Thesynergyonline Economic Bureau

NEW DELHI, JANUARY 24 :
FINANCE Minister Mr Pranab Mukherjee has said that the targets for direct and indirect tax collections are being raised for this financial year.

He said that direct tax collection target is to be increased to 4 percent and indirect tax collection target will be raised to 6 percent. The Finance Minister was addressing the review meeting of Central Board of Direct taxes (CBDT) and Central Board of Exise and Customs (CBEC) in Chennai today.

The Finance Minister asked officials to focus on increasing service tax collection.
He pointed out that while the services sector has grown enormously, the rise in service tax collection was not commensurate.

Mr Pranab Mukherjee also said that for ensuring a high rate of economic growth it was necessary to roll out the Goods and Services tax (GST) regime.
He assured everyone that all steps will be taken to resolve the hurdles in the implimentation of GST.

Besides high officials of both the boards, Minister of State for Finance Mr S S Palnimanickam, Revenue Secreatry Mr Sunil Mitra, Chairman CBDT Mr Sudhir Chandra and Chairman, CBEC Mr Dutt Majumdar took part in the review meeting.

FINANCE ACT 2010 & 8 NEW SERVICES BROUGHT UNDER SERVICE TAX AMBIT

WHICH new services have been brought under the ambit of Service Tax with effect from May 8, 2010, i.e. the date of enactment of the Finance Act, 1994 (14 of 2010)?

The Union finance minister had introduced the Finance Bill, 2010 in the Lok Sabha on February 26, 2010. Later, during the budget debate in the last week of April 2010 certain exemptions were extended for the purpose of levy of Service Tax. On May 8, 2010, the

President gave her consent to the Finance Bill and thus the Finance Act, 1994 (14 of 2010) has come into effect from that date.

Eight new taxable services have been brought under the ambit of Service Tax through appropriate amendments in sub-section 105 of Section 65 of the Finance Act, 1994. The new services range from promotion and marketing of lotteries to special services provided by the builders. The services provided for promotion or marketing or organising games of chance are now covered by introducing a separate taxable service [Section 65 (105) (zzzzn)] to cover the services in connection with games of chance, organised, conducted or promoted by the client, in whatever form or by whatever name called (such as lottery, lotto) under the 'Games of chance' service. The tax would be applicable also to such games conducted online.

With the enactment of the Finance Act, 1994 (14 of 2010), services in the health sector are also brought under the ambit of Service Tax. Under the proposed new service, tax has been imposed on the medical charges paid by insurance companies to hospitals on behalf of a business entity for its employees. As such, the insurance company would be the service receiver and the tax paid by the hospital would be available to the insurance companies as credit.

The tax on health services would be payable only if and to the extent the payment for such medical check-up or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment. This new taxable service is defined under Section 65 (105) (zzzzo). Any additional amount paid by the individual (i.e. the employee or the insured, as the case may be) to the hospital would not be subject to service tax. This is to ensure that an individual is not required to pay a tax for which he cannot take credit. Apart from this services provided for maintenance of medical records of employees of a business entity [Section 65 (105) (zzzzp)] are also brought under the Service Tax net.

The Service Tax department has faced difficulties in the past in classifying certain services under the taxable category. If the brand name/house mark etc. is promoted by a celebrity without reference to any specific product or services etc., it is difficult to classify it. Such activities, like mere establishing goodwill or adding value to a brand would fall under this newly-introduced service.

This new taxable service of promoting of a 'brand' of goods, services, events, business entity etc [Section 65 (105) (zzzzq)] has now come into effect. A new taxable service of permitting commercial use or exploitation of any event organised by a person or organisation [Section 65 (105) (zzzzr)] has now come into effect.

This service now seeks to tax the amount received by a person or organisation, who permits the recording and broadcasting of the event, from the broadcaster, or any other person, who seeks to commercially exploit the event.

In the recent past, exchanges have been set up for transactions in electricity. The Central Electricity Regulatory Commission authorises such exchanges. Since electricity exchanges are not covered by Forward Market Regulations, such transactions are not covered under the commodity exchange taxation. A new taxable service has been introduced [Section 65 (105) (zzzzs)] which seeks to tax the charges recovered for services in relation to assisting, regulating, controlling the business of trading, processing and settlement pertaining to sale or purchase of electricity by the associations authorised by Central Electricity Regulatory Commission.

Services related to two types of copyrights were not covered under the existing taxable service of 'Intellectual Property Right (IPR)'. These two - on cinematographic films and sound recording - have now been brought under the Service Tax net [Section 65 (105) (zzzzt)]. However, it may be noted that this taxable service will not cover individual artists, composers, performers etc. as their copyrights fall under clause (a) of Sec. 13 of the Copyright Act. The finance ministry is constantly exploring new tax avenues. The builders of residential or commercial complexes provide certain facilities and charge separately for them.

These charges do not form a part of the taxable value for charging tax on construction. These facilities include: (a) prime/preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. direction- sea facing, park facing, corner flat; floor- first floor, top floor; Vastu - having the bed room in a particular direction; number- lucky numbers); (b) internal or external development charges which are collected for developing/maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc; (c) fire-fighting installation charges; and (d) power back-up charges etc.

Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, such charges are being brought under the Service tax. These special services provided by a builder to the prospective buyers, such as providing preferential location or external or internal development of complexes on extra charges is now taxable [Section 65 (105) (zzzzu)].

Charges for providing parking space have been specifically excluded from the scope of this service. Development charges, to the extent they are paid to state government or local bodies, would be excluded from the taxable value levy. Further, the ministry has already clarified vide its letter dated 26.02.2010 that any service provided by Resident Welfare Associations or Cooperative Group Housing Societies, consisting of residents/owners as their members, would not be taxable under this service.

Is Service Tax payable on retention money held by clients of EPC Contractors?

RECENTLY we received a mail from a multinational engineering consultant/EPC contractor on the extent of service tax liability on EPC contracts, the excerpts of which is as follows:

"In the contracts with our clients, generally there is a provision of 5% or 10% of total contract value as retention payable at the end of the project. Invoices (RB bills) are raised for the net amount (after deducting the proportionate retention) and service tax is levied on the net amount after deducting retention. Whether levying of service tax on the net amount (after deduction retention) is correct?"

This is an oft-repeated question faced by service providers executing EPC contracts/turnkey projects. For the contractors executing mega turnkey projects / EPC contracts, the payments from the clients are linked to the phase wise completion of the projects and the payment terms and conditions usually speaks of a certain percentage of the value of contract being retained by the clients; which only becomes disbursable to the contractor after completion of the project subject to fulfilling such other relevant terms and conditions of the contract. The quantum of percentage of retention money usually serves as a disincentive to delay the execution of the projects and often serves as a penalty for not executing the projects on time.
The issue is whether service tax is payable on the entire value of the contract or the net value of the contract arrived after deducting the amount indicated as retention money in the contracts.
Section 67 of Finance Act, 1994 speaks of service tax being chargeable on the value of taxable service which is the gross amount charged by the service provider. However, Rule 6 of the Service Tax Rules, 1994 provides that the service provider shall be liable to pay service tax only on the amounts received from the clients.
Since retention money is not received till the end of the project, in terms of the existing provisions of Rule 6 of the Service Tax Rules, 1994, service tax may not be paid on such retention money till the same is released by the client and received by the contractor. Even at the end of the project, service tax is payable only on the amount actually received from the client, because in some cases some potion of the retention money may still be retained by the clients as a penalty for reasons like delay in execution of the project, quality etc.

