"Service tax by way of Negative list" is the beginning of a new era in
the 18 years old Service tax law. Most of the existing provisions have
been reviewed to line up them with the new scheme. Inspite of a no. of
ambiguities regarding the negative list to be introduced w.e.f.
1.7.2012, the hotel industry is receiving positive signs therefrom. This
piece of articulation is about the impact of negative list scheme on
the hotel industry.
Cenvat Credit allowed with Abatement:-
In most of the services offered by a hotel, the abatement facility has been continued even in the negative list. However, as an add-on, the facility of Cenvat Credit has also been extended. On Mandap Keeper services abatement @ 30% has been extended with Cenvat facility under the notification no. 13/2012-ST dated 17.3.2012. However, on supply of food items in restaurant and as an outdoor caterer, taxable value has
been fixed as 40% & 60% (or abatement of 60% & 40%) respectively with the facility of Cenvat Credit by inserting a new rule 2C in the Service Tax (Determination of Value) Rules, 2006. In all the three cases, the facility of Cenvat credit includes the credit on input services, capital goods and inputs other than those falling under chapter 1 to 22. Though there is reduction in the proportion of abatement but simultaneously the credit is allowed which will ultimately reduce the costs. This may be explained by following example assuming only mandap keeper services are being provided:-
Receipts from Mandap Keeper services Rs. 3500000/-
Cenvat Credit availed Rs. 150000/-
Particulars
Before introduction of negative list
After introduction of negative list
Gross receipts
3500000
3500000
Less: Abatement @ 40% & 30%
1400000
1050000
Taxable value
2100000
2450000
Service tax payable @ 12.36%
259560
302820
Less: Cenvat Credit
0
150000
Service tax to be paid in cash
259560
152820
Thus, cash outflow has reduced drastically which will reduce ultimately the cost of service providers. Since a major part of income of hotels comes from the Mandap Keeper Services, they will be benefitted by this amendment at large.
Services with abatement + Cenvat excluded from Rule 2(e) of CCR, 2004:-
Rule 2(e) of Cenvat Credit Rules, 2004 defines the term exempted services. This rule reads as follows: –
(e) "exempted services" means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable services, shall be taken"
Thus, the following three types of services will be considered as exempted services under rule 2(e) for the purpose of Cenvat Credit Rules, 2004:–
Those services on which no service tax is leviable under section 66 of the Act; and
Those services which are wholly exempted by way of exemption notification; and
Those services which are partly exempted by way of exemption notification ON THE CONDITION THAT NO CREDIT OF INPUTS AND INPUT SERVICES SHALL BE TAKEN.
As such, the services on which abatement is being granted subject to the condition of non-availment of credit are covered in the definition of exempted services. Prior to enactment of budget, 2012; the abatement was allowed under the provisions of notification no. 1/2006-ST dated 1.3.2006 which clearly stated that the benefit under this notification will be allowed only if no Cenvat Credit is taken. Therefore, the abatement vis a vis Cenvat were not allowed and as such, the services on which abatement was claimed were treated as "exempted services" as per above definition given under rule 2(e) ibid.
Now w.e.f. 1.7.2012, the Cenvat Credit will be allowed alongwith abatement in case of certain services like Mandap Keeper, restaurant services, outdoor catering services, etc. these services will come out of the definition of exempted services. Accordingly, these services will be considered as "taxable services" for the purpose of Cenvat Credit Rules, 2004. As such, entire value pertaining to these services will be considered as taxable value.
This contention is also supported by Board circular no. 868/6/2008-CX dated 9.5.2008 which clarifies that for the purpose of rule 6(3) of the Cenvat Credit Rules, 2004; the value of exempted services will be the gross value before abatement. Since the services on which Cenvat is allowed alongwith abatement will come out of purview of exempted services and will be treated as taxable services. Therefore, the gross value charged for such services will be treated as taxable receipts on the analogy laid down by the above stated circular. Due to this, the quantum of taxable receipts will highly increase.
