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New Regime of Service Taxation in India- Dr. Sanjeev Agarwal

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New Regime of Service Taxation in India- Dr. Sanjeev Agarwal

  1. 1. Corporate Knowledge Foundation Presents A Knowledge Workshop On “New Regime of Service Taxation in India” Conducted by Dr. Sanjiv Agarwal FCA, FCS Saturday, 14th July,2012 New Delhi © Dr. Sanjiv Agarwal 1
  3. 3. Corporate Knowledge Foundation This Presentation Covers • Overview of Taxation of Services in India • Selective Approach (Positive) • Shift to Comprehensive approach (Negative) • The future approach (Proposed GST) 3
  4. 4. Indian Economy – An overview  India’s economy is the 11th largest economy in the world and the second fastest growing even in today’s recession  World is presently facing recession-II but Indian economy is still better than comparable economies.  Agriculture, services and industry are the major sector of India an economy. Contribution of different sectors in March, 2012 was :  Agriculture 19%  Services 59%  Industry 22% to be contd……. 4
  5. 5. Brief Overview of Services / Service Tax Share of Services in GDP Agricult ure 19% Service Sect or Indust ry 59% 22% GDP C O MPO S ITIO N IN MARC H, 2012 5
  6. 6. Share of services in GDP tracked Year % of GDP  1950 15  1970 33  1980 36  1994 40  1995 41  2000 47  2005 53  2010 57  2012 59 In 2011-12, services have grown by 9.6 % which is more than GDP growth rate 6
  7. 7. Growth in Tax GDP Ratio – Slow but Steady Years Tax GDP ratio 2003-04 9.2% 2007-08 11.9% 2009-10 9.7% 2010-11 10.3% 2011-12 10.1% 7
  8. 8. Power to Tax in India  Central Government and the State Governments under Part XI of Indian Constitution have power to levy taxes.  Legislative power v Administrative power  Legislative power has three lists:-  Union list,  States list and  Concurrent list  Administrative power – CBDT, CBEC  Union list consists of 100 items -Parliament has exclusive power to levy Tax.  State list consists of 66 items -Individual states have exclusive authority to levy Tax.  Concurrent list consists of 47 items - both Governments can levy tax. to be contd…….. 8
  9. 9. Power to Tax in India  India has a two tier federal power to collect tax –  the Union Government,  the State Governments including urban/rural local bodies  Presently goods are liable to Vat / Excise / Customs duty while taxable services attract service tax.  Certain transactions subject to both - Vat and Service tax  Efforts to revamp the direct tax structure - New direct tax code (Income Tax Act, 1961 & Wealth Tax Act, 1957 would be scrapped) proposed  Efforts to bring on a single indirect tax – GST proposed 9
  10. 10. Taxonomy of Indian taxation TAXATION POWERS OF UNION  Income Tax – on income, except agricultural income  Excise Duty – on goods manufactured  Custom Duty – on imports  Service Tax – on specified services  Central Sales Tax – on inter-state sale of goods  Stamp Duty – on 10 specified instruments to be contd….. 10
  11. 11. Service Tax in India (The Past)  Introduced in India in 1994 as a simple, modest tax with just three services.  Service tax – an indirect tax.  Approach to Service Tax – Selective as against comprehensive one .  Desirable from revenue, equity and economic view point.  Governed by Finance Act, 1994 and a dozen of rules.  Legislative dependence on other laws.  Scattered and heterogeneous large mass of service providers as well as wide spectrum of services.  Jurisdictional application. 11
  12. 12. Growth of Service Tax Year No of new services Total No of Total collection services (Rs. in crore) 1994 3 3 407 2001 - 26 2612 2005* 13 72 14199 2008 7 103 51301 2010 3 112 58000 2012 0 120 95000 2013 - All 126000 (BE) 12
  13. 13. Service Tax in India (The Past) Selective Approach to Service Tax  Selective v. Comprehensive approach  Taxation by choice  Service not defined but taxable service defined.  > 120 taxable services [section 65(105)]  Resulted in distortions / prejudice  Untapped tax potential  Economically unjustified 13
  14. 14. Service Tax in India (The Past) Selective Approach : Some Issues  Classification of service – disputes  Illogical definitions  Problem defining each taxable service  Inefficient tax administration  Constitutional Challenges  Services / deemed Services  Valuation / abatement / reverse charge 14
  15. 15. Service Tax - Today Shift to Comprehensive approach  W.e.f. 1 July 2012  Finance Act, 2012 – A land mark Act to shift from positive to negative approach.  It took 18 years to shift from selective approach to positive approach to tax services  Section 65 (Definition of Taxable Service), 65A (Classification of Taxable service), 66 (Charge of Section Tax) and 66A (Charge of Service Tax on Services received from outside India) have no application w.e.f. 01.07.2012. 15
