The Finance Minister has introduced the Finance Bill, 2010, in the Lok Sabha on 26th February 2010. Clause 75 and 76 of the said Bill covers the legislative changes relating to Chapter V of the Finance Act, 1994 (i.e. Service Tax). While some fresh exemptions from service tax have been granted, some existing exemptions have either been withdrawn or modified. All these changes have been notified under notification nos. 2/2010-ST to 17/2010-ST all dated 27th February 2010. While most of the legislative changes in the Finance Act, 1994 would come into force from a date to be notified after the enactment of the Finance Bill, 2010, the notifications (except notification nos. 7/2010-ST, 8/2010-ST and 9/2010-ST which would come into effect from 01.04.2010) would become effective from 27th February 2010. We have attempted to bring all the important changes pertaining to service tax relevant at this stage to your notice through this letter and its Annexures. Upon enactment of the Finance Bill, 2010, when the legislative provisions come into effect, another communication would be sent to you
explaining the changes in detail and addressing the doubts and queries raised by you and the trade in the intervening period. To avoid repetition, no separate Explanatory Notes are being issued for service tax.

2.     NEW SERVICES INCLUDED IN THE LIST OF TAXABLE SERVICES

2.1     Eight services, hitherto not included separately within the list of taxable services, are being included in the said list through appropriate amendments in sub-section 105 of Section 65 of the Finance Act, 1994. One of them, namely promotion, marketing etc. of lottery and similar games of chance presently figures as part of Business Auxiliary Service (BAS). This is now being introduced as an independent entry in the list of taxable services. Consequential amendments have been made in the definition of the BAS.

2.2     The new services are,-

• Services of promoting, marketing or organizing of games of chance, including lottery [Section 65 (105) (zzzzn)].
• Health services, namely:
ı health check up undertaken by hospitals or medical establishments for the employees of business entities##; and
ı health services provided under health insurance schemes offered by insurance companies##. [Section 65 (105) (zzzzo)] [##The tax on these health services would be payable only to the extent payment for such medical check up or preventive care or treatment etc. is made directly by the business entity or the insurance company to the hospital or medical establishment].
• Services provided for maintenance of medical records of employees of a business entity [Section 65 (105) (zzzzp)].
• Services of promoting of a ‘brand’ of goods, services, events, business entity etc [Section 65 (105) (zzzzq)].
• Services of permitting commercial use or exploitation of any event organized by a person or organization [Section 65 (105) (zzzzr)].
• Services provided by Electricity Exchanges [Section 65 (105) (zzzzs)].
• Services related to two types of copyrights hitherto not covered under existing taxable service ‘Intellectual Property Right (IPR)’, namely, those on (a)
cinematographic films; and (b) sound recording [Section 65 (105) (zzzzt)].
• Special services provided by a builder etc. to the prospective buyers such as providing preferential location or external or internal development of complexes on extra charges [Section 65 (105) (zzzzu)].
2.3     The scope of these services and other significant details are enclosed in Annexure A. The tax on these services would come into effect from a notified date after the enactment of the Finance Bill, 2010. It is requested that during this interim period, the relevant information for each of the aforementioned services such as revenue and taxpayer potential, issues that require further clarification, anticipated legal or implementation problems that are likely to be faced, may please be gathered and inputs of significance, if any, may be brought to the notice of Tax Research Unit latest by the second week of March, 2010.

