Highlights of proposed amendments to Service Tax by The Finance Bill, 2006

1. Changes effective from 1-3-2006

Exemptions withdrawn

1.1 Chartered Accountants, Company Secretary and Cost Accountant to pay service tax on all services rendered as opposed to specific services earlier. (Withdrawn by Notification No. 59/98 ST dated 16-10-1998)

1.2 Exemption to call centre and medical transcription withdrawn. They are now liable to tax under Business Auxiliary Services. (Withdrawn by Notification No. 8/2003 ST dated 20-6-2003).

1.3 Exemption to ERP Software system withdrawn. Now liable under Management Consultancy Service. (Withdrawn by Notification No. 16/2004 ST dated 10-9-2004).

1.4 Exemption to catering service in railway compartments and within the premises of academic institutions or medical establishment. (Withdrawn by Notification No. 19/2004 and 21/2004 ST respectively, both dated 10-9-2004).

1.5 All abatement Notifications are withdrawn and consolidated in one Notification No. 1/2006 dated 1-3-2006. However, with new condition that availer of such abatement will not be eligible to claim credit of service tax on input service.

New Exemptions effective from 1-3-2006

1.6 Exemption of 90% of interest, (i.e., difference between instalments paid towards repayment and principal amount) in case of financial and equipment leasing services or higher purchase.

1.7 Exemption to testing and analysis services in relation to water quality testing by Government or State or District level laboratories.

1.8 Exemption to taxable services provided by Reserve Bank of India.

Amendments to Service Tax Rules w.e.f. 1-3-2006

1.9 To intimate any change in information submitted at the time of registration within 30 days from such change to AC /DC of Central Excise.

1.10 Registration certificate may be cancelled upon application made by assessee for such cancellation and the Superintendent will ensure payment of service tax up to the date of cancellation.

1.11 Assessee to preserve service tax related records for at least 5 years from date of such records.

1.12 Assessee to make available records pertaining to service tax to the Central Excise officer for the purpose of inspection and examination at registrar office.

2. Changes effective from date of enactment of the Finance Bill

2.1 Service tax rate to be increased from 10% to 12%, effective rate 12.24%.

2.2 New rules for import of service upon abolishing explanation to S.65 (105). New section 66A is inserted in this behalf. The Government has already announced Draft Rules called Taxation of Services (provided from outside India and received in India) Rules in this behalf.

2.3 Section 67 of valuation of service to be substituted. It is now provided that valuation of taxable service in cases where the consideration for provision of service in money or where it is partly in money and partly or fully in kind will be ascertained in accordance with new rules of valuation of service to be announced. Where consideration is unascertainable, the valuation will be in the prescribed manner. Accordingly, provision of inclusion and exclusion from the valuation of taxable service will be replaced by the new valuation rules to be prescribed.

It is sought to be provided that gross amount charged would include all kinds of payment by cheques, credit cards, deduction from account, issue of credit notes or debit notes and book adjustment. Further the words "consideration" and "money" is also sought to be provided.

The Government has announced Draft Valuation Rules called Service Tax (Determination of Value) Rules in this behalf.

2.4 Penalty for delayed payment is raised to Rs. 200/- per day from Rs. 100/- per day or 2% per month whichever is higher. (S.76 to be substituted).

2.5 Provision for concluding adjudicating proceedings if voluntary deposit of service tax along with interest and 25% of penalty is made (Amendment to S. 73)

2.6 Provision made for payment to be made to the Government of recovery of excess amount of service tax. (S. 73A & S. 73B proposed to be inserted).

2.7 Provision made for attachment of property during the pendency of proceedings. (S.73C proposed to be inserted).

2.8 Provision made for publishing the names of person against whom proceedings are pending. (S.73D proposed to be inserted).

2.9 Separate provisions for recovery of service tax. Applicability of S. 11 and S. 11D of CE Act to be omitted.

2.10 Advance ruling authority empowered to determine the liability to pay service tax.

2.11 Central Govt. empowered to issue orders for removal of difficulty in case of classification, valuation or implementation.

3. Changes effective from the date to be notified after the enactment of Finance Bill, 2006

3.1 The scope of the following existing taxable services is proposed to be expanded by substitution of the word ‘commercial concern’ with the word ‘person’ :

1. Advertising agency services

2. Transport of goods by air services

3. Banking and other financial services

4. Courier services

5. Credit rating services

6. Dry cleaning services

7. Transport of goods by road services

8. Manpower recruitment or supply services

9. Market research services

10. Photography services

11. Programme production for TV or radio services

12. Security and investigation services

13. Sound recording and ancillary services

14. Convention services

15. On-line information and database access or retrieval services

16. Business auxiliary services

17. Commercial or industrial construction services

Needless to say that, with removal of words "commercial concern", all individual service providers are now covered under service tax.

