Changes in Service tax in Budget 2015 (proposed)

Rate of Service Tax

The rate of Service Tax will be increased from 12% to 14% from a date to be notified by the Government after the enactment of the Finance Bill, 2015. It is noticed that the Education Cess and Secondary and Higher Education Cess has been subsumed in the revised rate of Service Tax.

Thus, from the date when the new provision comes into effect, the service provider will not be liable to pay Education Cess or Secondary and Higher Education Cess which will be subsumed in the enhanced rate of 14%.

However, there is no transition provision for utilization of these accumulated cesses as proviso to Rule 3(7) (b) of the Cenvat Credit Rules, 2004 provides that the credit of Education Cess or Secondary and Higher Education Cess can be utilized only for payment of Education Cess or Secondary and Higher Education Cess respectively.

Inclusion of reimbursable expenses in the value of taxable services

Whether out of pocket expenses or reimbursable expenses incurred by the service provider in the course of providing the taxable services has to be included in the value of taxable services was examined by the Hon'ble Delhi High Court Intercontinental Consultants &Technorats (P.) Ltd. v. Union of India [2012] 28 taxmann.com 213 (Delhi) where the petitioner filed a writ petition before the High Court for quashing the show cause notice issued by the Service Tax Department for recovery of Service Tax on amount received as reimbursement of expenses such as hotel accommodation, travelling etc. under Rule 5(1) of the Service Tax (Determination of Value) Rules, 2006.

The Hon'ble Delhi High Court while deciding the petition held as follows:

- Rule 5 (1) of the Rules is ultra vires section 66 and section 67 of the Finance Act, 1994 since it travels beyond the scope of the aforesaid sections.

- The expenditure or costs incurred by the service provider in the course of providing the taxable service can never be considered as part of the gross amount charged by the service provider for the services provided.

- The reimbursement of expenses for air travel tickets, hotel accommodation, etc. may also lead to double taxation.

Though the Delhi High Court decision is in favour of the Assesse, the department has filed an appeal to the Supreme Court against the decision of the High Court which is pending for disposal.

Amendment to Section 67 of the Finance Act

To overcome the decision of the Hon'ble Delhi High Court in Intercontinental Consultants, the definition of consideration in Explanation to Section 67 has been amended to include:

- Any amount that is payable for the taxable services provided or to be provided

- Any reimbursable cost incurred by the service provider and charged in the course of providing or agreeing to provide a taxable service (except such conditions to be prescribed)

Thus, after the amendment there is no doubt that any expenditure incurred by the service provider for providing any taxable services has to be included in the value of taxable services unless specifically excluded and Service Tax would be chargeable on the total value including the reimbursable expenses incurred by the service providers.

However, the inclusion of reimbursable expenses for the period prior to the amendment is yet to be decided by the Hon'ble Supreme Court.