  16. 16. Taxation of Services by Finance Act, 2012 All Services (including declared Services (-) Specific Exclusions (-) Negative List Services (-) Exemptions (=) Taxable Services 16
  17. 17. Service Tax - Today New system of taxation of services  All services to be taxed other than services specified in the negative list and exempted services – Section 66B.  Negative list (17 in number) specified through statutory provisions – Section 66D.  ‘Service’ defined for the first time.  ‘Negative List’ and ‘declared services’ also defined. 17
  18. 18. Service Tax provisions no longer applicable (w.e.f. 1.7.2012)  Section 65 Old definitions of Services / Taxable Services  Section 65A Classification of Services  Section 66 Charge of Service Tax  Section 66A Charge of Service Tax on Services received from outside India.  Import of Service Rules, 2006  Export of Service Rules, 2005 18
  19. 19. New Provisions in Service Tax  Section 66 B deals with charge of service tax on the after Finance Act, 2012  Section 66 C provides for determination of place of provision of service.  Section 66 D comprises of negative list of services  Section 66 E comprises of the services which constitute declared services  Section 66 F provide principles of interpretation of specified description of services or bundled services 19
  20. 20. The New Taxability Concept SERVICE FOR A CONSIDERATION 9 DECLARED SERVICES E: Employee M: Money A: Actionable claim E - MAGIC TEST G: Goods I: Immovable property C: Court Fee Executive Summary 20
  21. 21. Taxable of Services w.e.f. 1.7.2012  All services Taxable [section 65B (44)]  Declared services Taxable (section 66E)  Services covered under Not Taxable negative list of services (section 66D)  Services exempt under Mega Exempted Notification No. 25/2012-ST dated 20.6.2012  Other specified Exemptions Exempted 21
  22. 22. Taxation of Services Post Finance Act, 2012 22
  23. 23. What is Service ‘Service' has been defined in clause (44) of the new section 65B and means –  any activity  for consideration  carried out by a person for another  and includes a declared service (66E) 23
  24. 24. What is Service  Activity must be for a consideration  Activity – includes both activity as well as non-activity  Consideration – includes both monetary and non monetary consideration.  Two persons are involved – Service provider Service receiver  Only services provided by one person to another are taxable  Person – natural as well as artificial 24
  25. 25. What is Service Activity  Not defined in the Act  In common understanding, activity includes –  An act done  A work done  A deed done  An operation carried out  Execution of an act  Provision of a facility etc.  Activity could be active or passive and forbearance to act  Agreeing to an obligation to refrain from an act or to tolerate an act or a situation - listed as a declared service u/s 66E 25
  26. 26. What is Service Activity for a Consideration Activity should be carried out by a person for a consideration  Activity without consideration like-  Donation  Gifts  Free charities outside the ambit of service  Charity for consideration would be service and taxable unless otherwise exempted 26
  27. 27. What is Service Consideration  Means everything received or recoverable in return for a provision of service which includes -  Monetary payment  Non-monetary payment  Deferred consideration  Under Indian Contract Act, 1872, Consideration means - “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise” 27
  28. 28. What is Service Consideration  Monetary consideration means any consideration in form of Money.  Includes not only cash but also cheques, promissory note, bill of exchange, letter of credit, draft, pay order, traveler’s cheques, money order, postal or electronic remittance or any such similar instrument  Non- monetary consideration- money equivalent 28
  29. 29. What is Service Money- 65B (33) "money" means legal tender, cheques, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheques, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic value Actionable Claim –Section 3 of Transfer of Property Act, 1882 • Claim to unsecured debts • Claim to beneficial interest in movable property not in possession of claimant • Right to insurance claim • Arrears of rent 29
  30. 30. What is Service Tax on Money Remittance  No service tax on foreign currency remitted to India from overseas (Circular No.163 dated 10.7.2012)  Amount of remittance comprises money  Service excludes money transactions  Even fee for remittance is not taxable (POPS)  Sender of money outside India bank / company remitting located outside India  Fee charged by Indian bank - remitter located outside India (not taxable as per POPS) 30
  31. 31. What is Service Person-65B(37) "person" includes,–– • an individual, • a Hindu undivided family, • a company, • a society, • a limited liability partnership, • a firm, • an association of persons or body of individuals, whether incorporated or not, • Government, • a local authority, or • every artificial juridical person, not falling within any of the above 31
