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KEY HIGHLIGHTS OF UNION BUDGET-2011 (Proposals relating to Indirect Taxes)

Following are the Key Proposals of Union Budget-2011 relating to Indirect Taxes:

A.
I.

CUSTOMS:
Tariff related amendments: [The changes in rates of duty are effective from the midnight of 28th February/1st March, 2011, unless otherwise stated] (a) Rate structure:

No change in the peak rate of BCD of 10% Existing rates of 2%, 2.5% and 3% fused into a single rate of 2.5%
(b) Industry/Product related amendments: (i) Aircraft: BCD of 2.5% imposed on imports of Aircrafts for non-scheduled operations. Exemption from CVD and SAD continued. Restriction on the inter-changeability of Aircraft imported for nonscheduled operations (passenger) and non-scheduled operations (charter) removed. Ed. Cess and S & HE Cess imposed on Aircrafts falling under specified headings. (ii) IT Software: Full exemption from payment of CVD granted on the portion of value representing the consideration paid or payable for the transfer of the right to use such goods, to those packaged or canned software, which do not require affixation of RSP under The Legal Metrology Act, 2009 or the Rules made thereunder, subject to the importer being registered under the Service Tax. :2: (iii) Pharma Industry: Concessional rate of 5% of BCD provided on 4 life-saving drugs, with Nil CVD alongwith Bulk drugs used in the manufacture of the said drugs. (iv) Export Duty:

Export duty on iron ore lumps and fines enhanced from 15% and 5% respectively to a uniform rate of 20%. Full exemption from export duty provided to iron ore pellets.

Export duty imposed at the rate of 10% on de-oiled rice bran


cake with immediate effect. (v) Iron or Steel Industry: Full exemption from BCD granted to Stainless steel scrap. BCD on Ferro-nickel reduced from 5% to 2.5%. (vi) Special Economic Zones: All clearances from SEZ into DTA exempted from SAD of 4% provided they are not exempt from the levy of VAT/Sales Tax. (vii) Export Promotion: List of specified goods, allowed to be imported duty free for use in the manufacture of leather goods, for export expanded. List of specified goods, allowed to be imported duty free for use in the manufacture of textile and leather garment, expanded by including Anti-theft devices like labels, tags and sensors therein. :3: Description of some items changed in the list of items allowed to be imported duty free for manufacture of textile/leather garments and other leather goods for exports.

Benefit

of duty free import extended to trimmings, embellishments, components, etc against exports of leather goods, footwear and textile garments by merchant-exporters also subject to certain conditions. Specified tools used in the handicrafts sector included in the list of specified goods, allowed to be imported duty free to the handicrafts exporters. II. Legislative Amendments: [The changes would come into effect upon the enactment of the Finance Bill, 2011, unless otherwise stated] Following important amendments have been proposed in certain provisions of the Customs Act, 1962 (CA):

(i) Section 2 (2) :

Definition of assessment amended to include self-assessment. (ii) Section 17 Assessment of duty: Introduction of self-assessment both, for imported goods and export goods. Powers granted to the Customs Officer to verify the assessment and have the goods tested or examined for the purpose as well as to call for such documents or information as may be required. Powers of Customs officer to re-assess the Bill of Entry if selfassessment found to be not in order. Issue of speaking order for re-assessment unless the importer/exporter agrees with the re-assessment.

:4: Powers assigned to Customs Officers to conduct audit either in their own office or at the premises of the importer or exporter except in cases where a speaking order is issued on re-assessment. (iii) Section 18 & Section 19 finalisation: - Provisional Assessment and

Liberty to importer to request for assessment of goods by the officer when he is not in a position to self-assess. Amendment to Section 19 to prescribe that the finalization of the provisional assessment may be carried out by the proper officer. Consequential amendments to Section 46 and 50 providing for the electronic filing of Bills of Entry/Shipping Bills. Powers to the Commissioner of Customs to permit filing in any other manner when electronic filing is infeasible. Section 157 amended to empower the Board to issue regulations for specifying the manner of conducting audit.

(iv) Section 27 Refund:

Sub-section (1) of Section 27 being substituted so as to enhance


the time limit for claiming refund of duty and interest from six months to one year for all categories of importers. (v) Section 28 - Notice for payment of duties, interest etc.

