Status quo on rates but services basket expands

Service providers can breathe a sigh of relief. The Union Budget 2009-10 has left the service tax rate unchanged to stimulate consumption. However, finance minister Pranab Mukherjee has brought some other services, including law firms, under the service tax net. Among other services pulled into the net are transport of goods by rail and water routes, plastic surgeries, etc.

In this two-part series, we decode the service tax proposals in the Budget. The main features are:

Exemption limit has been retained at Rs 10 lakh

Rate of service tax stays unchanged at 10% plus 2% education cess and 1% higher education cess (effective rate 10.3%).

Three new services will be liable to service tax from a date to be notified. They are:

1) service provided in relation to transport of
(i) coastal goods; and
(ii) goods through inland water including national waterways.

2) legal consultancy service, applicable only to business entity that provides service in relation to advice, consultancy or assistance in any branch of law, in any manner to any other business entity. Any service provided by way of appearance before any court, tribunal or authority won’t amount to taxable service. For the purpose of legal consultancy service, business entity includes an association of persons, body of individuals, company or firm but doesn’t include an individual. Any branch of law includes advice on income tax or sales tax or service tax or Customs Act or Excise Act or FEMA or Labour Law.

A few examples are:
i) service provided by Mr A to Mr B is not liable to service tax

ii) service provided by Mr A to XYZ Ltd or M/s XYZ & Co is not liable to service tax

iii) service provided by XYZ Ltd or M/s XYZ & Co to Mr. A is not liable to service tax

iv) service provided by XYZ Ltd or M/s XYZ & Co to ABC Ltd or M/s ABC & Co is liable to service tax

3) Cosmetic and plastic surgery service: Service provided by any person in relation to cosmetics or plastic surgery to any person is taxable under cosmetic and plastic surgery service. The abovementioned service doesn’t include any surgery undertaken to restore or reconstruct anatomy or functions of body affected due to congenital defects, development abnormalities, degenerative diseases, injury or trauma. For example, an actress going in for a facelift surgery shall be liable to pay service tax. Any surgery done for medical reasons won’t be subjected to service tax.

The government has also extended the scope of existing services.

A few details:
1) The definition of business auxiliary service (BAS) is being amended so as to provide that only the processes that result in the manufacture of ‘excisable goods’ (as defined in the Central Excise Act) are excluded from the purview of BAS. So far, workers who were processing the goods on the behalf of the manufacturer were not liable to service tax as any activity amounting to manufacture was not liable to service tax. With this amendment, the worker will have to start charging service tax to manufacturers who don’t pay excise duty due to exemption available for such goods or goods manufactured and cleared at nil rate of duty or 0% rate of excise duty as now only the processes that result in manufacture of excisable goods are not liable to service tax.

2) The definition of stockbroker (in stockbroker service) is being amended to exclude sub-broker from its ambit. As a consequence, sub-brokers will be outside the purview of the service tax. Before this amendment, a sub-broker couldn’t bill clients directly but had to do so through the stockbroker under whom he was a sub-broker.

The stockbroker would pay the agreed amount or a percentage of brokerage to the sub-broker for clients serviced by him. If the brokerage earned by the sub-broker exceeded Rs 10 lakh he would charge service tax to the stockbroker on the brokerage earned by him and the stockbroker would take Cenvat of the service tax paid to the sub-broker. So the amendment made by the government to exclude the sub-broker will not make any difference to the service tax collections by the government.

3) Transport of goods in containers by rail service has been amended to provide that any goods transported by railways in any manner shall now be liable to service tax. So far, only goods transported in a container by rail were covered but with this amendment, any goods sent in any manner by rail will be covered.

For example, a parcel sent to Delhi from Mumbai in Rajdhani Express will now be liable to service tax.

The above changes will come into effect from a date to be notified, after the enactment of Finance (No 2) Bill, 2009.

 4) The definition of ‘information technology software service’ is being amended to replace the word ‘acquiring’ with the word ‘providing’ (appearing in Sl No (iv) and (v) of the definition). The amendment is being given retrospective effect from May 16, 2008.

The author is a Mumbai-based chartered accountant