PRE-BUDGET

MEMORANDUM on

INDIRECT TAX LAWS

2016-17

Bombay Chartered Accountants’ Society 7, Jolly Bhavan No. 2, New Marine Lines, Mumbai 400 020

Tel. : 61377600 Fax : 61377666

E-mail : bca@bcasonline.org Website : www.bcasonline.org

WebTV : www.bcasonline.tv Web Journal: www.bcajonline.org

CONNECT WITH US Follow, Watch, Like, Connect on BCAS GLOBAL

Managing Committee

President

Raman H. Jokhakar

Vice President

Chetan M. Shah

Hon. Joint Secretaries

Narayan R. Pasari

Sunil B. Gabhawalla

Hon. Treasurer

Manish P. Sampat

Members

Abhay R. Mehta

Anil D. Doshi

Bharatkumar K. Oza

Bhavesh P. Gandhi

Jagdish T. Punjabi

Jayant M. Thakur

Krishna Kumar Jhunjhunwala

Mihir C. Sheth

Mukesh G. Trivedi

Narayan K. Varma

Nitin P. Shingala

Rutvik R. Sanghvi

Samir L. Kapadia

Saurabh P. Shah

Sonalee A. Godbole

Suhas S. Paranjpe

Indirect Taxation Committee Chairman

Govind G. Goyal

Ex-Officio

Raman H. Jokhakar

Chetan M. Shah

Convenors

Mandar U. Telang

Suhas S. Paranjpe

Saurabh P. Shah

Members

A. R. Krishnan

Ashit K. Shah

Bakul B. Mody

Bharat M. Shemlani

Bharatkumar K. Oza

Bhavna G. Doshi

Chandrakant B. Thakar

Chirag B. Mehta

Hasmukh H. Kamdar

Janak K. Vaghani

Jayraj S. Sheth

Naresh K. Sheth

Parind A. Mehta

Pranay H. Marfatia

Puloma D. Dalal

Rajiv J. Luthia

Rajkamal R. Shah

Sagar N. Shah

Samir L. Kapadia

Sanjay M. Dhariwal

Santosh M. Jain

Shreyas Sangoi

Sunil B. Gabhawalla

Surendra S. Gupta

Uday V. Sathaye

Udayan Choksi

Bombay Chartered Accountants’ Society 7, Jolly Bhavan No. 2, New Marine Lines, Mumbai 400 020

Tel. : 61377600 Fax : 61377666

E-mail : bca@bcasonline.org Website : www.bcasonline.org

WebTV : www.bcasonline.tv Web Journal: www.bcajonline.org

1

PRE-BUDGET MEMORANDUM 2016-17

SUGGESTIONS ON SERVICE TAX

Synopsis

Sr. No. Particulars Page No.

CHANGES IN LAW

1 Evidence of completion of construction should not be restricted to the

―completion certificate‖ granted by a competent authority but other

evidence such as Architect‘s certificate should also be relied upon as

allowed prior to 1.7.2012

2

2 Personal penalty on directors, managers etc. may be dispensed with

(section 78A) 4

3 Fixed mandatory pre-deposit for preferring appeals to Commissioner

(Appeals) / Tribunal – reconsideration required – Mandatory pre-deposit

should be optional 5

CHANGES IN RULES

4 Services provided by Indian establishments of an entity to overseas

establishment of same entity to be considered as exports (Changes in Rule

6A of the Service tax Rules, 1994) 6

5 Revision of Returns – Rule 7B of Service Tax Rules – Time limit to be

extended. 7

6 Late fees for delay in filing service tax returns 8

7 Annual returns 8

8 Time limit (1 year) for taking Cenvat Credit on ―inputs‖ and ―input

services‖ to be withdrawn or in the alternative be increased to one year

from the end of financial year and also to be made not applicable in cases

where tax liability arises after investigation, audit, assessment

proceedings or appeals.

