Union Budget An analysis

Transcription

1 Union Budget An analysis D. L. Desai (Shankarbhai) Finance Minister presented Rs. 14,90,925/- crores budget on 16 th March In light of various Industry Associations request for ending policy paralysis and putting economy back on growth path, it was expected that Budget would be bold and contain path breaking policy measures. Unfortunately it was not. Increase in rate of service tax from 10.30% to 12.36% and for composition scheme from 4% to 4.80% effective from 1 st April 2012 as well as increase in excise duty from 10.30% to 12.36% would yield additions Rs /- crores. Budget also contains a proposal for raising Rs /- crores by way of disinvestment. If performance is any guide it is doubtful whether government would be able to raise Rs /- crores. Finance Minister has amended I.T. Act with retrospective effect from 1962 so as to cover I.T. on overseas transfer of shares. Government expect to earn Rs /- to Rs /- crores by this measure. According to many economists this is a retrograde step which would adversely affect foreign direct investment in the country. Primary concern of the budget was to bring back the economy on 9% growth rate, by putting lot of emphasis on infrastructure. Government has increased plan expenditure to Rs /- crores as can be seen from Table A. There is a renewed push for development of urban infra including Metro Rail project, management and sewage treatment plants in various cities. Finance Minister projects 7.6% GDP growth in pick-up further to 8.6% in Fiscal deficit is projected at 5.1% of GDP compare to 5.9% in This is doubtful to be achieved in light of proposed food security bill to be passed in Budget session as can be seen from Table B. Deficit is plans to finance by resorting to market borrowing to the tune of Rs. 5.7 lakh crores, thus crowding out private sector borrowers. Income Tax exemption limit is raised from Rs lakh to Rs. 2/- lakh for benefit of aam admi. This is a move in line with recommendation of Parliamentary standing committee on finance and in direction towards implementation of Direct Tax code. Similarly a National Information Utility that will implement common PAN based registration, return filing and payment processing for all states on a shared platform will become operationalised by August Through this is a step in direction of implementation. Of Goods & Service Tax (GST), Finance Minister avoided any deadline for implementation. Indian Construction expect that some key long pending reforms (outside the budget) such as Land Acquisition Law, Mining Law reforms, public delivery mechanism, FDI in retail, further opening up of financial sector if passed can add to growth trajectory. One noteworthy feature of this budget is introduction negative list of services, numbering at 17 which will not attract service tax. There is no service pertaining to construction in negative list. In addition to negative list 34 services are in exemption category notified under No. 12/2012. There are four construction related services in this Exemption list. Under payment of tax under Reverse charge Mechanism works contract service is covered. In addition there is a list of Declared Service. There are two service which are construction related will attract tax. Detail of all these services is given in Table C. Service receivers hereafter will be responsible for paying 50% service tax payable from to is exempted from retrospective effect. Given below are details of revenue receipt and plan and non plan expenditure. (in Rs. Cr.) Sr. No. Revenue Receipts Revised Estimate Budget Estimate 1. Income Tax collection

2 2. Corporation Tax collection Custom Duty collection Excise Duty collection Service Tax collection Net tax receipts to centre after states share Dividends & Profits Interest Other revenue receipts Recovery of Loan Other receipts Gross Borrowings & other liability Total Sr. Plan Expenditure No. 1. Central Plan Other capital expenditure Capital expenditure Non Plan Expenditure 4. Interest Subsidies Defense Grants to state government Pension Social Services Police C.R.P. & CISF Economic Services Other non-plan expenditure Others Defense Capital Expenditure Total Expenditure Table A BUDGET OUTLAYS FOR INFRASTRUCTURE UNDER PLAN ALLOCATION RE Actual Actual Actuals RE (Rs CRORE) BE Central Plan outlay (Budget support) on infrastructure (A) 42,523 50,299 61,871 72,406 79, ,107 Ministry of Road Transport and Highways 12,499 13,075 13,780 17,871 20,119 23,000 Ministry of Railways 8,121 9,545 16,911 18,385 23,000 24,000 Ministry of Drinking Water and Sanitation 7,460 8,492 9,196 10,565 10,000 14,000 Ministry of Power 4,350 5,961 6,504 8,296 6,051 9,642 Ministry of Urban Development 3,008 4,597 5,477 5,909 6,127 6,908

