Transcript INSTITUTE OF BUSINESS LAWS

BUDGET 2011
INDIRECT TAXES
RAGHAVAN RAMABADRAN
COVERAGE

SERVICE TAX

CENVAT CREDIT

EXCISE

CUSTOMS

TAX PLANNING AND LITIGATION STRATEGIES

CENTRAL SALES TAX / GST
SERVICE TAX
COVERAGE
 New Services / Expansion of Existing
Services
 Point of Taxation Rules
 Services provided in SEZ
 Other changes
HOTEL & RESTAURANT
SERVICES
 Services provided by A/C Restaurants having
license to serve alcoholic beverages
 Service provided by hotels, inns, guest houses,
clubs & others at camp site for Continuous stay of
less than 3 months

Tariff less than Rs.1,000 per day to be exempted
 Suitable abatements proposed to be given from the
gross value
HEALTH CARE SERVICES
Cosmetic & Plastic Surgery Services
Budget 2009
Health Check-up and Treatment Services
-Payment made by Insurance Co. directly to
hospital for health check-up or treatment or
Budget 2010
-Payment made by Business Entity directly to
hospital for health check-up or preventive care
All Health Care Services provided by hospital,
nursing home, dispensary, clinic, etc.
- More than 25 beds for in-patients
- Central A/C
Government Hospitals remain excluded
Budget 2011
HEALTH CARE SERVICES…
Diagnostic Services
- Specifically excluded from the scope of
Technical Testing and Analysis Service since
2003
Services Provided by Consultant Doctors in
Hospital Premises
Budget 2011
Budget 2011
LEGAL SERVICES
 Earlier Coverage
 Services provided by Business Entity to
another Business Entity
• Consultancy and Advisory services only covered
• Appearance before courts, etc. not covered
• Individual lawyers kept out of levy
LEGAL SERVICES
 Proposed Coverage
 All services by business entity covered consultancy, advisory, opinions,
appearance
 Services provided by arbitral tribunal in
respect of arbitration also covered
 Appearance services provided by
Individual Lawyers also covered unless
provided to Individual clients
OTHER EXPANSIONS
 Authorized Service Station Service


Earlier coverage
• Only services provided by persons authorized by
vehicle manufacturer
• Motor car/ Light Motor Vehicle/ Two Wheeled
Motor Vehicle
• Repair, Reconditioning and Restoration
Proposed expansion
• Services provided by any person
• All Motor Vehicles (except goods carriage and
three wheeler auto rickshaw)
• Decoration and other similar services
OTHER EXPANSIONS

Commercial Training or Coaching Service

Earlier excluded
• Commercial coaching and training services provided by
an institute or establishment issuing degree or
certificate recognized by law

Now covered
• Commercial coaching and training services provided by
any institute or establishment
Fact that degree or certificate recognized by law
issued for other courses not relevant
TELECOM SERVICE VALUATION
 Value of the taxable service = gross amount
paid by the person to whom telecom service
is provided by the telegraph authority
• Gross Amount received from the
subscriber and not the amount paid by the
distributor or any other intermediary
WORKS CONTRACT –
COMPOSITION SCHEME

Input service credit restricted to 40% if

Sub-contractor providing any of the following
services
• Erection, Commissioning and Installation service
• Commercial or Industrial construction
• Construction of Residential Complex service

Tax paid by sub-contractor on full value after
availing credit on inputs
SEZ Refund- Notification 17/2011-ST
 Notification No.17/2011-ST
 Exempts services received by SEZ for authorised
operations
 Services ‘wholly consumed’ within SEZ – option not to
pay the service tax.
 Borrows the criteria of “wholly consumed” services from
Export of Service Rules, 2005
 Specified services not wholly consumed within SEZ,
refund restricted to extent of proportionate quantum.
Export of Services Rules, 2005

Rearrangement of services in various categories:
Description of services

Previous
category
Now
Preferential location services (PLC)
III
I
Rail travel agent
III
II
Health Check-up
III
II
Credit rating
II
III
Market research
II
III
Transport of goods by air, rail or
road, opinion poll
II
III
Similar rearrangement made in respect of Import of Services
EXPORT OF SERVICES RULES, 2005

Notification No.8/2011-ST
 Exempts transportation of goods by road, rail
and air
• Provided to person located in India
• Where goods are transported from outside
India to final destination outside India.

