Rajkamal Shah & Bakul Mody
Chartered Accountants

Introduction

This topic is divided into following four broad categories :

1. Important Amendments

2. Expansion of coverage of existing services

3. Other changes in the Act and Rules

4. Inclusion of new services

I. Important Amendments

1. Small Scale Exemption Scheme for Service Providers (SSES)

   1. Applicability

      • SSES has been notified vide Notification 6/2005 – ST dt. 1-3-2005 (N6/05) and is made applicable for the financial year 1-4-2005 to 31-3-2006.

      • SSES is applicable to all categories of Service Providers.
         

   2. SSES not to apply in specified cases

      It has been expressly provided in N6/05 that SSES shall not apply in the following 2 situations:

      1. In all cases where taxable services are provided by a person under brand name or trade name [whether registered or not] of another person.

         For the purposes of SSES "brand name" or "trade name" means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented words or writing which is used in relation to such specified services for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified services and some person using such name or mark with or without any indication of the identity of that person.

         Implications

         Brand Name/Trade Name restriction for availing Small Scale Exemption under Central Excise has been in force for many years. However the practical applicability of the same to Services Sector would have to be tested depending upon the facts and circumstances of given case.

         Illustration

         A Courier Agency appoints Franchisees in each suburb of Mumbai. Each Franchisee is an independent entity who receives commission from the said Courier Agency and as per understanding with the said Agency performs under the brand name/trade name of the said Agency. In such a scenario the Franchisee’s of the Courier Agency would be hit by the brand name / trade name restriction stated earlier and would not be able to avail the benefit under SSES.
          

      2. In cases where in terms of section 68(2) of the Finance Act, 1994 (Act) read with Rule 2(1)(d)(iv) of Service Tax Rules, 1994 (STR) the persons availing services have been specified as persons liable to pay Service Tax [Eg Insurance Agents, NRI / Foreigners not having office in India, Mutual Fund Agents wef 1-4-2005 etc.]

         However, it has been specifically provided in para 3 of N 6/05, that for the purpose of determining Exemption Limit in relation to taxable services provided by Goods Transport Agency (GTA) the payments received towards gross amount charged by such GTA under section 67 of the Act for which persons liable to pay Service Tax are specified under section 68(2) of the Act read with Rule 2(1)(d)(iv) of STR, shall not be taken into account.
          

   3. Eligibility

      It has been very clearly specified in N 6 / 05 that in order to be eligible to the benefit of SSES for the year 2005-06 the aggregate value of taxable services rendered by a Service Provider from one or more premises should not exceed Rs. 4 lakhs in preceding financial year viz. 1-4-2004 to 31-3-2005
       

   4. Computation of Exemption Limit

      According to N 6/05 the Exemption limit is Taxable Services of an aggregate value of Rs. 4 lakhs in any financial year. It has also been clearly specified in N 6/05 that in cases where Service Provider provides one or more taxable services from one or more premises:

      • Exemption Limit of Rs. 4 lakhs shall apply to the aggregate value of all categories of taxable services provided by a Service Provider from one or more premises and

      • Exemption Limit shall not apply separately for each premises or each category of services

      According to N 6/05 "aggregate value not exceeding four lakh rupees" means the sum total of first consecutive payments received during a financial year towards the gross amount, as prescribed under section 67 of the said Finance Act, charged by the service provider towards taxable services till the aggregate amount of such payments is equal to four lakh rupees but does not include payments received towards such gross amount which are exempt from whole of service tax leviable thereon under section 66 of the said Finance Act under any other notification.

      Refer discussion in para I.1.8 hereafter
       

   5. Option to Service Providers

      It has been provided in N 6 / 05 that a Service Provider has an option not to avail exemption under the said notification and pay service tax on services provided by him. However:

      • Such option can be exercised only once in a financial year

      • Once such option is exercised by a Service Provider it cannot be withdrawn during the remaining part of financial year.
         