Section 28 being substituted so as to make the provisions relating


to interest of duty not levied or short levied or erroneously refunded more coherent and clear. There is no change in the content of this provision.

:5: (vi) Section 28AA and 28AB Interest on delayed payment of duty:

Section 28AA and 28AB being substituted with a revised section


28AA so as to make the provisions relating to interest more coherent and clear. Interest would be payable from the first day of the month succeeding the month in which the duty ought to have been paid or erroneously refunded.

The rate of interest revised upwards to 18% per annum vide


Notifications, pending enactment of the Finance Bill, 2011. (vii) Section 110A - Provisional release of goods, documents and things seized pending adjudication :

Section 110A being amended to

empower the adjudicating authority to allow release of seized goods instead of Commissioner of Customs. of show cause notice before

(viii) Section 124 Issue confiscation of goods, etc:

Section 124 being amended so as to provide for issuance of a show


cause notice with prior approval of an officer not below the rank of an Assistant Commissioner of Customs as against Deputy Commissioner presently. (ix) Section 131BA

Section 131BA being

inserted to empower the Board to issue instructions relating to non-filing of appeal in certain case in line with National Litigation Policy retrospectively with effect from 20.10.2010.

(x) Section 142A

A new section 142A being inserted so as to create first charge on


the property of the defaulter for recovery of the customs dues from such defaulter subject to the provisions of Section 529A of the Companies Act, the Recovery of Debut due to Bank and Financial Institution Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. :6: (xi) Section 150 Procedure for sale of goods and application of sale proceeds:

Section 150 being amended so as to provide that the balance of


sale proceeds of unclaimed cargo sold in auction shall be paid to the Government if they cannot be paid to the owner within six months. III. Amendments in the Customs Tariff Act, 1975: [The amendments would come into effect from the date of the enactment of Finance Bill, 2011]

Section 3 is being amended to substitute the reference to


Standards of Weight & Measures Act, 1976 with Legal Metrology Act, 2009 with effect from 1.3.2011 as has been repealed by the latter.

The First Schedule is being amended to include editorial changes in


the Harmonized System of Nomenclature (HSN) in certain chapters, which would be effective from 01.01.2012.

B.
I.

CENTRAL EXCISE:
Tariff Amendments: [The changes in rates of duty are effective from the midnight of 28th February/1st March, 2011, unless otherwise stated] (a) Rate structure for goods, other than Petroleum: Standard rate for Non-petroleum products maintained at 10% Merit rate of Excise duty for non-petroleum goods increased from 4% to 5%. This increase would apply to all such goods that hitherto attracted the rate of 4%.

:7: (b) Withdrawal of exemptions/concessions: A number of exemptions from Central Excise duty (about 130 exempted entries) have been withdrawn. These include some cases where the rate of duty is Nil by tariff.

A nominal duty of 1% ad-valorem

being prescribed for these items without Cenvat Credit benefit vide Notification No. 1/2011-CE. rate by tariff has been fixed at 5% ad-valorem.

The statutory/tariff rate for those items that hitherto attracted Nil
For the remaining items, a general effective rate of 5% being prescribed with Cenvat credit benefit vide Notification No. 2/2011CE.

The benefit of Cenvat credit would also be available to the items in


respect of which tariff rate of 5% ad-valorem has been prescribed vide the Bill (Tenth Schedule to the Bill). The definition of exempted goods has been amended to include goods in respect of which the benefit of Notification No. 1/2011-CE is availed. Consequently, the credit attributable to such goods would have to be reversed when common inputs and input services are used for the manufacture of these goods and otherwise dutiable goods. Credit of the duty paid on items subjected to the levy of 1% would not be available to the manufacturer or service provider who buys them. Cenvat credit accumulated cannot be utilized for the payment of duty @ 1% on such items. The items brought under the levy of Excise would also be entitled for benefit of small scale exemption under Notification No. 8/2003CE if specified therein and subject to the fulfillment of the conditions prescribed therein.

:9: (c) Readymade garments and made-up articles: Excise duty @ 10% made applicable to branded readymade garments and made-up articles of textiles falling under Chapters 61, 62 and 63 (Headings 63.01 to 63.08) of the CET except those falling under Heading 63.09 and 63.10.

