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Legal Pulse: Today's new service tax regime, under the lens, criticised

Taxes
Taxes

The government post-budget notifications to tax new services and amend taxation of existing ones have taken effect today (1 July), particularly impacting sectors such as aviation, construction and hospital services while retrospective service tax imposition on rentals of immovable property and commercial coaching could increase litigation.

However, an important fallout of the expansion of the service tax net and consequent amendments less than a year before the GST comes into existence has been perceived by practitioners as likely to cause confusion. 

Athena Law Associates founding partner Puneet Agrawal, who was formerly with tax law firm Lakshmi Kumaran and Sridharan, told Legally India: "Since the government has already committed to introduce the GST [Goods and Services Tax] regime by April of next year there is no need to create further confusion when people are preparing themselves for it. Any new services or amendments could have been incorporated under the GST regulations only.

"What is the need to unsettle so many issues and bring under taxation so many new services which are debatable and disputable?

"Earlier the Delhi High Court had said that renting of immovable property is not a service, but now they have amended the definition to annul that with retrospective effect since 1 June 2007. This will lead to a hike in litigation, already writ petitions have been filed against retrospective imposition."

Aviation:

"Quite an important amendment has been brought in to increase the scope of existing air travel service. There will be service tax on domestic travel including the economy class. International travel was always under the service tax net but now even domestic air travel will be taxed with an exception that won't be more than Rs. 100 or 10 per cent, whichever is lower."

Construction industry:

"According to an amendment one will need to pay service tax on construction activity done by a builder.

"If somebody is constructing property for sale of that property with a view to sell it, the construction is deemed to be a service. The point here is that can this be challenged before the HC in a writ court saying that this cannot be a service at all.

"In fact there were departmental circulars which said that if you construct for yourself, it is a self service therefore there is no service tax.

"The distinction which needs to be highlighted is if you're buying the property after its completion - i.e. once the completion certificate is acquired and then you enter into an agreement to buy - then there is no liability to pay tax. There is discrimination here if you purchase it beforehand and pay advance you're liable to tax and if you purchase after completion there is no tax.

"Also, in the real estate industry, they have imposed service tax on preferential location charges which is differential pricing and now that is chargeable at 10 per cent."

Hospitals: service taxable

"They've imposed service tax on hospitals this time. Not all services provided are chargeable to service tax, only two of them are: One, when services are provided to employees of a business entity, for example an agreement to provide health check-up to employees of a company by a hospital is chargeable.

"Second, if you're covered by insurance and treatment is done by the hospital for which payment is directly made by the insurance company – that is also covered, hospital has to pay service tax. Tax will be imposed on either the hospital or business entity, on which they can claim credit."

Sports sponsorship

"Earlier there was no service tax on sponsorship of sports events like DLF IPL, so the money which was received by way of sponsorship was not taxed.

"Sponsorship for sports has been brought under service tax. The problem is what would happen to games like hockey, badminton or chess, etc. which, as it is, do not get enough sponsors. Service tax will further deter people from sponsoring such sports."

Rights in events

"Simple example - if a celebrity like Shilpa Shetty gets married and gives rights to a photographer for Rs 1 crores, these kind of rights in any events have also been made chargeable under service tax, in fact marriage have been specifically provided for under taxable service definition – rights in relation to marriage are now taxable.

"Marriage is considered a private affair but if you give somebody the right to partake the benefits by making it a commercial affair then you need to pay tax."

New services

The eight services that have now been included in the list of taxable services through appropriate amendments in section 65(105) of the Finance Act 1994 are:
  • Promotion, Marketing and Organizing of Games of Chance including Lottery. [Section 65 (105)(zzzzn)].
  • Health Service [Section 65 (105) (zzzzo)].
  • Service of maintenance of medical records of employees of a business entity. [Section 65 (105) (zzzzp)].
  • Service of promoting of a 'brand' of goods, services, events, business entity etc. [S. 65 (105) (zzzzq)].
  • Service of permitting commercial use or exploitation of any event organized by a person or organization. [S. 65 (105) (zzzzr)].
  • Service provided by Electricity Exchanges [S. 65 (105) (zzzzs)].
  • Service related to certain copyrights, earlier not covered under existing IPR Service.[Section 65 (105) (zzzzt)].
  • Service provided by a builder etc. for providing preferential location or external or internal development of complexes. [Section 65 (105)(zzzzu)].

Amendment in existing services

Scope of Services Expanded –
  • Air Passenger Transport Service' is being expanded to include domestic journeys, and international journeys in any class [S 65 (105) (zzzo)].
  • Information Technology Software Service' – expanded to include even if the service provided is used for purposes other than business or commerce. [S 65 (105) (zzzze)].
  • 'Commercial Training or Coaching Service' [section 65 (105) (zzc)] –That the term 'commercial' appearing in the relevant definitions, only means that such training or coaching is being provided for a consideration, whether or not such training or coaching is conducted with a profit motive.
  • Sponsorship Service [section 65 (105) (zzzn)], the exclusion relating to sponsorship pertaining to sports is being removed.
  • Construction of Complex service' [section 65 (105) (zzzh)], and 'Commercial or industrial construction service' [section 65 (105) (zzq)].
  • Renting of immovable property Service [section 65 (105) (zzzz)].
  • Explanation is inserted under Auctioneer Service [section 65 (105) (zzzr)].
  • Air port Service/ Port [section 65 (105) (zzm)].
  • Management of investment under ULIP Service [section 65 (105) (zzzzt)].
The government post-budget notifications to tax new services and amend taxation of existing ones have taken effect today, particularly affecting sectors such as aviation, construction and hospital services while retrospective service tax imposition on rentals of immovable property and commercial coaching could increase litigation.