HIGHLIGHTS OF AMENDMENTS TO SERVICE TAX ACT

Hon'ble Finance Minister Shri Pranab Mukharjee has introduced the Finance Bill, 2010 in the Lok Sabha on the 26th of February 2010. Clause 75 and 76 of the said bill covers the legislative changes relating to Chapter V of Finance Act, 1994 (i.e. Service Tax). While some fresh exemptions from service tax have been granted, some existing exemptions have either been withdrawn or modified. All these changes have been notified under notification nos. 2/201 0-ST to 17/201 0-ST all dated 27th February 2010. While most of the legislative changes in the Finance Act, 1994 would come into force from a date to be notified after the enactment of the Finance Bill, 2010, the notifications (except notification nos. 7/2010-ST, 8/2010-ST and 9/2010-ST which would come into effect from 01.04.2010) would become effective from 27th February 2010. Upon enactment of the Finance Bill, 2010, when the legislative provisions come into effect, another communication would be sent to you explaining the changes in detail.

NEW SERVICES INCLUDED IN THE LIST OF TAXABLE SERVICES

In addition to existing services, new eight services, hitherto not included separately within the list of existing taxable services, are being included in the said list through appropriate amendments in sub-section 105 of Section 65 of the Finance Act, 1994. The tax on these services would come into effect from a notified date after the enactment of the Finance Bill, 2010. The new services are,-
1. Services of promoting, marketing or organizing of games of chance, including lottery [Section 65 (105) (zzzzn)]
The State Governments appoint distributors to advertise, promote and sell lottery tickets. Besides the State Governments organizing lotteries, some other games of chance are also being organized. The services provided for promotion or marketing or organizing such games of chance are now being covered by introducing a separate taxable service to cover the services in connection with games of chance, organized conducted or promoted by the client, in whatever form or by whatever name called (such as lottery, lotto) under the 'Games of chance' service. The tax would be applicable also to such games conducted online. Consequently, the Explanation appearing under 'Business Auxiliary Service' is being deleted.
2. Health services, namely: (i) health check up undertaken by hospitals or medical establishments for the employees of business entities and (ii) health services provided under health insurance schemes offered by insurance companies [Section 65 (105) (zzzzo)].
Health services undertaken by hospitals or medical establishments for the employees of business organizations and health services provided under health insurance schemes offered by insurance companies. With the change in the style of functioning of the business organizations, health check up is a routine facility provided by the employers to their employees. The main purpose is to ensure that the productivity of the organization is not adversely affected due to ill health of its employees. Such activities, commonly known as corporate health check up schemes, are undertaken by designated hospitals in order to detect any medical indicator or to ensure timely diagnosis of any disease so that prophylactic measures can be taken. In such cases, the hospital providing these services charge the employer i.e. the business organization and it constitutes expenditure for the latter. In certain cases (for example, in case of flight crew) re-flight check ups are conducted not only to test the fitness levels but also to rule out the possibility of the flying crew being under intoxication. Such health checks up schemes are being brought within the ambit of service tax under the new service. A large number of health insurance schemes are being offered by the insurance companies under which charges for hospitalization, surgery, postsurgical nursing etc. are generally paid by the insurance company. Such insurance policies, which fall under the category of general insurance service, are already taxable. Under general insurance service, an insurance company is a service provider to its clients. Under the proposed new service, tax is also being imposed on the medical charges paid by the insurance companies to the hospitals on behalf of a business entity for its employees. As such, the insurance company would be the service receiver and the tax paid by the hospital would be available to the insurance companies as credit. The tax on the above mentioned health services would be payable only if and to the extent the payment for such medical check up or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment. Any additional amount paid by the individual (i.e. the employee or the insured, as the case may be) to the hospital would not be subjected to service tax. This is to ensure that an individual is not required to pay a tax for which he cannot take credit.
3. Services provided for maintenance of medical records of employees of a business entity [Section 65 (105) (zzzzp)].
World over, business organizations maintain medical histories of their employees which are used not only for medical purposes but also for finding the suitability of a person for a particular job or for promotion etc. Increasingly, this activity is being outsourced for a consideration. Such records are either maintained by certain designated hospitals or even by independent record keepers for a charge. This activity is now being brought under service tax.
4. Services of promoting of a 'brand' of goods, services, events, business entity etc. [Section 65 (105) (zzzzq)].
Commercial advertisement has taken different shapes and forms. Apart from the advertisements in print and visual media and sponsorship, one of the recent trends is to advertise a brand (i.e. of goods, services, events, business houses bearing a particular brand name or house name) usually by using a celebrity (such as sportsperson, film stars, etc.) to associate him/her with the brand. The intended impression that is created in the minds of customers or users is that the products and services of that brand have the level of excellence comparable to that of the celebrity. Unlike in case of advertisements using models, a brand ambassador works under a contract of a reasonably long period, where under he is not only required to advertise the goods or service in different media but also to attend promotional, product launching events, make appearances in public activities related to the brand or the brand holder or use such goods or services in public. The contractual amounts are substantial and it may not only involve an individual celebrity but a group of celebrities such as a cricket team or the actors of a successful film. It is important to note that promotion or marketing of sale of goods produced, provided or belonging to a client and promotion or marketing of services provided by the client are already covered under Business Auxiliary Services (BAS). Such activities would continue to remain classified under BAS. The difference between the services classifiable under BAS and the newly proposed service is that the latter has a wider coverage in the sense that mere promotion of a brand would attract tax under this service even if such promotions cannot be directly linked to promotion of a particular product or service. Many companies/corporate houses (for example Sahara, ITC or Tatas) are associated with a range of activities including production/marketing/sale of goods, provision of services, holding of events, undertaking social activities etc. If the brand name / house mark etc. is promoted by a celebrity without reference to any specific product or services etc., it is difficult to classify it under BAS. Such activities, like mere establishing goodwill or adding value to a brand would fall under this newly introduced service.
5. Services of permitting commercial use or exploitation of any event organized by a person or organization [Section 65 (105) (zzzzr)].
Like intellectual property rights there are certain personal rights such as, right to privacy, easement right, right to secrecy. With expansion in the field of information technology and broadcasting sector, many individuals or organizations offer to share / part with these rights for a consideration. A corporate sponsored cricket match or company sponsored music concert; film award events; celebrities' marriages; beauty contests are some of such private functions, which a large number of viewers like to see on TV or media. In such cases, companies, broadcasting agencies and video producers are given right to capture these events or programmes for their commercial exploitation in future. Often such commercial exploitation results in provision of another taxable service such as broadcasting service or programme production service. The proposed service now seeks to tax the amount received by the person or organization, who permits the recording and broadcasting of the event from the broadcaster, or any other person, who seeks to commercially exploit the event. In many cases, the credit of the tax paid would be available to the receiver of the service.
6. Services provided by Electricity Exchanges [Section 65 (105) (zzzzs)].
Under 'Forward Contract Service', tax is payable by exchanges who offer assistance in sale of goods or forward contracts in commodities. However, only forward contracts covered by the Forward Contract (Regulation) Act, 1952 are covered in the scope of taxation In the recent past, exchanges have been set up for transactions in electricity. The Central Electricity Regulatory Commission authorizes such exchanges. Since electricity exchanges are not covered by Forward Market Regulations, such transactions are not covered under the commodity exchange taxation.
The proposed new service seeks to tax the charges recovered for services in relation to assisting, regulating, controlling the business of trading, processing and settlement pertaining to sale or purchase of electricity by the associations authorized by Central Electricity Regulatory Commission.
7. Services related to two types of copyrights hitherto not covered under existing taxable service 'Intellectual Property Right (IPR)', namely, those on (a) cinematographic films; and (b) sound recording [Section 65 (105) (zzzzt)].
The right to temporarily transfer or permit the use of Intellectual Property Rights (IPR), namely, trademarks, designs and patents was brought under tax net in 2004.
However, one of the IPRs, i.e. copyright has been specifically kept out of the purview of the tax with an intent to encourage authors and artists, as it involves creative works, such as literary work, musical work and artistic work. In Budget 2008, Information Technology (IT) Software Service was also brought under tax net, which apart from involving development, up-gradation, assistance etc. also covered the IPR aspect i.e. right to use the information technology. The provisions of copyright are incorporated in the Indian Copyright Act, 1957. As per section 13 of the said Act, the copyright subsists in the following classes of work:
(a) Original literary, dramatic, musical and artistic works;
(b) Recording of cinematographic films;
(c) Sound recordings.
The first category of copyright has been kept out of the tax net while the second and third categories of copyrights are being made taxable under this service. A cinematographic film means any work of visual recording on any medium (emphasis added) produced through a process from which a moving image may be produced. The same may be accompanied with sound reproduction also. Both the recording of the cinematographic film and the accompanying sound track are the property of the producer, who can temporarily transfer it or permit its use by another person for a consideration. It is this activity, which is being taxed under this service. It would have an impact on the royalty payments on both imported and indigenously produced films when the producer/right holder allows such use to another person, say the distributor. Similarly, song, its music, lyrics and composition also enjoy the copyright protection to its owner who can commercially exploit it in the manner stated above.
Normally, the copyright of music vests in the composer and the copyright of music recorded vests in the producer of the sound recording. It is possible that a lyricist or a singer may hold copyright for the words of a song or the song itself. Merely allowing that song to be recorded is a copyright, which would fall under category (a) of section 13 of the Copyright Act and thus would not be subject to service tax.
However, after the performer has transferred his rights to a sound recording company, the sound recording company acquires the copyright mentioned in category (c) of section 13 supra. It is the transfer or allowing use of this right, which would be subjected to tax under the new service. As such, depending upon the nature and conditions of the contract, companies distributing music, owners of copyright of cinematographic films etc. would be prospective taxpayers. It may be noted that this taxable service will not cover individual artists, composers, performers etc. as their copyrights fall under clause (a) of Sec. 13 of the Copyright Act.
8. Special services provided by a builder etc. to the prospective buyers such as providing preferential location or external or internal development of complexes on extra charges [Section 65 (105) (zzzzu)].
Construction of commercial or industrial structures was brought under service tax net in 2004 while construction of residential complexes became a taxable service in 2005. The scope of the existing services includes construction, completion and finishing, repairs, alterations, renovation or restoration of complexes.
In addition to these activities, the builders of residential or commercial complexes provide other facilities and charge separately for them and these charges do not form part of the taxable value for charging tax on construction. These facilities include,-
(a) prime / preferential location charges for allotting a flat/commercial space according to the choice of the buyer (i.e. Direction- sea facing, park facing, corner flat; Floor- first floor, top floor, Vastu- having the bed room in a particular direction; Number- lucky numbers);
(b) internal or external development charges which are collected for developing/maintaining parks, laying of sewerage and water pipelines, providing access roads and common lighting etc; (c) fire-fighting installation charges; and (d) power back up charges etc.
Since these charges are in the nature of service provided by the builder to the buyer of the property over and above the construction service, such charges are being brought under the new service. Charges for providing parking space have been specifically excluded from the scope of this service. Development charges, to the extent they are paid to State Government or local bodies, will be would be excluded from the taxable value levy. Further, any service provided by Resident Welfare Associations or Cooperative Group Housing Societies consisting of residents / owners as their members would not be taxable under this service.