Notification No. 9/2011-ST exempts
 Transportation of goods by air service from so
much of value
 As equal to amount of air freight included in the
value determined u/s 14 of Customs Act.
POINT OF TAXATION RULES

Point of taxation, earlier of the:
 Provision of services
 Issuance of invoice
 Receipt of payment

Specific provision for determination of Point of Taxation
in case of:
 Change in rate of taxes
 Introduction of new taxable service
 Continuous supply of services
 Associated enterprises
 Copyright
CENVAT CREDIT
Definition: Capital Goods
To include goods used outside the
factory for generation of electricity for
captive use
ISSUES
 Outside factory
Part of electricity sent outside?
 Within the factory
Part of electricity sent outside?
 Captive Mines
Vikram Cement (SC)?
Inputs : New Definition
 all goods used in the factory
 any goods including accessories,
cleared along with the final product,
the value of which is included in the
value of the final product and goods
used for providing free warranty for
final products

Appollo Tyres – Kerala HC
Inputs : New Definition
 All goods used for generation of
electricity or steam for captive use

Vikram Cement (SC) -captive mines?
 All goods used for providing any
output service
Inputs: Not to include

Light diesel oil, high speed diesel oil or motor spirit,
commonly known as petrol;

Any goods used for

construction of a building or a civil structure or a part
thereof; or

laying of foundation or making of structures for support
of capital goods,

Except for port service, airport service, industrial or
commercial construction, construction for commercial
complex and works contract service
• Renting of immovable property- Credit on cement
and steel?
Inputs : Not to include

Capital goods except when used as parts or components


Motor vehicles


Credit on tower/ shelter?
Credit on dumpers?
Any goods such as food items, goods used in a
guesthouse, residential colony, club or a recreation facility
and clinical establishment, when such goods are used
primarily for personal use or consumption of any
employee
Definition of Input not to
include
 Any goods which have no relationship
whatsoever with the manufacture of a final
product

Relationship – Nexus theory?

First Aid kit for the car?

Tattoos along with confectionary items?

Toothbrush with toothpaste?
Input Services

Not to include

Services used in relation to setting up of a factory,
premises of provider of output service or an office
relating to such factory or premises

Activities relating to business
• Excluded to overcome High Court judgments in
case of Coca-Cola and Ultra Tech Cement

Specifically included

Business exhibition

Legal services
Input Services – Not to
Include

Architect Service, port service, airport service,
industrial or commercial construction, construction for
commercial complex and works contract used for

Construction of building or civil structure or a part
thereof

Laying of foundation or making of structures for
support of capital goods
Except for provision of above services

General Insurance, Rent-a-Cab, Authorized Service
Station, Supply of tangible goods for use relating to
motor vehicle other than taxable services covered
under capital goods
Input Services- Not to
Include
 Service used primarily for personal use or
consumption of employees

Outdoor catering

Beauty treatment

Health Services

Cosmetic and plastic surgery

Membership of a club

Health and Fitness Centre

Life insurance, health insurance and travel benefits
extended to employees on vacation such as Leave
or Home Travel Concession
ISSUES

Can renovation / modernisation result in construction
of building?

Activity relating to business

Mobile phones for official purpose

Rent-a -cab for official purpose

Rent of office building

Insurance of plant and machinery

Key man Insurance
Other Cenvat Amendments

Rule 3(5B)- Reversal of credit on partial writing off or
provision for partial writing off of value of inputs and
capital goods


Proviso to Rule 4(7)- Return of payment of input
service to service recipient


Whether full or proportionate credit reversal?
Reverse proportionate credit
Credit of service tax paid on import of services
introduced with retrospective effect from 18.4.2006
Rule 6 : Definitions


Definition of “Exempted Goods”

Goods exempt from whole of duty

Goods chargeable to nil rate of duty

Goods in respect of which 1% exemption availed
Definition of “Exempted Services”

Services exempt from whole of Service Tax

Services on which no Service Tax is leviable

Services whose part of value is exempt subject to nonavailment of cenvat

Trading
Rule 6 : Trading is exempted
service now

Orion Appliances (Tri-Ahd) – Trading is not exempted service, Rule 6
not applicable.