3 Department of Atomic Energy 2,876 4,077 4,492 3,289 4,615 5,600 Ministry of New and Renewable Energy ,200 1,385 Ministry of Shipping Ministry of Civil Aviation ,576 1,500 4,500 Ministry of Communication and Information Technology 1,935 2,523 2,451 3,627 4,554 8,600 Ministry of Housing and Urban Poverty Alleviation ,000 1,155 Ministry of Water Resources ,500 Central assistance for state and UTs (on infrastructure) (B) 21,180 30,001 27,509 28,963 32,416 46,287 MPs Local Area Development Scheme 1,580 1,580 1, ,950 3,955 Accelerated Irrigation Benefit Programme and other water source programmes 5,580 8,502 8,524 8,758 7,460 14,242 Roads and bridges 1,512 2,073 1,716 1,936 2,159 2,267 Accelerated Power Development Programme Backward Regions Grant Fund 4,730 5,019 4,799 8,680 10,997 12,040 Jawaharlal Nehru National Urban Renewal Mission 5,488 10,448 6,124 5,285 7,450 12,522 Other miscellaneous projects 1,890 1,943 4,658 2,772 1,400 1,261 Total spending on infrastructure (A+B) 63,703 80,300 89, , , ,394 Plan outlay 207, , , , , ,025 Infra spending as % of Plan outlay [Compilation: CII Economic Research] [RE: Revised estimates; BE: Budget estimates] Source : Business Standard Table B Details of subsidies expenditure (in Rs. cr.) Budget Estimate Sr. No. Item actual Revised Estimate 1. Fertilizer Food Petroleum Interest Other Total From the Table B above it is seen that with rising crude oil price petroleum subsidy is likely to be more than Rs /- crores unless government decontrol diesel and LNG price which is highly unlikely. So is the case with food subsidy more so when government intends to cover almost entire population expert feel that it will overshoot figure by additional Rs /- crores. Table C VII. New Exemptions by Notification No. 12/2012 ST: Sr. No. Description of service in respect of which exemption from payment of Service Tax is proposed to be granted 12. Services provided to the Government or local authority by way of erection, Comment Specified services when provided to the Government or local authority are proposed

4 construction, maintenance, repair, alteration, renovation or restoration of (a) a civil structure or any other original works meant predominantly for a nonindustrial or non-commercial use; to be exempted in terms of this entry. All non-government but non-commercial structures etc could now be liable to tax (b) a historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958; (c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; (d) canal, dam or other irrigation works; (e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii)sewerage treatment or disposal; or (f) a residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Finance Act; these persons are member of parliament, State Legislatures and Other local bodies, persons holding Constitutional posts like Election Commissioner and Chairperson, Member or Director in body established by the Central or State Government or Local Authority. 13. Services provided by way of erection, construction, maintenance, repair, alteration, renovation or restoration of,- (a) road, bridge, tunnel, or terminal for road transportation for use by general public; (b) building owned by an entity registered under section 12AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public; (c) pollution control or effluent treatment plant, except located as a part of a factory; or The taxing entries for Works Contract Service and Commercial or Industrial Construction Service specifically exclude services in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. Constructions etc of private school building or hospital and such other buildings owned by charitable trust are not exempt

5 (d) electric crematorium; 14. Services by way of erection or construction of original works pertaining to,- (a) airport, port or railways; (b) single residential unit otherwise as a part of a residential complex; (c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the Scheme of Affordable Housing in Partnership framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India; (d) post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or (e) mechanized food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages; 25. Services provided to the Government or a local authority by way of - (a) repair of a ship, boat or vessel; (b) effluents and sewerage treatment; (c) waste collection or disposal; (d) storage, treatment or testing of water for drinking purposes; or (e) transport of water by pipeline or conduit for drinking purposes. The taxing entries for Works Contract Service and Commercial or Industrial Construction Service specifically exclude services in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams. Presently, the definition of the term residential complex only covers complexes having more than 12 residential units. Therefore, complexes having more than 1 residential unit will now be covered in the Service tax net. Presently, exemption from Service Tax is available in relation to housing projects under the JNNURM and RAY schemes in terms of Notification No. 6/2011-S.T., dated read with Notification No. 28/2010-S.T. dated Presently, exemption from Service Tax is available in respect of erection, commissioning or installation of mechanised food grain handling systems and equipment for setting up or substantial expansion of cold storage vide Notification No. 12/2010-ST dated Currently, the services of repair of ships or boats or vessels belonging to the Government of India and the services of supply of water are exempted, only when provided within a port or an airport vide Notification No. 31/2010-S.T., dated Effectively, the above services remains exempted even when provided outside the port / airport. Also, certain services of non-commercial nature and in the interest of public at large (health, sanitation etc.) are proposed to be exempted when provided to the Government and local authority. VIII. Payment of tax under Reverse Charge Mechanism: Sr. No. Description of Services % of Service tax payable by the person providing services % of Service tax payable by the per person receiving the services 9. Services by way of Works contract 50% 50%