The existing optional exemption Notification No. 29/2004-CE


providing for concessional rate of duty of 4% in respect of readymade garments and made-up articles of cotton, not containing any other textile material has been continued provided the goods are not bearing or sold under a brand name. The concessional rate of 4% has however been increased to 5%. This benefit would be available alongwith Cenvat Credit.

Readymade garments and made-up articles of textile materials


other than cotton (unbranded) would continue to attract the levy of duty @ 10%. Similarly, the benefit of total exemption (subject to non-availment of Cenvat credit) alternatively available under Notification No. 30/2004-CE has been continued in respect of readymade garments and made-up articles of any textile materials has been continued provided the goods are not bearing or sold under the brand name.

Readymade garments and made-up articles bearing or sold under a brand name would be chargeable to duty @ 10% regardless of the composition of the item/article. Note 5 is being inserted to Chapter 63 on the similar lines of existing Note 12 of Chapter 61 and Note 11 of Chapter 62 declaring certain processes such as affixing a brand name on a product, labeling or re-labelling of container etc. as amounting to manufacture. The existing tariff value fixed @ 60% of the retail sale price is being extended to goods of Chapter 63 as well. In other words, the duty will be payable on 60% of the RSP in respect of branded readymade garments and made-up articles of Chapter 61, 62 or 63 henceforth.

:9:

Small scale exemption under Not. No. 8/2003-CE is being extended to all such goods attracting the levy of duty. Levy does not apply to retail tailoring establishments that stitch garments for the individual customers, whether out of the fabrics supplied by the customer or purchased from the same establishment.

In case of goods i.e. ready made garments or made-up article being


manufactured on job work basis, the liability to pay duty and comply with the Central Excise procedure will be on the person on whose behalf the goods are manufactured by job workers. In other words, the brand owners who get the goods manufactured through the job-workers would have to discharge the duty liability. In such case, the job workers would be exempt from payment of duty.

Alternatively, the merchant-manufacturer i.e. the brand owner and


supplier of material may authorize the job worker to discharge the duty liability. Cenvat credit Rules, 2004 being amended to enable merchantmanufacturers to avail Cenvat credit of duty paid on inputs, input services and capital goods. (d) Goods for Mega Power Projects:

The description of goods covered by the relevant entry in the


existing exemption Not. No. 6/2006-CE has been amended to align it with the description under Heading No. 98.01 (project imports) and the condition regarding eligibility for Customs exemption has been deleted. The exemption has also been extended to power cables used within the generation facility of such a project.

An Explanation has been inserted to clarify that the ash disposal system including ash dyke, coal transportation systems and water intake are integral parts of such a project. Specified goods supplied to expansion projects of existing Mega Power Projects have been fully exempted subject to certain conditions. : 10 :

(e) Relief Measures:


Full exemption from Excise duty has been provided in the following cases: Air-conditioning equipment, panels and refrigeration panels for installation of cold-chain infrastructure for preservation, storage or transport of agricultural produce and apiary, horticulture, dairy, poultry, aquatic & marine produce and meat as well as processing thereof; Conveyor belt systems for use in gold storages and in mandis and warehouses for the storage of food grains and sugar. Goods required for the expansion of an existing mega/ultra power project subject to specified conditions. Specified parts of sewing machines (other than those with inbuilt motors) Parts of power tillers when cleared to another factory of the same manufacturer for manufacture of power tillers Cotton stalk particle board Enzymatic preparations for pre-tanning of leather Colour, unexposed cinematographic film in jumbo rolls of 400 feet and 1000 feet. Pipe fittings required for a water supply project.

II.

Important Legislative Amendments: [The changes would come into effect upon the enactment of the Finance Bill, 2011, unless otherwise stated]

: 11 : 1. Amendments in the Central Excise Act, 1944 (CEA): (a) Section 11A Recovery of duties short paid, etc:

Section 11A has been entirely re-drafted with a view to improve the
sequence in which provisions occur and simplify their language. Each sub-section consists of one sentence and conveys a single point. Provisos have been eliminated to the extent possible.

