May 282015

Impact of Change in Service Tax Rate

The immediate impact of the change in rate would be increase in the service tax amount which is to be paid by the service provider post 1.6.2015. As per Section 68(1), service tax is a levy which is payable by the service provider. ST is a destination based levy, could be collected from the customer and paid to the Government.

Service provider has statutory right to pass on the burden of the service tax component to service receiver in absence of prescription by legislature that service tax burden should not be passed on. The Finance Act, 1994 does not contain any such restriction that service provider should not pass on the burden to the service receiver.

However it all depends on terms of contract between the parties. When the contracted price includes all taxes, then the increased service tax burden of 14% would go out of the pocket of the service provider.

When the terms are taxes including service tax extra as applicable, then the service provider could collect and pay the service tax. For all existing contracts as well as future contracts to be inked, care to be taken by service providers engaged in providing taxable services, to renegotiate and put in clause that ‘all taxes including service tax as applicable, to be collected extra from the customer’.

The ideal alternatives for on going contracts are as under:

  1. Service Completed before 1.6.2015: All the services provided upto end of May 2015 need to be billed. These would include those bills not raised which have been postponed, missed, other reasons. These are to be identified and bill raised by end of May 2015. Otherwise the 14% rate may have to be applied in future.
  2. Part services provided before 1.6.2015: The part bill to extent of completed service, could be raised before 1.6.2015 and service tax paid thereon by 5th/6th of June 2015 at 12.36%.
  3. Advances received before 1.6.2015 for future services: Even on advances received towards services to be provided in future, invoices to be raised by 30th May 2015 and ST could be paid at 12.36%.
  4. Where the invoices are issued before 1.6.2015: When the invoices are raised before 1.6.15 for services to be provided in future[post June 2015], service tax rate is 14%.

Impact of subsuming cess

FA 2015 has done away with the Cess, both under central excise and service tax. The provisions of Rule 3 of the CENVAT Rules permit utilisation of CENVAT credit of Excise duty/Service tax for payment of Cess but not vice versa. With no Cess on Excise duty/service tax, the manufacturer/service provider will merely accumulate such credit.

There has been a notification no.12/2015-CE(NT) where it has clarified that the ED/SHE cess on inputs/input services/capital goods received on or after 1.3.2015 could be set off to pay excise duty by a manufacturer of final product. Similarly that balance 50% of ED and SHE cess on capital goods received in the factory of manufacture of final product in 2014-15 can be utilized to pay excise duty.

There is no clarity on the past period accumulated credit. A similar issue, could arise under service tax, when cesses are subsumed wef 1.6.2015. Where the customer has substantial accumulated credit could examine legal validity and take a call on set off of such accumulated credit of cess against the service tax payable post 1.6.2015 under intimation to department. It is hoped there would be some clarification issued in this regard.