6 provided by any individual, HUF, or proprietary firm or partnership firm including AOP, located in taxable territory to any company or a business entity registered as body corporate, located in the taxable territory VI. Declared Services (S. 66E): Definition covered under Section 66E Construction services Section 66E(b) construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completioncertificate by the competent authority. (I) the expression "construction" includes additions, alterations, replacements or remodeling of any existing civil structure. Works contract services Section 66E(h) service portion in the execution of a works contract; "works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land. Comments The services are currently covered by Section 65(105) (zzzh) of the Act covering services in relation to construction of complex No separate abatement is provided for constructions service however, it appears that the rates provided for works contract service under Notification No. 11/2012-ST may be applicable. It has been clarified that the contracts for erection, commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise would be treated as works contract if: Transfer of property in goods is involved in such a contract; and The machinery equipment structures are attached or embedded to earth after erection commissioning or installation. EPC contracts are not covered in this service. Relief for small and medium level contractors:- Other activities previously covered under works contract service like thermal insulation, sound insulation etc are not covered. The issue may arise about applicability of alternate scheme of payment under works contract, in absence of which tax may be levied at full rates.

7 Earlier U/s. 44AD of I.T. Act 1961, an assesses whose turnover was Rs. 40/- lakhs or less offer 8% as profit on turnover need not have tax audit or keeping detailed books of a/c. Limit of turnover is now raised to Rs. 1/- crore. Similarly small scale service provider whose turnover was Rs. 8/- lakh had no obligation for registration or to pay service tax. Limit is now raised to Rs. 10/- lakh with a condition that service provider has to have registration and file nil return without payment of tax if his turnover is more than Rs. 8/- but less than Rs. 10/- lakh.

8 Relevant Extract of Finance Minister Budget Speech III. Infrastructure and Industrial Development Let me now turn to infrastructure and industrial development. 48. Lack of adequate infrastructure is a major Constraint on our growth. The strategy we have followed so far is to increase investment in infrastructure through a combination of public investment and public private partnerships (PPP). During the Twelfth Plan period, infrastructure investment will go upto Rs. 50 lakh crore. About half of this is expected to come from private sector. 49. Viability Gap Funding (VGF) under the Scheme for Support to PPP in infrastructure is an important instrument in attracting private investment into the sector. This year it has been decided to make irrigation (including dams, channels and embankments), terminal markets, common infrastructure in agriculture markets, soil testing laboratories and capital investment in fertiliser sector eligible for VGF under this scheme. Oil and Gas/LNG storage facilities and oil and gas pipelines, fixed network for telecommunication and telecommunication towers will also be made eligible sectors for VGF. 52. For the year , tax-free bonds for Rs. 30, 000 crore were announced for financing infrastructure projects. I propose to double it to raise Rs. 60, 000 crore in This includes Rs. 10, 000 crore for NHAI, Rs. 10, 000 crore for IRFC, Rs. 10, 000 crore for IIFCL, Rs. 5, 000 crore for HUDCO, Rs. 5, 000 crore for National Housing Bank, Rs. 5, 000 crore for SIDBI, Rs. 5, 000 crore for ports and Rs. 10, 000 crore for power sector. 53. A harmonised master list of infrastructure sector has been approved by the Government. This will help in removing ambiguity in the policy and regulatory domain and encourage investment in the infrastructure sector. Transport : Roads and Civil Aviation 59. The Ministry of Road Transport and Highways is set to achieve its target of awarding projects covering a length of 7, 300 km under NHDP during This would be 44% higher than the best ever length of 5, 082 km awarded in Of the 44 projects awarded during , 24 projects have fetched a premium. I propose to set a target of covering a length of 8, 800 kms under NHDP next year. The allocation of the Ministry has been enhanced by 14% to Rs. 25, 360 crore in To encourage public private partnerships in road construction projects, I propose to allow ECB for capital expenditure on the maintenance and operations of toll systems for roads and highways so long as they are a part of the original project. Skill Development 113. In National Skill Development Corporation (NSDC) approved 26 new projects, thereby doubling the number of projects sanctioned since 2009 to 52, with a total funding commitment of Rs. 1, 205 crore. At the end of 10 years, these projects are expected to train 6.2 crore persons and augment vocational training capacity by crore per year in the private sector.