Increase in taxable receipts, decrease in proportionate reversal:-
Rule 6 of the Cenvat Credit Rules, 2004 is the most critical aspect for the service providers like hotels which offer a bouquet of services, both exempted as well as taxable. As of now, many of the services provided by the hotel were exempt, due to which the ratio of reversal under rule 6(3)(ii) is very high. The services normally provided by the hotels which are exempt currently are washing services, telephone facility, etc. and are going to be taxable as from 1.7.2012. Further, as per above discussion, the entire receipts from specified services like Mandap Keeper will be considered in the receipts from taxable services. In other words, the quantum of exempted services will reduce drastically. Since the formula of proportionate reversal depends on the quantum of exempted services, lower the receipts from exempted services lower the amount of reversal. For the sake of convenience, rule 6(3) which prescribes the formula for reversing the credit attributable to common input services is produced as follows:-
Total value of exempted services/Total value of exempted and taxable services * Total Cenvat Credit availed = Proportionate reversal
Thus, lower the amount of numerator in a formula, lower the ratio of reversal. As per changes made due to negative list, the services like Mandap keeper, etc. are excluded from the purview of exempted services as defined in rule 2(e) of CCR, 2004. As such, it will lead to major reduction in the exempted receipts. Therefore, the ratio of reversal will come down significantly. It is expected that the ratio of reversal will come even below 20%. Since service tax is always recovered from the customer, the hotels are not bothered much about the increase in tax payable on increased no. of taxable services; however, they are happy that the service tax credit which was earlier reversed will now enhance the Cenvat balance of hotels.
Alternatives in place of proportionate reversal:-
Rule 6(3) of the Cenvat Credit Rules, 2004 gives two options to the provider of taxable and exempted services who is availing the credit on common input services. These two options are either pay the amount @ 6% of value of exempted services or proportionately reverse the credit availed. However, prior to negative list proposal, the quantum of exempted services was so high that it was not feasible to opt for paying the amount @ 6% of the value of exempted services. Thus, eventhough the formula prescribed for the proportionate reversal is cumbersome and the procedure is also complicated, the service providers had no choice, but to opt for proportionate reversal. Now w.e.f. 1.7.2012 when most of the services are going to be taxable, there will be very less amount of exempted service. Since the no. of exempted services has reduced drastically, they can now think of a simpler method as given under rule 6(3)(i) which is simple reversal @ 6% of the value of exempted services. As such, many of the large hotels are doing cost-benefit analysis of these two options as given under rule 6(3) of the Cenvat Credit Rules, 2004. Thus, negative list has given them a chance to get rid of the cumbersome procedure of proportionate reversal.
Before parting:-
The negative list of services is going to shuffle the entire service tax law. Out of many ambiguities and lacunas therein, the hotel industry seems to have been benefitted. Though the ultimate benefit available will be known only after the implementation of new provisions, yet, we can say that the Negative list seems to be positive for the Hotel Industry…
Cenvat Credit allowed with Abatement:-
In most of the services offered by a hotel, the abatement facility has been continued even in the negative list. However, as an add-on, the facility of Cenvat Credit has also been extended. On Mandap Keeper services abatement @ 30% has been extended with Cenvat facility under the notification no. 13/2012-ST dated 17.3.2012. However, on supply of food items in restaurant and as an outdoor caterer, taxable value has
been fixed as 40% & 60% (or abatement of 60% & 40%) respectively with the facility of Cenvat Credit by inserting a new rule 2C in the Service Tax (Determination of Value) Rules, 2006. In all the three cases, the facility of Cenvat credit includes the credit on input services, capital goods and inputs other than those falling under chapter 1 to 22. Though there is reduction in the proportion of abatement but simultaneously the credit is allowed which will ultimately reduce the costs. This may be explained by following example assuming only mandap keeper services are being provided:-
Receipts from Mandap Keeper services Rs. 3500000/-
Cenvat Credit availed Rs. 150000/-
Particulars
Before introduction of negative list
After introduction of negative list
Gross receipts
3500000
3500000
Less: Abatement @ 40% & 30%
1400000
1050000
Taxable value
2100000
2450000
Service tax payable @ 12.36%
259560
302820
Less: Cenvat Credit
0
150000
Service tax to be paid in cash
259560
152820
Thus, cash outflow has reduced drastically which will reduce ultimately the cost of service providers. Since a major part of income of hotels comes from the Mandap Keeper Services, they will be benefitted by this amendment at large.
Services with abatement + Cenvat excluded from Rule 2(e) of CCR, 2004:-
Rule 2(e) of Cenvat Credit Rules, 2004 defines the term exempted services. This rule reads as follows: –
(e) "exempted services" means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act and taxable services whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable services, shall be taken"
Thus, the following three types of services will be considered as exempted services under rule 2(e) for the purpose of Cenvat Credit Rules, 2004:–
Those services on which no service tax is leviable under section 66 of the Act; and
Those services which are wholly exempted by way of exemption notification; and
Those services which are partly exempted by way of exemption notification ON THE CONDITION THAT NO CREDIT OF INPUTS AND INPUT SERVICES SHALL BE TAKEN.
