Highlights of Budget 2011-12
Budget 2011-12 and Finance Bill 2011 were presented before Parliament on 28-2-2011 at 11 AM by Hon. Finance Minister. Some changes relating to Central excise and customs have become effective from 1-3-2011. Some changes will be effective from 1-4-2011, while statutory changes will be effective when President assents the Finance Bill, 2011, after passing of the Bill by Parliament. Service tax on new services and expansion in definitions of taxable services will be effective from a date to be notified.
1. Changes in Central Excise
Excise duty @ 1% or 5% on 130 items – As a step towards moving to GST, exemption in respect of 130 items has been withdrawn and excise duty of 5% has been imposed (total duty 5.15%) vide Notification No. 2/2011-CE dated 1-3-2011. If assessee does not avail Cenvat credit on his inputs, excise duty payable on these goods will be 1% vide Notification No. 1/2011-CE dated 1-3-2011. It is also clarified that if excise duty @ 1% is paid, buyer cannot avail Cenvat credit.
Excise duty on branded readymade garments and made up articles - Excise duty @ 10.30% has been imposed on branded readymade garments and made up articles, w.e.f. 1-3-2011.
Increase in interest rate – Interest payable on delayed payment of excise duty or wrong availment of Cenvat credit has been increased from 13% to 18% w.e.f. 1-4-2011 [Really, interest can be only compensatory. 18% interest rates appears to be semi-penal].
Change in penalty provisions – Penalty provisions as contained in sections 11A and 11AC have been revamped. A separate category of penal provisions has been created inn cases where there has been suppression of facts or wilful mis-statement or fraud but transactions were duly recorded by the assessee in the ‘specified records’. In such cases, penalty will be upto 50% of duty (against normal penalty of 100% of duty).
It is also provided that even if excise duty and interest is paid before issue of show cause notice, penalty @ 1% per month (maximum 25%) is imposable if the short payment was on account of suppression of facts, wilful misstatement or fraud.
2. Changes in Cenvat Credit Rules
Substantial changes have been made in Cenvat Credit Rules, 2004 w.e.f. 1-4-2011. The summary is as follows –
Inputs - Definition of input [rule 2(k)] has been amended. Construction material, goods for personal consumption of employees and goods which have no relation with ‘manufacture’ will not be eligible for Cenvat credit. Expenses beyond ‘place of removal’ will not be entitled to Cenvat credit.
Input Services - Definition of input services [rule 2(l)] have been completely revamped. Many input service which were hitherto eligible will not be eligible after 1-4-2011. Services relating to construction of factory or office, motor vehicles and personal use or consumption of employee will not be eligible for Cenvat credit.
Capital goods - Capital goods used outside the factory for generation of electricity for captive use within the factory will be eligible for Cenvat credit. Services in relation to generation of electricity for captive use within the factory also eligible for Cenvat credit. However, issue relating to wind mills is not clear. These are situated far away from the factory and electricity is not directly received in the factory.
Partial write off of inputs - Rule 5B has been amended to provide that Cenvat credit will have to be reversed even if inputs are partially written off from books of account.
Restriction on Cenvat credit in case of ships brought for ship breaking - Cenvat credit of CVD paid on ship breaking will be restricted to 85%
Rule (5) omitted - Rule 6(5) allowed full Cenvat Credit in case of specified 16 input services, even when some services or some goods were exempt. This rule has been withdrawn w.e.f. 1-4-2011. Thus, all services are now under 5% amount scheme or proportionate reversal scheme.
Manufacturers of exempted goods and taxable goods and exempted service and taxable services - Rule 6 applies where both exempted goods and taxable goods are manufactured or exempted and taxable services provided. In case of exempted services, ‘amount’ payment reduced to 5% w.e.f. 1-4-2011.
Further, so far, provisions about reversal of Cenvat credit were not clear in cases like (a) trade goods (b) Value of exempted service to be considered where service tax is paid under abatement scheme or composition scheme. Now, clear provisions have been made for these issues.
In case of traded goods, difference between sale price and purchase price will be treated as value of exempted service for purpose of calculating ratio under rule 6(3A) of Cenvat Credit Rules.
Payment of ‘amount’ means Cenvat credit not taken - Rule 6(3D) (inserted w.e.f. 1-4-2011) states that payment of ‘amount’ under rule 6(3) means Cenvat credit is not taken for purpose of an exemption notification where exemption is granted on condition that no Cenvat on input and input services is availed.
Overriding provisions - In respect of banking service [section 65(105)(zm)], the Bank or NBFC is required to pay ‘amount’ equal to 50% of Cenvat Credit availed on inputs and input services [Rule 6(3B) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011]. In respect of general insurance services [section 65(105)(zx)] and life insurance service [section 65(105)(zzzza)], ‘amount’ payable is equal to 20% of Cenvat credit availed on inputs and input services in the month [Rule 6(3C) of Cenvat Credit Rules as inserted w.e.f. 1-4-2011].
No reversal of Cenvat if service provided to SEZ unit or developer - No reversal or payment of amount if services provided to SEZ unit or developer [Rule 6(6A) inserted w.e.f. 1-4-2011]
3. Change in Customs Law
Introduction of self assessment – One major change is that self assessment has been introduced in customs. It is trust based compliance management. Provision has been made for provisional assessment.