3.     ALTERARTION OR EXPANSION IN THE SCOPE OF EXISTING SERVICES

3.1     In the case of following existing taxable services, the scope has been altered either to expand their scope or to remove certain difficulties that have been faced during tax implementation. These changes are as follows,-
• The scope of the taxable service ‘Air Passenger Transport Service’ [section 65 (105) (zzzo)] is being expanded to include domestic journeys, and international journeys in any class.
• Presently the taxable service, ‘Information Technology Software Service’ [section 65 (105) (zzzze)] is subjected to tax only in cases where such IT software is used for furtherance of business or commerce. The scope of the taxable service is being expanded to tax such service even if the service provided is used for
purposes other than business or commerce.
• An Explanation is being added in the definition of the taxable service ‘Commercial Training or Coaching Service’ [section 65 (105) (zzc)] to clarify 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. This change is being given retrospective effect from 01.07.2003.
• In the definition of the taxable service ‘Sponsorship Service’ [section 65 (105) (zzzn)], the exclusion relating to sponsorship pertaining to sports is being removed.
• In the definition of the taxable services ‘Construction of Complex service’ [section 65 (105) (zzzh)], and ‘Commercial or industrial construction service’ [section 65 (105) (zzq)], it is being provided that unless the entire consideration for the property is paid after the completion of construction (i.e. after issuance of completion certificate by the competent authority), the activity of construction would be deemed to be a taxable service provided by the builder/promoter/developer to the prospective buyer and the service tax would be charged accordingly.
• Amendments are being made in the definition of the taxable service ‘Renting of immovable property’ [section 65 (105) (zzzz)] to,-
(i) provide explicitly that the activity of ‘renting’ itself is a taxable service. This change is being given retrospective effect from 01.06.2007; and
(ii) provide that renting of vacant land, where the agreement or contract between the lessor and lessee provides for undertaking construction of buildings or structures on such land for furtherance of business or commerce during the tenure of the lease, shall be subjected to service tax.
• The definitions of the taxable services, namely the ‘Airport Services’ [section 65 (105) (zzm)], the ‘Port Services’ [section 65 (105) (zn)] and the ‘Other Port Services’ [section 65 (105) (zzl)] are being amended to provide that,- (a) all services provided entirely within the airport/port premises would fall under these services; and
(b) an authorization from the airport/port authority would not be a precondition for taxing these services.
• An explanation is being added in the definition of the taxable service ‘Auctioneer’s Service’ [section 65 (105) (zzzr)] to clarify that the phrase ‘auction by government’ means an auction involving sale of government property by any auctioneer and not when the government acts as an auctioneer for sale of the private property.
• The definition of the taxable service ‘Management of Investment under ULIP Service’ [section 65 (105) (zzzzt)] is being amended to provide that the value of the taxable service for any year of the operation of policy shall be the actual amount charged by the insurer for management of funds under ULIP or the maximum amount of fund management charges fixed by the Insurance Regulatory & Development Authority (IRDA), whichever is higher.

3.2     The scope of modifications in the aforesaid taxable services and other significant details pertaining to amendments being made in the Finance Act, 1994 are enclosed in Annexure ‘B’. These modifications would come into effect from a notified date after the enactment of the Finance Bill, 2010. It is requested that during this interim period, the impact of the above changes, issues that require further clarification, anticipated legal or implementation problems may please be assessed and inputs in this regard may be brought to the notice of Tax Research Unit latest by the second week of March, 2010.

4.     OTHER AMENDMENTS TO THE FINANCE ACT, 1994

4.1     Finance Act, 1994 is being amended to,-
a) insert an explanation in sub-section (3) of Section 73 to clarify that no penalty shall be imposed where service tax along with interest has been paid before issuance of notice by the department. This would be effective from the date of enactment of the Finance bill, 2010; and

b) provide definition of the term ‘business entity’ so as to include an association of persons, body of individuals, company or firm but to exclude an individual. This would be effective from a notified date after the enactment of the Finance bill, 2010

