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Saturday, May 23, 2015

THE PROS AND CONS OF INCORPORATION OF ONE PERSON COMPANY (OPC)

With the enactment of Companies Act, 2013 w.e.f. April 1, 2014, a new concept called “ONE PERSON COMPANY (OPC)” also came into existence. The legislature were of the view that OPC shall have an edge over the other companies in relation to the benefits being earned w.r.t. holding of Board Meetings/ General Meetings/ Preparation of accounts and many more. Although there are a no. of benefits available to OPC but the progress of incorporation of such companies is comparatively too less in as compared to private limited companies. In The Last One Year I.E. April 1, 2014 to March 31, 2014, a total of 2026 companies have been registered (This calculation is based on searching of name of companies with the end word” OPC Private Limited” on MCA Portal) whereas a total of 68, 000 private/ public limited companies have been incorporated during 2013-14. The concept of OPC was being generated by J. J. Irani Committee was with an intention:
1. To enable growth and most business friendly corporate regulation in India.
2. To encourage the individuals/ small Proprietors who used to carry their business on individual basis on small scale in small towns even, could convert themselves into the corporate.
3. To give the young businessman all benefits of a private limited company which categorically means they will have access to credits, bank loans, limited liability, legal protection for business, access to market etc. all in the name of a separate legal entity.
4. To bring more and more business under the MCA that could make enable the government to check over such business in a transparent way.
5. For those persons who want to venture alone, the only option was proprietorship, an onerous task since it is not legally recognized as a separate entity. Hence, the concept of OPC has opened the doors for the entrepreneur looking to set up a company all by himself.
6. OPC will give the businessman all benefits of a private limited company which categorically means they will have access to credits, bank loans, limited liability, legal protection for business, access to market etc all in the name of a separate legal entity.
7. Complete Control of the company with the single owner
8. Legal Status And Social Recognition For the Business
9. Limited Liability Protection To Directors and Shareholder
10. This has benefitted for those persons who wanted to do business under corporate culture alone but because of the condition of two persons as members, they face difficulties and have to induce some other into the business. This has given an option to such persons for carrying their business in a corporate way without inducing any other person as owner of the business.
BENEFITS TO OPC UNDER THE ACT
Even, the ACT has provided a no. of benefits to the OPC under the law. These are as follows:

1. The financial statements of a one person company can be signed by one director alone.
2. Cash Flow Statement is not a mandatory part of financial statements for a One Person Company [Section 2(40)].
3. Board Report to be annexed to financial statements may only contain explanations or comments by the board on every qualification, reservation or adverse remark or disclaimer made by the auditor in his report.
4. OPC should file a copy of the financial statements duly adopted by its member, along with all the documents which are required to be attached to such financial statements, within one hundred and eighty days from the closure of the financial year.
5. As per Section 96(1) of the Companies Act 2013, the provision relating to holding of AGM is not mandatory for OPC.
6. For the purposes of holding board meetings, in case of one person company which has only one director, it shall be sufficient compliance if all resolutions to be passed by such a company at a board meeting, are entered in the minutes book required to be maintained under section 118 and signed & dated by the member and such date shall be deemed to be the date of the board meeting for all the purposes under this act. If OPC has only one director, it is exempted from holding Board meetings.
7. Provision for compulsory rotation of auditor in section 139(2) are not applicable to OPC
WHY OPC NOT ATTRACTING THE PUBLIC AT LARGE
(The reason for not attracting the public at large for OPC has been drawn on basis of Practical Experience of my clients which may differ from Person to Person)

1. The cost of incorporation of an OPC with 1 lakh capital is same as that of incorporation of a Private Limited Company. No cost benefit has been given to the OPC. Hence,  Businessman prefers to have Private Limited Company only
2. Using the word “OPC Private Limited” seems odd to a no. of people instead of Private Limited Company. Hence, there is no craze for OPC among them.
3. A person shall not be eligible to incorporate more than a One Person Company or become nominee in more than one such company. This restricts them to carry more than one business where as being just a non-corporate businessman, they can carry any no. of activities with single name.
4. The concept says that that the member will have to nominate any person. But restriction has been imposed with regard to Minor i.e. Minor cannot become member or nominee of the One Person Company or can hold share with beneficial interest. This restricts those non-corporate businessman who does not have any nominee other than their legal representatives as minor.
5. Moreover nominating someone again look like intervention/ involvement of third person into the company.
6. In case the company needs funds, it cannot raise through money through issue of shares because of condition of only one person as members and compulsory will have to convert itself into private limited company. Even if the person thinks of converting itself into the Private limited company, law impose a restriction that no OPC can be converted into private limited company unless two years have been expired from the date of incorporation or specified limit has been achieved by the OPC.
7. In some of the business, the product value is as high that the target of sales more than 2 crores can be achieved in couple of months. In such a case, incorporating an OPC will not at all benefit to the NON-Corporate as they compulsorily will have to convert themselves into Private or Public Limited Companies within a short span of time.
8. This concept was brought specifically for non-corporate business men. But these Non-Corporate Businessmen has thinking that incorporating a company will bring them under preview of one more department i.e. Registrar of Companies un-necessarily. Hence, they hesitate to do business under corporate culture. Moreover, after the enactment of Companies act, 2013, which has brought down strict provisions, penalties for non-compliance, the Professionals even are not suggesting their clients for incorporating the companies.
Conclusion: Hence, the above is my own interpretation on Pros and Cons of Incorporation of OPC which may differ from person to person. But public at large/ Non-Corporate must be encouraged by Professionals to opt for OPC incorporation because it on one hand bring the corporate culture in country among businessman and on the other hand will bring the transparency in the business houses which will ultimately helpful for the economy of the country.