9 114. The NSDC partners have opened 496 permanent and 2429 mobile centres in 220 districts across 24 states. More than 89, 500 persons have been trained and almost 80% employed. Under NSDC, 10 Sector Skill Councils have been sanctioned. Of these, 3 Skill Councils for Automobile, Security and Retail sectors have become operational. For , I propose to allocate Rs crore to National Skill Development Fund (NSDF) In order to improve the flow of institutional credit for skill development, I propose to set up separate Credit Guarantee Fund. This will benefit you thin acquiring market oriented skills Thus, I propose to tax all services except those in the negative list. The list comprises 17 heads and has been carefully drawn up, keeping in view the federal nature of our polity, the best international practices and our socio-economic requirements Construction services relating to specified infrastructure, canals, irrigation works, postharvest infrastructure, residential dwelling, and low-cost mass housing upto an area of 60 sq. mtr. under the Scheme of Affordable Housing in Partnership are also included in the exemptions. To make the life of those who already own an apartment a little easier, I propose to raise the exemption for the monthly charges payable by a member to a housing society from Rs. 3, 000 to Rs. 5, Movement towards the negative list will result in reducing nearly 290 definitions and descriptions in the Act to 54, and the exemptions from the existing 88 to 10, of course merging some of the existing exemptions into a revised notification. In terms of number of pages, the law will be shorter by nearly 40% As a measure of harmonisation between Central Excise and Service Tax, a number of alignments have been made. These include a common simplified registration form and a common return for Central Excise and Service Tax, to be named EST-1. This common return will comprise only one page, which will be a significant reduction from the 15 pages of the two returns at present Place of Supply Rules, that will determine the location where a service shall be deemed to be provided, are being placed in public domain for stakeholders' comments and shall be notified when the negative list is put into effect. These rules will also provide a possible backdrop to initiate an informed debate to assess all the issues that may arise in the taxation of inter-state services for the eventual launch of GST Rules pertaining to the Point of Taxation are also being rationalised, providing greater clarity and removing the irritants. Cenvat credits in a number of areas are being restored. There are a number of other proposals both for the facilitation of business and to check malpractices. I do not wish to take the valuable time of this House for discussing all these proposals You will notice that most of these measures are guided by the need to move towards a system that is simple, equitable and progressive but are unlikely to make the exchequer richer in any significant way. Looking at our vast commitment and to maintain a healthy fiscal situation, I propose to raise the service tax rate from 10% to 12%, with consequential changes in rates for services that have individual tax rates. Roads

10 187. Full exemption from import duty on specified equipment imported for road construction by contractors of Ministry of Road Transport and Highways, NHAI and State Governments is being extended to contracts awarded by Metropolitan Development Authorities Tunnel boring machines and parts for their assembly are covered by this exemption. I propose to allow their import free of duty without end-use condition. IV. NEW REVERSE CHARGE MECHANISM: 1) Section 68 (2) of the Finance Act, 1994 is being amended to put the onus of payment of service tax on reverse charge basis partly on service provider and partly on service receiver. The scheme is proposed to be made applicable on three specific services i. e. hiring of means of transport; construction and man power supply. A notification will be issued after the Finance Bill, 2012 receives the assent of the President, in which the manner and extent of service tax payable by service provider and service receiver in the case of the three services will be specified. 2) Consequent to the above change, suitable amendment is also being made in the concept of 'person liable to pay' provided in Rule 2 (1) (d) of Service Tax Rules, VI. RETROSPECTIVE EXEMPTIONS : 1) Vide Notification No. 24/2009-ST dated service tax on repair of roads is aleady exempted. Vide section 97 of the Finance Act, 1994, the exemption granted to repair of roads is being extended for the earlier period from to ) Management, maintenance or repair service undertaken in relation to non-commercial Government buildings is being exempted from service tax vide section 98, with effect from till the new charging section, namely section 66B, comes into force. In a bid to provide the much needed push to the cash starved infrastructure sector issue of tax free Bond of Rs Crores is allowed as under:- a) National Highway Authority =00 b) Indian Railway Finance Corporation =00 c) Infrastructure Finance Co. Ltd =00 d) National Housing Bank. 5000=00 e) SIDBI. 5000=00 f) HUDCO. 5000=00 g) Power Sector =00 h) Port Sector. 5000=00 Total 60000=00 Simultaneously with presentation of Budget, Finance Department issues circulars explaining budgetary provision. Accordingly relevant portion of circular pertaining to Excise duty and Service Tax is enclosed for ready reference. GOVERNMENT OF INDIA MINISTRY OF FINANCE