   6. CENVAT Credit restrictions

      In cases where a Service Provider avails benefit under SSES he cannot avail the following:

      • CENVAT Credit of Service tax paid on any input Services under Rule 3 or 13 of CENVAT Credit Rules, 2004, used for providing taxable services for which exemption benefit is availed.

      • CENVAT Credit under Rule 3 of the said Rules on Capital goods received in premises of service provider during the period for which exemption is availed.

      However Service Provider can avail CENVAT Credit on such inputs/input services received on or after the date on which Service Provider starts paying Service Tax and which are used for providing taxable services for which Service Tax is paid.
       

   7. Implications in cases where CENVAT Credit is availed at the point of time of availing Exemption

      In cases where Service Provider have been availing of CENVAT Credit and subsequently opt for Exemption under ES, the balance credit at that point of time shall lapse. Further such Service Provider is also required to pay back any credit taken in respect of inputs lying in stock or process. However, the credit balance may be used for payment of such tax.
       

   8. Clubbing of Taxable Services Value – Position under Central Excise and its applicability

      In order to determine the entitlement to benefit of SSI Exemption Scheme under Central Excise the following clearances are to be clubbed:

      • Clearances of a single manufacturer from one or more factories.

      • Clearances of one or more manufacturer from the same factory.

      The Central Excise Dept. and the manufacturers have from time to time raised various doubts, issues, and disputes as to the eligibility and entitlement to SSI Exemption Notification in case of multiple units owned/controlled by a person or his relatives.

      On a study of various judgments in regard to clubbing of clearances in case of multiple units, the factors usually considered by Central Excise Dept. are as under:

      • Common management

      • Common partners

      • Control through relatives

      • Common work force

      • Common manufacturing facilities

      • Common power connections

      • Common telephone and other communication facilities

      • Common administration and accounting set up

      • Common material procurement arrangements

      • Common selling arrangements

      • Financial transactions between units

      • Common storage facilities

      • Registration with Government autho-rities viz, Income Tax, Sales Tax etc.

      • Business dealings/transactions between the units

      An analysis of judicial views on Clubbing of Clearances under Central Excise would reveal that the 2 important tests usually employed by the Central Excise authorities to ascertain whether or not two units are independent and for entitlement to Exemption are:

      • Financial flow back between the units

      • Common ownership and control of units

      The above analogy would be equally applicable and relevant in regard to SSES for Service Providers.
       

2. Import of Services

   Section 64 of the Act provides as under:

   1. This Chapter extends to the whole of India except the State of Jammu and Kashmir

   2. ………

   3. It shall apply to taxable services provided on or after…

   On the basis of Dept. views expressed through Trade Notices and practical implementation of the levy it has been a reasonably settled position that Service Tax Law applied to cases where services were provided/rendered within the territorial jurisdiction of India except J & K.

   An amendment is proposed in section 65(105) of the Act whereby an Explanation is being inserted at the end of the section as under:

   Section 65(105) of the Act

   "taxable service" means any service provided or to be provided –

   ………….

   Explanation

   For the removal of doubts, it is hereby declared that where any Service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India such service shall be deemed to be taxable service for the purposes of this clause,

   The amendment proposes to essentially change the character of the Service Tax from an origin based tax to a destination based tax. The international practice is to charge an import VAT on import of services into a country. However, there are strict definitions as to what would constitute an import of service. Further, the import VAT is brought into force on a correct and proper wording of all the relevant statutory provisions.

   The proposed amendment if carried out, in the manner proposed, could have far reaching implications

   An additional and significant implication of the aforesaid amendment would be the need for the various recipients of such services to register and pay service tax on a self declared basis, as per existing provisions of the Act / STR..
    

3. Business Auxiliary Services: Section 65(19)

   An explanation is inserted in clause iv) clarify that input means all goods and services intended to use by the client.

   Clause v sought to be substituted by "production or processing of goods for or on behalf of the client".