Wednesday, May 20, 2015

FAQ on tax on income from share market

Income from intra-day trading is considered as speculation income and taxed as such. While speculation losses can be set off only against speculation gains, non-speculation business losses may be set off against short/long-term capital gains.

KEY POINTS:

i. As per Section 43(5) of the Income Tax Act, 1961, intra-day trading shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. Income from speculation gains is taxed at the normal rates.

ii. Speculation losses can be set off only against speculation gains and not against any other head of income or non-speculation business income.

iii. Short-term capital loss can be set off only against income from short/long-term capital gains.

iv. Non-speculation business loss can be set off against the Long Term or Short Term Capital Gains made during the said year

1. How profit  on F&O taxed ?

If you are playing the F&O market, you are considered a trader. So profits from trading in the F&O market will be considered business income.

This will be added to your income under other heads and the total will be subject to axation at the applicable income tax slab rate.

As usual, expenses incurred on trading can be deducted.

The loss can be carried forward and set off over the next eight years.

2. Can losses in F&O be set off against profits from short-term trading gains or vice versa?

According to the provisions of Section 43(5) of the Income Tax Act, 1961, the gains or losses from an eligible transaction in ‘Options’ and ‘Futures’ will not be treated as a speculation gain or loss, and it will be taxed as Income from Business/Profession.

In case of the business loss not being a speculative loss, it can be set off against income from other sources or other heads. It cannot, however, be set off against income under the head ‘Salaries’. The balance, if any, can be carried forward and set off against business income within eight assessment years immediately succeeding the assessment year in which the loss was first computed.

Thus, losses incurred in the F&O business can be set off against short-term trading gains.

3. Can profits from intraday trading be set off against losses in F&O or vice versa?

Income from intraday trading in shares is treated as speculative business income as the transaction is settled without delivery. Accordingly, it is charged under the head ‘Profit and gain of business or profession'. As per Section 43(5) of the Income Tax Act, 1961, speculative transaction means a transaction in which a contract for the purchase or sale of any commodity including stocks and shares is settled otherwise than by the actual delivery or transfer of the commodity or scrips.

However, trading in derivatives, referred to in Section 2(ac) of the Securities Contracts (Regulation) Act, 1956, carried out on a recognised stock exchange is not deemed to be a speculative transaction. Recognised stock exchanges are NSE, BSE, the MCX Stock Exchange and the United Stock Exchange of India. The transaction will be treated as non-speculative business income.

It may be noted that though loss from a non-speculative business, i.e. F&O loss can be set off against income from speculation business i.e. Profit from Intra Day trading, but loss from a speculative business cannot be set off against income from non-speculation business

4. Is the profit from STCG and F&O added to my salary / business income to calculate the tax slab?

Short Term Capital Gains (STCG) on capital assets other than Securities Transaction Tax (STT) is paid as well as profit from F&O are taxed at normal rates. Hence, the same will be added to your salary income, and the tax would be determined after taking into account the slabs as applicable to non-specified individuals. However, if STT is paid on STGC on the sale of shares, a tax rate of 15 per cent is payable on such STGC as per the Income Tax Act.

5. What charges can I book as expenses to calculate my tax liability?

While you can get only deduction in respect of profession tax paid/deducted by the employer in respect of your income from Salaries, the deductions under the other heads of income are allowable as follows:

Short Term Capital Gains – The cost of acquisition/cost of improvement incurred on the capital asset.

Income from Business – Generally speaking, any expenditure is allowed as deduction under this head of income provided that:

i. The expense is in the nature of revenue expenditure (capital nature only if specifically allowed by the provisions of the Act).

ii. The expense is not a personal expense of the assessee. 

iii. The expense is laid out or expended wholly or exclusively for the purpose of the business.

iv. The expense relates to the income earned.

v. The expense is incurred in the previous year.

vi. The expense is not for a purpose which is an offence or which is prohibited by law.

Thus, expenses such as postage, conveyance and telephone etc. incurred by you for carrying on the business can be claimed as deduction. Further, you may also claim depreciation on assets used for the business or profession.