ALTERATION OR EXPANSION IN THE SCOPE OF EXISTING SERVICES

In the case of following existing taxable services, the scope has been altered either to expand their scope or to remove certain difficulties that have been faced during tax implementation. These modifications would come into effect from a notified date after the enactment of the Finance Bill, 2010. These changes are as follows,-
(1) The scope of the taxable service 'Air Passenger Transport Service' [section 65 (105) (zzzo)] is being expanded to include domestic journeys, and international journeys in any class. Two services, namely 'port services' and the 'airport services' were introduced in Budgets 2001 and 2004 respectively. The services provided by minor ports covered under 'other ports' became taxable from 2003. The purpose behind creating these services was that since a number of activities are undertaken within the premises of ports and airports, it would be easier to consolidate all such services under one head. It was reported that divergent practices are being followed regarding classification of services being performed within port/airport area. In some places, all services performed in these areas [even those falling within the definition of other taxable services] are being classified under the port/airport services. Elsewhere, individual services are classified according to their individual description on the grounds that the provisions section 65 A of Finance Act, 1994 prescribes adoption of a specific description over a general one. Further, both the definitions use the phrase 'any person authorised by port / airport'. In many ports/airports there is no procedure of specifically authorizing a service provider to undertake a particular activity. While there may be restriction on entry into such areas and the authorities often issue entry-passes or identity cards, airport/port authorities seldom issue authority/permission letters to a service provider authorising him to undertake a particular task. Many taxpayers have claimed waiver of tax under these services on the ground that the port / airport authority has not specifically authorised them to provide a particular service. In order to remove these difficulties, the definitions of the relevant taxable services are being amended to clarify that all services provided entirely within the port / airport premises would fall under these services. Further, specific authorisation from the port/airport authority would now not be a pre-condition for the levy.
(2) Presently the taxable service, 'Information Technology Software Service' [section 65 (105) (zzzze)] is subjected to tax only in cases where such IT software is used for furtherance of business or commerce. The scope of the taxable service is being expanded to tax such service even if the service provided is used for purposes other than business or commerce.
In Budget 2008, services provided in relation to Information Technology (IT) Software, such as development, designing, programming, up-gradation of IT software, providing advice, consultancy and assistance on the matters of IT software and providing right to use IT software, whether supplied on a media or electronically, were brought in the ambit of service tax. However, the tax was limited to cases where such IT software was to be used in the course or furtherance of business or commerce. In other words, these activities are taxable only when the receiver of service exploits them for commercial or business purposes. The definition of this taxable service is being suitably amended to extend this levy to cover the aforesaid IT software services provided in all cases i.e. whether or not used in the course or furtherance of business or commerce.
(3) An Explanation is being added in the definition of the taxable service 'Commercial Training or Coaching Service' [section 65 (105) (zzc)] to clarify that the term 'commercial' appearing in the relevant definitions, only means that such training or coaching is being provided for a consideration, whether or not such training or coaching is conducted with a profit motive. This change is being given retrospective effect from 01.07.2003.
Commercial training and coaching service was introduced in Budget 2003 with a view to tax the mushrooming coaching institutes and training centres which either provide coaching classes for examinations or unrecognized courses in various areas such as, management, marketing, engineering etc. The schools, institutes, colleges and universities providing courses that lead to award of recognized diplomas/degrees and sports education were kept out of tax net. These include universities created under a Central or State Act, institutes recognized by UGC as universities or deemed universities, institutes granted recognition professional councils like AICTE, Medical Council of India, Bar Council of India etc. To distinguish the former types of institutes/centres from the latter, the word 'commercial' was used in the definitions of 'Commercial training and coaching', 'Commercial training and coaching centres' and 'taxable service'.
The use of the word 'commercial' in these definitions has led to certain unintended consequences. A view has been taken that the term 'commercial' appearing in various definitions implies that the institute must be run with a profit motive to fall under the taxable service. A number of taxpayers resisted paying tax on this ground. In order to clarify the legislative intent, the definition of the taxable service is being suitable amended, through insertion of an Explanation, to clarify that the word 'commercial' means any training or coaching that is provided for a consideration irrespective of the presence or absence any profit motive. This amendment is being carried out retrospectively (from July 2003) so as resolve the disputes pending at different levels of the dispute settlement system.
(4) In the definition of the taxable service 'Sponsorship Service' [section 65 (105) (zzzn)], the exclusion relating to sponsorship pertaining to sports is being removed.
Business entities often associate their brand names, products or services by sponsoring popular or successful events with intent to obtain commercial benefits of spreading their name, goodwill or reputation to public. It is a form of advertisement. Sponsorship service was brought under tax net in Budget 2006. However, sponsorship of sports events was kept out of the purview of the taxation with a view to encourage sports activity and to provide an avenue for funding sports events. Corporate involvement in certain sports such as cricket, golf and tennis has grown rapidly in the recent years and there is a substantial increase in sports events organized by private organizations or business entities. Further, the concept of owning and forming sports clubs that hire the services of sports persons has made many such events highly commercial and profitable activities. The advertisements through sponsorship of such events have created a disparity, as unlike advertisements displayed otherwise, advertisement (through sponsorship) when associated with sports, does not attract service tax. Therefore, the exclusion available for sponsorship pertaining to sports is being removed by suitable amendment. Suitable exemption to certain categories of sports events would be considered at the appropriate time.
(5) In the definition of the taxable services 'Construction of Complex service' [section 65 (105) (zzzh)], and 'Commercial or industrial construction service' [section 65 (105) (zzq)], it is being provided that unless the entire consideration for the property is paid after the completion of construction (i.e. after issuance of completion certificate by the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder / promoter / developer to the prospective buyer and the service tax would be charged accordingly.
The service tax on construction of commercial or industrial construction services was introduced in 2004 and that on construction of complex was introduced in 2005. As regards payment made by the prospective buyers/flat owners, in few cases the entire consideration is paid after the residential complex has been fully developed. This is in the nature of outright sale of the immovable property and admittedly no service tax is chargeable on such transfer. However, in most cases, the prospective buyer books a flat before its construction commencement/completion, pays the consideration in instalments and takes possession of the property when the entire consideration is paid and the construction is over. In some cases the initial transaction between the buyer and the builder is done through an instrument called 'Agreement to Sell'. At that stage neither the full consideration is paid nor is there any transfer in ownership of the property although an agreement to ultimately sell the property under settled terms is signed. In other words, the builder continues to remain the legal owner of the property. At the conclusion of the contract and completion of the payments relating thereto, another instrument called 'Sale Deed' is executed on payment of appropriate stamp duty. This instrument represents the legal transfer of property from the promoter to the buyer. In other places a different pattern is followed. At the initial stage, instruments are created between the promoter and all the prospective buyers (which may include a person who has provided the vacant land for the construction), known as 'Sale Of Undivided Portion Of The Land'. This instrument transfers the property right to the buyers though it does not demarcate a part of land, which can be associated with a particular buyer. Since the vacant land has lower value, this system of legal instrumentation has been devised to pay lesser stamp duty. In many cases, an instrument called 'Construction Agreement' is parrallely executed under which the obligations of the promoter to get property constructed and that of the buyer to pay the required consideration are incorporated. These different patterns of execution, terms of payment and legal formalities have given rise to confusion, disputes and discrimination in terms of service tax payment. In order to achieve the legislative intent and bring in parity in tax treatment, an Explanation is being inserted to provide that unless the entire payment for the property is paid by the prospective buyer or on his behalf after the completion of construction (including its certification by the local authorities), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly. This would only expand the scope of the existing service, which otherwise remain unchanged.