As such, the services on which abatement is being granted subject to the condition of non-availment of credit are covered in the definition of exempted services. Prior to enactment of budget, 2012; the abatement was allowed under the provisions of notification no. 1/2006-ST dated 1.3.2006 which clearly stated that the benefit under this notification will be allowed only if no Cenvat Credit is taken. Therefore, the abatement vis a vis Cenvat were not allowed and as such, the services on which abatement was claimed were treated as "exempted services" as per above definition given under rule 2(e) ibid.
Now w.e.f. 1.7.2012, the Cenvat Credit will be allowed alongwith abatement in case of certain services like Mandap Keeper, restaurant services, outdoor catering services, etc. these services will come out of the definition of exempted services. Accordingly, these services will be considered as "taxable services" for the purpose of Cenvat Credit Rules, 2004. As such, entire value pertaining to these services will be considered as taxable value.
This contention is also supported by Board circular no. 868/6/2008-CX dated 9.5.2008 which clarifies that for the purpose of rule 6(3) of the Cenvat Credit Rules, 2004; the value of exempted services will be the gross value before abatement. Since the services on which Cenvat is allowed alongwith abatement will come out of purview of exempted services and will be treated as taxable services. Therefore, the gross value charged for such services will be treated as taxable receipts on the analogy laid down by the above stated circular. Due to this, the quantum of taxable receipts will highly increase.
Increase in taxable receipts, decrease in proportionate reversal:-
Rule 6 of the Cenvat Credit Rules, 2004 is the most critical aspect for the service providers like hotels which offer a bouquet of services, both exempted as well as taxable. As of now, many of the services provided by the hotel were exempt, due to which the ratio of reversal under rule 6(3)(ii) is very high. The services normally provided by the hotels which are exempt currently are washing services, telephone facility, etc. and are going to be taxable as from 1.7.2012. Further, as per above discussion, the entire receipts from specified services like Mandap Keeper will be considered in the receipts from taxable services. In other words, the quantum of exempted services will reduce drastically. Since the formula of proportionate reversal depends on the quantum of exempted services, lower the receipts from exempted services lower the amount of reversal. For the sake of convenience, rule 6(3) which prescribes the formula for reversing the credit attributable to common input services is produced as follows:-
Total value of exempted services/Total value of exempted and taxable services * Total Cenvat Credit availed = Proportionate reversal
Thus, lower the amount of numerator in a formula, lower the ratio of reversal. As per changes made due to negative list, the services like Mandap keeper, etc. are excluded from the purview of exempted services as defined in rule 2(e) of CCR, 2004. As such, it will lead to major reduction in the exempted receipts. Therefore, the ratio of reversal will come down significantly. It is expected that the ratio of reversal will come even below 20%. Since service tax is always recovered from the customer, the hotels are not bothered much about the increase in tax payable on increased no. of taxable services; however, they are happy that the service tax credit which was earlier reversed will now enhance the Cenvat balance of hotels.
Alternatives in place of proportionate reversal:-
Rule 6(3) of the Cenvat Credit Rules, 2004 gives two options to the provider of taxable and exempted services who is availing the credit on common input services. These two options are either pay the amount @ 6% of value of exempted services or proportionately reverse the credit availed. However, prior to negative list proposal, the quantum of exempted services was so high that it was not feasible to opt for paying the amount @ 6% of the value of exempted services. Thus, eventhough the formula prescribed for the proportionate reversal is cumbersome and the procedure is also complicated, the service providers had no choice, but to opt for proportionate reversal. Now w.e.f. 1.7.2012 when most of the services are going to be taxable, there will be very less amount of exempted service. Since the no. of exempted services has reduced drastically, they can now think of a simpler method as given under rule 6(3)(i) which is simple reversal @ 6% of the value of exempted services. As such, many of the large hotels are doing cost-benefit analysis of these two options as given under rule 6(3) of the Cenvat Credit Rules, 2004. Thus, negative list has given them a chance to get rid of the cumbersome procedure of proportionate reversal.
Before parting:-
The negative list of services is going to shuffle the entire service tax law. Out of many ambiguities and lacunas therein, the hotel industry seems to have been benefitted. Though the ultimate benefit available will be known only after the implementation of new provisions, yet, we can say that the Negative list seems to be positive for the Hotel Industry…
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