11 Vivek Johri Joint Secretary (TRU-I) Tel: ; Fax: Dear Chief Commissioner/Commissioner, DEPARTMENT OF REVENUE ***** D.O.F.No.334/ 3/2012-TRU New Delhi, dated the 16th March, The Finance Minister has introduced the Finance Bill, 2012 in Lok Sabha today, i.e., 16th March, Changes in Customs and Central excise law and rates of duty have been proposed through the Finance Bill, 2012 [clauses 114 to 126 for customs; clauses 127 to 142 for Central Excise and clauses 151, 152, 154 to 156 for miscellaneous changes)]. In order to prescribe effective rates of duty and to carry out changes in the Rules made under the respective Acts, the following notifications are being issued: 3.1 The standard rate of Central Excise duty for non-petroleum products has been enhanced from 10% to 12% ad valorem. The merit rate of excise duty for non-petroleum goods that hitherto attracted 5% has been increased to 6%. Similarly, the rate of duty of 1% imposed on 130 items in the last Budget has been increased to 2%. The exceptions to this increase are: Centre Excise Goods of heading no. 2701, i.e. coal; All goods of Chapter 31, other than those clearly not to be used as fertilizers; Articles of jewellery of heading 7113; and Mobile handsets and cellular phones of heading Note: Excise Duty on R.M.C. increased from 1% to 2%. Cement: 3.6 The rate structure applicable to Portland cement falling under heading no has been revised. Both for packaged cement manufactured by mini-cement plants as well as non-mini cement plants, there were differential rates of duty depending on the Retail Sale Price (RSP) per bag of 50kgs, so far. Moreover, the rates of duty applicable to mini-cement plants were lower compared to non-mini plants. Now, a uniform rate of duty is being prescribed regardless of the RSP per bag although a difference in the rates applicable to mini and non-mini cement plants is being retained. The details of these changes are as under: Sr. Description of goods Earlier rate Revised rate No. 1. Packaged cement manufactured in a mini-cement plant (i) Of retail sale price not exceeding Rs. 190 per 10% ad valorem 50 kg bag or of per tonne RSP not exceeding Rs % ad valorem + Rs. 120 PMT (ii) Of retail sale price not exceeding Rs. 190 per 10% ad valorem

12 50 kg bag or of per tonne RSP not exceeding Rs Packaged cement manufactured in a plant other than a mini-cement plant (i) Of retail sale price not exceeding Rs. 190 per 50 kg bag or of per tonne RSP not exceeding Rs (ii) Of retail sale price not exceeding Rs. 190 per 50 kg bag or of per tonne RSP not exceeding Rs Rs. 30 PMT 10% ad valorem + Rs. 80 PMT 10% ad valorem + Rs. 160 PMT 12% ad valorem + Rs. 120 PMT 3. Cement, not cleared in packaged form. 10% ad valorem 12% ad valorem 4. Cement clinker. 10% ad valorem + Rs. 200 PMT 12% ad valorem 3.7 Another important change in respect of Portland cement is that the item is being notified under section 4A of the Central Excise Act. Accordingly, the value for the purpose of charging duty on packaged cement would be determined on the basis of the Retail Sale Price. An abatement of 30% from the RSP is also being notified. 13. Classification of Natural marble Slabs subjected to processes of resin filling, fibre netting and Polishing: 13.1 Marble slabs and tiles are classified under Chapter 25 or Chapter 68 of the Central Excise Tariff depending on the extent to which they have been finished. Polished marble slabs are classifiable under heading which attracts the general effective rate of 10% ad val. Concessional excise duty of ` 30 per square meter is applicable to marble slabs and tiles falling under heading nos , or in terms of notification no.4/2006-ce dated Representation were received by the Board that the benefit of this exemption is not being extended to polished marble slabs of heading as the latter does not find specific mention in the exemption entry even though covered by the description. It is pertinent to mention that the Board has examined similar issues in the past on more than one occasion and clarified that the benefit of exemption will be available to goods as long as they are covered by the description. It is clarified that the benefit of concessional rate of ` 30 per square metre is available to polished marble slabs of heading under the said notification. For the removal of doubts, however, the relevant exemption entry is being amended to specifically include CETH [Notification No.12/2012-CE dated 17th March, 2012 refers]. V. K. Garg Joint Secretary (Tax Research Unit) Telephone No Fax No garg.vk@nic.in Government of India Ministry of Finance Department of Revenue (Tax Research Unit) ***