However, an important fallout of the expansion of the service tax net and consequent amendments less than a year before the GST comes into existence has been perceived by practitioners as likely to cause confusion.  

Athena Law Associates partner Puneet Agrawal, who was formerly with tax law firm Lakshmi Kumaran and Sridharan told Legally India: "Since the government has already committed to introduce the GST [Good and Service Tax] regime by April of next year there is no need to create further confusion when people are preparing themselves for it. Any new services or amendments could have been incorporated under the GST regulations only.

"What is the need to unsettle so many issues and bring under taxation so many new services which are debatable and disputable?"

"Earlier the Delhi High Court had said that renting of immovable property is not a service, but now they have amended the definition to annul that with retrospective effect since 1 June 2007. This will lead to a hike in litigation, already writ petitions have been filed against retrospective imposition."
https://www.legallyindia.com/20100521857/Tax/legal-pulse-tax-no-service-tax-on-immovable-property-but-questions-remain

Aviation:
"Quite an important amendment has been brought in to increase the scope of existing air travel service. There will be service tax on domestic travel including the economy class. International travel was always under the service tax net but now even domestic air travel will be taxed with an exception that won't be more than Rs. 100 or 10 per cent, whichever is lower."

Construction industry:
"According to an amendment one will need to pay service tax on construction activity done by a builder.

"If somebody is constructing property for sale of that property with a view to sell it, the construction is deemed to be a service. The point here is that can this be challenged before the HC in a writ court saying that this cannot be a service at all.

"In fact there were departmental circulars which said that if you construct for yourself, it is a self service therefore there is no service tax.

"The distinction which needs to be highlighted is if you're buying the property after its completion - i.e. once the completion certificate is acquired and then you enter into an agreement to buy - then there is no liability to pay tax. There is discrimination here if you purchase it beforehand and pay advance you're liable to tax and if you purchase after completion there is no tax.

"Also, in the real estate industry, they have imposed service tax on preferential location charges which is differential pricing and now that is chargeable at 10 per cent."

Hospital Service: Service Tax on Hospitals
"They've imposed service tax on hospitals this time. Not all services provided are chargeable to service tax, only two of them are: One, when services are provided to employees of a business entity, for example an agreement to provide health check-up to employees of a company by a hospital is chargeable.

"Second, if you're covered by insurance and treatment is done by the hospital for which payment is directly made by the insurance company – that is also covered, hospital has to pay service tax. Tax will be imposed on either the hospital or business entity, on which they can claim credit."

Sports Sponsorship:
"Earlier there was no service tax on sponsorship of sports events like DLF IPL, so the money which was received by way of sponsorship was not taxed.

"Sponsorship for sports has been brought under service tax. The problem is what would happen to games like hockey, badminton or chess, etc. which, as it is, do not get enough sponsors. Service tax will further deter people from sponsoring such sports."

Rights in Events:
"Simple example - if a celebrity like Shilpa Shetty gets married and gives rights to a photographer for Rs 1 crores, these kind of rights in any events have also been made chargeable under service tax, in fact marriage have been specifically provided for under taxable service definition – rights in relation to marriage are now taxable        
"Marriage is considered a private affair but if you give somebody the right to partake the benefits by making it a commercial affair then you need to pay tax."

New Services:
 The eight services that have now been included in the list of taxable services through appropriate amendments in section 65(105) of the Finance Act 1994 are:
•    Promotion, Marketing and Organizing of Games of Chance including Lottery. [Section 65 (105)(zzzzn)].
•    Health Service [Section 65 (105) (zzzzo)].
•    Service of maintenance of medical records of employees of a business entity. [Section 65 (105) (zzzzp)].
•    Service of promoting of a 'brand' of goods, services, events, business entity etc. [S. 65 (105) (zzzzq)].
•    Service of permitting commercial use or exploitation of any event organized by a person or organization. [S. 65 (105) (zzzzr)].
•    Service provided by Electricity Exchanges [S. 65 (105) (zzzzs)].
•    Service related to certain copyrights, earlier not covered under existing IPR Service.[Section 65 (105) (zzzzt)].
•    Service provided by a builder etc. for providing preferential location or external or internal development of complexes. [Section 65 (105)(zzzzu)].

Amendment in Existing Services:
Scope of Services Expanded –
•    Air Passenger Transport Service' is being expanded to include domestic journeys, and international journeys in any class [S 65 (105) (zzzo)].
•    Information Technology Software Service' – expanded to include even if the service provided is used for purposes other than business or commerce. [S 65 (105) (zzzze)].
•    'Commercial Training or Coaching Service' [section 65 (105) (zzc)] –That the term 'commercial' appearing in the relevant definitions, only means that such training or coaching is being provided for a consideration, whether or not such training or coaching is conducted with a profit motive.
•    Sponsorship Service [section 65 (105) (zzzn)], the exclusion relating to sponsorship pertaining to sports is being removed.
•    Construction of Complex service' [section 65 (105) (zzzh)], and 'Commercial or industrial construction service' [section 65 (105) (zzq)].
•    Renting of immovable property Service [section 65 (105) (zzzz)].
•    Explanation is inserted under Auctioneer Service [section 65 (105) (zzzr)].
•    Air port Service/ Port [section 65 (105) (zzm)].
•    Management of investment under ULIP Service [section 65 (105) (zzzzt)].

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