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Service tax not to be levied on payments made
July, 03rd 2010

Post the finance ministrys move to include eight new services such as domestic air travel and health under the ambit of service tax from 1 July, the revenue department has clarified that payments made before that date for services yet to be delivered would be exempted from the tax.

A major chunk of airline tickets are booked much ahead of the actual date of journey.

While legally, tax is payable on such amounts received, it has been decided to specifically exempt service tax on that partial or full amount, which is received by the service provider before 1 July, the departments clarification said.

It also makes its stance clear on air tickets where more than one sector is covered (say, Mumbai-Delhi-Mumbai)the 10.3% service tax applies to each leg of the journey.

But it adds that if the service provider, who is liable to pay the tax, received the payment from travel agents before 1 July, the exemption applies.

This could complicate issues despite the clarification. Like in the case of airlines, over 80% of the tickets are booked by the travel agents whose payment cycles are also long, said R. Muralidharan, executive director, PricewaterhouseCoopers.

As for those who have bought property and are paying in instalments, the exemption applies to payments made before 1 July. It will be a relief for buyers who could have already made partial or full payment for a property which is complete or under construction, said Bipin Sapra, partner, Ernst and Young. But in what could change how property buyers make decisions, the department has said service tax will be levied hence if payments are made before a property has been constructed.

In most cases, developers ask buyers to make payments several years in advance before the possession is made. This practice will now invite service tax, said Jatinder Pal Singh, managing associate, Luthra and Luthra Law Offices.

Moreover, projects that include the value of the land will get abatement of service tax on 75% of the value of the property. Otherwise, the existing rate of abatement of 67% would continue to apply, the department said.

Despite the clarifications, several ambiguities remain, say experts. For instance, the department has not clarified how a construction project will be taxed which is partially completed by 1 July, said Pratik Jain, executive director, indirect tax, KPMG.

After the finance ministrys decision to have only a few exemptions for ports and airports under the newly introduced taxable services, the department has said that service tax paid on services used for exporting goods would also be eligible for refund.

Residential complexes under the Jawaharlal Nehru National Urban Renewal Mission and Rajiv Awaas Yojana have been kept out of the ambit of the service tax. Meanwhile, the department has postponed the levy of service tax on transport of goods by railways to January 2011. Freight carried by Indian railways in 2009-10 was 890 million tonnes (mt), which generated a revenue of Rs58,715 crore.

The target for the current fiscal year is of 944 mt, which is expected to fetch a revenue of Rs62,489.33 crore. The railways estimates the impact of the service charge at about Rs1,500 crore a year, a railways official said.

Transmission of electricity is exempt from service tax, as are taxable services provided by a distribution licencee or a distribution franchisee.

The exemption notification is timely as the framework of the service tax law had inadvertently created a risk that transmission of electricity could be considered liable to service tax by over-zealous officers, said Gokul Chaudhri, partner at audit and consulting firm BMR Advisors.

We never paid service tax on electricity distribution. The current notification simply clarifies the issue, said Arup Ghosh, chief operating officer, North Delhi Power Ltd, which supplies power in North Delhi.

The department has also clarified that only sponsorship services to certain sports championships or tournaments, such as national tournaments, would be exempt from the service tax.

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