(6) Amendments are being made in the definition of the taxable service 'Renting of immovable property' [section 65 (105) (zzzz)] to,-
(i) provide explicitly that the activity of 'renting' itself is a taxable service. This change is being given retrospective effect from 01.06.2007; and (ii) provide that renting of vacant land, where the agreement or contract between the lessor and lessee provides for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease, shall be subjected to service tax. This service was introduced in 2007 with a view to tax the commercial use of immovable property hired on rent. The tax on rent paid is available as input credit if the commercial activity involves provision of taxable service or manufacture of dutiable goods. However, the Hon'ble High court of Delhi in its order dated 18.04.2009 in the case of Home Solutions Retail India Ltd. & Others vs. UOI has struck down this levy by observing that the renting of immovable property for use in the course of furtherance of business or commerce does not involve any value addition and therefore, cannot be regarded as service. Apart from the revenue loss caused to the exchequer, the judgment has placed the landlords in a very precarious situation. In view of this judgment, the commercial tenants have stopped them reimbursing the tax element. However, the landlords are receiving regular demand notices from the department issued to protect government's revenue for the interim period. In order to clarify the legislative intent and also bring in certainty in tax liability the relevant definition of taxable service is being amended to clarify that the activity of renting of immovable property per se would also constitute a taxable service under the relevant clause. This amendment is being given retrospective effect from 01.06.2007.
(ii) Renting of vacant land: Under the definition of taxable service pertaining to renting of immovable property, the renting of vacant land used for agriculture, farming, forestry, animal husbandry, mining, education, sports, circus, entertainment and parking purposes, is excluded from the purview of service tax. Further, 'vacant landç whether or not having facilities clearly incidental to the use of such vacant land has also been excluded from the tax net. It has been reported that in many states, the local industrial corporations or PSUs or even private organizations rent vacant land on a long term leases with an explicit understanding that lessee would construct factory or commercial building on that land. In such cases the ownership of the land is not transferred to the lessee and thus it is a service provided by the lessor to the lessee. The situation is similar to renting out a constructed structure for commercial purposes except that at the time of executing the lease agreement the land is in a vacant state and that later the lessee constructs commercial structure thereon after executing the lease deed. Such lease agreements escape service tax because of the exclusion mentioned above. Suitable amendment in the definition of taxable service relating to renting to immovable property is being made so as to provide that tax would be charged on rent of a vacant land if there is an agreement or contract between the lessor and lessee that a construction on such land is to be undertaken for furtherance of business or commerce during the tenure of the lease.
(7) The definitions of the taxable services, namely the 'Airport Services' [section 65 (105) (zzm)], the 'Port Services' [section 65 (105) (zn)] and the 'Other Port Services' [section 65 (105) (zzl)] are being amended to provide that,-
(a) all services provided entirely within the airport / port premises would fall under these services; and
(b) an authorization from the airport/port authority would not be a precondition for taxing these services.
The taxes on transport of passengers traveling by air were in operation in the past. These were not in the nature of service tax but operated through separate legislations. Inland Air Travel Tax [@ 15%] was levied on domestic travel in 1989. Foreign Travel Tax [@ Rs. 500 per trip, except to neighboring countries for which the rate was Rs. 150 per trip] was levied on international travel in 1979.
These taxes were withdrawn in the interim Budget 2004. In 2006, tax was imposed on international air travel by a passenger embarking in India and traveling in higher [other than economy] classes. This tax continues. The taxable service is being suitably amended to extend this levy to cover all domestic and international air passengers embarking in India. The, modalities of working out the tax amount including exemptions, abatement etc. would be prescribed at the appropriate time.
(8) An explanation is being added in the definition of the taxable service 'Auctioneer's Service' [section 65 (105) (zzzr)] to clarify that the phrase 'auction by government' means an auction involving sale of government property by any auctioneer and not when the government acts as an auctioneer for sale of the private property.
Auctioneer's service was introduced in 2006 and is applicable to any service provided in relation to auction of property whether moveable or immoveable, tangible or intangible. However, the service, by definition excludes 'auction by government'. This phrase has given rise to confusion. In certain cases, the property belonging to or vested in the Central or the State governments (such as goods confiscated by Customs department) are sold in an auction that is conducted by private organizations. Conversely, in certain cases government bodies, such as 'Tobacco Board' conducts auction of properties that belong to private individuals or organizations. In order to avoid the confusion, it is being clarified through an explanation that the phrase 'auction by government' appearing in the taxable service, namely 'Auctioneer's service' means an auction where government property is being auctioned and not when the government acts as an auctioneer for the private goods.
(9) The definition of the taxable service 'Management of Investment under ULIP Service' [section 65 (105) (zzzzt)] is being amended to provide that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by the Insurance Regulatory & Development Authority (IRDA), whichever is higher.
Tax on insurers issuing Unit Linked Insurance Plans (ULIP) was imposed w.e.f. 1-06-2008. The taxable service is the "Management of investment, under unit linked insurance business, commonly known as Unit linked Insurance Plans (ULIP) scheme" by an insurer carrying life insurance business. ULIPs are broadly similar to the mutual funds, except that they are required to segregate a certain part of the premium towards the life insurance of the plan holder.
Further, unlike in the mutual fund industry, where the funds are managed by an independent Asset Management Company (which is a separate legal entity), in case of ULIP the funds are managed by the insurance company itself. Thus, it is difficult to ascertain the component of the total charges that is attributable to the management of investment. Accordingly, for the purpose of valuation for charging of service tax, an Explanation was prescribed which in brief, explained that the taxable value for the purpose of this service is the difference between the (a) premium paid by the policy holder for the Unit Linked Insurance Plan policy; and (b) the sum of premium paid for or attributable to risk cover, whether for life, health or other specified purposes, and the amount segregated for actual investment. In other words the differential amount was considered as the charges for asset management. It is however a fact that the amount appropriated by the insurance company is not only asset management but for various activities, such as,-
(a) Premium Allocation Charge: is an upfront deduction from the policy premium, which is generally more than 10% in the first year of ULIP, and continues to be very high for the initial three years. This amount is used for following purposes:
(i) Initial expenses in marketing the issue, including commission paid to distributors.
(ii) Cost of conducting medical check up of the ULIP holder and other miscellaneous charges.
(b) Policy administration charges; monthly charges for managing the paperwork and other formalities for the insurance, and are not related to asset management. It is chargeable to service tax under insurance services.
(c) A number of other charges are also charged by the insurance companies, which, inter alia, include, policy surrender charges, switching charges, partial withdrawal charges, miscellaneous charges etc.
(d) Fund management charges: This is the amount charged by the insurance company for managing the investible funds, which is intended to be taxed under this service. This amount has been capped for ULIPs by Insurance Regulatory and Development Authority (IRDA) at 1.5% of the gross yield for schemes below 10 years, and 1.25% for schemes above 10 years.
Since the charge pertaining to asset management alone should form the value for taxable purpose, the explanation provided under the definition of the taxable service is being suitably amended to provide that that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by IRDA, whichever is higher. The method of computation for monthly payment of tax by such service providers, would be prescribed at the appropriate time.