A separate category has been carved out from cases involving


extended period of limitation (fraud, collusion, willful mis-statement etc.) wherein a lower mandatory penalty of 50% of the duty (rather than 100% of the duty) would apply. These would cover cases where it is noticed during an audit, investigation or verification that duty has not been levied, short levied, nor paid or short paid or erroneously refunded but the transactions to which such duty relates are entered in the specified records. While a provision has been made for issuance of show cause notice invoking the extended period for recovery f duty with interest under section 11AC and penalty equivalent to 50% of the duty, it has also been specifically provided that even in cases where show cause notice has been issued involving extended period of limitation (fraud, collusion, willful mis-statement etc.) with penalty equal to the duty, the penalty can be remitted to 50% if the Central Excise officer is of the opinion that the details of the transactions in respect of which the demand notice has been issued have been duly recorded by the person charged with duty in the specified records. The provisions of the existing sub-section (1A) of section 11 have been omitted. The facility of compounding the penalty amount has been confined only to the new category and if the person chargeable with duty (for an extended period) pays the duty in full or part alongwith interest before the issuance of a show cause notice, the penalty shall stand reduced to 1% per month but not exceeding 25% of the duty. However, if the duty alongwith interest is paid within thirty days of the issuance of adjudication order, the penalty would be 25% of the duty. : 12 : (b) Section 11AA and 11AB Interest on delayed payment of duty :

Pending enactment of the

Bill, the rates of interest are being revised with effect from 1st of April, 2011 to a uniform rate of 18 per cent per annum under the existing provisions of Sections 11AA and 11AB.

(c) Section 11E Creation of first charge on the property of defaulter: A new Section 11E is being inserted so as to create first charge on the property of the defaulter for recovery of the Central Excise dues from such defaulter subject to the provisions of Section 529A of the Companies Act, the Recovery of Debut due to Bank and Financial Institution Act, 1993 and Securitisation and Reconstruction of

Financial Assets and Enforcement of Security Interest Act, 2002. This implies that after the dues, if any, owing under these provisions, dues under the Central Excise Act shall have a first charge. (d) Section 12 Application of the provisions of the Customs Act, 1962 to Central Excise Duties: The provisions of Section 12 are being amended to include a reference to duties imposed under section 3A as well so that the same provisions can be applied in respect of duties collected on the basis of compounded levy. The amended provision shall acquire legal force upon the enactment of the Finance Bill, 2011 with retrospective effect from 10.05.2008. (e) Section 12F A new Section 12F is being inserted so as to empower the Joint/Additional Commissioner (instead of Assistant Commissioner) to carry out the search of any premises or to authorize a Central Excise Officer to do so.

: 13 : (f) Section 35R -

A new Section 35R is being inserted so as to empower the Board to issue the instructions so as to provide that the cases where appeals, revision application or references are not filed in terms of the prescribed monetary limits, the same should not be cited as precedence in cases involving similar issues or questions. The Section is being given retrospective effect from 20.10.2010 and would acquire legal force on enactment of the Bill. (g) Section 4A Section 4A is being amended to incorporate a reference to the Legal Metrology Act, 2009 replacing The Standards of Weights and Measures Act, 1976 w.e.f. 01.03.2011. 2. Central Excise Tariff Act, 1985 (CETA) : The First Schedule to the CETA is being amended (vide Tenth Schedule to the Bill read with clause 70 (a)(i) with immediate effect) to, inter alia carry out the following changes: To prescribe that the process of repacking from bulk to retail packs, labeling or re-labelling of containers or adoption of any other process to render the product marketable shall be a process amounting to manufacture through the insertion of a Chapter Note in Chapter 22.

To prescribe that the process of conversion of ores into concentrates shall be a process amounting to manufacture through the insertion of a Chapter Note in Chapter 26. To prescribe that the process of refining of gold dore bars shall be a process amounting to manufacture through the insertion of a Chapter Note in Chapter 71.

: 14 :

To prescribe that the process of galvanization shall be a process amounting to manufacture through the insertion of a Chapter Note in Chapter 72.

The First Schedule to the CETA is also being amended to incorporate the latest editorial changes in the HSN. These changes will come into effect from 01.01.2012. 3. Amendments in the Schedule to the ADE (GSI) Act, 1957:

The Schedule to the Additional Duties of Excise (Goods of Special


Importance) Act, 1957 is being amended so as to remove sugar and textile and textile products from its purview. This would enable the State Governments to levy VAT on these items. 4. Amendments in Cenvat Credit Rules, 2004 (CCR, 2004): [The amendments would be effective from 01.04.2011, unless otherwise specified] (a) Rule 2 Definitions: The definition of capital goods contained in Rule 2(a) is being amended so as to permit the availment of credit of duty paid on capital goods used outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory. The change will be effective from 01.03.2011.