8

OTHER CHANGES

9 Rate of interest to be reinstated at the old rate of 18% instead of slab

ranging from 18% to 30% p.a. 10

10 Service tax payment – based on accounting codes under erstwhile

classification may be dispensed with. 12

11 Swachh Bharat Cess levied under Chapter VI of Finance Act, 2015 to be

integrated in Cenvat Credit Rules 12

12 Exhibit 1 14

2

CHANGES IN LAW

1. Evidence of completion of construction should not be restricted to the

“completion certificate” granted by a competent authority, but other

evidence such as Architect’s certificate should also be relied upon as

allowed prior to 1.7.2012.

1.1 Section 66E(b) has sought to bring an agreement for ‗sale‘ of office units/

residential flats within the ambit of service tax if any amount has been

received by the builder from the buyer before the completion of office

units / residential flats. The date of grant of a ‗completion certificate‘ by a

competent authority under any law for the time being in force is being

considered as the only evidence of completion. Subsequently vide press

release dated 26.10.2015 occupation certificate was also considered to be

adequate proof of completion of construction of the office units /

residential flats. However, other options should also be considered

namely a certificate from architect, chartered engineer or a licensed

surveyor certifying completion so as to substantiate that the sale is of a

completed office units / residential flats as was the law prior to 1.7.2012.

1.2 Further, in several cases though the building is complete and ready for

occupation the flat owners/developers are not able to get completion

certificate from the relevant authorities, so as to substantiate that it is a

sale of completed flat. Further, completion certificate is issued only after

several compliance of several statutory formalities which are not related

to the completion of construction work of any building. Hence in many

cases especially in cities like Mumbai, the property is completed and

occupied for several years [25-30 years] but the completion certificate

from municipal authorities is not received. In such cases even sale of

completed flats/ offices maybe subject to service tax though it is not the

3

intention of the Legislature nor would there be an element of service in

such transaction.

1.3 In this regard prior to introduction of Negative List Regime i.e. 1st July

2012, when in a similar situation sale of under construction flats/offices

were subject to service tax from 01.07.2010 the Ministry of Finance had

clarified by issuing M.F. (D.R) Order No. 1/2010 dated 22th June 2010

(Removal of difficulties order), that a certificate issued by, (i) Architects,

(ii) Chartered Engineers, and (iii) Licensed Surveyors would also qualify

for determination of ‗completion‘ of construction though there is a

requirement for obtaining a completion certificate from the relevant

authority [Copy of said order attached – Exhibit 1]

1.4 Hence, it is hereby suggested that the evidence of completion of

construction should not be restricted to production of ‘completion

certificate’ even in cases of requirement of such certificate under the

law but a certificate from an architect, chartered engineer or a licensed

surveyor should also be relied on. The Explanation (I) to section 66E(b)

maybe amended as follows:

“66E. Declared services.— The following shall constitute declared services,

namely :—

(a) …………….

(b) construction of a complex, building, civil structure or a part thereof,

including a complex or building intended for sale to a buyer, wholly or partly,

except where the entire consideration is received after issuance of completion

certificate by the competent authority.

Explanation.— For the purposes of this clause,—

(I) the expression ―competent authority‖ means the Government or any

authority authorised to issue completion certificate under any law for the time

being in force or any of the following, namely :—

4

(A) architect registered with the Council of Architecture constituted under

the Architects Act, 1972 (20 of 1972); or

(B) chartered engineer registered with the Institution of Engineers (India); or

(C) licensed surveyor of the respective local body of the city or town or

village or development or planning authority;

who is authorised under any law for the time being in force, to issue a

completion certificate in respect of complex or building, as a precondition

for its occupation.

(II) the expression ―construction‖ includes additions, alterations,

replacements or remodelling of any existing civil structure;

(c) ………………‖

2. Personal penalty on directors, managers etc. may be dispensed

with-Section 78A

2.1 Section 78A provides for imposing a financial penalty upto Rs. 1,00,000/-

on directors, managers, secretary or other officers in-charge of the

company for specified contraventions committed by a company.

2.2 In this regard, it may be noted that for similar contraventions, such

persons are already liable to prosecution under Section 89 of the Act r.w.

s. 9AA of the Central Excise Act. Thus, in view of the liability for

prosecution there is no need to provide for penalty also. Such a

corresponding penalty is absent in Customs, Excise and Income-Tax.

