Shailendra Kumar

Hello and welcome to simply inTAXicating. In this episode second episode on Indirect Tax we are going to touch upon various amendments proposed in the Finance Bill in the Union Budget 2015-16. We will go straight to our Hyderabad office where our in house experts Mr Vijay Kumar and Mr Raghavendra Rao are going to talk about the nitty grity of those changes proposed technical aspect the debatable aspect some of the rationalisation some of the issues expressions for instance like exports. What is the exports? For the first time in this Finance Bill the expression exports have been given a definition then of course the time limit for availing CENVAT credit. Time limit for availing credit on capital goods and of course pruning the negative list. Two distinguish guests will be joining Mr Vijay Kumar at our Hyderabad office. They are going to talk about some of the proposed changes by Mr Jaitley and how they are related to the proposed GST roll out next year. Let's go straight to Mr Vijay Kumar who is going to explain some of the budget provisions in the Union Budget 2015.

Vijay Kumar

The central excise rules. Under rules now they have permitted maintenance of records digitally. And even the invoice can be now signed digitally. What is digital signature? How to go about it? The conditions and procedures are to be notified by the board wait for the boards instructions. What is export? Just like what is manufacture, what is tax, what is service? This is another issue that has belied a proper defination all these years. Now in central excise when goods are exported on payment of duty the duty paid is refunded as a rebate. Similarly if the CENVAT credit cannot be used and the CENVAT credit gets accumulated because of the export a refund of the CENVAT credit accumulated is also given. But the goods have to be exported. Now in the central excise department there is a concept called deemed exports. Exports to SEZ 100% export oriented units are considered to be deemed exports. Now if an SEZ unit imports goods it can get them without the payment of duty. Why can't it get a same concession when it buys from an Indian manufacturer. So an Indian manufacturer should also get the benefit of the exports. So all these days there was some litigation on whether deemed exports that is clearances to SEZ and EOU's are considered to be export or not. Now once and for all the government clarifies that export means the goods should leave the country. No deemed exports and so you cannot get rebate if the goods are not physically exported. Under the rules you are required to file the returns regularly. The earlier .. if you dont file a return department had to give you a show cause notice and then perhaps impose the penalty of Rs 5000. Now there is no need of a notice if you dont file a return within the stipulated time from the day after you have to pay a penalty of 100 rupees per day subject to of course a maximum amount of Rs 20,000.

In central excise you are required to file several returns starting from ER1,2,3,4,5,6 and what. If you dont file a return the present practice is you are issued a notice and then the adjudicating authority imposes a penalty of maximum Rs 5000. This system has gone. If you dont file a return within a stipulated time now from the day after the stipulated date you will have to pay and amount of rupees 100 per day. Subject of course to a maximum of Rs 20,000. Some important changes are made in the CENVAT credit rules also. One which would be welcomed by the trade and which was vociferous demanded by several assessees was a rule introduced last year that CENVAT credit has to be taken within 6 months from the date of the prescribed document. Now this 6 months period is enhanced to 1 year. This would be welcomed by all the assessees. And those who have lost the credit because of the 6 months restriction between 6 months to 1 year can now take that credit. Earlier capital goods sent to job worker had to be returned within a period of 6 months. Now this period is enhanced to 2 years. There has been a controversy on exempted goods and non-excisable goods. If you are using inputs in the manufacture of exempted goods as well as dutiable goods there are several conditions or restrictions that you will have to bear with. Like maintenance of separate accounts, payment of an amount, not taking credit at all. Now does this apply to exempted goods or does it apply to non-excisable goods also. If you are manufacturing excisable goods and non-excisable goods and if you are using common inputs you are doomed. You cannot use it and you will have to follow one of those requirements. For now the government says exempted goods include non-excisble goods. You must all be perhaps knowing the famous Indswift case where it was held that CENVAT credit taken or utilised for interest rebate it is enough if the CENVAT credit is taken even if it is utilised or not. The government had amended the law the issue has gone through several courtrooms and finally now this year they want to make the distinction if we have taken credit and even if you ave not utilised it the credit will be recovered as per the provisions of Section 11A and all the consequences follow which may include penalty.