13 Dear Sir/Madam, D. O. F. No 334/1/2012-TRU New Delhi, dated 16th March, A. Rate changes: Subject: Union Budget 2012: Changes in Service Tax-reg. 1. The rate of service tax is being restored to the statutory rate of 12% - same as goods-and Notification No. 8/2009-ST dated February 24, 2009 reducing the rate to 10% has been rescinded effective April 1, B. Taxation of services: B.1. Negative List: 1. There is paradigm shift in the way services are proposed to be taxed in future. Taxation will be based on what is popularly known as Negative List of Services. 2. In simple words, it means that if an activity meets the characteristics of a service it is taxable unless specified in the Negative list, comprising 17 heads listed in proposed new section 66D, or otherwise exempted by a notification issued under section 93 of the Act. Most of the 88 exemptions at present will be either rescinded, being no more needed, or modified in some manner, or merged in a mega notification, leaving the final tally of exemptions to just The word service is defined in clause (44) of the new section 65B. This will also include certain activities that have been specified as declared services in section 66E. Most of these declared services are presently taxed as positive list. 4. The new charging section is contained in section 66B and levies taxes on all services, other than those in the negative list, provided or agreed to be provided in the taxable territory by one person to another. 5. The entire concept, including the key to understanding the various dimensions of the new taxation, together with answers to possible questions, is contained in a detailed draft Guidance Paper: A (GPA for short) and is attached as Annexure A to this letter. The negative list, the mega-exemption notification and list of other exemptions, being retained, are a part of GPA as Exhibits A1, A2 and A3 respectively. 6. On the coming into force of the new provisions, the earlier provisions contained in sections 65, 65A, 66, 66A will cease to apply but will remain relevant in respect of services provided prior to the coming into force of the new provisions. B.2. Place of Provision of Services Rules, 2012: 7. An important component of the proposed changes is the introduction of the Place of Provision of Services Rules, 2012, which have been released for comments and feedback for the time being. Another draft Guidance Paper-B, or GPB for short, has also been issued explaining all the various aspects relating to these rules and is attached as Annexure B.

14 8. The new rules will replace the existing Export of Services Rules, 2005 and the Taxation of Services (Provided from Outside India and Received in India) Rules, Rule 5 of the export rules will be incorporated in Service Tax Rules. B.3. Other related changes: 9. The transition to Negative List will require a number of other changes, in particular, movement away from service-specific provisions in rules and notifications. Many other changes are also being timed with the introduction of negative list, including most of the new exemptions. These changes are as follows: B. 3(I). Service Tax Rules 10. Besides complying with some revised drafting needs due to negative list, the rules will need changes in respect of person liable to pay tax: to provide for recipient persons relating to services provided to business entities by government, advocates or arbitrators, change in services provided from non-taxable territory, some changes to services provided by GTA and the deletion of all those services that are now exempt e.g. mutual funds agents and distributers. 11. Since the Export Rules will cease to apply, the required provisions will be incorporated in Service Tax Rules. A transaction will qualify as export when it meets following requirements: i The service provider is located in Taxable territory; ii Service recipient is located outside India; iii Service provided is a service other than in the negative list. iv The Place of Provision of the service is outside India; and v The payment is received in convertible foreign exchange Exhibit A2: Proposed exemptions under Mega Notification 12. Services provided to the Government or local authority by way of erection, construction, maintenance, repair, alteration, renovation or restoration of: (a) A civil structure or any other original works meant predominantly for a non-industrial or noncommercial use; (b) A historical monument, archaeological site or remains of national importance, archaeological excavation, or antiquity specified under Ancient Monuments and Archaeological Sites and Remains Act, 1958 (24 of 1958); (c) A structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an art or cultural establishment; (d) Canal, dam or other irrigation works; (e) Pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii) sewerage treatment or disposal; or

15 (f) A residential complex predominantly meant for self-use or the use of their employees or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said Finance Act; 13. Services provided by way of erection, construction, maintenance, repair, alteration, renovation or restoration of:- (a) Road, bridge, tunnel, or terminal for road transportation for use by general public; (b) Building owned by an entity registered under section 12 AA of the Income tax Act, 1961(43 of 1961) and meant predominantly for religious use by general public; (c) Pollution control or effluent treatment plant, except located as a part of a factory; or (d) Electric crematorium; 14. Services by way of erection or construction of original works pertaining to:- a) Airport, port or railways; b) Single residential unit otherwise as a part of a residential complex; c) low- cost houses up to a carpet area of 60 square metres per house in a housing project approved by competent authority empowered under the Scheme of Affordable Housing in Partnership framed by the Ministry of Housing and Urban Poverty Alleviation, Government of India; d) Post- harvest storage infrastructure for agricultural produce including a cold storages for such purposes; or e) Mechanised food grain handling system, machinery or equipment for units processing agricultural produce as food stuff excluding alcoholic beverages; Guidance Note 5 Declared Services 5.2 Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority. This service is already taxable as part of construction of residential complex service under clause (zzzh) of sub-section 105 of section 65 of the Act and as part of service in relation to commercial or industrial construction under clause (zzq) of sub-section 105 of section 65 of the Act. This entry covers the services provided by builders or developers where building complexes, civil structure or part thereof are offered for sale but the payment for such building or complex or part thereof is received before the issuance of completion certificate by a competent authority There are various types of arrangements under which builders or developers sell buildings, flats, office space etc. to buyers where entire consideration is received before completion certificate is issued including tripartite model, redevelopment model, investment model, reconversion model, BOT projects and joint development agreement model. How will the taxability of such arrangements be determined?