The definition of exempted goods contained in Rule 2 (d) is being amended so as to include the goods in respect of which exemption under Not. No. 1/2011-CE (i.e. payment of duty @ 1%) is availed. This change will be effective from 01.03.2011.

: 15 : (b) Rule 3 Cenvat Credit: Rule 3 is being amended so as to prescribe that Cenvat Credit shall not be allowed in excess of 85% of the Additional Duty of Customs

(CVD) paid on shops, boats, etc imported for breaking. This change will be effective from 01.03.2011. (The details of other amendments in CCR, 2004 are briefly outlined under Part-C titled Service Tax) C. I. SERVICE TAX: New Services: The following two new services are proposed to be brought under the Service Tax net: Services by Air-conditioned Restaurants having license to serve liquor; Short term accommodation (stay of continuous period of less than 3 months) provided by Hotels, Inns, Guesthouses, Clubs and others and at Camp-sites. The levy will come into effect from the date to be notified after the enactment of the Bill. II. Abatements/exemption in respect of new services (to be notified after the enactment of the Bill):

The abatements as under are proposed in respect of the above new services: 70% in case of services by Air-conditioned restaurants having license to serve liquor. 50% in case of short term accommodation provided by Hotels, etc. : 16 : Levy in case of short term accommodation provided by Hotel etc. will be restricted to accommodation with declared tariff of Rs.1,000/- per day or higher by an exemption Notification. III. Amendments, substitution or expansion of existing services ( to be effective from the date to be notified after enactment of the Bill): (a) The Authorized Service Station Services : The existing definition is being substituted with a new definition to cover services provided by any person i.e. whether Authorised Service Station or otherwise and all motor vehicles (other than vehicles used for goods carriage and three wheeler auto rickshaws) as well as repair, reconditioning or restoration (already taxable) and services of decoration and any other related services.

(b) Life Insurance Business: The scope of the service is proposed to be expanded to cover all services, including services in relation to management of investments. (c) Commercial Training or Coaching Service:

The scope of the service is proposed to be expanded to include all


coaching and training that is not recognized by law irrespective of whether the Institute is providing any other course(s) recognized by law. Suitable exemption is expected to be given to pre-school coaching and training and to coaching or training relating to educational qualifications that are recognized by law after the enactment of the Bill.

: 17 : (d) Club or Association Service: The scope of the service is proposed to be expanded so as to include services provided to non-members as well. (e) Business Support Service: The scope of the service is being expanded to include operational or administrative assistance of any kind. (f) Legal Consultancy Services: The scope of the existing service is being expanded to include : Services of advice, consultancy or assistance provided by a business entity to individuals as well; Representational services provided by any person to a business entity; and Services provided by arbitrators to business entities. Services provided by individuals to other individual will remain outside the levy. (g) Services provided by Clinical Establishments: The existing levy on health services is proposed to be replaced as follows:

Any service provided by a clinical establishment having the facility of central air-conditioning in any part of the establishment and more than 25 beds for in-patient treatment at any time of the year; Diagnostic services provided by a clinical establishment with the aid of laboratory or medical equipment; and

: 18 :

Health-related services provided by doctors, not being employees, providing health-related services from the premises of a clinical establishment. IV. Compliance Mechanism: Following changes are proposed in the Finance Act, 1994 (FA) relating to the compliance mechanism. (Changes will be effective from the date of enactment of the Bill, unless otherwise specified). (a) Section 70 Furnishing of Returns: Maximum penalty for delay in filing of return under Section 70 is proposed to be increased Rs. 2,000/- to Rs. 20,000/-. The existing rate of penalty is being retained under Rule 7C of the Service Tax Rules, 1994 (STR). The maximum penalty is presently reached after a delay of 40 days. The new limit to impact only those who delay filing of returns for longer durations. (b) Section 73 Recovery of service tax not levied etc. : The provisions of Section 73 (1A) and both the provisos of Section 73(2) are proposed to be deleted. As a consequence, the benefit of reduced penalty shall not be available in cases of fraud, mis-statement, suppression, collusion etc. in the ordinary course. However, revised benefit will be available under the new sub-section 4A of Section 73 in situations where the true and complete account of transactions is otherwise available in the specified records and the assessee during the course of audit, verification or investigation pays the tax dues, together with interest and the reduced penalty.