OTHER AMENDMENTS TO THE FINANCE ACT, 1994

Finance Act, 1994 is being amended to,-
(a) insert an explanation in sub-section (3) of Section 73 to clarify that no penalty shall be imposed where service tax along with interest has been paid before issuance of notice by the department. This would be effective from the date of enactment of the Finance bill, 2010; and
(b) provide definition of the term 'business entity' so as to include an association of persons, body of individuals, company or firm but to exclude an individual. This would be effective from a notified date after the enactment of the Finance bill, 2010

EXEMPTIONS

The following exemptions from service tax are being provided with effect from 27th February, 2010, namely,-
(i) Statutory taxes charged by any government (including foreign governments, where a passenger disembarks) on air passenger would be excluded from taxable value for the purpose of levy of service tax under the Air Passenger Transport Service. (Notification No.15/2010-ST, dated 27th February, 2010 refers).
(ii) Exemption from service tax is being provided to services relating to 'Erection, Commissioning or Installation' of,-
(a) Mechanized Food Grain Handling Systems etc.;
(b) Equipment for setting up or substantial expansion of cold storage; and
(c) Machinery/equipment for initial setting up or substantial expansion of units for processing of
agricultural, apiary, horticultural, dairy, poultry, aquatic, marine or meat products. (Notification No.12/2010-ST, dated 27th February, 2010 refers).
(iii) Packaged I.T. software, pre-packed in retail packages for single use, is being exempted from service tax leviable under IT Software Service, subject to specified conditions. These conditions include that either the customs duty (in case of import) or excise duty (in case of domestic production) has been paid on the entire amount received from the buyer (Notification No.17/2010-ST and No.2/2010-ST, both dated 27th February, 2010 refer).
(iv) At present, exemption from service tax is available to transport of fruits, vegetables, eggs or milk by road by a goods transport agency. The scope of exemption is being expanded by including food grains and pulses in the list of exempted goods (Notification No.4/201 0-ST, dated 27th February, 2010 refers).
(v) Exemption from service tax is being provided to Indian news agencies under 'Online Information and Database Retrieval Service' and 'Business Auxiliary Service' subject to specified conditions (Notification
No.13/2010-ST, dated 27th February, 2010 refers).
(vi) Exemption from service tax is being provided to the 'Technical Testing and Analysis Service' and 'Technical Inspection and certification service' provided by Central and State seed testing laboratories, and Central and State seed certification agencies (Notification No.10/2010-ST, dated 27th February, 2010 refers).
(vii) Exemption from service tax is being provided to the transmission of electricity (Notification
No.1 1/2010-ST, dated 27th February, 2010 refers).