3.2 Following taxable services are proposed to be amended to expand their coverage as follows:

Sr. No	Name of taxable service	Particulars of amendments
1	Banking and other financial services.	To include services such as: (i) transfer of money through different modes, such as telegraphic transfer, mail transfer and electronic transfer, by any person, and (ii) services provided as banker to an issue.(iii) issuing cheques/DDs/Letter of Credit/Bill of Exchange, bill discounting, Safe Deposit Locker, overdraft facility and bank guarantee, etc.
2	Management consultancy services.	To specifically mention, consultancy in different areas of management such as financial management, human resources management, marketing management, production manage-ment, logistics management, procurement and management of information technology resources, or other similar areas of management.
3	General insurance services and Life insurance services.	To include, services provided to a policy holder or any person by an insurer, including a re-insurer.
4	Insurance auxiliary services concern-ing general insurance business and  Insurance auxiliary services  concerning life insurance business.	To include services provided to a policy holder or any person or an insurer, including a re-insurer.
5	Maintenance or repair service.	To rename as “management, maintenance or repair” service and to include management of movable property.
6	Erection, commissioning or installation service.	To include erection, commissioning or installation of structures, whether prefabricated or otherwise.
7	Consulting engineer’s service.	To include engineering consultancy services provided by any firm or body corporate.
8	Business auxiliary service.	To include computerized data processing. Exemption relating to IT service except development of software is sought to be removed.

3.3 Mutuality concept given go-bye

Explanation after Clause (121) of S. 65 to be inserted to provide for any service provided by any unincorporated association or body of persons to a member thereof for cash or other valuable consideration shall be treated as service provided by any person to any other person.

3.4 Following services are proposed to be specifically included and defined in the list of taxable services, namely:

3.4.1 Services provided by Registrar to an Issue

All activities relation to registrar to issue from collecting collection of application forms from investors, keeping their records, assisting in the basis of allotment, processing and dispatching allotment letters, refund orders or certificates, etc. are sought to be covered.

3.4.2 Services provided by Share Transfer Agent

All activities relating to transfer of shares or redemption of securities is sought to be covered.

3.4.3 Services in relation to Automated Teller Machine operations, maintenance or management

Maintenance of ATM was covered under Maintenance or Repair services. Now all activities relating to ATM site selection, contracting, acquisition, financing, installation, transaction processing operations, maintenance or management of hardware, software, cash forecasting replenishment and reconciliation, etc. are covered in separate category.

3.4.4 Services provided by Recovery agents

Services provided for any sum due to a commercial or business entity are sought to be covered. (recovery due to individuals is not covered).

3.4.5 Sale of space or time for advertisement service, excluding sale of space for advertisement in print media and sale of time slots by a broadcasting agency or organization

Sale of space or time for advertisement includes providing space or time for display, advertising, showcasing of any product or services. Sale of time slot was covered under Broadcasting Agency’s services earlier. Now sought to be provided by a separate entry that sale of time or space for advertisement except in print media and broadcasting is covered. All internet advertisements, hoardings on buildings, vehicles, etc., advertisements in motion pictures, TV programmes, music and video albums, mobile phones, ATMs, product placements in films, billboards, public places, building, cell phones, aerial advertising etc. are sought to be covered.

3.4.6 Sponsorship service, excluding sponsorship in relation to sports events

Sponsorship of any event except sports event is sought to be covered in this new entry. Tax is sought to be levied not on the organizers of events but the sponsors under reverse charge method. Rules to be framed in this regard.

3.4.7 Air passenger’s journey (except of economic class)

International air travel by passengers embarking in India for international journey is sought to be covered. Transit passengers not leaving customs area not covered.

3.4.8 Transport of goods in containers by rail provided by any person, other than Government railway (Indian Railways)

Details to be separately notified.

3.4.9 Business support services

Outsourcing of transaction processing, administration, accountancy, telemarketing, logistic, customer relationship management, accounting, operational assistance for marketing, formulation of customer service and pricing policies, infrastructural support services, secretarial assistance is the illustrative list of what is sought to be covered.

Infrastructural support services is defined as to include providing office with utilities, longe, reception with competent personnel to handle messages, secretarial services,
internet and telecom facilities, pantry and security.

It is to be noted that what is already covered under Business Auxiliary Service is service provided on behalf of a client whereas in this category, direct support service to business or commerce or outsource activity in this regards is sought to be covered.

3.4.10 Auctioneers’ service

Auctioneers conducting the auctions for sale of property is sought to be covered. However auction of property under the order of court of law or by the Government is not covered. Pre-auction price estimates, short-term storage, repairs or restoration in relation to auction of property sought to be included.