: 19 : The Assessee can avail the above benefit on his own also.

The extent of penalty is being reduced to 1% per month of the tax amount for the duration of default, with an upper ceiling of 25% of the tax amount. (c) Interest rate for delayed payment of service tax: Rate of interest for delayed payment of service tax is being increased to 18% per annum, effective 01.04.2011. A concession of 3% is proposed for the tax-payers whose turnover during any of the years covered in the notice or the preceding financial year is below Rs.60 lacs. (d) Section 76 Penalty for failure to pay service tax: Penalty prescribed under this Section is being halved. (e) Section 77 Residual penal provision: The maximum penalty for contravention of various provisions proposed to be increased from Rs.5,000/- to Rs. 10,000/-. The daily rate of penalty, wherever applicable, is being retained. (f) Section 78 Mandatory Penalty: Penalty imposable under this Section is being altered from upto twice the amount of tax to an amount equal to the tax. If true and complete information is captured in the specified records, penalty shall be 50% of the tax amount. This shall be further reduced to 25% if the tax dues are paid within a period of one month together with interest and reduced penalty. is

: 20 :

In case of Assessees with turnover upto Rs. 60 lacs, the period of one month shall be increased to 90 days. (g) Section 80 Power to waive penalty: Section 80 is being amended so as to provide that the power to waive penalty shall be available only in cases where the information is captured properly in the specified records. (h) Section 82 Search: Power of issue search warrant is proposed at the level of Joint Commissioner and the execution of search warrant at the level of Superintendent.

(i) Section 88 First charge : A new Section 88 is being inserted so as to create first charge on the property of the defaulter for recovery of the Service Tax dues from such defaulter subject to the provisions of Section 529A of the Companies Act, the Recovery of Debut due to Bank and Financial Institution Act, 1993 and Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. (j) Section 89 Prosecution:

Provisions relating to prosecution are proposed to be re-introduced


and shall apply in the following situations: Provision of service without issue of invoice; Availment and utilization of Cenvat credit without actual receipt of inputs or input services;

: 21 : Maintaining false books of accounts or failure to supply any information or submitting false information; Non-payment of amount collected as service tax for a period of more than six months. There shall be no power of arrest and the prosecution can be launched only with the approval of the Chief Commissioner. V. Point of Taxation Rules, 2011:

Point of Taxation Rules, 2011 have been framed vide notification


18/2011-ST and made effective from 01.04.2011.

These rules determine the point in time when the services shall be
deemed to be provided.

The general rule will be that the time of provision of service will be
the earliest of the following dates: i. Date on which service is provided or to be provided ii. Date of invoice iii. Date of payment

Consequential changes have also been made in the Service Tax


Rules, 1994 to alter the payment of service tax from receipt of payment to provision of service and also to permit adjustment of tax when service is not finally provided. However, Rule 4 (7) of STR has not been amended so as to permit the availment of Cenvat credit to the recipient even when the

service tax has already been paid on accrual basis by the service provider.

: 22 :

VI.

Service Tax Rules, 1994 (STR): [Changes are effective from 01.04.2011] Certain provisions of STR have been amended so as to align the provisions consequent to the introduction of Point of Taxation Rules, 2011. New Rule 5B is being introduced to provide that the applicable rate of service tax shall be the rate prevailing at the time when the services are deemed to have been provided. Effectively, the service tax would be payable henceforth on accrual basis instead of on receipt of payment basis as is the case at present. In case where invoice has been issued or payment is received for a service not subsequently provided, the credit of the service tax earlier paid can be taken when the amount has been refunded by him to the recipient or by the issue of Credit Note, as the case may be. The amount prescribed in Rule 6 (4B) (iii) for adjustment of excess amount paid is being enhanced to Rs. 2.00 lacs.

A new sub-rule (6A) has been inserted to provide that if an amount


of service tax has been self-assessed but not paid, the same shall be recoverable alongwith interest under Section 87 of the Act. The composition rate in Rule 6 (7B) applicable in relation to purchase or sale of foreign currency including money changing, has been reduced from 0.25% to 0.1% and the proviso has been deleted. Such service providers will now have no option of paying service tax on billed charges.