WITHDRAWALS OR AMENDMENTS TO EXISTING EXEMPTIONS

The following changes have been brought about in the existing exemptions,-
(a) Exemption from service tax on service provided in relation to 'Transport of Goods by Rail' by notification No.33/2009, dated 1st September, 2009 is being withdrawn (Notification No.7/2010-ST, dated 27th February, 2010 refers). The exemption provided to certain specified goods transported by rail vide Notification No. 28/2009-ST, dated 31st August, 2009, which was subsequently withdrawn vide notification No. 36/2009-ST dated 9th September, 2009, has been restored. (Notification No. 8/201 0-ST, dated 27th February, 2010 refers). An abatement of 70% of the gross value of the freight charged on goods (other than exempted goods) is being provided vide notification No. 9/2010-ST dated 27th February, 2010 by adding the service of 'Transport of goods by rail' in notification No. 1/2006-ST dated 01.03.2006. All these changes will also come into effect from 01.04.2010.
(b) The exemption from service tax on 'Commercial training or coaching service' extended to vocational training institutes vide notification No. 24/2004-ST dated 10.09.2004 is being limited by introducing a new definition of vocational training institutes. Service tax exemption will be available only to industrial training institutes or industrial training centres affiliated to National Council of Vocational Training (NCVT) and offering courses in the designated trades covered under Schedule I of the Apprentices Act, 1961. The List figuring under Schedule I of the Act covers engineering as well as non-engineering skills/trades (Notification No.3/2010-ST, dated 27th February, 2010 refers).
(c) Exemption from service tax, presently available to Group Personal Accident Scheme provided by Govt. of Rajasthan to its employees, under General Insurance Service is being withdrawn (Notification No.5/201 0-ST, dated 27th February, 2010 refers).
(d) Notification No.1/2002-ST dated 01.03.2002 is being superceded by Notification No.14/2010-ST, dated 27th February 2010 to provide that the construction and operation of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oils and natural gas in the Exclusive Economic Zone and the Continental Shelf of India and supply of any goods connected with these activities would be within the purview of the provisions of Chapter V of the Finance Act, 1994. Similar changes have been made in the definition of the term 'India' appearing in the Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India & Received in India) Rules, 2006.
(Notification No.6/2010-ST and Notification No.16/2010-ST, both dated 27th February 2010 refers).
The revenue impact of these withdrawals and amendments [especially those mentioned under S. Nos. (1) and (2)] is significant. In the case of service tax on railway freight, a period of one month (i.e. upto 31.03.2010) has been provided for the railways to adjust freight rates, accounting system etc. During this period the jurisdictional officers should contact the local railways officials to finalize the modalities to operationalize this levy. Similarly, a quick survey should be conducted to ascertain the number of commercial coaching and training centres, which hitherto were availing the exemption and would now fall under the tax net. For finding out the eligible vocational training courses listed under of the Apprentices Act, 1961, please look at the web site of the Directorate General of Employment and Training, Ministry of Labour (dget.nic.in). Immediate steps should be taken to identify and allot registration to such institutes. Broad estimation of the numbers of the new taxpayers, revenue potential must be carried out and the legal/administration issues, if any, should be identified.

AMENDMENT TO EXPORT OF SERVICE RULES, 2005

Export of Service Rules, 2005 have been amended as follows:
(1) The taxable service, namely 'Mandap Keeper Service' has been shifted from the list under rule 3(1) (ii)
[i.e. performance related services] to the list under rule 3(1 )(i) [immovable property related services] and three taxable services, namely 'Chartered Accountant Services', 'Cost Accountant Services' and 'Company Secretary's Services', have been shifted from the list under rule 3(1) (ii) [i.e. performance related services] to the list under rule 3(1)(iii) [residual category of services]. Notification No.6/2010-ST, dated 27th February 2010 refers. Identical changes have been made under the Taxation of services (Provided from Outside India and Received in India) Rules, 2006 as well (Notification No.16/2010-ST, dated 27th February 2010 refers);
(2) The condition prescribed under rule (2) (a) i.e. 'such service is provided from India and used outside India' has been deleted (Notification No.6/2010-ST, dated 27th February 2010 refers).
These changes have been carried out keeping in view certain difficulties that were faced by the trade while following the aforesaid rules.

AMENDMENT TO NOTIFICATION NO. 5/2006-CE(NT) ISSUED UNDER RULE 5 OF THE CENVAT CREDIT RULES, 2004

It may be recalled that a number of representations were received from exporters, especially the exporters of services regarding difficulties being faced in availing the benefit of refund of accumulated credit under the scheme prescribed under Notification No. 5/2006-CE (NT) dated 14.03.2006, issued under rule 5 of the CENVAT Credit Rules, 2004. While certain issues germinated from the wordings used in the provisions of the notification or interpretation of such provisions, other issues were more in the nature of administrative difficulties in operating the scheme. As an immediate measure, CBEC issued a clarificatory circular No. 120/01/2010-ST, dated 19.01.2010. It was however felt that a permanent solution would require supplementing the clarification with certain amendments to the notification, part of which had to be 'retrospective' in nature. Accordingly, Notification No. 5/2006(CE) (NT) has been amended vide Notification No. 7/2010-CE (NT), dated 27th February 2010. This mainly deals with the procedure that needs to be adopted in case of the new refund claims. However, to resolve the disputes arising on account of the wordings/ illustration provided in the notification, the same is being amended retrospectively (w.e.f. 14.03.2006) (Clause 73 of the Finance Bill, 2010 refers) so as to resolve the disputes in respect of pending cases as well. Therefore to visualize the entire revamped and simplified refund scheme, both the amending notification and the Finance Bill provision must be read in conjunction.
Refund of accumulated CENVAT credit to Exporters: Amendments in Notification No. 5/2006-CE (NT) Representations had been received by the Board that refund of accumulated CENVAT credit to the exporters of services and other service providers like call centers and BPO's were getting delayed and most of them are ultimately getting rejected,-
(i) On account of difference in perception/interpretation between the department and the export of services as to whether their actives fall under the purview of 'export of service at all';
(ii) Difference in wordings used in Notification No. 5/2006-CE (NT) dated 14.03.2006, issued under Rule 5 of CENVAT Credit Rules, 2004 as regards the definitions of terms such as 'inputs'/ 'input services'
(iii) The procedural requirements prescribed under the notification and illustrations given therein were causing difficulties both in terms of delays and filing of incorrect/incomplete refund forms.
The issue was discussed both with the departmental officers as well as the trade and as an immediate solution, Circular No. 120/01/2010-ST dated 19th January 2010 was issued. To give legal backing to the above said circular, leading to faster and fair settlement of the refunds claims, changes have been effected in Notification No. 5/2006-CE (NT). Some of the changes have been made retrospective so that the pending cases are also covered. Other changes are being brought in prospectively, and are aimed at assisting the Departmental officers in faster processing of refund claims. The retrospective amendments are contained in clause 73 of the Finance Bill, 2010 while the prospective changes are contained in Notification no.7/2010-Central Excise (Non Tariff) dated the 27th February 2010. Both these documents may be carefully read together for appreciating the full impact of the changes. The salient features of these changes are as follows:-
Retrospective changes effected from 14.03.2006 (i.e. from the date of issue of notification)
(1) The words "in relation to" have been added in main condition (a) of the Notification.
(2) The word "in' contained in main condition (b) of the said Notification has been replaced with "for".
The above two changes ensure that the provisions of the refund notification and the CENVAT Credit Rules are aligned and that refund is granted on all goods or services on which CENVAT can be claimed by the exporter of goods or services.
(3) The illustration given in condition 5 of the Appendix to the Notification has been deleted. This ensures that refund of CENVAT credit which has been availed in the period prior to the quarter/ period for which the refund has been claimed is also eligible for refund. The refund claims should be calculated only on the basis of the ratio of the export turnover to the total turnover of the claimant. Thus, if the CENVAT credit available to the exporter at the end of the quarter, or month, as the case may be, is Rs. 1 crore, and the ratio of export to total turnover during the quarter is 50%, then Rs. 50 lakh should be refunded to the exporter. The essence of the changes is that refund shall be available for all goods, or input services, on which CENVAT is permissible and should be processed accordingly. Further, refund of CENVAT should not be linked to CENVAT taken in a particular period only.
Prospective changes
(1) The conditions A and B given in the Annexure to the Notification are being deleted, and the details required to be given under these conditions, along with certain additional details, are to be furnished by the claimant in a table, which has been prescribed in condition A. The table should be certified by a person authorized by the Board of Directors (in the case of a limited company) or the proprietor/partner (in case of firms/partnerships) if the amount of refund claimed is less than Rs.5 lakh in a quarter. In case the refund claim is in excess of Rs.5 lakh, the declaration should also be certified by the Chartered Accountant who audits the annual accounts of the exporter for the purposes of Companies Act, 1956 (1 of 1956) or the Income Tax Act, 1961 (43 of 1961), as the case may be. This verification is aimed at reducing the checking of voluminous records which is required to be done by the officers processing the refund claims and ensure faster processing of refund claims.
(2) Consequential changes by introducing the words "in relation to" and "for" in the Annexure to the Notification have been brought to bring them in line with the amendments made in the main conditions of the Notification