Central Excise registration. Getting a central excise registration or getting the central excise existing registration cancelled is one of the most difficult things to happen in the department. Now the government says the board says it has simplified the registration process. The registration will be granted within two working days of the receipt of the duly completed application form. The verification of the premises will be done post issue of the registration.

Inside into matters relating to service tax I invite my colleague Consulting Editor Raghavendra Rao.

Shailendra Kumar

Thank you sir. One of the major changes proposed in the Finance Bill in 2015 with regard to service tax is enhancement of tax rate from 12.36% to 14%. This 14% is not with immediate effect. This will come into force only from the date to be notified after the enactment of the Finance Bill. Till such time the existing rate of 12.36% will continue and the assessees are required to pay education cess s it is till new 14% will come into force. There is also a proposal to levy a huge cess called Swachch Bharat Cess at 2% value of the service provided. Please note that this 2% is not computed on the service tax amount but it is computed on the value of the service to be provided. That means with effect from the date to be notified Swachch Bharat Cess is also included. The gross rate of service tax will be 14% plus 2% that means 16% on the value of the service provided. Now certain services are to be included in the tax net by making amendments to negative list existing under section 60 at present. Now these services which were held whether to not taxable now they are brought under service tax net like admission to entertainments or access to amusement parks. Till now support services provided by the government to business entities they were covered under service tax net. This scope is proposed to be expanded to include all services provided by the government to a business entity whether they are supporting services or not. Suitable amendments are proposed in the negative list. In explanations proposed to be inserted in the defination of the service to clarify that services in relation to chit funds and distribution agents selling agents of lottery they are covered under the service tax net. This is to take care of certain judgements where it was ruled that the service tax are not covered under the existing provisions. An illustration is proposed to be inserted in section 66 c which explains that any reference to immense service does not include its input service. For example services provided by RBI they are covered under negative list. It does not mean that agency services provided by other banks to RBI they are also covered in negative list. So they are taxable. To explain this an illustration is proposed to be inserted in section 66 cf to make things clear. Certain exemptions are proposed to be .. by amendmening exemption notification 25 of 2012 to bring certain services under tax net. For example construction service provided to government in relation to non-commercial buildings, schools, hospitals, earlier these were covered under exemption now these entries are deleted thereby making the services liable to service tax. Similarly construction of port or airport the relevant entry is also deleted. So these services will now attract service tax. Exemption to service provided by performing artist, earlier it was completely exempted now its scope of exemption is limited upto a value of Rs 1 lakh received per performance. Transportation of food stuffs is exempted under notification 25 of 2012. This notification is proposed to be amended to lit the scope of exemption only for transportation of milk, salt, foodgrain including flours, pulses, rice. The other items which were earlier covered like tea, coffee, sugar, milk product and edible oils. This exemption is withdrawn now. So transportation of these items will attract service tax and all. This is effective from 1st April 2015. For certain services the service recipient is liable to pay partial liability like manpower supply and security services. Till now the liability of the service recipient is 75% of the tax payable. There is a proposal to amend this notification to make it 100% reverse charge. That means manpower supply and security services provided by specific service providers will now attract 100% service tax in the hands of the recipient of the service. This notification will come into effect from 1st April 2015. There are certain changes in abatements of the transportation of goods by vessel, rail, or road is now abatement is made uniform at 70% that means the liability of the service provider is only n the 30% of the gross amount charged. The impact of this amendment is mostly the goods and service agencies where the abatement is now at 75% and they are paying service tax on the 25% of the gross amount received. So that is not slightly increased to 30%. In rule 4(7) of CENVAT credit rules is proposed to be amended to make an assessee who is paying service tax either partially or fully under reverse charge he can take credit after making payment of the service tax. Earlier the partially reverse charge service recipients they can take credit only after making payment of the value of service to service providers. Now there is a relaxation the moment they pay service tax under reverse charge they can take credit. Again this change will also come into effect from 1st April, 2015.

Shailendra Kumar

Lets take a short break and after the break we will go back to Mr Vijay Kumar. A very distinguish guests will be joining him. He is noted exponent of law and a former President of FAPCCI Mr Thirumalai. He is going to talk about what compelled the Finance Minister to hide the service tax rate so substantially such a huge jump and how it was envitable. Vis a vis the proposed GST rolled out.