  32. 32. What is Service Government – Not defined  Section 3 (22) of General Clause Act, 1897  Includes Central/State Government/ Union Territory  Actions taken in the name of President/ Governor  Most of services provided by government are in Negative List 32
  33. 33. What is Service Local Authority - Section 65B(31)  A Panchayat as referred to in clause (d) of article 243 of the Constitution  A Municipality as referred to in clause (e) of article 243P of the Constitution  A Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund  A Cantonment Board as defined in section 3 of the Cantonments Act, 2006  A regional council or a district council constituted under the Sixth Schedule to the Constitution  A development board constituted under article 371 of the Constitution, or  A regional council constituted under article 371A of the Constitution. 33
  34. 34. What is Service Governmental Authority (N. No. 25/2012- ST)  board/ Authority / other body  established with > 90% participation  of government control/ equity  set up by Act of Parliament or State Legislature  to carry out any functions entrusted to municipality u/s 243W of constitution 34
  35. 35. What is Service : Exclusions 'Service' does not include -  any activity that constitutes only a transfer in title of goods or immovable property by way of sale, gift or in any other manner a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution  a transaction only in money or actionable claim  a service provided by an employee to an employer in the course of the employment.  fees payable to a court or a tribunal set up under a law for the time being in force 35
  36. 36. What is Service This scope shall not apply to – c) functions performed by M.P., M.L.A., Members of Panchayats / Municipalities who receive any consideration in performing the functions of that office as such member; or d) duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or e) duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Government or local authority and who is not deemed as an employee before the commencement of this section. 36
  37. 37. What is Service It may be noted that - (a) an unincorporated association or a AOP and a member thereof shall be treated as distinct persons; (b) an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. (c) A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory 37
  38. 38. Taxability of Services – Then & Now Period Taxable Non Taxable Prior to Finance Act, 2012 (upto 30.6.2012) • Taxable services • Exempt services specified in section 65 • Service not covered (105) under section 65 (105) • Import of services under • Export of services reverse charge Post Finance Act, 2012 (w.e.f. 1.7.2012) • All services provided in • Services in Negative List taxable territory • Exempt services • Declared services • Services provided in non- taxable territory (as per POPS Rules) 38
  39. 39. MAJOR CHANGES IN SERVICE TAX LAW BY The FINANCE ACT, 2012 - AT A GLANCE  Objective to widen tax base  Service Tax law to be shorter by about 40 percent  Effective rate of Service Tax shall be 12.36 percent w.e.f. 01.04.2012 including education cesses.  Definition of ‘service’ finds place in statutory provisions  All services to be taxed including a set of services called ‘declared services’  Negative list of services containing 17 broad service categories to be out of Service Tax ambit.  Withdrawing of many existing exemptions / abetments or their rationalization 39
  40. 40. MAJOR CHANGES IN SERVICE TAX LAW BY The FINANCE ACT, 2012 - AT A GLANCE  Place of provision of supply rules will determine the location of service and become be basis of taxation.  Withdrawal of export of service rules and import of service rules in view of place of supply of service rules coming into operation.  Concept of taxable territory and non- taxable territory brought in  Basis of charge of Service Tax shifted under new section 66B.  Taxation of Service to be determined by provision of service in taxable territory and non taxable territory.  Classification of service criteria replaced by new section 66F on interpretation principles of specified description of service or bundled services. 40
  41. 41. MAJOR CHANGES IN SERVICE TAX LAW BY The FINANCE ACT, 2012 - AT A GLANCE • Consequent upon change in service tax rates, there is change of service tax rate in composition scheme and specified rates w.e.f. 1.4.2012 (Composition scheme withdrawn w.e.f 1.7.2012.  Penalty wavier for arrears paid within specified time in respect of renting of immovable property service.  Retrospective exemption to road repairs and repairs etc of non commercial government buildings.  Under new reverse charge mechanism, onus of paying Service Tax will be shared by service provider and service receiver in case of specified services.  Service Tax on taxable services provided by service provider located in Jammu & Kashmir state liable under reverse charge. to be contd…. 41