SERVICE TAX REFUND CLAIM

By CA Pradeep Jain and Anjali Bihani

Introduction:-

The recent circular no. 120/01/2010-ST dated January 19, 2010 has been issued by the Board for claiming the refund of unutilized Cenvat credit under Rule 5 of Cenvat credit Rules by the service exporters. The above circular has tried to address all the problems faced by the service tax exporters in claiming such exemption. They have tried to give clarification on all the issues. But the famous Hindi proverb "lohe ke chane chabana" (Hard nut to crack) is apt for refund claim for the exporters under Notification 41/2007 or refund under Rule 5. This is also applicable even after this circular. Even we have written a Series of articles on such refund scheme titled as "Johnny and Service Tax refund" for the refund of service tax under notification 41/2007. This can be viewed on our website. We are discussing the aforesaid circular in this article in length.

Rule 5 of Cenvat Credit Rules, 2004 provides that accumulated credit of inputs and input services which are used for providing output services or output goods, can be refunded to the exporter subject to stipulated conditions. Notification No. 5/2006-CE (NT) dated 14.03.2006 provides the conditions, safeguards and limitations for obtaining refund of such credit. The Rule 5 of CENVAT Credit Rules, 2004 is produced as under for your ready reference:

" Rule 5: Refund of CENVAT credit

"Where any input or input service is used in the manufacture of final product which is cleared for export under bond or letter of undertaking, as the case may be, or used in the intermediate product cleared for export, or used in providing output service which is exported, the CENVAT credit in respect of the input or input service so used shall be allowed to be utilized by the manufacturer or provider of output service towards payment of,
i) duty of excise on any final product cleared for home consumption or for export on payment of duty; or
ii) service tax on output service, and where for any reason such adjustment is not possible, the manufacturer or the provider of output service shall be allowed refund of such amount subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification:

Provided that no refund of credit shall be allowed if the manufacturer or provider of output service avails of drawback allowed under the Customs and Central Excise Duties Drawback Rules, 1995, or claims rebate of duty under the Central Excise Rules, 2002, in respect of such duty; or claims rebate of service tax under the Export of Service Rules, 2005 in respect of such tax.

Provided further that no credit of the additional duty leviable under subsection (5) of section 3 of the Customs Tariff Act shall be utilized for payment of service tax on any output service.
Explanation: For the purposes of this rule, the words 'output service which is exported' means the output service exported in accordance with the Export of Services Rules, 2005."
Notification No. 5/2006 is produced as under for your ready reference:
" Notification No. 5/2006-CE (NT)

G.S.R. (E) In exercise of the powers conferred by rule 5 of the CENVAT Credit Rules, 2004 (hereinafter referred to as the "said rules?), and in supercession of the notification of the Government of India in the Ministry of Finance (Department of Revenue), No.11/2002 - Central Excise (NT), dated 1st March, 2002, published in the Gazette of India Extraordinary, vide number G.S.R. 150(E), dated 1st March, 2002, the Central Government hereby directs that refund of CENVAT credit shall be allowed in respect of :
(a) input or input service used in the manufacture of final product which is cleared for export under bond or letter of undertaking;
(b) input or input service used in providing output service which has been exported without payment of service tax, subject to safeguards, conditions and limitations, set out in the Appendix to this notification.

Appendix
1. The final product or the output service is exported in accordance with the procedure laid down in the Central Excise Rules, 2002, or the Export of Services Rules, 2005, as the case may be.

2. The claims for such refund are submitted not more than once for any quarter in a calendar year
Provided that where,-
(a) the average export clearances of final products or the output services in value terms is fifty percent or more of the total clearances of final products or output services, as the case may be, in the preceding quarter; or
(b) the claim is filed by Export Oriented Unit, the claim for such refund may be submitted for each calendar month.

3. The manufacturer or provider of output service, as the case may be, submits an application in Form A annexed to this notification to the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, in whose jurisdiction,-
(a) the factory from which the final products are exported is situated, along with the Shipping Bill or Bill of Export, duly certified by the officer of customs to the effect that goods have in fact been exported; or
(b) the registered premises of the service provider from which output services are exported is situated, along with a copy of the invoice and a certificate from the bank certifying realization of export proceeds.

4. The refund is allowed only in those circumstances where a manufacturer or provider of output service is not in a position to utilize the input credit or input service credit allowed under rule 3 of the said rules against goods exported during the quarter or month to which the claim relates (hereinafter referred to as "the given period?).

5. The refund of unutilized input service credit will be restricted to the extent of the ratio of export turnover to the total turnover for the given period to which the claim relates i.e.
Maximum refund = Total CENVAT taken on input services during the given period × export turnover ÷ Total turnover

Illustration:
If total credit taken on input services for a quarter = Rs. 100
Export turnover during the quarter = Rs 250
Total Turnover during the quarter = Rs 500
Refund of input service credit under Rule 5 of the CENVAT Credit Rule, during the quarter = 100*250/500 i.e. Rs 50

Explanation: For the purposes of condition no.5,-
1.

1. "Export turnover" shall mean the sum total of the value of final products and output services exported during the given period in respect of which the exporter claims the facility of refund under this rule.

2. "Total turnover" means the sum total of the value of, -
(a) all output services and exempted services provided, including value of services exported;
(b) all excisable and non excisable goods cleared, including the value of goods exported;
(c) The value of bought out goods sold, during the given period.

6. The application in Form A, along with the prescribed enclosures and the relevant extracts of the records maintained under the Central Excise Rules, 2002, CENVAT Credit Rules, 2004, or the Service Tax Rules, 1 994,in original, are filed with the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be, before the expiry of the period specified in section 11B of the Central Excise Act, 1944(1 of 1944).

7. the refund of excise duty or service tax is allowed by the Deputy Commissioner of Central Excise or the Assistant Commissioner of Central Excise, as the case may be."
Difficulties pointed out in the circular: -

The service tax exporters are facing difficulties in getting refund from the department. Similar difficulties are also faced by the goods exporters are and many matters are pending in the tribunal.

The circular says that the call centers or the BPOs are sailing in the same boat. The main problems faced by service tax exporters and as clarified in this circular are summarized as under:-
a. Language of the notification vis-à-vis input service definition.
b. Nexus between input or input services and final services exported
c. Verification of the documents.
d. Refund of Cenvat credit accumulated during the quarter or earlier quarter.
e. Incomplete invoices.

Underneath we have discussed these problems and solutions offered by the circular in a detailed view as follows: -

1) Language of the notification:
The Board circular no. 120/01/2010 ST, Dt 19 January, 2010 says that the language of the notification 5/2006 provides that:-

"Refund is permitted of duties and taxes paid on inputs or input services USED in the manufacture of export goods or USED in providing the output services exported".

However, "Input services" definition under Rule 2(l) of Cenvat credit Rules reads as follows:-
"(i) used by a provider of taxable service for providing an output service;or
(ii) used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal, (This clause has been amended vide Notification 10/2008 C.E. (N.T.) - dated 01-03-2008) and includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal;"

The field formalities says that the CENVAT Credit Rules allowed the credit on input services used "whether directly or indirectly, in or in relation to the manufacture of final product or for providing the output service". But the Rule 5 says that it should be directly used in the manufacture of export goods.