STT is allowable as a deduction, as it is a direct expense.

Long Term Capital Gains (LTCG) in respect of securities for which STT is paid are exempt, and hence not taxable

6. Are intra-day transactions in the share market considered while calculating short-term gains/losses?

Intra-day trading is the trading of shares within the same day. Generally, delivery is not taken in case of intra-day trading, and thus, these are said to be speculative transactions. As per Section 43(5) of the Income Tax Act, 1961, the said transactions shall be considered as speculation business transactions and the income therefrom would be either speculation gains or speculation losses. However, if based the on facts and circumstances of your case, you can prove that though delivery was not actually taken it was within your normal business transaction, it could be treated as non-speculation business income or a short-term capital gain.

As regards taxation, the income from speculation gains is taxed at the normal rates. Your tax liability would thus depend upon your net taxable income. If the income is treated as non-speculation business income/short-term capital gain (Securities Transaction Tax not paid), the taxation is at normal rates. However, if the same is treated as a short-term capital gain and the STT is paid, the tax is chargeable at specified rate, viz. 15 per cent plus education cess/higher education cess as applicable.

It may be noted that in case of speculation loss, the same can be set off only against speculation gain and thus cannot be set off against any other head of income or non-speculation business income.

Short-term capital loss can be set off only against income from capital gains, whether long term or short term.Non-speculation business loss cannot be set off against salary income

It may also be noted that trading in derivatives (futures and options) is treated as non-speculation business even though delivery is not effected in such transactions.

7. What are the common mistakes investors/ traders make in their tax return?

The big mistake that traders do is they don’t declare the loss at the time of filing their returns. By doing so, the loss cannot be carried forward and set off against income from future years and it becomes a dead loss.

Apart from not declaring losses, erroneous calculation of the turnover is another common mistake that traders make. Turnover is not the contract value, but the sum of the settlement profit and settlement loss for intraday trades in equity. That is, if you make a profit of say ₹5,000 in one transaction and a loss of ₹5,000 in another transaction, then your turnover will be ₹10,000 (₹5,000 profit +₹5,000 loss).

A third error,  is in choosing the wrong ITR form for filing a tax return. “If you have only long-term capital gains or losses, you need to use ITR 2. For traders, ITR 4 is to be used, but getting your books audited is mandatory if you use this form to file your returns.”

Auditing is also mandatory if your turnover is either greater than ₹1 crore, or if your turnover is less than ₹1 crore but your profit is less than 8 per cent of your turnover.

8. How profit on shares taxed if the same was held for investment purpose and not for trading purpose?

Any gain or loss made after holding the stock for more than 12 months is considered a long-term capital gain or loss. For an investor, long-term capital gains are completely exempt from tax.

But for a trader, the gains will be considered as business income and taxed at the normal slab rates of 10, 20 or 30 per cent. However, since this is business income, the expenses incurred on trading, such as internet connection charges and so on, can be excluded from the gains.

Gains made within 12 months of the sale of a stock are short-term capital gains, which are taxed at 15 per cent for investors. For traders, short-term gains are taxed the same way as long-term gains. In case of a loss, traders can set off/carry forward both short-term and long-term capital losses. In the case of investors, only the short-term capital loss can be carried forward and set off, with no provision for setting off or carrying forward a long-term capital loss. There is an eight year time limit for setting off a capital loss.

If you make a quick buck through day trading, the profit or loss from such intraday trades is treated as speculative activity. So if you make a profit, it will be added to your income and taxed as per your tax slab. A speculative loss can be taken forward for setting off, but only within the next four years and against speculative income

9. What will happen to unabsorbed speculation loss?

If there is unabsorbed speculation business loss, then such loss can be carried forward to be set off against the subsequent year's income from speculation business. Such loss cannot be carried forward for more than four assessment years (AY) immediately succeeding the AY for which the loss was first computed. Further, loss from trading in derivatives carried out on a recognised stock exchange should not be treated as speculation loss. Unabsorbed non-speculative business loss can be carried forward for eight years to be set off against business income of subsequent years.

