that under Rule 2A(i) value of land or undivided share of land shall be excluded and in respect of Rule 2A(ii) if the amount charged includes value of land or undivided share of land, the value of taxable service shall be same as a percentage of total amount charged/specified under abetment Notification no. 26/2012-ST from time-to-time or earlier law. Let us analyze both the proposed changes.
  Rule 2A(i) provides for determination of value by splitting up the contract into goods and service components. It provides that the value of service shall be total value of contract less the value of transfer of property in goods involved in the execution of the said works contract. As per Explanation (c) value adopted for the purposes of payment of value added tax shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service. This existing rule created an ambiguity as to whether value of land can also be deducted to arrive at the value of service. Hon. Punjab and Haryana High Court in the case of CHD Developers Ltd. v. State of Haryana [2015] 57 taxmann.com 315 (Punjab & Haryana) held that value of land must be allowed as a deduction in such circumstances when the contract is bifurcated into individual components. It is now proposed to amend the Rule to specifically provide for deduction of value of land or undivided share of land in such cases.
  Rule 2A(ii) provides for a composition scheme. If the value cannot be determined by splitting up the contract, tax shall be payable on 40% value of gross amount charged in case of original works and at 70% value in case of other works contract. It may be noted that Notification 26/2012-ST also provides for payment of tax on 30% value in case of construction of complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, except where entire consideration is received after issuance of completion certificate, provided value of land is included in the amount charged. Hon. Delhi High Court in the case of Suresh Kumar Bansal v. Union of India (supra) without even referring to Notification 26/2012-ST held that service tax shall not be payable if the contract includes value of land, as Rule 2A does not specifically provide for its deduction. To overcome said decision, it has been proposed that if the amount charged includes value of land or undivided share of land, the value of taxable service shall be same as a percentage of total amount charged specified under abetment Notification No. 26/2012-ST from time-to-time or earlier law. Thus, currently if the value of such construction contract includes value of land, service tax shall be payable on 30% value of total amount charged, including the value of land.
  Retrospective amendment shall come into force from the date of assent of The Finance Bill, 2017.

3. Service Tax on Long-Term Lease – Retrospective exemption & refund

  It may be noted that as per Notification No. 41/2016-Service Tax, dt. 22 Sept. 2016 one time upfront amount (called as premium, salami, cost, price, development charges or by any other name) payable on long-term (thirty years or more) lease of industrial plots provided by State Government Industrial Development Corporations/Undertakings is exempted from Service Tax.
  However, said Notification does not operate retrospectively. It came into operation from 22nd September 2016. Hence, it has been proposed that no tax shall be payable during the period commencing from the 1st day of June, 2007 and ending with the 21st day of September, 2016. It shall come into force from the date of assent of the Finance Bill, 2017.
  Refund shall be made of all such service tax collected, which would not have been so collected, had sub-section (1) been in force at all material time. An application for claim of refund of service tax shall be made within a period of six months from the date on which the Finance Bill, 2017 receives the assent of the President.

4. Retrospective exemption to insurance service provided to members of Army, Navy and Air Force

  No service tax shall be levied or collected in respect of taxable services provided or agreed to be provided by the Army, Naval and Air Force Group Insurance Funds by way of life insurance to members of the Army, Navy and Air Force, respectively, under the Group Insurance Schemes of the Central Government, during the period commencing from the 10th day of September, 2004 and ending with the 1st day of February, 2016 (both days inclusive). It shall come into force from the date of assent of The Finance Bill, 2017.
  Refund shall be made of all such service tax which has been collected, but which would not have been so collected, had sub-section (1) been in force at all material times. An application for the claim of refund of service tax shall be made within a period of six months from the date on which the Finance Bill, 2017 receives the assent of the President."
  As per Notification no. 7/2017-Service Tax, dated 02.02.2017, Services of life insurance business provided or agreed to be provided by the Army, Naval and Air Force Group Insurance Funds to members of the Army, Navy and Air Force, respectively, under the Group Insurance Schemes of the Central Government will be included in the mega exemption notification 25/2012-ST (effective from 02.02.2017)