16 A detailed circular has been issued by the Board dealing with such arrangements in the context of existing taxable service of same description vide Circular no 151/2/2012 ST dated 10/2/12 issued from F.No. 332/13/2011 TRU. The said circular may be referred to for guidance on this point 5.8 Service portion in execution of a works contract Works contract has been defined in section 65B of the Act as a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, improvement, repair, renovation, alteration of any building or structure on land or for carrying out any other similar activity or a part thereof in relation to any building or structure on land. Typically every works contract involves an element of sale of goods and provision of service. In terms of Article 366 (29A) of the Constitution of India transfer of property in goods involved in execution of works contract is deemed to be a sale of such goods. It is a well settled position of law, declared by the Supreme Court in BSNL s case [2006(2) STR 161 (SC)], that a works contract can be segregated into a contract of sale of goods and contract of provision of service. This declared list entry has been incorporated to capture this position of law in simple terms. Further, with a view to bring certainty and simplicity the manner of determining the value of service portion in works contracts will be given in the Valuation Rules Would labour contracts in relation to a building or structure treated as a works contract? No. Labour Contracts do not fall in the definition of works contract. It is necessary that there should be transfer of property in goods involved in the execution of such contract which is leviable to tax as sale of goods. Pure labour contracts are therefore not works contracts and would be leviable to service tax like any other service and on full value Would contracts for construction of a pipe line or conduit be covered under works contract? Yes. As pipeline or conduits are structures on land contracts for construction of such structure would be covered under works contract Would contracts for erection commissioning or installation of plant, machinery, equipment or structures, whether prefabricated or otherwise be treated as a works contract? Such contracts would be treated as works contracts if Transfer of property in goods is involved in such a contract; and The machinery equipment structures are attached or embedded to earth after erection commissioning or installation Would contracts for painting of a building, repair of a building, renovation of a building, wall tiling, flooring be covered under works contract? Yes, if such contracts involve provision of materials as well.

17 5.8.7 What is the way to segregate service portion in execution of a works contract from the total contract? A simplified manner for determining the value of service portion of a works contract from the total works contract is given in Rule 2A of the Service Tax (Determination of Value) Rules, 2006 ( which will be amended partially for the negative list). In brief the value of the service portion is the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract. Gross amount includes Labour charges for execution of the works. Amount paid to a sub-contractor for labour and services. Charges for planning, designing and architect s fees. Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract. Cost of consumables such as water, electricity, fuel, used in the execution of the works contract. Cost of establishment of the contractor relatable to supply of labour and services and other similar expenses relatable to supply of labour and services. Profit earned by the service provider relatable to supply of labour and services. Gross amount does not include Value of transfer of property in goods involved in the execution of the said works contract. Note: Where Value Added Tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of Value Added Tax, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract. Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract Is there any simplified scheme for determining the value of service portion in a works contract? Yes. The scheme will be contained in the revised Rule 2A of the Service Tax (Determination of Value) Rules, As per this scheme the value of the service portion, where value has not been determined in the manner as explained at above, shall be determined in the manner explained in the table below Where works contract is for (i) Execution of original works. (ii) Execution of original works and the gross amount charged includes the value of land. (iii) Works contracts, other than contracts for execution of original works, including contracts for completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings. Value of the service portion shall be Forty percent of the total amount charged for the works contract. Twenty five per cent of the total amount charged including such gross amount. Sixty percent of the total amount charged for the works contract.

18 Important - total amount referred to in the second column of the table above would be the sum total of gross amount and the value of all goods and services supplied free of cost for use in or in relation to the execution of works contract, under the same contract or any other contract and, in case of (ii) in the table above, including the value of land charged as a part of the total consideration How is the value of goods or services supplied free of cost be determined to arrive at the total amount charged for a works contract? If the value of goods and services supplied free of cost for use in or in relation to execution of a works contract is not ascertainable, the same shall be determined on the basis of the fair market value of the goods or services that have close resemblance to goods made available. 6.7 Construction (Details at Sr No 12 to 14 of Exhibit A2) I am in to construction of hospitals and educational institutes. Am I required to pay service tax? If you are constructing such structures for the government or local authority, you are not required to pay service tax. If you are constructing for others, you are required to pay tax. B. 3(II). Valuation Rules 12. Negative list will require movement away from service-specific provisions. As such, the abatements under Notification 1/2006-ST and composition rate under the Works Contract (composition scheme for payment of service tax) Rules, 2007 will need some reformulations. 13. A new valuation rule is being introduced to substitute the Works Contract (Composition Scheme for Payment of Service Tax) Rules, The value of the Works Contract is proposed to be redefined, as follows: i) As at present, first determination will be the value of service being the total amount charged for the contract reduced by the value of property transferred in goods for State VAT purpose; ii) If value of goods is not intimated to State VAT, the assessees can still calculate the actual value of goods and the same will be relevant to deduce the value of the service involved in the works contract; iii) If the value is not so deduced, and not merely as an option, the value shall be specified percentage of the total value as follows: a) For original works: 40% of the total amount; b) Other contracts: 60% of the total amount; c) For contracts involving construction of complex or building for sale where any part of the consideration is received before the completion of the building: 25% of the total amount 14. Original works will include all new constructions and all types of additions and alterations to abandoned or damaged structures to make them workable.