ALL ABOUT GST

The Goods and Service Tax (GST) is a tax likely to be implemented in India, from 1st April 2016. GST is proposed to be a comprehensive indirect tax to be levied on manufacture, sale and consumption of goods as well as services at the national level. It will substitute all indirect taxes levied on goods and services by the Central and State Governments in India as of now. It is aimed at being comprehensive for most goods and services.
Introduction of Goods and Services Tax (GST) will indeed be an important perfection and the next logical step towards a widespread indirect tax reforms in India. Initially, it was conceptualized that there would be a national level goods and services tax, however, with the release of First Discussion Paper by the Empowered Committee of the State Finance Ministers on 10.11.2009, it has been made clear that there would be a “Dual GST” in India, i.e. taxation power lies with both by the Centre and the State to levy the taxes on the Goods and Services. Almost 150 countries have introduced GST in some form since now. While countries such as Singapore and New Zealand tax virtually everything at a single rate, Indonesia has five positive rates, a zero rate and over 30 categories of exemptions. In China, GST applies only to goods and the provision of repairs, replacement and processing services. GST rates of some countries are given below :-
Country
Rate of GST
Australia
10%
France
19.6%
Canada
5%
Germany
19%
Japan
5%
Singapore
7%
Sweden
25%
New Zealand
15%
In India, government proposed the GST rate at 27% which is well above the global average of 16.4% for similar taxes.
But, Our Finance Minister, Mr. Arun Jaitley told lawmakers that the proposed rate is too high and needed to be much more diluted. But some states are asking for an even higher rates for GST.
Exemptions and exceptions have also been worked into the GST bill. This tax does not apply to alcohol and petroleum products. These will be taxed separately at first. And manufacturing states will be allowed to levy an additional tax of 1% on supply of goods.
World over in almost 150 countries there is GST or VAT, which means tax on goods and services. Under the GST scheme, no distinction is made between goods and services for levying of tax. In other words, goods and services attract the same rate of tax. GST is a multi-tier tax where ultimate burden of tax fall on the consumer of goods/services. It is called as value added tax because at every stage, tax is being paid on the value addition. Under the GST scheme, a person who was liable to pay tax on his output, whether for provision of service or sale of goods, is entitled to get input tax credit (ITC) on the tax paid on its inputs.
OBJECTIVES OF GST:- One of the main objective of Goods & Service Tax(GST) would be to eliminate the cascading effects of taxes on production and distribution cost of goods and services. The exclusion of cascading effects i.e. tax on tax will significantly improve the competitiveness of original goods and services in market which leads to beneficial impact to the GDP growth of the country. It is felt that GST would serve a superior reason to achieve the objective of streamlining indirect tax regime in India which can remove cascading effects in supply chain till the level of final consumers.
BENEFITS OF GST:-
• GST will end cascading effects:- This will be the major contribution of GST for the business and commerce. At present, there are different state level and centre level indirect tax levies that are compulsory one after another on the supply chain till the time of its final consumption.
Growth of Revenue in States and Union:- It is expected that the introduction of GST will increase the tax base but lowers down the tax rates and also removes the multiple point taxation. This will lead to higher amount of revenue to both the states and the union.
• Reduces transaction costs and unnecessary wastages:- If government works in an efficient mode, it may be also possible that a single registration and a single compliance will suffice for both SGST and CGST provided government produces effective IT infrastructure and integration of states level with the union.
Eliminates the multiplicity of taxation:- One of the great advantages that a taxpayer can expect from GST is elimination of multiplicity of taxation. The reduction in the number of taxation applicable in a chain of transaction will help to reduce the paper work and clean up the current mess that is brought by existing indirect taxation laws.
• One Point Single Tax:- Another feature that GST will hold is it will be ‘one point single taxation’. This also gives a lot of comforts and confidence to business community that they would focus on business rather than worrying about their taxation that may crop at later stages. This will help the business community to decide their supply chain, pricing modalities and in the long run helps the consumers being goods competitive as price will no longer be the function of tax components but function of sheer business intelligence and innovation.
Reduces average tax burdens:- Under GST mechanism, the cost of tax that consumers have to bear will be certain and it is expected that GST would reduce the average tax burdens on the consumers.
Reduces the corruption:- It is one of the major problems that India is overwhelmed with. We cannot expect anything substantial unless there exists a political will to root it out. This will be a step towards corruption free Indian Revenue Services.
• Present CST will be removed and need not to be paid. At present there is no input tax credit available for CST.
• There are many indirect taxes in state and central level currently, which will be included by GST. i.e. you need to pay a single GST instead of all of them.
• Uniformity of tax rates across the states
• Ensure better compliance due to aggregate tax rate reduces.
