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SERVICE
TAX CIRCULAR NO
01. The Finance Bill (No.2), 2004 has been enacted on 10.09.2004. With
the enactment of the Finance Bill, The following new services have come
under the service tax levy,-
The following taxable services get expanded to include,-
The risk cover in life insurance becomes subject to levy of service tax. 02. The scope of these changes is explained in the following paragraphs. . 03. Education Cess on taxable services: Education cess on taxable services is imposed under section 91 read with section 95 of the Finance (No.2) Act, 2004. The cess would be 2% of the service tax levied and collected. Therefore, fully exempted taxable services would not be subjected to cess. In case of a partial exemption, say by way of abatement, the cess would be calculated on the net tax paid and not on the entire amount of tax that would have been payable, but for the exemption. 04.
Business exhibition services 4.2 While event management service (a currently taxable service) also relates to organizing such events, but in that case, the services are rendered to the organizer by an event manager in relation to planning, promoting, organizing etc. Thus, an organizer of a business exhibition is not covered under Event Management Services, but would be covered under the new levy of ‘Business Exhibition Services’. Similarly, while services rendered in relation to a circular, label, documents, hoardings or any other audio visual representation of a product or service falls under ‘advertisement services’, the services relating to actual exhibition or display of the product or services would fall under the category of ‘Business Exhibition Services’. 05. Airport services: Services provided in an airport or civil enclave, to any person by Airports Authority of India (AAI), a person authorized by it, or any other person having charge of management of an airport are taxable under this category. This includes variety of services provided to airlines, as well as for cargo and passenger handling such as security, transit facilities, landing charges, terminal navigation charges, parking and housing charges and route navigation facility charges. It would be on the gross amount chargeable by AAI or other such authorized person. Thus, charges such as royalty, license fees etc. collected by AAI from other service providers at the airport such as ground handling, security, common user terminal services etc. are chargeable to service tax. However, in case a part of airport/ civil enclave premises is rented / leased out, the rental/lease charges would not be subjected to service tax, as the activity of letting out premises is not rendering a service. 06. Transport of goods by air: Services provided by an aircraft operator (i.e. commercial concern like an airlines) in relation to transport of goods by an aircraft falls under this category. Thus, in addition to the actual air-freight charges, all charges collected towards storing, handling, loading/unloading (done in relation to air transportation of cargo) by an airlines are also chargeable to this levy. 07. Survey and exploration of minerals: The service tax would be leviable when the service of survey and exploration of minerals is provided by any person to a customer. The survey and exploration may result in locating ores, crude etc. Subsequent to survey and exploration, the mineral is extracted and transported for refining, processing and production. The service tax under this category would be limited to the services rendered in relation to survey and exploration only and not on the activity of actual extraction after the survey and exploration is complete. The transport, refining, processing or production of the extracted products would also be out of the ambit of service tax. Activities such as seismic survey, collection/ processing/interpretation of data and drilling or testing in relation to survey and exploration would, however, fall within the ambit of taxable service. 08. Opinion poll services: Services provided by an opinion poll agency (i.e. any person providing that service) in relation to opinion polls are taxable under this category. Opinion poll means securing information on public opinions regarding social, economic, political and other issues. The term ‘securing’ would include activities like selecting the target groups, preparing questionnaires, gathering opinions from such target groups, collating their responses, drawing conclusions or analyzing trends and preparing reports based thereon. A similar service i.e. ‘market research agency service’ is taxable since 1998. However, that service includes conducting of market research in relation to products, services and utilities. Opinion polls conducted to secure information on economic issues do not include such market researches about specific products, services or utilities. Therefore, obtaining opinion of general public on economic issues like price rise, reaction of people to certain government or corporate policies etc., would fall under the category of opinion poll services while information gathered in relation to specific products, services etc. would fall under ‘market research agency service’. 09.
Intellectual property services (other than copyrights): 9.2 A permanent transfer of intellectual property right does not amount to rendering of service. On such transfer, the person selling these rights no longer remains a ‘holder of intellectual property right’ so as to come under the purview of taxable service. Thus, there would not be any service tax on permanent transfer of IPRs 9.3 In case a transfer or use of an IPR attracts cess under Section 3 of the Research and Development Cess Act, 1986, the cess amount so paid would be deductible from the total service tax payable. (refer notification No.17/2004-ST, dated 10.09.2004). 10. Forward contract services: As per the provisions of Forward Contract (Regulation) Act, 1952, a forward contract is a contract for delivery of goods, which is not a ready delivery contract. For commodities notified under the Act, forward contracts can be entered into only through members of association recognized under that Act. For other commodities, future trading can be done through associations registered with Forward Market Commission. The levy of service tax under this category is on the services provided by members of such associations (commonly called as commodity exchanges) to any person in relation to forward contracts. 11.
