If tax laws were a movie, service tax would qualify as an item number - extremely popular in a short period of time and meant for the masses. With Direct Taxes Code (DTC) looming over the horizon and Excise and Customs duties flattening, the Government found itself in the familiar situation of having to turn to service tax in Budget 2011 to stabilise revenues. The estimated revenue from service tax in the ensuing financial year is Rs 82,000 crore, an increase in excess of 18 per cent. Considering the amendments made in the Budget, actual revenues would exceed estimates without breathing too hard.
Are home-stays hotels?
The Government may have stumped the Delhi High Court in Home Solution Retail case (over its ruling that renting of immovable property would not attract service tax) by adding that service as a taxable service last year, but it appears to have taken a few lessons from the judgement as well. The High Court made a pointed reference that only value-added services such as air-conditioning would attract a levy.
In the Budget, both the new service of restaurant (having a licence to serve alcoholic beverages) and the expansion of the scope of healthcare services to include clinical establishments use the word air-conditioning. Would the increasingly popular home-stays be considered hotel, inn, guesthouse, club or campsite – entities that now need to charge service tax on short-term accommodation of less than three months? If one goes by the intent of the law they would, but it is only a matter of time before this issue arises before a CESTAT due to the practice of introducing a levy, and later clarifying what services fall within that.
POT Rules
The Service Tax (Point of Taxation) Rules (POT) as found in Notification No 18/2011 takes a lot of words to inform us that service tax would now be payable on the date of issue of invoice or receipt of payment, whichever is earlier. Payments would cover advance payments. In case of change in tax rates as is expected next year if GST comes out of the drawing board, amnesty is provided depending on when the triggering event, if invoice issue or payment, occurs. Service tax collections would occur earlier under the POT rules and one may have to pay tax on bad debts. POT rules are slated to be followed from April 1, 2011.
Aligning with GST
Without too much brouhaha, Budget 2011 appears to be moving towards aligning provisions of Service Tax with GST. The decision to have a public debate on a negative list of services is welcome, though 16 years late. The exemption given to professionals for appearance before any court, tribunal or authority is being done away with and healthcare services which were protected for ages now come under the levy as do doctors providing services from a clinical establishment.
However, the multitude of abatements with almost every new levy is not contemplated under the GST era. It appears that the inevitable increase in service tax rate would occur along with the transition to GST or next year, whichever is earlier.
Domestic and international air travel, all healthcare facilities and restaurants all come under service tax now. These can no longer be considered luxuries.
Since each monetary unit would buy fewer of these goods and services, would this not add a few decimal points to inflation as consumption of these goods is not going to come down drastically? Is there an attempt to make amends for the failure of the erstwhile Fringe Benefit Tax?
Administrative provisions
There has been action aplenty on the administrative provisions of service tax too. Credit of tax on input services of erection, commissioning or installation, commercial or industrial construction and construction of complex would be restricted to 40 per cent of tax paid when tax has been paid on the full value of the service after availing Cenvat Credit. Some lenient interest and some harsh penal provisions complete the tinkering with the service tax provisions in Budget 2011.
(The author is a Bangalore-based chartered accountant.)