• By reducing the tax burden the competitiveness of Indian products in international market is expected to increase and there by development of the nation.
• Prices of goods are expected to reduce in the long run as the benefits of less tax burden would be passed on to the consumer.
Other features of the GST model
(I) The GST shall have two components: one levied by the Centre (referred to as Central GST or CGST), and the other levied by the States (referred to as State GST or SGST). Rates for Central GST and State GST would be approved appropriately, reflecting revenue considerations and acceptability.
(II) The CGST and the SGST would be applicable to all transactions of goods and services made for a consideration except the exempted goods and services.
(III) The CGST and SGST are to be paid to the accounts of the Centre and the States respectively.
(IV) Since the CGST and SGST are to be treated individually, taxes paid against the CGST shall be allowed to be taken as input tax credit (ITC) for the CGST only and could be utilized only against the payment of CGST.
(V) Cross utilization of ITC between the CGST and the SGST would not be permitted except in the case of inter-State supply of goods and services.
(VI)  Ideally, the problem related to credit accumulation on account of refund of GST should be avoided by both the Centre and the States except in the cases such as exports, purchase of capital goods, input tax at higher rate than output tax etc.
(VII) To the extent feasible to the government, uniform procedure for collection of both CGST and SGST would be prescribed in the respective legislation for CGST and SGST.
(VIII) The States are also of the view that Composition/Compounding Scheme for the purpose of GST should have an upper ceiling on gross annual turnover and a floor tax rate with respect to gross annual turnover.
(IX) The taxpayer would need to submit periodical returns, in common format as far as possible, to both the CGST authority and to the concerned SGST authorities.
Indirect taxes that will be included under GST :- The following indirect taxes from state and central level is expected to be integrated with GST
State taxes
• VAT/Sales Tax
• Entertainment Tax (unless it is levied by local bodies)
• Luxury Tax
• Taxes on lottery, betting and gambling.
• State cess and surcharges in so far as they relate to supply of goods and services.
• Entry tax not on in lieu of octroi.
Central Taxes
• Central Excise Duty.
• Additional Excise Duty.
• The Excise Duty levied under the medical and Toiletries Preparation Act
• Service Tax.
• Additional Customs Duty, commonly known as countervailing Duty (CVD)
• Special Additional duty of customs(SAD)
• Surcharges
• Cesses.
The above taxes dissolve under GST; instead all of these, only CGST & SGST exists.
Impact of Goods and Service Tax:-
Food Industry: The application of GST to food items will have a significant impact on those who are living under subsistence level. But at the same time, a complete exemption for food items would drastically shrink the tax base. Food includes grains and cereals, meat, fish and poultry, milk and dairy products, fruits and vegetables, candy and confectionary, snacks, prepared meals for home consumption, restaurant meals and beverages. Even if the food is within the scope of GST, such sales would largely remain exempt due to small business registration threshold. Given the exemption of food from CENVAT and 4% VAT on food item, the GST under a single rate would lead to a doubling of tax burden on food.
Housing and Construction Industry: In India, construction and Housing sector need to be included in the GST tax base because construction sector is a significant contributor to the national economy.
FMCG Sector: Despite of the economic slowdown, India's Fast Moving Consumer Goods (FMCG) has grown consistently during the past three, four years. Implementation of proposed GST and opening of Foreign Direct Investment (F.D.I.) are expected to fuel the growth and raise industry's size.
Rail Sector: There have been suggestions for including the rail sector under the GST umbrella to bring about significant tax gains and widen the tax net so as to keep overall GST rate low. This will have the added benefit of ensuring that all inter–state transportation of goods can be tracked through the proposed Information technology (IT) network.
Financial Services: In most of the countries GST is not charged on the financial services. Example, In New Zealand most of the services covered except financial services as GST. Under the service tax, India has followed the approach of bringing virtually all financial services within the ambit of tax where consideration for them is in the form of an explicit fee. GST also include financial services on the above grounds only.
Information Technology enabled services: To be in sync with the best International practices, domestic supply of software should also attract G.S.T. on the basis of mode of transaction. Hence if the software is transferred through electronic form, it should be considered as Intellectual Property and regarded as a service. And if the software is transmitted on media or any other tangible property, then it should be treated as goods and subject to G.S.T. Implementation of GST will also help in uniform, simplified and single point Taxation and thereby reduced prices.
Impact on Small Enterprises: There will be three categories of Small Enterprises in the GST regime.
(a) Those below threshold need not register for the GST 
(b) Those between the threshold and composition turnovers will have the option to pay a turnover based tax or opt to join the GST regime,
(c) Those above threshold limit will need to be within framework of GST.
Possible downward changes in the threshold in some States consequent to the introduction of GST may result in obligation being created for some dealers. In this case considerable assistance is desired. In respect of Central GST, the position is slightly more complex