Welcome back. We will go back to Mr Vijay Kumar who is going to talk to Mr Thirumalai with respect to some of those important issues related to proposed GST. And what runs through them entire GST structure is of course the shameless credit chain. Mr Thirumalai is going to talk about some of the legislative aspects and the constitutional technicalities involved in the entire issue and of course the GST bill.

Vijay Kumar

I have with me a very distinguish expert a former President of FAPCCI, an advocate by profession, a chartered accountant also by qualification, a former director in a huge corporate entity and also at present a director in another company. The very distinguish, knowledgeable Mr Thirumalai. Welcome Sir. I would like you to touch upon this huge increase proposed in service tax.

S Thirumalai

If we want GST it is necessary that we should reach revenue neutral rate of GST. Both on the excise side as well as on the service tax side sooner or later. What is the revenue neutral rate going to be? Is it going to be different for services and goods or is it going to be the same. Atleast for now based on the information public domain one could say that we could have a rate which is common for both goods and services. Of course there could be a band in the standard rate which is available for the states to play around with limited band. That is the information in the public domain so far. But the fact of the matter is that we have to reach there. And if you look at some of the strategies made by the Institute of Public Finance and Management NIPF policy they had suggested something close to a summation of the excise duty and service tax after a detailed study. 25-26%. It is not the rate that is important it is seamless credit that is important. Have we created the environment, the necessary ground conditions for the purpose of seamless credit. And if I look at the changes that have been made particularly in the context of pruning of the exemption notifications, bringing in service tax on packaging and processing of portable liquor and the changes that have been made in the context of services to government in the area of construction original works and also the changes that have been made with regard to non-eligibility of service tax exemption. When you render construction services for ports and airports. Obviously there is a clear signal because in the GST regime construction is outside the GST, real estate and construction is outside GST they are not entitled for input credit because property tax is still very much a state subject, registration is a state subject. So therefore the question that comes up..

Vijay Kumar

How do you visualize the intoxication of alcohol. You have mentioned about alcohol. Where does that fit in?

S Thirumalai

WHere does that fit in? That fits in if you look at the defination under 366 12(A) of the constitution amendment bill 122nd constitutional amendment bill which talks about goods and service tax as something attacks other than on alcohol or liquor. Processes relating to alcohol or liquor taking advantage of that and very much encroaching if I may say so into the field of occupied by entry 54 of the second schedule list 2. They have now taken power to levy tax on the process of portable liquor. These shows very clearly that while they have deeply studied the contiers of the constitutional bill and to see what can come within the purview of GST because this is going to other forms of liquor particularly human consumption or going outside the purview of GST and within the realm of states. So therefore they have carved it out so well and take out portable liquor as something which would be subject to service tax. Now coming back to this point of the moment that you asked from 12.36 to 14 , 14 to 16. Where should we go. Is it 18 is it 20 and as I said it is on the one hand all the restrictions on the input credit which we saw in 2011 and then followed in 2012 have been kept including certain regiment positions in the context of availment under the by way of what is utilisation under rule 14. All this that I am mentioning is that on the one hand this seamless credit seems to be curbed in this transition process. Whereas the avenues of revenues which may acru as a consequence of moving to GST to both the centre and the states of course are being carved out and taken. And those exemptions which are outside the purview of the GST like construction sector, alcohol and liquor those have been completely left out in terms of the exemptions that they engaged on. So the point that comes up is right from 1.7.2012 we had the place of provisions of service rules amendments were made ahead of time. But GST is yet to arrive. And my own calculation is that if you take the normal process by which all the 29 states have to pass their own legislation's and these will have to come into force after forming the GST council which should make the recommendation on the most important revenue neutral rate which is what we are talking about when you say 14 becoming 16 it is nothing but the revenue neutral rate. It has to move towards revenue neutral rate. And that process is going to take atleast till the middle of 2016 according to me.

Vijay Kumar

So April 2016 is the date?