3.4.11 Public relations service

Media and perception research, corporate image management, media relations, media training, press release, press conference, brand support, brand launch, retail support and promotions, events and communication, crisis communication, strategic counseling based on industries are sought to be covered.

3.4.12 Ship management service

Service in relation to running and operation of ships, supervision and maintenance, survey and repairs, engagement or provision of crew, receiving of hire or freight charges, arrangement of loading, unloading, victualling or storing of ships, negotiating contracts payment on behalf of owner on expense incurred in providing services, entry of ships in a protection or indemnity association, dealing with insurance, salvage and other claims, arranging of insurance, etc. are sought to be covered.

3.4.13 Internet telephony service

Separate entry is sought to be carved out from online information and database access or retrieval service. The word "internet" is defined for this purpose.

3.4.14 Transport by cruise ship

Service provided to any person embarking from any port in India for transport by cruise ships for recreational or pleasure trips is sought to be taxed. However, ship or vessel used for private purpose or ships or
vessel of less than 15 net tonnage is not included.

3.4.15 Credit card, debit card, charge card or other payment cards related service :

Services in relation to credit card was earlier included under Banking and Other Financial Services which is now separated and covered all services in relation to all types of credit, debit and other cards issued by a banking company, financial institution including NBFC or any other person, ATMs, promotion or marketing of goods and services through such cards, etc. under new category.

TO BE PUBLISHED IN THE GAZETTE OF INDIA, EXTRAORDINARY, PART II, SECTION 3, SUB-SECTION (i) DATED THE — 2006

— PHALGUNA, 1926 (SAKA)
Government of India
Ministry of Finance
(Department of Revenue)

New Delhi , the —, 2006.
—Phalguna, 1926 (Saka)

DRAFT NOTIFICATION
No.—/2006-Service Tax

G.S.R. (E).– In exercise of the powers conferred by sub-sections (1) and (2) of section 94 read with sub-section (4) of section 67 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:–

1. Short title and commencement.– (1) These rules may be called the Service Tax (Determination of Value) Rules, 2006.

(2) They shall come into force on the date of their final publication in the Official Gazette.

2. Definitions.– n these rules, unless the context otherwise requires,–

1. "Act" means the Finance Act, 1994 (32 of 1994);

2. "value" means the value referred to in section 67 of the Act;

3. words and expressions used in these rules and not defined but defined in the Act shall have the meanings respectively assigned to them in the Act.

3. Determination of taxable value.– The value of any taxable service shall, except as otherwise provided by or under the Act, for the purposes of sub-section (1) of section 67 of the Act, be determined in accordance with these rules.
    

4. Taxable value where consideration is in money.– The value of any taxable service shall, if the service provided or to be provided is for a consideration in money, be the gross amount charged by the service provider for such service.
    

5. Taxable value where consideration is not wholly or partly in money.– (1) Where the service provided or to be provided is for a consideration not wholly or partly consisting of money, the value for such service shall be the equivalent money value of the consideration received, or the sum total of the consideration received in money and the equivalent money value of the consideration received, other than in terms of money, as the case may be.

(2) The equivalent money value of the consideration received other than in terms of money referred to in sub-rule (1), shall be determined by the service provider subject to the condition that–

1. the equivalent money value of the consideration received, or as the case may be;

2. the sum total of the consideration received in money and the equivalent money value of the consideration received,

other than in terms of money, for the taxable service so determined by the service provider, shall not be less than –

1. the value of similar services provided by the same service provider to any other person in the ordinary course of trade; or

2. cost of provision of such service provided or to be provided, whichever is higher.

(3) Nothing contained in this rule shall be construed as restricting or calling into question the right of the Central Excise Officer to satisfy himself as to the accuracy of any information furnished, or document presented for valuation.

6. Taxable value where consideration is not ascertainable.– If the service provided is for a consideration in money but such consideration is not ascertainable, the value of such service provided or to be provided shall be ascertained in accordance with the method of determination notified for that particular category of taxable services, by the Central Board of Excise and Customs in this regard.
    

7. Inclusion in or exclusion from taxable value of certain expenditure or costs.– (1) Where certain expenditure or costs are incurred by the service provider in the course of providing any taxable service, all such expenditure or costs shall be treated as consideration for the taxable services provided or to be provided and shall be included in the value.