   It has been clarified that "commission agent" will now include "any person who acts on behalf of another person and causes sale or purchase of goods or provision or receipt of service for a consideration and includes any person who while acting on behalf of another person –
    

   1. deals with goods or services or documents of title to such goods or services; or

   2. collects payment of sale price of such goods or services; or

   3. guarantees for collection or payment for such goods or services; or

   4. undertakes any activities relating to such sale or purchase of such goods or services.

   Comment

   1. At present, word "input" in clause iv would mean input as defined in Cenvat Credit Rules, 2004. However, with the insertion of words "all goods or services intended to be used by client" it will cover all kinds of goods and services which is not even taxable under service tax.

   2. Insertion of word "processing" of goods "for" or "on behalf of client" in clause v will now include all kind of job work either undertaken for client or rendered to third party on behalf of client will be covered. Earlier processing of goods was not covered. Now all job workers will be covered except those prescribed under notification No. 8/2005 and discussed hereinbelow in para No. d).

   3. Earlier a controversy had arisen that job work undertaken "for" the client or in the nature of processing undertaken for client was not covered.

   4. By Notification No. 8/2005 dated 1st March, 2005, the exception to coverage of job work would be production/ processing (in full or part at any stage) of final products which had suffered Excise Duty at appropriate rate. The goods for which NIL rate of Excise Duty is applicable or wholly except from Excise Duty will not be covered as appropriate rate of duty and therefore will get covered under BAS.

   This amendment will be effective from the date to be notified after the enactment of Finance Bill, 2005.
    

4. Taxable event – service provided or to be provided

   Section 65(105) is sought to be amended to include within the scope of taxable services - service to be provided (along with the words service provided).

   Comment

   It remains to be seen as to how tax can be levied on service to be provided (i.e., on advance receipt of payments) in the absence of corresponding amendment in Rule 6(1). It is also ultra vires section 64(3) of Chapter V of Finance Act, 1994 which deals with scope of services and provides that "it shall apply to taxable services provided on or after the commencement of this chapter".

   This amendment will be effective from the date to be notified after enactment of the Finance Bill, 2005.
    

5. Payment received before provision of service to be treated as a part of gross value of taxable service: (Section 67 – Amendment)

   To include payment received before, during or after the provision of taxable service as a part of gross amount for charging tax.

   This means that if an amount is received for a service which was not taxable at that time but categorized as taxable subsequently, the amount received before will constitute part of taxable service for the period of service to be rendered after it became taxable. An example will clarify this position :

   Service of "membership of club or association" becomes taxable say from 1-4-2005. XYZ club has received yearly membership fees Rs. 25,000/- from Mr. X on 1-1-2005. The club will be required to pay tax on Rs. 18,750/- i.e. for 9 months period falling from 1-4-2005 on which the service has become taxable. In all such cases, there will be genuine hardship as the service provider would not have collected service tax on the amount received simply because service tax was not applicable on that service at that point of time.

   Under this circumstance, all assessees/service providers whose service is not included under taxable services today, should include a clear cut term in the contract/agreement to provide for an enabling clause so that the contractor will be in a position to collect tax amount from the receiver of the service if he is required to pay tax subsequently.

   This amendment will be effective from the date of enactment of Finance Bill, 2005.

6. Rule 6(1) : Due date of payment of service tax will be 5th of month or quarter (and not 25th as is a case in present), as the case may be.

   This amendment will be effective from 1st April, 2005.

   However, in case of payment for the month of March 2005 or quarter ending March 2005, due date will be 31st March, 2005 only.
    

7. Rule 4A(1) – Invoice to be issued within 14 days

   Service provider is now required to issue invoices within 14 days from the date of completion of service or receipt of any payment towards the value of such service, whichever is earlier.

   This amendment will be effective from 1st April, 2005.
    

8. Rule 2(d)(vi) : To shift liability to pay service tax on the mutual fund or asset management company as receiver of service in case of distribution of mutual fund by the distributors or agents.

   This amendment will be effective from 1st April, 2005.

II. Expansion of coverage of existing services
(to be effective from the date to be notified after enactment of Finance Bill, 2005)

1. Erection, commissioning & installation services

   Sub-section(39a) of section 65(105) substituted to include installation of

   1. electrical and electronic device including wiring and fittings

   2. plumbing, drain laying or other installation for transport of fluids.