S Thirumalai

According to me it is on even very tight day to day monitoring and since 60 days the GST council is the only one that has to make this recommendation though it cannot take away this power and powers of the 29 states but it has to make a recommendation and that recommendation is only after the bill is passed. And therefore even very tight rope situation according to me seems to be middle of 2016. But if you put in all the force that is required with all the concenses that is required then possibly 1st of October is something which is not out of reach. But very very tight according to me. And therefore the issue that comes up is while the rate increases are progressed. Other ground conditions of making the transition less harsh if you use that expression. We have removed the exemption we have kept the curbs on input credit and we have also gone to the extent of saying even the amusement parks entertainment which is all under entry 64 list 62 those have been again brought within the purview like portable liquor. These are examples to show that wherever carving can be done and taken out for the purpose of augmenting the current revenues those have not been given up.

Vijay Kumar

You mean to say we have taken whatever we can without giving anything. And you are not even sure of GST coming atleast in April 2016. So the promise GST is not coming but the liabilities or the harshness is on its way now. This is what you mean sir.

S Thirumalai

I mean that the seamless credit which is the crux of any GST system. Must also be indicated what is the point in only indicating that your rates will go up we will carve out and take whatever is possible into the GST system because we have got a very peculiar GST where bulk of the items like petrol, petroleum products or out of it. Construction industry real estate and construction which is part of that is out of this. So therefore the crucial question is it has become according to me one sided in somewhat normal expression. In the sense that we could have also shown how seamless credit of course it is going to have an immediate impact on revenue realisation. 40-45000 crores which is what service tax should yield according to the recent budgets inclusive of the rate increase which is there. it is going to be affected by the process but that this thing investments should have been made for preparing all of us. Because if you look at the GST situation where a huge lot of dealers, traders, are going to join this. 62% of them or less than 25 lakhs. You will ask them to file returns you will ask them to go through a line by line matching process for the purpose of adaption. Where are you going to end in terms of threshold. These will have again a impact on the revenue neutral rate. So I think that while the rate increases it had to happen. Today or tomorrow. In the way of GST the ground conditions should have been little bit of that should have been given to us. Like for example why have continue with a rent a cab not eligible for credit. General insurance not eligible for credit and accepted under certain circumstances. They will all be business related credits which should have been allowed. Then that would have shown the indication balance that yes we are on the right note. This is the observation rate had to increase today or tomorrow in the wake up GST and the promise of GST 1-2% increase in GDP is really going to be captured and must be captured. That has to be done. Sooner you deal with it the better and this opportunity I think is not lost because the rules can be amended at any time in terms of the CENVAT credit and also put in place the B2B and B2C rules which must come in. Not just the POPs that we just had in 1.7.2012. What is business to business and business to consumer rules that are going to come in. Why keep it in some back room. Why not share with the so that we can also contribute in the context of this path of GST.

Vijay Kumar

Generally in every budget you see retrospective amendment to undo the decision of a court. The policy of the present government is not to impose taxes retrospectively but they can still undo the decisions of the courts prospectively. There is one such provision in the finance bill regarding the valuation of the service tax. I have with me Mr Shankar Bala senior advisor tax and regulated services of E and Y. Mr Shankar welcome to TIOL. Please tell us what this valuation is all about.

Shankar Bala

Thank you Mr Vijay Kumar. Thanks for this opportunity. As you correctly hit the nail on the head. Austensibly the amendment which is been made to Section 67 of the Finance Act so as to bring within the ambit of value of services reimbursable expenditure is to undo the judgement of Delhi High Court case of inter-continental consultants. The Delhi High Court as you are aware has struck down Rule 5 of the valuation rules as going beyond the provisions of the statute. Its new point still after this amendment this law is still challengeable because if you read the Delhi High Court judgement carefully it also says that 67 itself is subject to the provisions of chapter 5 which includes section 66 and in so far as 66 only mandates tax on services 67 to the extended with amendment extended goes beyond the purview of 66 still challengeable. To my mind undoing this judgement of Delhi High Court so Austensibly so but may not really serve the end purpose.

Vijay Kumar

Sir for our viewers if you can explain a little bit about what exactly has been done. What was the provision and what is been done.