19 15. The total amount will be gross amount plus the value of any material supplied under the same contract or any other contract. 16. The input tax credit on goods forming part of the property on which VAT is payable shall not be available as they are not used in the provision of service, which is totally independent of the deemed sale. However taxes paid on capital goods and input services will be available including in respect of iii.c of para 13 above. C.2. Reverse charge provisions: 10. There are a number of changes relating to reverse charge provisions. First of all, the term taxable territory has been defined in the Act and only services provided in taxable territory will be liable to tax. Thus any service provided in the state of J&K will not be liable to tax. The Place of Supply Rules, 2012 will determine whether a service is being provided in J&K. 13. To give effect to this new reverse charge mechanism, some changes are being proposed: firstly, a proviso is being added to sub-section (2) of section 68 and both the service provider and service receiver will be considered as persons liable to pay the tax on notified taxable services and to the extent specified against each one of them. 14. The scheme is being introduced for three services where the service provider is either an individual or a firm or LLP and the recipient is a body corporate. The three services and the portion of tax payable are as follows: Sr. Description of service Service recipient Service provider No. 1. Hiring of a motor vehicle designed to carry passengers: (a) with abatement (b) without abatement 100% 400% NIL 60% 2. Supply of manpower for any purpose 75% 25% 3. Works contract service 50% 50% 15. It is clarified that the liability of the two persons is for respective amounts and is not influenced by compliance or the lack of it by the other side. Service provider is allowed Cenvat credit of tax paid by him on inputs and input services. The respective portions have been attempted such that the credits available will be well below the amount required to be paid by such persons. In extreme situations the small service provider is also being allowed the refund of unutilized Cenvat credit if any, available with him. Suitable changes will be made in Cenvat Credit Rules, to this effect. C.4. Retrospective changes 20. Exemption provided for the setting up of common facilities for treatment and recycling of effluents and solid wastes by Notification 42/2011-ST dated 25th July, 2011 shall be made applicable effective June 16, 2005; 21. Repair of roads has been exempted from service tax by Notification 24/2009-ST dated 27th July, By section 97, exemption relating to roads is extended for the earlier period commencing from June 16, 2005;

20 22. Service tax exemption has also been granted with retrospective effect on management, maintenance or repair service in relation to non-commercial Government buildings from 16th June, 2005 till the coming into force of the negative list when such repair will be exempted by the new mega notification. 23. These changes will come into effect when the Bill receives the Presidential assent barring C.1.1 & reverse charge that will come into effect along with Negative List. D. Point of Taxation Rules, The definition of continuous supply of service is being amended to capture the concept in a more wholesome manner, namely the recurrent nature of services and the obligation for payment periodically or from time-to-time. 6. Since the essence of the rule in case of continuous supply of service is the same as the main Rule, the separate rule for continuous supply of service [Rule 6] is being merged with the main rule. Moreover the provisions of rules 4 and 5 relating to changes in rates or application of tax on new services would also be applicable to continuous supply of services; E. Service Tax Rules, 1994: 1. A common simplified registration format for Central Excise and Service Tax is being placed for public comments, together with further liberalization in registration requirements, particularly centralized registrations. The proposed changes are attached as Annexure C. 2. Likewise a new simplified one page common return with Central Excise: to be called Excise & Service Tax Return (EST for short) is being introduced. The format of the return is given as Annexure D. It is also being proposed that the cycles for the payment service tax and filing of return should coincide. To this end the tax payment requirement is proposed to be revised as follows: A. Assessees who paid tax of Rs 25 lakh or more in previous year and new assessees other than individuals and firms: Monthly B. Others: Quarterly Draft Guidance Paper: A Taxation of Services based on Negative List 1.1 What is the significance of the changes due to the new system of taxation? Budget 2012 proposes to usher a paradigm shift in the manner services will be taxed in future. The transition involves shift from taxation of 119 service-specific descriptions to a new regime whereby all services will be taxed unless they are covered by any of the entries in the negative list or are otherwise exempted. The new system is a marked shift by way of comprehensive taxation of the entire service sector without getting into complex issues of classification of services Would the payments in the nature as explained in column A of the table below constitute a consideration for provision of service? S. No. A B Nature of payment Whether consideration for service? 1. Amount received in settlement of Would depend on the nature of dispute.