Pandal or shamiana services and Outdoor catering services 11.2 Similarly, catering services provided by a caterer at a place other than his own place is taxable as ‘outdoor catering service’. 11.3
The following abatement/exemptions have been allowed in respect of ,- 11.4
It is clarified that pandal/shamiana services provided for pure religious
ceremonies or congregation, for example, for worship of Gods/ Goddesses,
are not liable to service tax. It is also clarified that in case a café,
hotels, restaurants etc. delivers food to home and no charge, other than
that for the cost of the foods, is charged (i.e. free home delivery) no
service tax is leviable. 13.
Construction services (commercial and industrial buildings or civil structures) 13.2 The leviability of service tax would depend primarily upon whether the building or civil structure is ‘used, or to be used’ for commerce or industry. The information about this has to be gathered from the approved plan of the building or civil construction. Such constructions which are for the use of organizations or institutions being established solely for educational, religious, charitable, health, sanitation or philanthropic purposes and not for the purposes of profit are not taxable, being non-commercial in nature. Generally, government buildings or civil constructions are used for residential, office purposes or for providing civic amenities. Thus, normally government constructions would not be taxable. However, if such constructions are for commercial purposes like local government bodies getting shops constructed for letting them out, such activity would be commercial and builders would be subjected to service tax. 13.3 In case of multi-purpose buildings such as residential cum commercial construction, tax would be leviable in case such immovable property is treated as a commercial property under the local/ municipal laws. 13.4 The definition of service specifically excludes construction of roads, airports, railway. transport terminals, bridge, tunnel, long distance pipelines and dams. In this regard it is clarified that any pipeline other than those running within an industrial and commercial establishment such as a factory, refinery and similar industrial establishments are long distance pipelines. Thus, construction of pipeline running within such an industrial and commercial establishment is within the scope of the levy. 13.5 The gross value charged by the building contractors include the material cost, namely, the cost of cement, steel, fittings and fixtures, tiles etc. Under the Cenvat Credit Rules, 2004, the service provider can take credit of excise duty paid on such inputs. However, it has been pointed out that these materials are normally procured from the market and are not covered under the duty paying documents. Further, a general exemption is available to goods sold during the course of providing service (Notification No. 12/2003-ST) but the exemption is subject to the condition of availability of documentary proof specially indicating the value of the goods sold. In case of a composite contract, bifurcation of value of goods sold is often difficult. Considering these facts, an abatement of 67% has been provided in case of composite contracts where the gross amount charged includes the value of material cost. (refer notification No.15/04-ST, dated 10.09.2004) This would, however, be optional subject to the condition that no credit of input goods, capital goods and no benefit (under notification no. 12/2003-ST) of exemption towards cost of goods are availed. 14.
Extension of service tax on installation and commissioning, to erection
services: Service tax was levied on commissioning and installation of
plant, machinery and equipment w.e.f. 1.7.2003. The general practice is
that ‘erection, commissioning and installation’ are contracted
as a composite package. There have been a number of doubts and queries
regarding the distinction between erection and commissioning/installation.
Erection would refer to the civil works to installation/commissioning
of a plant or machinery. In this year’s budget, the scope of service
tax under installation and commissioning is being extended to include
erection also. Erection involves civil works, which would otherwise fall
under the category of construction services. However, in case of a composite
contract for erection, commissioning and installation, the erection charges
would be taxed as part of this category of service. 16. Sub-brokers : Services provided by brokers, sub-brokers to investors in connection with sale and purchase of securities listed on recognized stock exchanges would be subjected to service tax. 17. Extension of service tax on cable operators to Multi system operators (MSOs) : In cable TV services, broadcast channels transmit television signals to multi system operators (MSO) who further send them to the cable operator. The services provided by the MSOs to the cable operators have been made taxable. 18.