On the basis of wordings, departmental authorities are focusing on nexus theory. For refund, the inputs/ input services should be directly related to the goods / services exported. The department states that the goods or services covered under a particular invoice which are not able to establish a connection with a specific consignment of export goods or specific instance of export of service, are not eligible for refund.

The board has maintained that the Harmonious reading of both the rules should take place. The real intention of the rule is to provide the refund claim to exporters. Even if different words have been used in both the rules then also they should be read in Harmonious manner. It is very welcome step on the part of the Board. Thus, by reading these lines, one can say that refund of all Cenvat credit taken will be allowed to the exporters.

But the Board goes further and says that to prove the nexus it is to be seen that whether the quality and efficiency of services exported is increased. This was not there in Rules also but the Board has inserted the new provision and field formalities will use this weapon to say that the all input services credit taken by the exporters does not increase the efficiency and quality and as such refund is to be denied. Else the exporter has to prove that the quality and efficiency has increased. The circular has given examples also in respect of the call centres or the BPOs. The services which are directly correlate with the export of services are renting of premises, right to use software, rent a cab, maintenance & repair of equipment, telecommunication facilities, etc. are eligible for granting of refund.

The activities which are recreational in nature or used in beautification of premises are apparently not able to correlate with the export of services, hence not eligible for refund. The activities which are recreational in nature like event management, company-sponsored dinners/picnics/ tours, flower arrangements, mandap keepers, hydrant sprinkler systems, rest houses, etc. can establish nexus with the export of services indirectly. The call centres or BPO will get atleast get refund on such services. But the poor other service providers has to face the music from the department.

However, recreational activities also increase the efficiency of the employees. The expansion of office building etc. also increases the export of services. As such the refund should be allowed on such services also.

The nexus will be said to exist if it is essential for the quality and efficiency of provision of service exported. The departmental authorities considered that the recreational activities are not related to export of services or does not impact the efficiency, but they are meant for the improvement of efficiency only. The recreational activities provided to employees are to ensure that output service is provided efficiently.

2) Voluminous record to grant refund as well as one to one co-relation:
The board circular has mixed up both these problems and given solution in single para. The exporters has to submit many documents like input service invoices, export invoices, bank certificates etc, in order to get refund. This was also the situation for the goods exporters who have to get the refund under notification 41/2007. But afterwards self certification model was introduced in budget 2009 by notification 17/2009. A declaration certified by the CA was to be submitted to help in faster disposal of the refund claims. The circular says that the same procedure should be followed in such type of refunds.

A CA certificate should be provided along with the refund claim about the co-relation and nexus. But there is legal provision for the same under notification 17/2009 but no such legal backing for the same for the refund claim under Rule 5. The circular can prescribe the conditions which are not there in Rule and notification.
As a member of ICAI, we welcome these provisions but the language of circular says that after the certificate, it will be verified by the AC/DC. If this is situation, then why this circular is increasing the problems of the poor exporters who is already not getting the refund claim. One more step of certificate of CA is added. It has prescribed one more declaration along with the refund claim.

3) Quarterly filing of refund claims:
There was a dispute between the serviced tax exporter and the department that the service tax refund is to be granted for the quarter where the export has taken place. If the Cenvat is accumulated in the earlier quarter and there was no export but the export has taken place in next quarter then the refund will not be granted of cenvat credit accumulated for the earlier quarter.

This is a good clarification from the Board. The refund will be granted even for the earlier quarter also. But the notification does not suggest the same. It allows the refund on proportionate basis. If the real intention of the Board was to give the refund then they have to amend the notification. It is settled position that the board circular which are against the law are not binding on the departmental officers. As such they can very well challenge the same.

Hence, the overall position is not alerted and the exporter will not get relief on this count also.
4) Non compliance of Rule 4A

The department rejects refund claim because invoices submitted are not complete in all respects as per Rule 4A of Service tax Rules. In invoices, either description of the service or the classification is not mentioned. The exporters submits that refund should be allowed if it appears on invoice the nature of service received, tax paid, details required under Rule 4A, & the input service has link with the service/goods exported. The board has accepted this position and granted the refund claim even if there is minor variation. It has instructed the field formalities to take broader view based on judicial pronouncements.

A Quick Wrap before we wind up:-

We have seen that the board has tried to resolve the problems of the exporters but it has not finished yet. The rule should be amended in such a manner that it provides that complete unutilized credit lying with the exporter should be refunded irrespective of the nexus theory. Ultimately, the aim is to provide the refund of unutilized credit to the exporter. Till then it does not seem that the problems will be resolved for the exporters. And the most important thing is that a positive attitude is required for grass root level to says, it will be hard nut to crack.

Goods Exporter can also claim the rebate claim on finished goods under Rule 18 rather than to claim the refund of unutilized credit under Rule 5. This is very easy and total unutilized credit can be claimed as rebate. We have always suggested to exporters that they should claim the same. The refund of unutilized credit should be opted when no other option is available with the exporter, like in case, when the exporter is supplying goods to 100%EOU or else the 100% EOU is having unutilized Cenvat credit. In such cases rebate route is not available.

We suggest that the same route is available for the service tax exporters. They can also pay the service tax on their output services under Rule 5 of Export of services rules and get the refund from the department. This is a simple solution. As per our opinion, the same should be preferred.

REVENUE COMMENTS ON GST

'ANNOUNCE WAIVER OF SERVICE TAX, MAT FOR INDUSTRIES FOR CREATING EMPLOYMENT'

Thesynergyonline Economic Bureau

NEW DELHI, JAN 04 :
KEEPING in view the top priority of government to employment generation, The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has proposed complete waiver of Service Tax as also Minimum Alternate Tax (MAT) for industries set up solely with a view to creating employment opportunities both in public and private sectors having minimum marginal profits.

In addition, the Chamber has demanded that imports of capital goods, required to set up such industries be exempt from import tariffs, initially for a period of 10 years.

The Chamber is of the firm view that despite employment generation has been among lead priorities of successive government s, experience shows that industries set up to create employment are hardly centivised.

It is in view of this background, the ASSOCHAM has proposed to the government not to subject such industries and ventures either to service tax or MAT which are established solely for employment oriented and are labor intensive.

In an SoS, sent to Finance Ministry, president ASSOCHAM Dr. Swati Piramal also demanded that employment generation could pick up, provided capital goods required to be imported for such industries are exempt from imposition of import tariffs and exempted from MAT and service tax.

These suggested measures will motivate qualified people with entrepreneur skills to plunge into establishing such units which enjoys high return of people to boost the employment generation which has been one of the priorities of the government.

According to the Chamber, direct linkages with employment generation can be established to set up chains of labour intensive industries provided with suggested tax exemption.

The criteria for extending the proposed benefits could be linked to Head Counts and as these increase, the incentives should be commensurate accordingly and in case Head Counts decrease, the suggested incentives can be reduced accordingly.

The suggestion as regards to extension of benefits about service tax as well as MAT to industries set up with altruistic purpose is based on the internal assessment of the ASSOCHAM which found that in order to establish direct linkages with employment generation, the government has to forgo some of its taxation measures. As far as labour intensive industries are concerned, no worth recalling incentive schemes were ever announced and therefore, now the time has come when the government needs to look at the suggestion mooted by the Chamber.(editor @thesynergyonline.com)