Credit scheme for manufacturer & service provider, trader was not
covered.

Impact:
Three options available:• Pay 5% of Margin (Sale Price – Purchase Price) payable
• Proportionate Credit reversal under Rule 6(3A)
• Maintain separate accounts for inputs & pro-rata credit reversal on input services under
Rule 6(3A)

Will it cover sale of inputs & capital goods?

Will credit on common capital goods be available?
Other Issues of Rule 6

Rule 6(5) Omitted : 17 services of capital nature were
granted full credit even if partially used for exempted
goods

Rule 6(5) was similar to Rule 6(4) for capital
goods
Other Issues of Rule 6

If excise duty paid on exempted goods, the same
shall be reduced from 5% payable under Rule 6

If part of value of service exempted subject to nonavailment of cenvat, 5% of value of exempted portion

If exemption subject to non-availment of credit,
payment under Rule 6(3) deemed to be cenvat not
taken

Supreme Court judgment in the case of Lifelong
Appliances now given statutory recognition
CENTRAL EXCISE
EXCISE
 CHANGE OF RATE
 DEEMED MANUFACTURE
 OTHERS
WITHDRAWAL OF EXEMPTION
 Withdrawal of exemption for 130
goods.
 Duty @ 1% ad valorem subject to
non-availability of cenvat credit on
inputs and input services
 Duty @ 1% not available as credit to
buyer
CONCESSIONAL RATE OF DUTY
For 76 goods - Option given
to pay duty @ 5%
For goods attracting duty @
4% - duty increased to 5%
Full credit available on inputs,
input services and capital
goods
OTHER RATE CHANGES
 Branded ready-made garments brought under the
tax net
Concept of merchant manufacturer re-introduced
Cement – Duty changed from specific rate to advalorem
 Ambulance – Unconditional 10% duty instead of
earlier refund mechanism
Deemed Manufacture
 Chapter 26 : Conversion of ores into
concentrates
 Chapter 71 : Refining of gold dore
bars
 Chapter 72 : Process of galvanization
Exemption to Power Projects
 Goods supplied to mega power projects & ultra
mega power projects – Full exemption – No
condition of exemption from BCD & CVD at the
time of import
 Goods required for expansion of existing mega
power projects also included
 Entry made wider than project imports under
tariff heading 9801

Power cables specifically covered
CUSTOMS
CUSTOMS
 SPECIFIC SECTORS
 AVIATION
 IT
 AUTOMOBILE
 EXPORT INCENTIVES
 SELF ASSESSMENT
AVIATION
 BCD imposed @ 2.5%
 Education Cess payable now
 CVD & SAD Exemption continues
 Restriction on interchangeability
between passenger and charter
services removed
SUMMARY OF TAX
IMPLICATIONS
Sl
No
Description
BCD
CVD / Excise
Service tax
1
Customized software
Exempted
Exemption
Available
No Exemption
2
Packaged software
(Single or multiple
licenses shrink wrap
with RSP)
Exempted
CVD u/s 4A of
CE Act on RSP
Exemption
Available
3
Packaged software
(Volume licenses with
no RSP)
Exempted
Exemption on
Right to Use CVD on media
only
No Exemption
on Right to Use
4
Electronic download
Not leviable
Not leviable
No Exemption
AUTOMOBILE – CKD





Tariff rate for car (CBU) – 100%
Car in the form of CKD – 10%
Car in SKD – 60%
Parts otherwise – 10%
CKD means unit having all the necessary
components, parts or sub-assemblies for
assembling a complete vehicle, but does not
include:


Kit/Unit containing a pre-assembled engine or gearbox
or transmission mechanism; or
Chassis/Body assembly of a vehicle on which any of
the component or sub-assembly viz. engine or
gearbox or transmission mechanism is installed.
EXPORT INCENTIVES
 Exports under EPCG also entitled to
rewards schemes namely SFIS, FMS,
FPS, etc.
 Retrospective - w.e.f. 01.04.2008
ASSESSMENT OF CUSTOMS
DUTY
 Self-assessment by importer introduced for the
first time as a trade facilitation measure
 Salient features

Selective verification by the Department with
powers to reassess.