Further, in any case separate penalties are already provided for the

company which has defaulted.

2.3 In view of the above, the provisions Section 78A appear to be very harsh.

It is hereby suggested that this section 78A be deleted.

5

3. Fixed mandatory pre-deposit for preferring appeals to Commissioner

(Appeals) / Tribunal – reconsideration required – Mandatory pre-

deposit should be optional.

3.1 The Finance (No. 2) Act, 2014 has amended section 35F of the Central

Excise Act, 1944 by providing for fixed mandatory pre-deposit of certain

percentage of adjudicated demands (‗duty / tax demanded or penalty or

both‘) for filing an appeal before the Commissioner (Appeals) / Tribunal

as under:

Sl.

No.

Particulars Percentage of pre-deposit

(i) Appeal to the Commissioner

(Appeals)

7.5% of tax in case where tax or

tax and penalty are in dispute; or

7.5% of penalty where only

penalty is in dispute

subject to a maximum amount of Rs.

10 crores.

(ii) Appeal to Tribunal – 1st Stage [i.e.

against CCE‘s order]

7.5% of tax in case where tax or

tax and penalty are in dispute; or

7.5% of penalty where only

penalty is in dispute

subject to a maximum amount of Rs.

10 crores.

(iii) Appeal to the Tribunal – 2nd stage

[against CCE(Appeals)‘s order]

10% of tax in case where tax or tax

and penalty are in dispute; or

10% of penalty where only penalty

is in dispute

subject to a maximum amount of Rs.

10 crores.

3.2 Considering the past trend, the order adjudicating a SCN invariably

sustains the demand alongwith penalties and in most cases the assessee

has no option but to file an appeal. The mandatory deposit would cause

6

undue hardship specially if the assessee has a very good case on merits.

He cannot afford to pay the mandatory pre-deposit. It goes against the

persons who cannot afford to fight or who have a very good case. Further,

there would be no discrimination between good case and bad case and

between assessee who can pay and assessee who cannot pay.

3.3 In view of the above, it is hereby suggested that the requirement of

mandatory pre-deposit should be optional i.e. an assessee may have

either one of the option –

(i) apply to the appellate authority for a waiver of pre-deposit of

demands adjudicated (tax, interest, penalties) as per the erstwhile

provisions; or

(ii) pay the mandatory pre-deposit as prescribed.

CHANGES IN RULES

4. Services provided by Indian establishments of an entity to overseas

establishment of same entity to be considered as exports (Changes in

Rule 6A of the Service tax Rules, 1994)

4.1. Under Section 65B(44) of the Act an establishment of a person in taxable

territory and any of his other establishments in non-taxable territory is

treated as establishment of distinct persons. Accordingly, as per CBEC‘s

Education Guide where a service has been provided by an overseas

establishment of an entity to the Indian establishment of the same entity

the recipient establishment in India would be liable to pay service tax on

the said services under reverse charge mechanism. However, in a reverse

scenario (i.e. exports) where a service has been provided by an Indian

establishment of an entity to the overseas establishment of the same entity

the services would not be considered as exports in view of the express

7

provisions of Rule 6A(1)(f). In such a scenario, the benefit of exports

would not be available in the context of Cenvat Credit Rules. Hence the

service provider would have to reverse proportionate cenvat credit

attributable to such exports under Rule 6(3) of the Cenvat Credit Rules,

2004 since the services would be considered as an exempt service as the

place of provision of such services is outside India. Moreover no rebate

of service tax paid on input services would also be available. This would

result in making the exports costlier, which is not the intention of the

legislature. Further the deeming fiction for import of services that the

transaction in effect is in between two separate entities should also be

applicable for exports with no dilution.

4.2. Hence it is hereby suggested that Clause (f) to Rule 6A(1) of the Service

Tax Rules, 1994 maybe deleted.

5. Revision of Returns – Rule 7B of Service Tax Rules – Time limit to be

extended.