(2) Subject to the provisions of sub-rule (1), the expenditure or costs that a service provider incurs, as a pure agent of the client, shall be excluded from the value if such service provider fulfills the following conditions with respect to such expenditure or costs, namely:-

1. the service provider acts as an agent of the recipient of service when he makes payment to the third party for the goods or services procured;
    

2. the recipient of service receives and uses the goods or services so procured by the service provider as an agent of the recipient of service;
    

3. the recipient of service and not the service provider who is only an agent of the recipient of service , is responsible for making payment to the third party;
    

4. the recipient of service authorises the service provider to make the payment on his behalf;

5. the recipient of service knows that the goods and services paid for by the service provider will be provided by a third party;
    

6. the service provider’s payment on the service recipient’s behalf is indicated separately when he invoices the recipient of service;
    

7. the service provider recovers only the actual amount he has paid to the third party; and
    

8. the goods or services for which the service provider pays for are clearly additional to the services he provides to the recipient of service on his own account.

Explanation1.– For the purposes of sub- rule (2), "pure agent or an agent" is a person who–

1. enters into a contractual agreement with his client (recipient of service) to act as
   an agent of the client to incur expenditure or costs in the course of providing a taxable service;
    

2. neither intends nor holds any title to the goods or services so provided as an agent of the client;
    

3. never uses such goods or services provided; and
    

4. receives the actual amount incurred to procure such goods or services.

Explanation2.– For the purposes of this rule, it is clarified that the value of the taxable service provided is the total amount of consideration consisting of one or more components of the taxable service, received for such taxable service provided or to be provided and details of such components of the total consideration, whether or not indicated separately in the invoice, are not relevant for the purpose of determining the taxable value.

Illustration 1.– X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in newspaper. Y billed X including charges for newspaper advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. X cannot contend that Y acted as agents on his behalf when obtaining newspaper advertisement even if the cost of newspaper advertisement is mentioned separately in the bill. Such services are in the nature of input services for the estate agent in order to enable or facilitate him to perform his services as an estate agent

Illustration 2.– To provide a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., in the course of providing a taxable service and may indicate these items separately on the invoice to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procure the inputs or input service on his own account for providing the taxable service. Merely because such expenses are shown separately in an invoice do not mean that they are reimbursable expenditure.

Illustration 3.– A contracts with B, an architect for building a house. During the course of providing the taxable service B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him effectively to perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. It is quite immaterial how the service provider computes the charges or how they break their invoice or bill down. Consideration for the service is what A pays B which is the taxable value for the purposes of levy of service tax.

Illustration 4.– To provide a taxable service of rent-a-cab, company X provides chauffeurs for overseas visitors. The chauffeur is given a lump sum amount during the tour to cover his food and overnight accommodation and any other incidental expenses such as parking fees. At the end of the tour, he returned the balance of the amount with a statement of his expenses and the relevant bills. Company X charged these amounts from the recipients of service. In such a case, the cost incurred by the chauffeur and billed to the recipient of service constituted part of the consideration for the provision of services by the company

8. Cases in which the commission, costs, etc., will be included or excluded.– (1) Subject to the provisions of section 67 of the Act, the value of the taxable services shall include‚–

1. the aggregate of commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock-broker to any sub-broker;
    

2. the adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit;
    

3. the amount of premium charged by the insurer from the policy holder;
    

4. the commission received by the air travel agent from the airline;
    

5. the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;
    

6. the reimbursement received by the authorised service station, from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer;
    

7. the commission or any amount received by the rail travel agent from the Railways or the customer;
    

8. the remuneration or commission, by whatever name called, paid to such agent by the client engaging such agent for the services provided by a clearing and forwarding agent to a client rendering services of clearing and forwarding operations in any manner; and
    

9. the commission, fee or any other sum, by whatever name called, paid to such agent by the insurer appointing such agent in relation to insurance auxiliary services provided by an insurance agent.

(2) Subject to the provisions contained in sub-rule (1), the value of any taxable service, as the case may be, does not include–

1. initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit;
    

2. the cost of unexposed photography film , unrecorded magnetic tape or such other storage devices, if any, sold to the client during the course of providing the service;
    

3. the cost of parts or accessories, or consumable such as lubricants and coolants, if any, sold to the customer during the course of service or repair of motor cars, light motor vehicle or two wheeled motor vehicles;
    

4. the airfare collected by air travel agent in respect of service provided by him;
    

5. the rail fare collected by air travel agent in respect of service provided by him;
    

6. the cost of parts or other material, if any, sold to the customer during the course of providing maintenance or repair service;
    

7. the cost of parts or other material, if any, sold to the customer during the course of providing erection, commissioning or installation services; and
    

8. interest on loans.

9. Actual consideration to be the value of a taxable service provided from outside India.– The value of any taxable service received under the provisions of section 66A of the Act, shall be taken to be such amount as is equal to the actual consideration charged for the services so provided or to be provided .