If re-assessment is made, a speaking order
SHALL be passed within 15 days of such reassessment

Audit at importers premises proposed
TAX PLANNING AND
LITIGATION STRATEGY
Issue of Show Cause Notices


Where during audit, investigation or verification, found that
tax not paid due to fraud, suppression but details available
in records:
Notice can be issued in 5 years

Assessee liable to pay interest & 50% penalty (25%
penalty if paid within 30 days of adjudication order)
Where during audit, investigation or verification, found that
tax not paid due to fraud, suppression but details available
in records:
Assessee can deposit tax before issue of notice

Assessee liable to pay interest & penalty @ 1% p.m.
(subject to ceiling of 25%)
Issue of Show Cause Notices


Where fraud, suppression:
Notice can be issued in 5 year

Assessee liable to pay interest & equal penalty
Interest rate increased to 18%


Interest on refund still 6%
Issues
Prosecution

Fate of SCN not determined within 6 months/ one
year

Co-Noticee

Private records
PROSECUTION IN SERVICE TAX
 Prosecution provisions were introduced in service tax in
1994

Omitted in 1998: Budget Speech
176. I am conscious of the fact that there is strong resentment against
the procedures and legal obligations relating to service tax. I have
removed a number of obnoxious and deterrent provisions in law. I also
propose to abolish several of the redundant and irritating Central
Excise Rules very shortly.
 Prosecution provisions sought to be reintroduced in this
Budget
 Service tax no longer ‘taxpayer’ friendly?
PROSECUTION IN SERVICE TAX
 What would constitute “offence”?

Providing taxable service without issuing invoice

Availing or utilizing Cenvat credit without actual receipt of inputs and input services

Maintaining false books of account

Failing to supply any information or supplying false information

Failing to deposit any amount collected as service tax beyond six months
 What is the punishment?

If amount > 50 Lakhs – Imprisonment upto 3 years

Others – Imprisonment upto 1 year
 Previous sanction of Chief Commissioner required
 No power to arrest
Central Sales Tax
 In clause (a) of Section 15 of Central Sales Tax
Act, 1956, for the words ‘four percent’, the words
‘five percent’ have been substituted.
 Therefore now Section 15(a) would read as:


Every sales tax law of a State shall, insofar as it imposes or
authorises the imposition of a tax on the sale or purchase of
declared goods, be subject to the following restrictions and
conditions, namely
(a) the tax payable under that law in respect of any sale or
purchase of such goods inside the State shall not exceed [five]
per cent of the sale or purchase price thereof, and such tax
shall not be levied at more than one stage
 Thus, the ceiling limit of taxation on declared
goods has been raised from 4% to 5%.
GST
GST
 “21. The introduction of the Direct Taxes
Code (DTC) and the proposed Goods and
Services Tax (GST) will mark a watershed.
These reforms will result in moderation of
rates, simplification of laws and better
compliance.”
GST
 “23. Unlike DTC, decisions on the GST have
to be taken in concert with the States with
whom our dialogue has made considerable
progress in the last four years. Areas of
divergence have been narrowed. As a step
towards the roll-out of GST, I propose to
introduce the Constitution Amendment Bill in this
session of Parliament. Work is also underway on
drafting of the model legislation for the Central
and State GST.”
GST

“24. Among the other steps that are being taken for the
introduction of GST is the establishment of a strong IT
infrastructure. We have made significant progress on the
GST Network (GSTN). The key business processes of
registration, returns and payments are in advanced
stages of finalization. The National Securities Depository
Limited (NSDL) has been selected as technology partner
for incubating the National Information Utility that will
establish and operate the IT backbone for GST. By June
2011, NSDL will set up a Pilot portal in collaboration with
eleven States prior to its roll out across the country.”
Our contacts
Hyderabad
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Opp. Methodist Church
Chapel Road, Nampally
Hyderabad.
E-Mail: [email protected]
Mob: +91-9963322188
Thank You
© Institute of Business Laws, 2010