   3. heating, ventilation, or air conditioning including all related pipe, duct and sheet metal work.

   4. thermal or sound installation, fire proofing or water proofing.

   5. lift and escalator, fire escape staircase or travelators or

   6. such other similar services.

   Comment

   Earlier in this category what included was erection, commissioning and installation in relation to plant, machinery and equipments only. However, it was not clear that whether all above kind of installations etc. Would also be covered under the meaning of plant, machinery or equipments? With specific inclusion, all above activities will now be covered.

2. Commercial or industrial construction service (renamed from "Construction service")

   To include (by insertion of sub-section (25b) to section 65 and clause zzq to section 65(105))

   1.  construction of new buildings or civil structure or a part thereof, or construction of pipe line or conduit. Completion and finishing services including construction of swimming pools in relation to building or civil structure.

   2. Repairs, alteration, renovation, restoration and similar services in relation to building or civil construction, pipeline or conduit, used occupied or engaged or so to be used or to be occupied or engaged primarily in relation to commerce or industry,

   However this will not include road, airport, railway, transport terminal, bridge, tunnel, long distance pipeline and dam.
    

   Comment

   In addition to whatever included earlier the followings will also be covered, i) construction of pipeline or conduit, post construction, completion and finishing, glazing, plastering, painting floor and wall tiling, wall covering, wall papering, wood and metal joinery, carpentry, fencing, railing, acoustic applications (sound related) or fittings, or construction of swimming pools other similar services in relation to building or civil structure, ii) repair, alteration, renovation, restoration services in relation to building or civil structure, pipeline or conduit used occupied or engaged or so to be used or to be occupied or engaged primarily in relation to commerce or industry.

   Construction of long distance pipeline which was exempted earlier now covered.
    

3. Franchise service : Sub-section (47) of section 65 substituted to widen the scope by retaining only sub-clause (i) and removing sub-clauses (ii, iii & iv).

   Comment

   For treating franchise category as taxable service, it was required to fulfil all four conditions cumulatively provided in sub-clauses i to iv of clause (47). Now with the removal of later three limbs, the scope is widened to cover all kinds of franchise agreements, where franchisee is granted representational right to sale or manufacture goods or to provide service or undertake any process identified with franchiser whether or not a trademark, service mark, trade name or logo or any such symbol as the case may be.
    

4. Manpower recruitment or supply agency : Sub-section (68) of section 65 and clause (k) of section 65(105) substituted to include recruitment or supply of manpower in any manner, temporarily or otherwise to the client.

   Comment

   Manpower supply was not included so far. Now temporary recruitment and manpower supply is included. Therefore, services provided by contractor for providing contractual labour or personnel to be covered.
    

5. Outdoor catering : Sub-section (76a) of section 65 and clause (m) of section 65(105) amended to include catering at a place provided by the person receiving such service by way of tenancy or otherwise.

   Comment

   The scope of this service is expanded by including the service at a place which is provided by the person receiving such service. Canteen contractors providing catering service in industrial complexes, government buildings, etc. will now be covered.

   In clause (m) of section 65(105), the following words are substituted "to include service to be provided as a caterer" in place of the words "provided to the client". That means an outdoor caterer would be covered for rendering services to persons other than client also.
    

6. Authorised Service Station : Definition in sub-section (9) of section 65 and sub-clause (zo) of section 65(105) amended :

   In addition to whatever covered earlier, reconditioning or restoration of motor car, light motor vehicle or two wheeled motor vehicle is now sought to be covered.
    

7. Broadcasting Service : Sections 65 (15) & (16) and sub-clause (zk) of sub-section 105 of section 65 amended :

   Comment

   All kinds of charges recovered by broadcasting agency from the cable operators or from multi system operator or from any other person for permitting to receive any form of communication (signal, picture, image etc.) through cable or space including direct to home (DTH) signals within the definition of broadcasting service. Therefore broadcasting agency will be liable to pay service tax on subscription received from such persons.
    