5. Other exemptions

  As per Notification No. 7/2017-Service Tax dated 02.02.2017, services provided to the Government by way of transport of passengers, with or without accompanied belongings, by air, embarking from or terminating at a Regional Connectivity Scheme Airport, against consideration in the form of Viability Gap Funding (VGF) will be included in the mega exemption notification 25/2012-ST (effective from 02.02.2017) and, hence, same shall be exempt from tax. Exemption shall not apply on or after the expiry of a period of one year from the date of commencement of operations of the Regional Connectivity Scheme Airport as notified by the Ministry of Civil Aviation.
  As per Notification no. 7/2017-Service Tax dated 02.02.2017, services by way of carrying out any process amounting to manufacture or production of goods excluding alcoholic liquor for human consumption, hitherto exempted under Sec. 66D(f), is proposed to be covered under mega-exemption notification 25/2012-ST (effective from the date of assent to Finance Bill, 2017).

6. Authority for advance ruling to be merged with Income Tax authority

  Authority for Advance Rulings constituted under section 245-O of the Income-tax Act, 1961 shall be the Authority for giving advance rulings for the purposes of Customs, Excise & Service Tax. Member from the Indian Revenue Service (Customs and Central Excise), who is qualified to be a Member of the Board, shall be the revenue Member of the Authority. Pending application on the date of assent of the Finance Bill, 2017 to be transferred to the new authority.
  Application fee proposed to be increased from INR 2,500/- to INR 10,000/-.
  Time-limit for pronouncing the ruling proposed to be increased from ninety days to six months.
  It shall come into force from the date of assent of The Finance Bill, 2017.

CHANGES IN CENVAT CREDIT RULES, 2004

(NOTIFICATION NO. 4/2017- C.E. (N.T.) EFFECTIVE FROM 02.02.2017)

1. Interest to be included for Rule 6 in case of banking and a financial institution

  As per Sec. 66D(n) services by way of extending deposits, loans or advances, in so far as the consideration is represented by way of interest or discount, are included in the negative list and, hence, no service tax is payable on such interest.
  As a banking or a financial institution provides both taxable services as well as exempted services in the nature of interest, Rule 6 of The CENVAT Credit Rules, 2004 is applicable and they have an option to claim full CENVAT credit and pay 7% of value of exempted service or proportionately determine the ineligible credit by applying following formula to common credits, credit exclusively attributable to exempted services is not allowed:
  D = (E/F) × C;
  where E is the sum total of—
(a)   value of exempted services provided; and
(b)   value of exempted goods removed, during the preceding financial year;
  where F is the sum total of—
(a)   value of non-exempted services provided,
(b)   value of exempted services provided,
(c)   value of non-exempted goods removed, and
(d)   value of exempted goods removed, during the preceding financial year
  In addition to above options a banking company and a financial institution including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances shall have an additional option to pay for every month an amount equal to fifty per cent of the CENVAT credit availed on inputs and input services in that month.
  If a banking company and a financial institution do not opt for last option (i.e., claiming 50% credit) then under both options, value of exempted services is to be determined. As per clause (e) of Explanation 1 the value shall not include the value of services by way of extending deposits, loans or advances, in so far as the consideration is represented by way of interest or discount. Thus, the amount of interest is not to be added in the value of exempted service while applying the formula.
  It is proposed that said clause (e) shall not apply to a banking company and, a financial institution, including a non-banking financial company, engaged in providing services by way of extending deposits, loans or advances. Hence, the amount of interest will be included in the value of exempted service for ascertaining the ineligible credit.

2. Transfer of credit

  Rule 10 provides that if a manufacturer of the final products/provider of output service shifts his factory/business to another site or the factory/business is transferred on account of change in ownership or on account of sale, merger, amalgamation, lease or transfer of the factory/business to a joint venture with the specific provision for transfer of liabilities of such factory/business, then the manufacturer or service provider shall be allowed to transfer the CENVAT credit lying unutilized in his accounts to such transferred, sold, merged, leased or amalgamated factory/business.
  It is proposed that the transfer of the CENVAT credit shall be allowed within a period of three months (can be further extended for period not exceeding six months by Principal Commissioner or Commissioner) from the date of receipt of application by the Deputy Commissioner of Central Excise or Assistant Commissioner of Central Excise, as the case may be.

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