Shankar Bala

Even as a the statute calls for levy of service tax on the value of services the value has been extended to include also to additional cost expenses which have incurred in the course of providing taxable service by means of fine of the ... service value rules 2006. What happens is there are also expenses which are incurred over and above, value of services which are also includable like lets take an example of say air travel. Ticket value is also to be included. Of course there are abatements provided we are not going to those abatements now but the value will also include value of the services to the ticket. But it will also include the value of the ticket. So to an extent the Delhi High Court head said that you cannot include the value of those which are not related to the service. You can only tax us value to the service and not cost or expenses which are incurred in course of the goods which go beyond the provisions of chapter 5 section 66. So that is been undone. To say that we will bring it value has been redefined to include reimbursable expenditure.

Vijay Kumar

You mean if your client reimburses you your air ticket that is also to be included in your fee.

Shankar Bala

Yes. There is an abatement provided elsewhere.

Vijay Kumar

But otherwise the value should include the abatement also.

Shankar Bala

I have one more point to make. Actually besides this legal

Vijay Kumar

Now suppose there are consultants who charge slightly more than the air ticket then what happens. Say air ticket is 10,000 rupees I charge my client 12,000 rupees.

Shankar Bala

The entire amount is includable.

Vijay Kumar

Yes it is includable. According to you this is challengeable and atleast that ten thousand is not includable. Because that's not service at all. But what about 2000 rupees.

Shankar Bala

That should be chargeable. Because its really not expenditure or its really a form of fee. I was saying that the word used reimbursable expenditure. So which to me I mean if you look at the point of view fro the accountant it must have gone through your profit and loss account. This will be our expenditure and your are getting it reimbursed. But if you debit the amount to the client of you know straight away the threshold nd don't root it to your revenue account, penal account then it should not be a point of expenditure at all. Because it is not a question of reimbursement it is not an expenditure. This is an amount you are recurring on behalf of the client.

Vijay Kumar

Thats a wonderful point you are making. This means for my air ticket if it is ten thousand rupees I pay ten thousand rupees I give the ticket to my client and ask him to reimburse that ten thousand rupees. Finish. It does not come into my account its okay. But if i show it in my account and then billed it to him you call it expenditure.

Shankar Bala

That's what law that is the loophole in the law. That's what I mean.

Vijay Kumar

So is this loophole going to be beneficial to the service providers or to the government?

Shankar Bala

Ideal way is not root to the professionalism account.

Vijay Kumar

That is ideal situation. Now but do you think there intention was prehaps always to tax all the expenditure. Assuming this is an expenditure. When a court says not so they are trying to change the law. Is it right?

Shankar Bala

You can only tax the value of services you cant tax the value of those which are our neighbour services.

Vijay Kumar

So you perhaps hope or expect that this will also go the inter-continental way through the Delhi High Court.

Shankar Bala

That's what I said in the beginning that in any case even if 67 is amended so long as it violates 66 which is charging section I think it will go the inter continental way.

Vijay Kumar

So that goes on that the law making is not all that easy you cant just undo a high court order by stoke of a pen. You need better law making techniques. Thank you very much Sir. It was very nice talking to you.

Shailendra Kumar

Thank you Mr Vijay Kumar. Mr Thirumalai and Mr Shankar Bala for sharing wonderful thoughts wonderful interpretation of some of the indirect tax related amendments proposed in the budget. Let us hope the Union Finance Minister Mr Arun Jaitley pays little attention to some of the areas which have created confusion with respect to for instance Swachch Bharat says that confusion should be taken care of. Secondly the key points which have been raised by Mr Thirumalai with respect to GST role out. Very rightly he pointed out that the Honorable Finance Minister has and he was expected even before the budget to hike the rate in order to move towards the proposed GST but he should have also given clear signal to the industry by making corresponding changes in the CENVAT credit rules by extending the scope of CENVAT credit to some of the services on which this is of course a cost to the business. The industry is not eligible to able credit. TIOL also agree with Mr Thirumalai that the deadline for GST roll out is apparently very tight. Even if it is monitor on day to day basis it will be difficult to catch April 1st 2016 deadline. Lets hope that Honorable Finance Minister is able to run little faster and catch the deadline. Apart from that what was pointed out by Mr Shankar Bala hopefully the north block will take care of that aspect. And some of the other provisions in Central Excise where the industries have express there concerns and the domain experts have also pointed out. Let us hope those issues are technically are taken care of. Thanking you watching us.