5.1 Rule 7B provides that an assessee may revise his returns to correct a

mistake or omission, within 90 days from the date of submission of the

original return. However, it is submitted that normally, mistakes or

omissions come to light during the course of audit or finalisation of the

accounts which generally takes place after the financial year ends.

5.2 Hence it is hereby suggested that the time limit for revision of returns

should be atleast six months from the end of the financial year. This is

so even in case of other laws such as income tax, state VAT laws, etc.

8

6. Late fees for delay in filing service tax returns.

6.1 Rule 7C of the Service Tax Rules, 1994 prescribes payment of late fees

for delay in filing Service Tax Returns based on the number of days of

delay. Section 70 of the Finance Act, 1994 provides for upper limit for

payment of Late Fees which is presently Rs.20,000/-. However, this

would cause undue hardships in case of small assesses in case where the

tax liability itself is less than Rs. 20,000/-.

6.2 Hence, it is humbly suggested that the upper limit for payment of late

fees be fixed based on amount of Service Tax liability, which will give

relief to small assesses.

7. Annual returns

7.1 There should be annual returns instead of half yearly returns though taxes

could be paid on a quarterly/monthly basis. Annual return would also

ensure that the return is in line with the accounts of the assessee. It would

also obliterate a lot of paper work and reduce the time of the department

and the assessee.

8. Time limit (1 year) for taking Cenvat Credit on “inputs” and “input

services” to be withdrawn or in the alternative be increased to one

year from the end of financial year and also to be made not

applicable in cases where tax liability arises after investigation, audit,

assessment proceedings or appeals.

8.1 The Central Government has w.e.f. 1.3.2015 provided a time cap for

‗taking‘ cenvat credit on inputs / input services viz., within 1 year from

the date of the document based on which credit is taken.

9

8.2 The above provision is likely to cause undue hardship to the assessee in

view of the following reasons –

(i) The right to take credit is vested in the assessee the minute he

receives input or the input service and such right should not be

allowed to lapse within 1 year since the supplier has already paid

the tax / duty to the Government.

(ii) Many a times a manufacturer or service provider may dispute the

excisability of the product manufactured or taxability of the service

provided which dispute invariably extends beyond 1 year before

being finally settled. The Courts and Tribunals have always

allowed the assessee to take cenvat credit on his input / input

service for the disputed period if the demand on his output gets

sustained. The time limit which is sought to be imposed would

prejudicially affect the assessee where he is demanded service tax

for a period of 5 years on his output but he is not allowed to take

cenvat credit on his input / input services in view of the time cap.

(iii) Many a time as a result of audits, it may come to the light of the

assessee that he has missed taking cenvat credits. In such cases, the

mistakes may come to light only on audits after the end of the

financial year by which time he may be disentitled to take genuine

credits.

8.3 When the professed intent of the Government is to move towards GST,

such limitation casts a serious cascading effect on the business of the

assessee.

10

8.4 In view of the above, it is hereby suggested that –

I. Time cap of 1 year for taking cenvat credit may be deleted.

II. In the alternative, if for any compelling reason the time cap

provisions are to be retained –

(i) The time limit must be increased from 1 year of the

document date to 1 year from the end of the financial year

in which credit was to be taken.

(ii) The time cap should not be made applicable where the tax

on the goods manufactured / output service is paid after

investigation, audit, assessment proceedings or appeals.

OTHER CHANGES

9. Rate of interest to be reinstated at the old rate of 18% instead of slab

ranging from 18% to 30% p.a.

9.1 W.e.f. 1.10.2014, the rate of interest on delayed payment of service tax

has been increased from 18% p.a. to a slab system of interest rate in the

range of 18%- 30% as under.

Sr. No. Period of Delay Rate of simple interest *

1. Upto 6 Months 18%

2. More than 6

months and upto 1

year

a) 18% for the first 6 months of delay

and

b) 24% for the delay beyond 6 months

3. More than 1 year a) 18% for the first 6 months of delay;

b) 24% for the period beyond 6

months upto 1 year; and

c) 30%for any delay beyond 1 year.

*Note: For assessee having a taxable turnover upto sixty lakhs in preceding financial

year, interest rate shall be reduced by 3% for every period of delay.