Customs officer will verify assessment and examine goods on selective basis. Subsequently, audit can be conducted either at customs office or at premises of importer or exporter.
Time limit for filing refund claim – Time limit for filing refund claim has been increased to one year from present limit of 6 months.
Export duty on iron ore lumps and fines – The export duty has been increased to 20%.
Simplification is project imports – Requirement of security deposit has been replaced by a bank guarantee.
Increase in interest rate – Interest payable on delayed payment of customs duty has been increased from 13% to 18% w.e.f. 1-4-2011 [Really, interest can be only compensatory. 18% interest rates appears to be semi-penal].
4. Service tax
Major changes have been made in service tax.
4.1 New services
Service tax will be effective from a date to be notified later.
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l Hotels, clubs, guest houses having declared tariff rate more than Rs. 1,000 per day even if actual charge was less – service tax @ 5%
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l Services in air-conditioned restaurant having license to service liquor – abatement 70% i.e. service tax payable on 30%
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4.2 Expansion of existing services
Changes will be effective from date to be notified later.
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l Providing any operational or administrative assistance will be Business Support Service.
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l Legal services – arbitration services covered Representational services provided by any person to a business entity now taxable. However, no daring to touch individual advocates.
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l Commercial coaching now covers all courses which are not recognised by law, even if conducted by recognised Institutes.
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l All vehicle repair services except goods transport vehicles and auto-rickshaws (so far only authorised service stations were covered).
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l Services provided by clubs to non-members are now taxable.
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l Services provided by non-Government clinical establishments having central AC in any part of establishment and more than 25 beds taxable @ 5%. Doctors attached to such hospitals and providing services will also be liable to service tax.
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l All diagnostic services provided will be taxable @ 5% (many by some relaxation will be given to individual diagnostic centres not attached to clinical establishments)
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4.3 Point of taxation Rules
Major change is that service tax would be payable on billing basis, and not on receipt basis, w.e.f. 1-4-2011.
Basic principle in Point of Taxation Rules is that service tax is payable at rate when service is provided, bill is made or advance is received, whichever is earlier, w.e.f. 1-4-2011. In case of associated enterprises, even raising of Bill not required. Entry in books of account is sufficient
Change in service tax rate - Receipt of advance or issue of bill, whichever is earlier is relevant. Hence, if advance was received and service tax rate changes later, differential tax is neither payable nor refundable.
Imposition of tax on new services - No service tax will be payable on new services if these were provided before imposition tax, if invoice raised within 14 days
Continuous supply of service - Continuous supply of services means provided for continuous period of three months – e.g. telephone, construction, insurance, AMC. In case of continuous service, due date of payment as per contract will be point of taxation, except when payment was received or bill was raised before due date
Credit note issued – If advance is received, service tax is payable. If credit note is issued later, self adjustment is permissible only if service is not provided in full or part. Such adjustment not permissible if discount is given or there is deduction on account of faults/deficiency in service provided.
If certain payment is made by service provider to service receiver later (i.e. if part amount is refunded), corresponding Cenvat credit to be reversed.
Credit of service tax only after payment to service provider - Service tax is payable on accrual basis but Cenvat credit is available to service receiver only on payment to service provider, as rule 4(7) not changed (This anomaly needs rectification).
4.4 Services provided to SEZ
Export of SEZ Rules are made applicable to provision of services to SEZ to determine whether the service is wholly consumed within SEZ. Three categories of services as applicable in case of Export of Services will apply to SEZ also.
In other cases, refund application will have to be filed. When SEZ unit or developer has operations outside the Zone, refund will be in ratio of export turnover divided by total turnover. This provision is not practicable in case of SEZ developers as they have no exports. Even in case of SEZ units, the ratio cannot apply in case of services received in initial period of construction and operations.
4.5 Other changes
Increase in interest rate – Interest payable on delayed payment of service tax or wrong availment of Cenvat credit has been increased from 13% to 18% w.e.f. 1-4-2011 [Really, interest can be only compensatory. 18% interest rates appears to be semi-penal].
Change in penalty provisions – Penalty provisions as contained in sections 76 to 80 of Finance Act, 1994 have been revamped. A separate category of penal provisions has been created inn cases where there has been suppression of facts or wilful mis-statement or fraud but transactions were duly recorded by the assessee in the ‘specified records’.
It is provided that even if service tax and interest is paid before issue of show cause notice, penalty @ 1% per month (maximum 25%) is imposable if the short payment was on account of suppression of facts, wilful misstatement or fraud.
Benefits to small service providers – There will be no audit if turnover is upto Rs. 60 lakhs per annum. Interest rate applicable to them would be 15% instead of normal 18%.
Provision for prosecution – Provision has been made for prosecution of offenses under service tax provisions. However, there is no powers of arrest under service tax provisions.
Service tax on money changing services - Person liable to pay service tax has option to pay service tax @ 0.1% of the gross amount of currency exchanged, instead of at full rate on value of services [Rule 6(7B) of Service Tax Rules as amended w.e.f. 1-4-2011]. Alternatively, he can find value of service as provided in rule 2B of Service Tax (Determination of Value) Rules, 2011 as inserted w.e.f. 1-4-2011 |