4.2     For other editorial changes being made in the Finance Act, 1994, please refer to the Finance Bill, 2010.

5.     EXEMPTIONS

5.1     The following exemptions from service tax are being provided with effect from 27th February, 2010, namely,-
• Statutory taxes charged by any government (including foreign governments, where a passenger disembarks) on air passenger would be excluded from taxable value for the purpose of levy of service tax under the Air Passenger Transport Service. (Notification No.15/2010-ST, dated 27th February, 2010 refers).
• Exemption from service tax is being provided to services relating to ‘Erection, Commissioning or Installation’ of,-
o Mechanized Food Grain Handling Systems etc.;
o Equipment for setting up or substantial expansion of cold storage; and o Machinery/equipment for initial setting up or substantial expansion of units for processing of agricultural, apiary, horticultural, dairy, poultry, aquatic, marine or meat products.
(Notification No.12/2010-ST, dated 27th February, 2010 refers).
• Packaged I.T. software, pre-packed in retail packages for single use, is being exempted from service tax leviable under IT Software Service, subject to specified conditions. These conditions include that either the customs duty (in case of import) or excise duty (in case of domestic production) has been paid on the entire amount received from the buyer (Notification No.17/2010-ST and No.2/2010-ST, both dated 27th February, 2010 refer).
• At present, exemption from service tax is available to transport of fruits, vegetables, eggs or milk by road by a goods transport agency. The scope of exemption is being expanded by including food grains and pulses in the list of exempted goods (Notification No.4/2010-ST, dated 27th February, 2010 refers).
• Exemption from service tax is being provided to Indian news agencies under ‘Online Information and Database Retrieval Service’ and ‘Business Auxiliary Service’ subject to specified conditions (Notification No.13/2010-ST, dated 27th February, 2010 refers).
• Exemption from service tax is being provided to the ‘Technical Testing and Analysis Service’ and ‘Technical Inspection and certification service’ provided by Central and State seed testing laboratories, and Central and State seed certification agencies (Notification No.10/2010-ST, dated 27th February, 2010 refers).
• Exemption from service tax is being provided to the transmission of electricity (Notification No.11/2010-ST, dated 27th February, 2010 refers).

6.     WITHDRAWALS OR AMENDMENTS TO EXISTING EXEMPTIONS

6.1     The following changes have been brought about in the existing exemptions,-
a) Exemption from service tax on service provided in relation to ‘Transport of Goods by Rail’ by notification No.33/2009, dated 1st September, 2009 is being withdrawn (Notification No.7/2010-ST, dated 27th February, 2010 refers). The exemption provided to certain specified goods transported by rail vide Notification No. 28/2009-ST, dated 31st August, 2009, which was subsequently withdrawn vide notification No. 36/2009-ST dated 9th September, 2009, has been restored. (Notification No. 8/2010-ST, dated 27th February, 2010 refers). An abatement of 70% of the gross value of the freight charged on goods (other than exempted goods) is being provided vide notification No. 9/2010-ST dated 27th February, 2010 by adding the service of ‘Transport of goods by rail’ in notification No. 1/2006-ST dated 01.03.2006. All these changes will also come into effect from 01.04.2010.

b)     The exemption from service tax on ‘Commercial training or coaching service’ extended to vocational training institutes vide notification No. 24/2004-ST dated 10.09.2004 is being limited by introducing a new definition of vocational training institutes. Service tax exemption will be available only to industrial training institutes or industrial training centres affiliated to National Council of Vocational Training (NCVT) and offering courses in the designated trades covered under  Schedule I of the Apprentices Act, 1961. The List figuring under Schedule I of the Act covers engineering as well as non-engineering skills/trades (Notification No.3/2010-ST, dated 27th February, 2010 refers).

c) Exemption from service tax, presently available to Group Personal Accident Scheme provided by Govt. of Rajasthan to its employees, under General Insurance Service is being withdrawn (Notification No.5/2010-ST, dated 27th February, 2010 refers).

d)     Notification No.1/2002-ST dated 01.03.2002 is being superceded by Notification No.14/2010-ST, dated 27th February 2010 to provide that the construction and operation of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oils and natural gas in the Exclusive Economic Zone and the Continental Shelf of India and supply of any goods connected with these activities would be within the purview of the provisions of Chapter V of the Finance Act, 1994. Similar changes have been made in the definition of the term ‘India’ appearing in the Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India & Received in India) Rules, 2006.
(Notification No.6/2010-ST and Notification No.16/2010-ST, both dated 27thFebruary, 2010 refers).

6.2     The revenue impact of these withdrawals and amendments [especially those mentioned under S. Nos. (1) and (2)] is significant. In the case of service tax on railway freight, a period of one month (i.e. upto 31.03.2010) has been provided for the railways to adjust freight rates, accounting system etc. During this period the jurisdictional officers should contact the local railways officials to finalize the modalities to operationalize this levy. Similarly, a quick survey should be conducted to ascertain the number of commercial coaching and training centres,
which hitherto were availing the exemption and would now fall under the tax net. For finding out the eligible vocational training courses listed under of the Apprentices Act, 1961, please look at the web site of the Directorate General of Employment and Training, Ministry of Labour (dget.nic.in). Immediate steps should be taken to identify and allot registration to such institutes. Broad estimation of the numbers of the new taxpayers, revenue potential must be carried out and the legal/administration issues, if any, should be identified.