: 23 : VII. Amendments to Export of Services Rules, 2005 (ESR):

The categorization of certain services under ESR has been re-arranged as under: Services provided by builders is being added to sub-rule (1)(i) and thus will be considered as exported, subject to compliance with other conditions, if the immovable property is situated outside India. Rail travel agent and health check-up or preventive care are being added to sub-rule (1)(ii) and will be considered as exported, subject to compliance with other conditions, if performed outside India.

Services of Credit Rating Agency, Market Research Agency,


Technical Testing and Analysis, Transport of Goods by Air, Goods Transport Agency, Opinion Poll and Transport of Goods by Rail are being deleted from sub-rule (1)(ii) and thus the additional condition of performance outside India will stand removed. These services will be considered as exported, subject to compliance with the relevant conditions, if the recipient is located abroad. VIII. Import of Services Rules, 2005 (ISR):

Certain specified services are being made taxable if the recipient


of the service is located in India even when the service is performed outside India. The changes are also on the similar lines as are made in ESR as aforesaid. IX. Service Tax (Determination of Value) Rules, 2006: New Rule (2B) is being inserted to prescribe the value of services rendered in relation to money changing (w.e.f. 01.04.2011).

: 24 : An Explanation has been added after Rule 5 (1) clarifying that for the purpose of telecommunication service, the value shall be the gross amount paid by the person to whom the service is provided by the telegraph authority. Thus, in case of service provided by way of re-charge coupons or prepaid cards etc, the value shall be the gross amount charged from the subscriber or the ultimate user and not the amount paid by the distributor or any such intermediary to the telegraph authority. (effective from 01.03.2011) X. Works Contract (Composition Scheme for payment of service tax) Rules, 2007:

New sub-rule (2A) is being added in Rule 3 so as to restrict the Cenvat Credit to 40% of the tax paid on services relating to erection, commissioning and installation; commercial or industrial construction and construction of residential complex, in case tax has been paid on full value of the service after availing Cenvat credit on inputs (i.e. forgoing the abatement under 1/2006-ST). XI. Small scale sector : Individual and sole proprietor Assessees with a turnover upto Rs. 60 lacs shall not be subject to Audit (announced in Budget). Interest rates for all Assessees (including firms etc.) upto a turnover of Rs. 60 lacs shall be 3% less than the prescribed rate. The period for making the payment in order to avail the benefit of reduced penalty under the second proviso to Section 78 shall be 90 days for such small Assessees with a turnover of Rs.60 lacs. XII. SEZ Refund: A new scheme of Refund is prescribed vide Not. No. 17/2011-ST superceding earlier Not. No. 9/2000-ST.

As per the new scheme, criteria for the determination of wholly


consumed services have been laid down in the Notification, borrowing from ESR. : 25 :

It has been specified also that all services received by an entity in SEZ, which does not have any other DTA operations, will constitute wholly consumed services. No service tax is required to be paid in the first instance itself if the same are meant to be wholly consumed within SEZ, including services liable to tax on reverse charge basis under Section 66A. Refund of the services which are not wholly consumed shall be available on pro-rata basis i.e. ratio of SEZ turnover to total turnover. CCR, 2004 has been suitably amended to waive the requirement of Rule 6 in case of services provided, without payment of tax, to a SEZ unit for its authorized operations. XIII. Amendments in Cenvat Credit Rules, 2004 (CCR, 2004): [Effective from 01.04.2011, unless otherwise specified]. (a) Rule 2 Definitions: (i) Inputs Rule 2 (k)

Definition of input contained in Rule 2 (k) has been thoroughly revamped and substituted by a new definition. Inclusions: Input has now been defined to include inter alia, all goods used in a factory by the manufacturer of the final product or all goods used for providing any output service. The proposed definition also covers any goods including accessories, cleared alongwith the final product, value of which is included in the value of the final product and goods used for providing free warranty for final product. : 26 :

Input would also include all goods used for generation of electricity
or steam for captive use. Exclusions: Light Diesel Oil, High Speed Diesel Oil or Motor Spirit (Petrol).

Any goods used for construction of a building or a civil structure or


apart thereof or laying of foundation or making of structures for support of capital goods. However, such goods used for the provision of certain specified services are however covered within the definition. Capital goods except when used as parts or components in the manufacture of a final product. Motor Vehicles; Any goods, such as food items, goods used in a guesthouse, residential colony, club or a recreation facility and clinical establishment, when such goods are used primarily for personal use or consumption of any employee; and

Any goods which have no relationship whatsoever with the manufacture of a final product.