Sunday, May 17, 2015

Service tax rate of 14% shall come into effect only from a date to be notified – Finance Bill, 2015 enacted



The Hon’ble President has given assent to the Finance Bill, 2015 on Thursday, May 14, 2015. Accordingly, the Finance Bill, 2015 now becomes Finance Act (No.20), 2015. However, it is to be noted here thatincrease in the rate of Service tax from 12.36% to flat 14% (Subsuming Education cess and Secondary & Higher Secondary Education cess) as was proposed in the Union Budget, 2015 will become effective only after the date to be notified and not effective from May 14, 2015.

Further pursuing with Mr. Narendra Modi’s Dream of Swachh Bharat, a new Chapter VI has been inserted in the Finance Bill, 2015 that contains a new levy of cess called the ‘Swachh Bharat Cess’ which may be leviedon all or any of the taxable services at the rate of 2% of the value of such services.Hence, Service tax rate may increase from present 12.36% to 16% for specified services on which Swachh Bharat Cess is leviedfrom a date notified later.

Therefore, it is to be noted that Higher rate of Service tax from 12.36% to 14% and Swachh Bharat Cess of 2% will become effective onlyfrom the date to be notifiedand not from May 14, 2015. Further, the changes in Negative List of services will also come into effect from the date notified later.

We are summarizing hereunder the changes in Service tax that are effective from May 14, 2015 and the changes that will become effective only from the date to be notified later for easy digest:

PART I: CHANGES IN SERVICE TAX EFFECTIVE FROM MAY 14, 2015:

A: Changes under various Sections under the Finance Act, 1994 (“the Finance Act”)

·         Section 65B: Definitions of certain terms has been inserted [Section 65B(23A): ‘foreman of chit fund’, Section 65B(26A):‘Government’ and Section 65B(31A):‘lottery distributor or selling agent’];
·         Section 65B(44): Change in definition of ‘Service’:

Explanation 2 to Section 65B(44) of the Finance Act, defining the term ‘Service’ is amended to specifically state the intention of the legislature to levy Service tax on activities undertaken by Chit fund foremen in relation to Chit, and lottery distributors and selling agents, in relation to lotteries. [Lottery Distributor or Selling Agent needs to pay Service tax under Reverse Charge on services received from selling or marketing agents of lottery tickets]

·         Section 66F: Section 66F (1) prescribes that unless otherwise specified, reference to a service shall not include reference to any input service used for providing such services. An illustration has been incorporated in the stated Section to exemplify the scope of this provision in the following manner:

“The services by the Reserve Bank of India, being the main service within the meaning of clause (b) of section 66D, does not include any agency service provided or agreed to be provided by any bank to the Reserve Bank of India. Such agency service, being input service, used by the Reserve Bank of India for providing the main service, for which the consideration by way of fee or commission or any other amount is received by the agent bank, does not get excluded from the levy of service tax by virtue of inclusion of the main service in clause (b) of the negative list in section 66D and hence, such service is leviable to service tax.”

·         Section 67: Amendment in definition of the term ‘Consideration’to include:

a.     any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed like Pure Agent.;
b.    any amount retained by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission, if any, or, as the case may be, the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket..

·         Section 73: New sub-section (1B) inserted to provide that the Service tax amount self-assessed and declared in the return but not paid (either in part or full) shall be recovered under Section 87 thereof, without service of any notice under Section 73(1).Consequently, Rule 6(6A) of the Service Tax Rules, 1994 (“the Service Tax Rules”) has been omitted, which provided for recovery of Service tax self-assessed and declared in the return in the manner prescribed under Section 87 of the Finance Act as the same has been now been incorporated in Section 73 of the Finance Act

Further, Section 73(4A) has been omitted, which provides for reduced penalty up to 25% of Service tax liability, where during the course of any audit, investigation or verification, it is found that any Service tax has not been levied or paid or has been short-levied or short-paid or erroneously refunded but true and complete details of transaction are available on specified records.

·         Section 76: Rationalization of penal provisions in cases not involving fraud or collusion or wilful misstatement or suppression of facts or contravention of any provision of the Finance Act or Ruleswith the intent to evade payment of Service tax, in the following manner:

a.     Ceiling of 10% of Service tax amount as penalty has been incorporated;
b.    No penalty leviable if Service tax and interest is paid within 30 days of issuance of SCN under Section 73(1) of the Finance Actand proceedings in respect of such Service tax and interest shall be deemed to have been concluded;
c.     Reduced penalty equal to 25% of the penalty (i.e. 2.5% of the Service tax liability) if the Service tax, interest and reduced penalty is paid within 30 days of receipt of the  Adjudication Order; and
d.    If the Service tax amount gets increased in any Appellate proceedings, then the penalty amount shall also stand modified accordingly, and benefit of reduced penalty (i.e. 25% of penalty imposed) shall be admissible if Service tax, interest and reduced penalty on such increased amount is paid within 30 days of such Appellate Orders.

·         Section 78: Rationalization of penal provisions relating to penalties in cases involving fraud or collusion or wilful misstatement or suppression of facts or contravention of any provision of the Finance Act or Rules with the intent to evade payment of Service tax, in the following manner:

