While all eyes are set on the on the Union Budget for the upcoming financial year, the Union Government is keen to present the unique and historic budget  on 1^st February, 2017, departing from the colonial-era tradition of presenting the Union Budget on the last working day of February.

Amidst all the horde of upcoming budget, the Central Board of Excise and Customs (CBEC) on 12th of January 2017 proposed several amendments in the Service Tax Law which have been effective from 22^nd January, 2017.

The details of the pre budget amendment in Service Tax Law along with the analysis of its effect are discussed below:

Notification No. 01/2017 – Service Tax dated 12.01.2017

This notification seeks for amendment in previous notification No. 25/2012-ST dated 20.06.2012   in two explicit areas:

• First is to withdraw the exemption from service tax for services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India;
• Second is to exempt services provided by a business facilitator or a business correspondent to a banking company with respect to accounts in its rural area branch.

Analysis of the first amendment

• Services by way of transportation of goods by a vessel for import into India provided by a provider located in a non-taxable territory to a receiver in non-taxable territory shall be chargeable to service tax w.e.f 01.2017.

Analysis of the second amendment

• The move of the Finance Ministry to provide exemption on services rendered by business correspondents or business facilitators to banking companies for its rural branch accounts by the revenue department will give a fillip to rural banking and enable financial inclusion, as the cost of delivering banking services in rural areas is expected to come down. Going forward, bank account operations in rural India would be more economical and viable.
  

   

  Notification No. 02/2017 & 03/ 2017 – Service Tax dated 12.01.2017

This amendment also seeks to amend Service Tax Rules, 1994 so as to in two places,

• One is to amend the definition of aggregator:

Now it exclude such persons from the definition of aggregator who enable a potential customer to connect with persons providing services by way of renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes subject to fulfilment of certain conditions;

• Second amendment in Service Tax Rules as per Notification No. 02/2017 is to Shift in liability to pay service tax from service provider to person in charge of vessel by specifying the person complying with the sections 29, 30 or 38 read with section 148 of the Customs Act, 1962 (52 of 1962) as the person liable for paying service tax in case of services provided or agreed to be provided by a person located in non-taxable territory to a person located in non-taxable territory by way of transportation of goods by a vessel from a place outside India up to the customs station of clearance in India and the previous notification No. 30/2012-ST dated 20.06.2012 have also been amended via Notification No. 03/2017 to give effect to second amendment of Notification No. 02/2017 

Note: Section 29 refers to a person in charge of vessel or aircraft. Section 30 contemplates person in charge of the vessel r aircraft as well as a person other than a carrier who is authorized to issue delivery order in favour of an importer to file an import manifest. Section 38 confers power on the proper officer to require the person in charge to provide documents. Section 148 refers to agent appointed by the person in charge.

Analysis of the first amendment in the notification

With the exclusion of some persons from the definition of aggregators some aggregators like Oyo Rooms may have some relief if the room rent charges are received directly by the hotels and if those hotels are separately registered under service tax.

Analysis of the second amendment in the Notification No. 02/2017 and Notification No. 03/2017

The place of provision of services of transportation of goods is the place of destination of the goods. Meaning thereby, in case of transportation of goods by a vessel from a place outside India to customs stations of clearance of India, the Place of Provision will be in India. Hence Service Tax may be levied in that service.

Now, the service provided or agreed to be provided by way of transportation of goods by vessel from a place outside India up to the custom station of clearance in India shall be covered under complete Reverse Charge Mechanism where service receiver is liable to pay 100% service tax.

Notification No. 04/2017 – Service Tax dated 12.01.2017

This amendment seeks to amend notification No. 26/2012-ST dated 20.06.2012 so as to rationalize the abatement for tour operator services.

Through this notification, the abatement available to Tour Operators has been changed effective 22nd January, 2017.

Analysis of the amendment

Following two relevant changes are found with respect to tour operator services

♦		Changes in the abatement percentage and
♦		Changes in the availment of Cenvat Credit
(i)		Changes in the abatement percentage :- Under existing scheme, two separate abatements are given. Tour operator who is only arranging and booking accommodation for any person and where the cost of accommodation is included in such invoice, Bill or Challan, tour operator can claim 90% abatement in respect of such service. Thereby, Service tax is payable only to the extent of 10% of the value.
		Services by a tour operator in relation to a tour, other than only arranging and booking accommodation and where gross amount charged includes charges toward accommodation and transportation, 70%abatement on value can be claimed by the tour operator and effectively Service tax is payable on 30% of value at the rate of 15%.
		Under revised scheme, abatement of flat 40% is available on the value in respect of all services provided by the tour operator. Effectively, on 60% portion Service tax is payable. The abatement is available only when bill issued for such tour is inclusive of charges of accommodation and transportation for such tour.   After this change cost of travel particular in relation to tour will increase.
(ii)		Changes in the availment of Cenvat Credit: -Under existing scheme Cenvat Credit on Capital Goods and Input is not available. Credit in respect of Input service is also restricted to the extent of those services on which service tax is paid by other tour operator.
		In the amended notification, only credit of Capital goods and Input used in the provision of taxable service is disallowed. That means, credit of Service tax paid on all Input services used in the provision of taxable service shall be available to tour operator. Therefore, Tour operator can avail credit of all input service used for the provision of tour operator services.   This will be the great relief to tourism industry as it will lead to removal of cascading to the extent of credit on the input service.

Though the recent amendment in tour operator service looks like rationalization of abatement scheme, but this will definitely lead to increase in the cost of travel industry at least by 10 to 15%. Questions like taxability of only hotel booking are still unanswered. These amendments will also disturb the existing financial models of tours and travel industry. However, restriction less credit of input service is the good move. This will definitely neutralize the effect of increase in cost of travel industry to some extent.