(ii) Input Service Rule 2 (l) The definition of the term input service has been substituted by a new definition. Inclusions: Any service used by a provider of taxable service for providing an output service.

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Any service used by a 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. Services used in relation to 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, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal. Exclusions: Specified services viz. Architect, Port, Other Port, Airport, Commercial or Industrial Construction, Construction of Residential Complex and Works Contract Service, if used for : Construction of a building or a civil structure or a part thereof; or Laying of foundation or making of structures for support of capital goods.

However, if these services are used for providing for any one or more of the specified services, then it would be considered as Input Service. Certain specified services viz. General Insurance, Rent-a-Cab, Authorised Service Station and Supply of Tangible Goods, if the same relate to a Motor Vehicle unless the credit in Motor Vehicle is provided as capital goods.

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Certain specified services viz. outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concessions, when such services are used primarily for personal use or consumption of any employee. (iii) Exempted service Rule 2 (e):

The definition of exempted services has been amended so as to include any taxable service which is partially exempted with the condition that no credit on input or input service is taken. Exempted service will, henceforth, also include trading. (b) Rule 3: Sub-rule 5B has been amended to provide that even in the case of partial write-off of inputs or capital goods, before they are being put to use, an amount equivalent to Cenvat credit taken shall be paid. This provision is made applicable w.e.f. 01.03.2011. Service tax leviable under section 66A has been added in the list of eligible credits under rule 3 w.e.f. 18.04.2006 by a retrospective amendment in the Bill. This was already clarified by circular F. NO.345/1/2008-TRU dated 27.06.2008 but has now been done by law to settle the disputes arising due to audit objections. It shall come into force on the enactment of the Finance Bill. (c) Rule 4 : Sub-rule 2(a) of Rule 4 has been amended so as to include the goods which are used outside the factory for generation of electricity for captive use within the factory. Therefore, credit on such goods will be restricted to 50% in the same financial year. : 29 : Sub-rule (7) has been amended and a proviso has been added therein so as to provide that in case any payment or part thereof has been refunded on such services, the proportionate credit availed on the same will be required to be paid. (d) Rule 6 Obligation of a manufacturer or producer of final products and provider of taxable service: Significant amendments have been made in Rule 6. Sub-rule (1) has been amended comprehensive and explicit. so as to make it more

Sub-rule (2) has been amended to specify the manner in which the separate accounts will be maintained by a manufacturer or provider of output service engaged in both, the dutiable/taxable and exempted activity and availability of Cenvat Credit in such cases. Option to maintain separate accounts only in respect of inputs (and not together with input services) has also been given so that allocation as per formula given in rule 6(3A) is done only in so far as credits on input services are concerned. The amount payable under rule 6(3)(i) in respect of services has been reduced from 6% to 5%. Moreover in the case of exempted services (that are partially taxed with no facility of credits) this amount shall be 5% of the exempted value of the service. Thus if

the exemption on a certain service is 60%, the amount required to be paid shall be 3% (60X5%) of the full value of the service. In case of exempt goods, amount payable will be reduced by the amount paid at the concessional rate. For the purpose of applying the formula under rule 6(3A) the value of trading service as well as value of services covered by composition schemes has been defined. The value of trading service shall be the difference between the sale price and purchase price of goods. The value in respect of services covered by a composition scheme will be tax amount divided by the rate of service tax applicable under section 66 read with any general exemption. : 30 : As the prevalent rate is 10% the value shall be ten times the amount of service paid or payable. A banking company or a financial institution, including NBFC, providing banking and financial services are being obligated to pay an amount equal to 50% of the credit availed. In case of services relating to life insurance or management of ULIPs such amount will be equal to 20% of credit availed. Other options of payment of amount under Rule 6 shall not be available for these taxpayers. Consequent to the introduction of the proportionate allocation and its rationalization now, Rule 6(5) that allows full credit of 17 specified services has been deleted. New sub-rule (6A) has been added to allow provision of services without payment of service tax to a unit in SEZ or to a developer in SEZ for their authorized operations, without requirement of reversal of any CENVAT credit on this account. This will help in tax-free receipt of services by units and developers in SEZs.

Shailesh P. Sheth Advocate.