a.     Penalty shall be of 100% of Service tax amount. However, in respect of the cases where the details relating to such transactions are recorded in the specified record for the period beginning with the April 8, 2011 upto the date on which the Finance Bill, 2015 receives the assent of the President i.e. May 14, 2015 (both days inclusive), the penalty shall be 50% of the Service tax so determined;
b.    Reduced penalty equal to 15% of the Service tax amount alleged in the SCN shall be levied if Service tax, interest and reduced penalty is paid within 30 days of issuance of SCN under Section 73(1) of the Finance Act. Further proceedings in respect of such Service tax, interest and penalty shall be deemed to be concluded;
c.     Reduced penalty equal to 25% of the Service tax amount, determined by the Central Excise officer by an Adjudication Order, shall be levied if the Service tax, interest and reduced penalty is paid within 30 days of receipt of Order of the Central Excise Officer; and
d.    If the Service tax amount gets modified in any Appellate proceedings, then the amount of penalty and the interest payable thereon shall stand modified accordingly, and after taking into account the amount of Service tax so modified, the person who is liable to pay such amount of Service tax, shall also be liable to pay the amount of penalty and interest so modified;
e.    If the Service tax amount gets increased in any Appellate proceedings, then the penalty amount shall also stand modified accordingly, and benefit of reduced penalty (i.e. 25% of Service Tax) shall be admissible if Service tax, interest and reduced penalty on such increased amountis paid within 30 days of such Appellate Orders.

·         New Section 78B inserted after Section 78A: A new Section 78B has been inserted to prescribe transition provision in the following manner:

a.     Amended provisions of Sections 76 and 78 of the Finance Act shall apply to cases where either no SCN is served, or SCN is served under Section 73(1)or proviso thereto but no Order has been issued under Section 73(2) thereof, before the date of enactment of the Finance Bill, 2015 (i.e. May 14, 2015); and
b.    In cases where SCN has been issued but no Orderhas been issued under Section 73(2), before the date of enactment of the Finance Bill, 2015 (i.e. May 14, 2015), the period of 30 days for the purpose of closure of proceedings on the payment of Service tax and interest under clause (i) of the proviso to sub-section (1) of Section 76 or on the payment of Service tax, interest and penalty under clause (i) of the second proviso to sub-section (1) of Section 78, shall be counted from the date on which the Finance Bill, 2015 receives the assent of the President (i.e. May 14, 2015).

·         Section 80 omitted: Now, no waiver of penalty under Section 76 and 77 of the Finance Act, on Reasonable cause will be allowed.

·         Section 83: Certain changes have been made in the provisions relating to Settlement Commission under the Excise Act,which are made applicable to the Finance Act by virtue of Section 83 thereof.

·         Section 86: Amended to prescribe that remedy against the Order passed by the Ld. Commissioner (Appeals), in a matter involving rebate of Service tax on Input services, duty paid on Inputs, used in providing service which is exported, shall lie in terms of Section 35EE of the Central Excise Act, 1944 (“the Excise Act”) (i.e. Revision by the Central Government).

It is also provided that all appeals filed before the Hon’ble Tribunal after the date the Finance Act, 2012 came into effect (i.e. May 28, 2012) and pending on the date when the Finance Bill, 2015 receives assent of the President (i.e. May 14, 2015) shall be transferred and dealt in accordance with Section 35EE of the Excise Act.


·         Section 94: Clause (aa) of Section 94(2) has been substituted with “determination of the amount and value of taxable service, the manner thereof, and the circumstances and conditions under which an amount shall not be a consideration, under Section 67”.

PART II: CHANGES IN SERVICE TAX TO BE EFFECTIVE FROM DATE TO BE NOTIFIED:

A: Increase in rate of Service tax:

·         From 12.36% (including Education Cess and Secondary and Higher Education Cess) to flat 14%.The ‘Education Cess’ and ‘Secondary and Higher Education Cess’ shall be subsumed in the new Service tax rate.

Open Issues: Whether balance lying in ‘Education Cess’ and ‘Secondary and Higher Education Cess’ standing as on date of notification of change in rates will be allowed to be adjusted with Service tax liability as this is being denied in terms of Rule 3(7)(b) of the Cenvat Credit Rules, 2004(“the Credit Rules”),which requires clarification by the CBEC at the earliest.

·         Consequent to the upward revision in Service tax rate, the composition rate is proposed to be revised proportionately under Rule 6(7), 6(7A), 6(7B) and 6(7C) of the Service Tax Rules on specified services, namely,

·         Air Travel Agent: From “0.6%” and “1.2 %”, to “0.7 per cent.” and “1.4 per cent of Basic fares in the case of domestic bookings and international bookings respectively.

·         Life insurance service: From “3%” and “1.5%”, to “3.5%” of the premium charged from policy holder in the first year and “1.75% in the subsequent year”.