8. Beauty Treatment Service : Sub-section 65 (17) amended

   Comment

   Hair cutting, hair dyeing which (earlier exempted by Notification No. 11/2002 and Circular No. B-II/2002) now sought to be covered. With this, practically all services rendered by a beauty parlour are now sought to be covered
    

9. Sound Recording : Sub-section (98) of section 65 substituted to widen the scope to include:

   1. recording of sound of any media or device and

   2. services related to recording of sound in any manner such as sound, cataloguing, storing, mixing or remixing or any audio post production activity.

   Comment

   The earlier definition included recording of sound on a magnetic storage device and editing thereof in any manner only. However, it appears that copying of cassettes, etc. are not covered.
    

10. Video tape production :– Substitution of sub-section (120) of section 65.

    The scope expanded to include :

    1. recording of any programme

    2. on magnetic tape or any other media or device

    3. service relating thereto such as editing, cutting, colouring, dubbing, title printing, imparting special effects, processing, adding, modifying or deleting sound

    4. transferring from one media to another or

    5. undertaking post production activity, in any manner.
        

11. Maintenance or repair service : Sub-section (64) of section 65 substituted to enlarge the scope to include

    1. the word maintenance is removed from sub-clause (i)

    2. maintenance or management of immovable property (repairs not included)

    3. reconditioning and restoration undertaken of any goods or equipments excluding motor vehicles.

    Comment

    With the removal of word "maintenance", it appears that all contracts even for one time repair will also get covered and therefore all roadside repair shops will be liable to register and pay tax.

III. Other changes in the Act and Rules

1. Rule 4(2) (3)(3A) – Centralized Registration

   To facilitate centralized registration even in case of person having centralized filing or centralized accounting system of all such premises are located within the jurisdiction of the Commissioner or Chief Commissioner of Central Excise as the case may be.

   The CBEC may specify the rules in respect of the assessee having centralized billing and/or accounting system in respect of premises located under jurisdiction of more than one Commissioner or Chief Commissioner of Central Excise.

   It has been further provided that registration granted so far will not be disturbed. A situation may arise wherein a company is granted centralized registration in respect of one service provided at different branches all over India. Now if it starts rendering another service, it will be entitled for separate registrations under different commissionerates only. Under this circumstance, it will be filing returns and making payments in respect of first service for all over India in one Commissioner, however, in respect of new service it will need to file return and make payment at different jurisdictional Commissioner’s office.

   This amendment will be effective from 1st April, 2005.
    

2. Section 69 is sought to be amended to enable Central Government to notify specifying such other person or class of persons to make application for registration. Section 70 provides for filing of returns by such persons who are registered.
   
   This amendment will be effective from the date of enactment of Finance Bill, 2005.
    

3. Sections 73, 74, 78, 84, 85, 86, 83A are sought to be amended to give powers to Central Excise Officers for issuing show cause notices, etc.

   This amendment will be effective from the date of enactment of Finance Bill, 2005.
    

4. Section 33A of Central Excise Act is adopted for the purpose of adjudication procedures under service tax matters. Under this section, maximum three adjournments are allowed for the purpose of adjudication.

   This amendment will be effective from the date of enactment of Finance Bill, 2005.
    

5. Section 96A is sought to be amended to allow existing joint venture in India and a wholly owned subsidiary Indian company of a foreign company to avail benefit of advance ruling.

   The Central Government is empowered to notify such other categories for the purpose of benefit of advance ruling.

   This amendment will be effective from the date of enactment of Finance Bill, 2005.
    

IV. Inclusion of new services (effective from the date to be notified after enactment of Finance Bill, 2005)

Comments under this section are given on the basis of plain interpretation of newly inserted/substituted sections. A detailed implications of these provisions are expected to be provided by the Finance Ministry or CBEC by issue of trade notice/circular, etc. before the services are notified.

