One of the key expectations from Budget 2010 was that of a revised timeline for implementation of goods and service tax (GST) as well as some guideline on its expected contours.

In line with the above, the finance minister declared that the comprehensive GST is likely to be introduced in April 2011 along with the Direct Tax Code, thereby laying to rest speculations of introduction of GST from October 2010. However, no further direction as to the contours of the proposed GST has emerged. Apart from the statement on GST, no significant structural changes have been proposed in the Budget in the indirect tax regime.

The stimulus package has been partially rolled back by increasing the median rate of excise duty (for non-petroleum goods) from the erstwhile 8% to 10%.

On the customs front, the customs duty of 5% has been re-imposed on crude oil. There has also been an enhancement of customs duty rates to 7.5% on diesel and petrol and 10% on other refined products. The excise duty on petrol and diesel also has been increased by Re 1 per litre.

Further, the finance minister in his speech made a passing reference to certain steps being taken in the service tax sphere to avoid revenue leakage, to remove distortions and to clarify certain aspects. However, on a detailed review of the Finance Bill, it emerges that several far reaching changes have been proposed, especially in the service tax laws. Some of the key changes are discussed below.

Service tax proposals at a glance

* The scope of transport of passengers by air service has been enhanced to include international travel and domestic travel in any class. Therefore, all airline travel is now covered for the purposes of service tax.

* The Budget proposes to include transactions involving copyrights on cinematograph films and sound recordings in the service tax net, while "original literary, dramatic, musical and artistic works" continue to remain outside the service tax net. It emerges from the explanatory memorandum that the aim is to target the music distributing companies and production houses owning copyright on cinematograph films and not the individual performers.

A 'cinematograph film' has been defined in the Copyright Act as "a cinematographic film means any work of visual recording on any medium produced through a process from which a moving image may be produced". This is a broad definition and may include visual content other than movies as well. Accordingly, there is a likelihood that even copyrighted educational or other visual content would also get included in the service tax net.

This amendment has to be understood in the context of the complete exemption from customs duty provided to motion pictures, music, gaming software for use on gaming consoles recorded on specified media beyond the customs duty leviable on the value of such carrier media. This was a long-standing demand of the entertainment industry.

* The Budget proposes to add an explanation to 'commercial or industrial construction services' category clarifying that unless the entire payment for the property is paid by the prospective buyer post the completion of construction (including its certification by the local authorities), 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.

It is not clear if the value towards the sale of land (interest in immovable property) is also to be considered for calculating service tax. Coupled with this, it has been proposed that service tax would be applicable on preferential location charges as well as external developmental charges. The latter would impact even completed buildings. It is also not clear at this stage if this will only apply to new transaction or even to the ones that have been contracted in the past and where possession is not yet granted.

Given that most of the properties are purchased during construction phase, a levy of service tax would have a significant impact on property prices. Also, service tax implications may arise on the installments already paid.

* It has also been provided retrospectively that the activity of 'renting' itself is a taxable service in a bid to over rule the judgement of Delhi High Court where the act of renting, by itself, has been held not to be a service. However, the reasons relied upon by the high court to arrive at the above decision is unlikely to be overcome merely by retrospectively amending the legislation in this manner. This issue is certain to generate further litigation

* The definitions of 'port' and 'airport' services have been amended to clarify that all services provided entirely within the port/airport premises would fall under these services. Further, the pre-condition of specific authorisation from the port/airport authority has been removed. While the aim of this amendment was to avoid any revenue leakage by arguing lack of specific authorisation, this may lead to ambiguities.

Conclusion

In the light of the above, it appears that service tax has been identified by the government as a growth engine for enhancement of indirect tax revenue in future. It would be intriguing to see how the above amendments transition to GST.