Expansion of Business auxiliary service 18.2 The pre-budget definition of Business auxiliary Service covered services, which relate to the sale and marketing side of a business. However, the auxiliary services which relate to procurements, inventory, production (or provision in case of services) were not covered. The present definition intends to bring all business auxiliary services relating to procurement, inventory and production under service tax. Thus, the procurements of input, capital goods or input services as defined in the CENVAT Credit Rules, by a commercial concern for a client i.e. a person producing goods or providing services would be now taxable under this category. Similarly, if a commercial concern produces goods on behalf of the client or provides service on behalf of a client, such activities would come under the scope of this service, unless the activity of service provider amount to manufacture in terms of the central excise law. The aim of all such activities is production of goods or provision of services, the whole or part of which is being carried out by the service provider (i.e. the agent) on behalf of the client. Such activities include procurements, productions or service providing activities done for the client. 18.3 The service tax is, however, being restricted to only those cases where the service provider is a factory governed by the Factories Act, 1948, a company established by or under the Companies Act, 1956 or a corporation or a body corporate established by or under any law, partnership firms (whether or not registered), societies registered under Societies Registration Act, 1860 or under any law and any co-operative society established by or under any law. However, services in relation to agriculture, printing, textile processing and education would remain exempt even if provided by such service providers. (refer Notification no.14/04-ST, dated 10.09.2004) 19.
Expansion of banking and other financial services 19.2 The ‘interest on loans’ has been specifically excluded by way of amendment to the provisions relating to valuation (S.67). All such interests that are in the nature of interests on loans would thus remain excluded from taxable value. Further, clarifications on these issues would be issued shortly. 19.3 Collection and other bank charges in relation to taxes / duties collected on behalf of the Union/State Governments and Union Territories have been exempted from service tax. (refer notification No. 13/04-ST, dated 10.09.2004) 20.
Extension of tour operator service to package tour operators using different
modes of transport : At present, tour operator service covers package
tour operators also. However, under the present definition, such package
tours attract service tax only if such tours involve modes of transport
other than road (say a combination of air-rail-cab travel). The definition
of tour operator has been suitably expanded. While the existing levy on
tour operators engaged in operating tours in tourist vehicles remains
as such, in case of a package tour (which are planned, scheduled, organized
or arranged by tour operators), the scope of the levy is being extended
by removing the limitation regarding transportation by tourist vehicles
only. Such tourist operators would be subjected to service tax irrespective
of the mode of transport used during such tours. The abatements (notification
no.39/97-ST) in case of package tour operators (providing transportation
and accommodation) would remain at 60%. 21.2
It has been provided that in the case of composite policies (risk plus
saving) life insurer can at his option pay 1% of the total premium towards
discharge of service tax liability. This shall not be applicable in case
an insurance policy is towards risk only or where the premium gives details
of risk premium and other premium separately. (refer notification No.
11/04-ST, dated 10.09.2004). However, those insurance companies who want
to pay tax on risk premium as certified by the Appointed Actuary on a
company basis can do so. The insurance companies may be allowed to pay
monthly service tax provisionally, based on estimates. The monthly estimated
(i.e. provisional) duty payment for the entire company would be based
on a provisional certificate issued by the Appointed Actuary, subject
to final certification at the end of the year. At the end of the financial
year, when the sum at risk is calculated and certified by the Actuary,
the liabilities would be finalized and the companies would pay the balance
tax or adjust the excess tax paid. 23.
Service tax on IT industry: 23.5. Notification no. 8/2003-ST exempts services provided by call centres. For this notification, call centres mean a commercial concern which provides assistance, help or information, through telephone on behalf of another person. The definition of call centres has been modified as ‘a commercial concern which provides assistance, help or information or contacts current or prospective customers for sales, telemarketing, payments through telephone, lease lines, satellite links, mail fax, web chat and using information systems for monitoring and recording information on behalf of another person’. (refer to notification No. 12/04-ST, dated 10.09.2004) 24.
Restriction on availment of credits and exemptions towards goods sold,
in cases where abatements are allowed 25. Withdrawal of exemption to engineering consultancy services in relation to computer software.: The exemption to services provided by a consulting engineer in relation to computer software (notification No. 4/99-ST) has been withdrawn (refer notification no. 23/04-ST, dated 10.09.2004).
27. Many of the services covered under fresh levies may include activities that were taxable earlier under different category of taxable services. While the classification of a taxable service would be in terms of section 65A of the Finance Act, 1994, it should be ensured that there is no double taxation and a service is taxed only once under the appropriate category. 28. Notification Nos 18 and 25/04-ST dated 10.9.2004 have been issued so as to exempt the payments received by the service provider before 10th September, 2004 in respect of new services and expanded services. 29. The CENVAT Credit Rules, 2004 have been issued allowing credit across goods and services (refer Notification No.23/04-CE(NT), dated 10.09.2004). 30.
The above changes may be immediately brought to the notice of the field
formations and the trade. All possible assistance and facilitation may
be provided to providers of such services who have been subjected to the
above changes, so that the implementation of these new levies or other
changes is smooth and the tax payers do not face any problem in this regard.
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