1. Construction of complex : Substitution of sub-section (30a) to section 65 and clause (zzzh) to section 65(105) :–

   1. construction of new residential complex or a part thereof

   2. completion and finishing services in relation to residential complex such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry, fencing and railing construction of swimming pools, acoustic applications or fittings and other services.

   3. Repairs, alteration, renovation or restoration of, or similar services in relation to residential complex.

   Residential complex is defined by insertion of clause (91a) as any complex comprising of a building or buildings having more than 12 residential units, a common area and any one or more facilities of services such as park, lift, parking space, community hall, common water supply or effluent treatment system which is located within premises and layout of such premises is approved by such authority under any law for the time being in force. However, construction of complex for one’s personal use tenanted or otherwise is not covered.

   Residential unit means a single house or single apartment intended for use as a place of residence.
    

2. Club or Association : Insertion of section (25a) to section 65 and clause (zzze) to section 65(105) :–

   A person or body of persons providing services, facilities or advantages for a subscription or any other amount to its members. However, this does not include

   • a body established or constituted by or under any law, trade unions

   • promotion of agriculture, horticulture, animal husbandry or

   • any activity or service of public nature of charitable, religious or political nature, press or media association.

   Comment

   The service appears to cover all private clubs, gymkhanas, etc. and also all kinds of fees including lump sum, life membership, etc.
    

3. Cleaning activity : Insertion of sub-section (24b) to section 65 and clause (zzzd) to section 65(105)

   Cleaning activity including specialized cleaning like disinfecting, exterminating or sterilizing of objects or premises of commercial or industrial building or factory, plant or machinery, tank or reservoir etc.

   However, services in relation to agriculture, horticulture, animal husbandry or dairying are not covered.

   Comment

   It appears that cleaning of non-commercial or non-industrial buildings such as residential buildings, schools, hospitals, etc. are not covered.
    

4. Dredging services : Insertion of sub-section (36a) to section 65 and clause (zzzb) to section 65(105) :

   Dredging service is defined as removal of material temporarily or permanently including silt, sediment, rocks, sand, refuse, debris, plant or animal matter in any excavating, cleaning, deepening, widening or lengthening, permanently or temporarily of any river, port, harbour, back water or estuary.
    

5. Mailing list compilation and mailing : Insertion of sub-section (63a) to section 65 and clause (zzzg) to section 65(105) to include for or on behalf of client,

   1. compiling and providing list of mail, address and any other information from any source or

   2. sending document, information, goods or any other material in a packet by whatever name called by addressing, stuffing, sealing, metering or mailing for on behalf of the client.
       

6. Packaging service : Insertion of sub-section (76b) to section 65 and clause (zzzf) to section 65(105) :–

   This service is defined as packaging of goods including pouch filling, bottling, labelling or imprinting of package, however, excluding such packaging activity which amounts to manufacture within the meaning of Third Schedule s. 2 (f) of CEA.
    

7. Site formation and clearance, excavation and earthmoving and demolition service – insertion of sub-section (97a) to section 65 and clause (zzza) to section 65(105) to include:

   1. drilling, boring and core extraction services for construction, geophysical, geological or civil process, or

   2. soil stabilization or

   3. horizontal drilling for the passage of cables or drain pipes or

   4. land reclamation work or

   5. contaminated top soil stripping work or

   6. demolition and wrecking of building structure or road, but does not include such service provided in relation to agriculture, irrigation, watershed development and drilling, digging, repairing, renovation or restoring of water sources or water bodies.

   This will cover all pre-construction activities in respect of digging, etc.
    

8. Survey and map making – Insertion of sub-section (104b) to section 65 and clause (zzzc) to section 65(105) to include – geological, geophysical or any other prospecting, surface, sub-surface or aerial surveying of any kind but does not include survey and exploration of minerals.

   Government agencies under the control or authorized by the Government are excluded.
    

9. Transportation of goods by pipeline or other conduit : Included as taxable service by insertion of clause (zzz) in sub-section (105) of section 65

   Transportation of goods (other than water) through pipelines or other conduits.