  42. 42. MAJOR CHANGES IN SERVICE TAX LAW BY The FINANCE ACT, 2012 - AT A GLANCE  Change in valuation rules in relation to works contracts and outdoor catering / supply of food.  Provision introduced for date of determination of value of service, tax rate and rate of exchange.  Payment of Service Tax on receipt basis for all service providers being individuals / firms / LLPs, if aggregate value of taxable services in previous year does not exceed Rs. 50 lakh.  Criteria for Rs 10 lakh threshold exemption changed.  Time limit for appeal by assessees to Commissioner (Appeals) reduced from 3 months to 2 months • Revision Application Authority and Settlement Commission provisions made applicable to service tax. • Special Audit of Service tax assesses by CAs /CWAs . 42
  43. 43. Goods & Service Tax (The Future) GST: A Common Tax on Goods Services 43
  44. 44. Pre-requisites for migrating to a GST regime • Setting up of empowered committee for GST (like VAT) which can steer the road map into action - done • Broaden the tax base for excise duty (presently 40% comes from petroleum products) – being done • Finishing area based and product based exemptions – being done • Rationalization of concessions and exemptions including that on exports – being done • Expanding service tax to almost all services – now proposed • Common/unified tax rate for goods and services which may be ideally, revenue neutral (a suitable GST rate) – dual tax proposed • Avoiding or minimizing differential tax rates – under discussions • Abolition of other small taxes - under discussions • Abolition of CST in a phased manner - being done • Power to levy service tax on select/agreed services to States - under discussions • Issue of inter-State services and goods movement vis-à-vis levy of duty or tax to be sorted out - under discussions • Revenue sharing mechanism to be rationalized - under discussions 44
  45. 45. GST - Journey so far  Feb, 2006 : First time introduced concept of GST and announced the date of its implementation in 2010  Jan. 2007: First GST study by ASSOCHAM released by Dr. Shome  Feb. 2007: F.M. Announced introduction of GST from 1 April 2010 in Budget  April 2007 : CST phase out started - CST reduced to 3%, currently 1%  May 2007: Joint Working Group formed by EC  Nov. 2007: Joint Working Group submits report  April 2008 : Empowered Committee (EC) finalizes views on GST Structure  July 2009: FM announces commitment to bring GST from April 2010  Consultation on inter-state services in progress to be contd…… 45
  46. 46. GST - Journey so far Budget 2010  To achieve the roll out of GST by April 2011  Revamping of indirect tax administration at centre/ states internal work processes based on use of information technology - massive information technology (IT) platform  Project ACES- ‘Automation of Central Excise and Service Tax’ rolled out  Rate of service tax retained at ten per cent  States to revamp their internal work processes to be contd…… 46
  47. 47. GST - Journey so far Budget 2011  non-committal on timing and roll out but the Government introduced Constitutional Amendment Bill, 2011  overall amendments targeted towards moving close to harmonize with GST regime in future  major highlights of budget discussions/proposals on GST –  DTC and GST to mark a water shed  Decisions on GST to be taken in concert with the states  Areas of divergence between centre and states narrowed  Drafting of model legislation for central and state GST underway to be contd…… 47
  48. 48. GST - Journey so far  Establishment of IT infrastructure in process (GST network)  NSDL selected as technology partner for GST  Tax rates maintained at same level of 10% to stay on course towards ST  Certain central excise rates changed to prepare the ground for transition to GST by reducing number of exemptions  Nominal central excise duty of 1% imposed on 130 items, no Cenvat credit allowed on such items.  In service tax, proposals aimed to achieve a close fit between the present service tax regime and GST. 48
  49. 49. GST - Journey so far Budget 2012  No announcement on GST rollout date  GST to be implemented in consultation with the States at the earliest  GST network (GSTN) likely to be in place from August, 2012  GSTN to implement common PAN based registration, return filing and processing of payments for centre and all states on a shared platform.  Bringing closer of Service Tax and Central Excise for transition to GST  Drafting of model legislation for CGST and SGST under progress.  Common forms for Service Tax and Central Excise registration and return proposed.  Place of Supply Rules, 2012 to trigger debate to assess issues that may arise in taxation of inter state services for eventual launch of GST. 49
  50. 50. The Journey – beginning of end……. Past Now Future Past Now Future National GST Dual GST ??????? …or end of beginning !! 50