·         Money changing service provided by banks or authorized dealers:
o    From “0.12%” to “0.14%”  of gross amount of currency exchanged for an amount upto Rs.1,00,000/-subject to minimum amount of “Rs. 35”which was “Rs. 30 earlier or;
o    From “Rs. 120 and 0.06%” to “Rs. 140 and 0.07%” of gross amount of currency exchanged for an amount exceeding Rs.1,00,000/- upto Rs. 10,00,000/ or;
o    From “Rs. 660 and 0.012%” to “Rs. 770 and 0.014%” of gross amount of currency exchanged for an amount exceeding Rs.10,00,000/- subject to maximum amount of Rs. 7000/- which was Rs. 6000/- earlier

·         Service provided by lottery distributor and selling agent:
o    Guaranteed price payout is more than 80%: Rs. 8200/- (earlier Rs. 7000/-) on every Rs. 10,00,000/- (or part of Rs. 10,00,000/-) of aggregate face value of lottery tickets printed by organizing State for a draw or
o    Guaranteed price payout is less than 80%: Rs. 12,800/- (earlier Rs.11,000/-) on every Rs. 10,00,000/- (or part of Rs. 10,00,000/-) of aggregate face value of lottery tickets printed by organizing State for a draw.

B: Swachh Bharat Cess – Enabling Provision
·         An enabling provision is being made to empower the Central Government to impose a Swachh Bharat Cess (“SB Cess”) on all or any taxable services at a rate of 2% on the value of all or any taxable services. The proceeds from this Cess would be utilized for Swachh Bharat initiatives.

The Government will specify the categories of taxable services on which SB Cess would be leviable.

Open issues:
a.     What all services are going to be covered under the levy of SB Cess?

In the absence of clearly defined provisions, it is likely that the SB Cess may re-ignite the tussle on ‘classification’ of services.

a.     Whether Cenvat credit of SB Cess would be available or not because there are no amendments proposed in the Credit Rules?

C: Changes in relation to the Negative List – Section 66D of the Finance Act

·         Section 66D(a): Under clause (iv), the words ‘support services’ has been substituted by the words ‘any service’.

Accordingly, after such amendment, all services provided by the Government or local authority to a Business Entity would be exigible to Service tax, except for the services that are specifically exempted, or covered by any another entry in the Negative List.

Consequently, the term ‘support’ has been omitted from the Rule 2(1)(d)(i)(E) of the Service Tax Rules, which provides for liability of service receiver to pay Service tax under Reverse Charge in relation to support services provided or agreed to be provided by Government or Local authority with certain exceptions.

Further, in paragraph I, clause (A) sub clause (iv) Item Cunder Notification No. 30/2012-ST dated June 20, 2012 (Reverse Charge Mechanism), the term ‘support’ has been omitted for services provided or agreed to be provided by Government or Local authorityvide Notification No. 7/2015-ST dated March 1, 2015. Thus, now any services provided by the Government or Local authority to a Business Entity would be exigible to Service tax under Reverse Charge, except for the services that are specifically exempted, or covered by any another entry in the Negative List.

·         Section 66D(f): Services by way of carrying out any processes for production or manufacture of alcoholic liquor for human consumption brought under the Service tax net.

·         Section 66D(i): Explanation inserted whereby the expression “betting, gambling or lottery” shall not include the activity as specified in substituted explanation 2 to Clause (44) of Section 65B of the Finance Act.

·         Section 66D(j): Omitted, which covers‘admission to entertainment event or access to amusement facilities’.

Consequently, Service tax to be levied on the services provided by way of access to amusement facility such as rides, bowling alleys, amusement arcades, water parks, theme parks, etc;

Service tax also to be levied on services by way of admission to entertainment event of concerts, non-recognized sporting events, pageants, music concerts and award functions, if the amount charged for admission is more than Rs. 500.

Whereas services by way of admission to exhibition of the cinematographic film, circus, dance, or theatrical performances including drama, ballets or recognized sporting events shall continue to be exempt; [Read with the Notification No. 6/2015-ST dated March 1, 2015 vide which changes has been made in the Mega Exemption List of Services]

Consequent to the changes in the Negative List of services, definition of following terms has been omitted/ amended in Section 65B of the Finance Act:

·         Definitions of certain terms omitted [Section 65B(9): ‘amusement facility’, Section 65B(24): ‘entertainment event’ and Section 65B(49): ‘support services’ has been omitted;]

·         Definitions of certain terms amended [Section 65B(40): ‘process amounting to manufacture or production of goods’ excluding alcoholic liquors for human consumption]

D: Changes in Mega Exemption Notification No. No. 25/2012-ST dated June 20, 2012 vide Notification No. 6/2015-ST dated March 1, 2015 (effective from the date to be notified)

·         Entry 30: Service tax would be levied on services by way of carrying out of intermediate production process of alcoholic liquor for human consumption on job work, consequent to imposition of Service tax on services by way of manufacture of alcoholic liquor for human consumption.

New Exemption:
·         Entry 47: Services by way of right to admission to:
o    exhibition of cinematographic film, circus, dance, or theatrical performances including drama or ballet;
o    recognized sporting events;
o    award functions, concerts, pageants, musical performances or any sporting events other than recognized sporting event, where the consideration for such admission is upto Rs. 500 per person

[This exemption will be effective from the date to be notified for amendments being made in the Negative List, concerning the service by way of admission to entertainment events.]

·         Definition of ‘recognized sporting events’ provided.