11

9.2 The above rates of interest are astronomically high considering that –

(i) The interest for delayed payment of service tax is supposed to be

compensatory in nature and not penal since penal provisions

already exist. Infact, service tax is the only law where there is not

only a penalty of 100% of tax for non-payment of tax with an

intent to evade tax (section 78) but also a penalty u/s. 76 upto 10%

of tax amount for delayed payment of service tax. This penalty for

delayed payment of service tax is not there in other laws since

interest provisions already exist.

(ii) The present interest rates on bank deposits are in the range of 8% -

9%.

(iii) The rate of interest payable under other laws are as under

Sr. No. Nature of Tax Rate of interest

1. Income Tax - Advance Tax

- TDS

12 % p.a.

18 % p.a.

2. Central Excise Duty 18 % p.a.

3. Customs Duty 18 % p.a.

(iv) Paradoxically interest on refunds is payable by the department only

at 6% that too, from the date not when the tax was paid but from

the date after the expiry of 3 months from when the refund

application is made.

9.3 In view of the above, it is hereby suggested that the interest on delayed

payment of service tax should be reinstated at old rate of 18% instead of

the peak rate of 24% - 30%.

12

10. Service tax payment – based on accounting codes under erstwhile

classification may be dispensed with.

10.1 Circular No. 165/16/2012-ST, dated 20.11.2012 read with Notification

No. 48/2012-ST, dated 30.11.2012 provides for payment of service tax in

the accounting codes under erstwhile classification.

10.2 In many cases, this creates substantial hardship to the assessee in

determining the classification, particularly in the absence of the relevant

definitions under the new negative list regime.

10.3 The objective to pay service tax based on accounting codes was to

monitor service tax collections sector-wise. However, the onus of

classification of services without definitions is difficult and perhaps

infructuous work for the assessee.

10.4 Thus, it is suggested that the said Notification be rescinded and the said

Circular be withdrawn.

11. Swachh Bharat Cess levied under Chapter VI of Finance Act, 2015 to

be integrated in Cenvat Credit Rules.

11.1 The FAQs on Swachh Bharat Cess (SBC) issued by CBEC has stated that

SBC is not integrated with Cenvat Credit chain and therefore credit of

SBC cannot be availed nor can the liability to pay SBC be discharged by

utilizing credit of SBC paid on input services. It is suggested that such

non integration of SBC with the extant Cenvat Credit Rules would result

in cascading effect of tax resulting in inflation and increased cost of

goods and services.

13

11.2 Hence it is suggested that suitable amendments may be made in the

Cenvat Credit Rules, 2004, so that SBC may be integrated with Cenvat

Credit Rules and the SBC liability on output services can be discharged

by availing and utilizing credit of SBC paid on input services.

14

Exhibit 1

M.F.(D.R.) ORDER NO

1/2010, Dated : June 22, 2010

In exercise of the powers conferred by sub-section (1) of section 95 of the

Finance Act, 1994 (32 of 1994) (hereinafter referred to as the Finance Act), the

Central Government, hereby makes the following Order, namely :-

1. (1) This Order may be called as the Service Tax (Removal of Difficulty)

Order, 2010.

(2) This Order shall come into force on the 1st day of July, 2010.

2. For the purposes of sub-clauses (zzq) and (zzzh) of clause (105) of section 65

of the Finance Act, the expression ‗authority competent' includes, besides any

Government authority,-

(i) architect registered with the Council of Architecture constituted under the

Architects Act, 1972( 20 of 1972); or

(ii) chartered engineer registered with the Institution of Engineers (India); or

(iii) licensed surveyor of the respective local body of the city or town or village

or development or planning authority;

who is authorised under any law for the time being in force, to issue a

completion certificate in respect of residential or commercial or industrial

complex, as a precondition for its occupation.

F. No. 334/3/2010-TRU

(K.S.V.V.Prasad)

Under Secretary to the Government of India

\\Server\data server\WINWORD\SER_TAX\GENERAL\Prebudget\PREBUD 16\PREBUD 16.docx