7.     AMENDMENT TO EXPORT OF SERVICE RULES, 2005

7.1     Export of Service Rules, 2005 have been amended as follows:

• The taxable service, namely ‘Mandap Keeper Service’ has been shifted from the list under rule 3(1) (ii) [i.e. performance related services] to the list under rule 3(1)(i) [immovable property related services] and three taxable services, namely ‘Chartered Accountant Services’, ‘Cost Accountant Services’ and ‘Company Secretary’s Services’, have been shifted from the list under rule 3(1) (ii) [i.e. performance related services] to the list under rule 3(1)(iii) [residual category of services]. Notification No.6/2010-ST, dated 27th February 2010 refers. Identical changes have been made under the Taxation of services (Provided from Outside India and Received in India) Rules, 2006 as well (Notification No.16/2010-ST, dated 27th February 2010 refers);
• The condition prescribed under rule (2) (a) i.e. ‘such service is provided from India and used outside India’ has been deleted (Notification No.6/2010-ST, dated 27th February 2010 refers).

8.     AMENDMENT TO NOTIFICATION NO. 5/2006-CE(NT) ISSUED UNDER RULE 5 OF THE CENVAT CREDIT RULES, 2004

8.1     It may be recalled that a number of representations were received from exporters, especially the exporters of services regarding difficulties being faced in availing the benefit of refund of accumulated credit under the scheme prescribed under Notification No. 5/2006-CE (NT) dated 14.03.2006, issued under rule 5 of the CENVAT Credit Rules, 2004. While certain issues germinated from the wordings used in the provisions of the notification or interpretation of such provisions, other issues were more in the nature of administrative difficulties in
operating the scheme. As an immediate measure, CBEC issued a clarificatory circular No. 120/01/2010-ST, dated 19.01.2010. It was however felt that a permanent solution would require supplementing the clarification with certain amendments to the notification, part of which had to be ‘retrospective’ in nature. Accordingly, Notification No. 5/2006(CE) (NT) has been amended vide Notification No. 7/2010-CE (NT), dated 27th February 2010. This mainly deals with the procedure that needs to be adopted in case of the new refund claims. However, to
resolve the disputes arising on account of the wordings/ illustration provided in the notification, the same is being amended retrospectively (w.e.f. 14.03.2006) (Clause 73 of the Finance Bill, 2010 refers) so as to resolve the disputes in respect of pending cases as well. Therefore to visualize the entire revamped and simplified refund scheme, both the amending notification and the Finance Bill provision must be read in conjunction. A note on the issue is enclosed as Annexure C.

9.     It may be noted that this d.o. letter does not set out the changes in an exhaustive fashion. It gives a broad view of the changes made in the service tax law and procedure in Budget 2010. It should not be used for interpreting any provisions in the case of any ambiguity. The wordings used in the statutory provisions and the notifications alone have legal standing. Therefore, they must be read carefully for interpretation, tax compliance and tax administration purposes.

10.     Although all efforts have been made to draft the statutory provisions in the Finance Bill and the notifications correctly, it is possible that some errors, inconsistencies, omissions may have escaped our notice inadvertently. I shall be extremely thankful if you could point out such errors to me or to my colleagues immediately so that the same can be rectified. Further, please do not hesitate to contact us in case of any doubt, difficulty, and suggestion relating to interpretation or implementation of the provisions mentioned above. For this, you may contact
• Shri Roopam Kapoor (OSD-TRU)
Tel; 23095590, e-mail: roopamkapoor@gmail.com
• Shri J.M.Kennedy (Director-TRU)
Tel: 23092634, e-mail: jm.kennedy@nic.in
• Shri Samar Nanda (TO-TRU)
Tel; 23092037, e-mail:samarnanda@gmail.com