[Industries] Service Sector- service tax, negative list, FDI limits, ICT, Tourism, Trade, R&D, Budget 2014 provisions

Cover Economic Survey Service tax

[Industries] Service Sector- service tax, negative list, FDI limits, ICT, Tourism, Trade, R&D, Budget 2014 provisions

  1. [Act 1] Services: theory and statistics
    1. Service Tax: theory
    2. Services kept out?
    3. Service tax: negative list (17 services)
    4. Budget 2014: Service Tax provisions
    5. Service sector vs GDP, Employment
    6. Service sector: FDI
  2. [Act 2] Tourism sector
    1. Budget 2014: tourism related
    2. Sacred Rivers
    3. E-Visa
  3. [Act 3] Real Estate Services and Housing
    1. RESIDEX
    2. Budget 2014 provisions
  4. [Act 4] IT industry
    1. National Policy on IT 2012
    2. Budget 2014: Digital India
  5. [Act 5] Trade industry
  6. [Act 6] Media, Entertainment
    1. Cable Digitization
    2. Research and Development
    3. Budget 2014: research related provision
  7. Service sector: Overall Challenges & Outlook

[Act 1] Services: theory and statistics

Cover Economic Survey Service tax

Service Tax: theory

  • Service tax is an Indirect tax of the Union.
  • Collected by CBEC-Central board of excise and customs.
  • Doesn’t apply to Jammu and Kashmir.
  • Doesn’t apply to person/company selling less than Rs.10 lakhs worth services in a financial year.
  • Tax deduction at source (TDS) mechanism doesn’t apply.
    • Suppose, there was TDS system in service tax, then if hotel bill was 100 rupees, then customer would have to pay only Rs.87.64 to hotel owner and remaining 12.36 directly to Government as service tax payment.
    • And in that case, we wouldn’t’ call it ‘indirect’ tax either but ‘direct tax’.
    • There was a similar “hotel receipt tax” (a direct tax) in past, but it was abolished.

Service tax: Constitutional angle

Originally, Constitution did not provide for “service tax”. Therefore Government had to amend the Constitution

88th Constitutional amendment, 2003.
Art. 268A Empowers union Government to levy services tax.
7th Sch. Entry 92C Tax on services, falls under Union list.
  • For income tax, there is income tax act; for excise duty there is excise duty act; for custom duty there is custom duty act.
  • BUT there is no separate service tax act for collection of service tax.
  • Service tax levied under provisions of ch.5 of the finance Act.*
  • *Recall that along with budget (Annual financial statement art.112), Government puts two bills:
    • APPROPRIATION BILL: to spend money from consolidated fund of India
    • FINANCE BILL: to collect taxes

Services kept out?

Government collects service tax using “Comprehensive approach” i.e. service tax applicable on all services except those given in kept out.

Two types of services kept out of tax ambit
Negative List Exempted
These services are specifically listed in finance act. (sec.66D) these services are exempted (temporarily) by  Government notification
Changing this list, requires parliamentary approval- because you’ll need to amend the Finance Act itself. Doesn’t require parliamentary approval. Government can change it any time.
17 services in negative list (given below) some examples-veterinary healthcare, legal service, cord blood bank, sports-recreation, hotel rooms below Rs. 1000, non-AC restaurants, general insurance and so on.

Service tax: negative list (17 services)

Service tax will not apply to following services:

  1. services provided by Government /local authority
    1. Post card, inland letter, money order etc. kept out of service tax. but premium services like speedpost, express parcel=service tax applies.
    2. No service tax on “sovereign functions”- like granting spectrum license, delivering justice etc.
  2. RBI’s services (Except when RBI acts as banker’s bank)
  3. foreign diplomatic mission in India
  4. agriculture related services for example
    1. Renting agro. machineries
    2. supplying farm labour
    3. Grading, sorting, processing, packaging – as long as essential characteristics not changed.
    4. research and extension services
    5. pisciculture (fish), sericulture (silk), plantations
  5. Trading of goods
  6. “processes” required in goods manufacture
  7. Advertisement except radio and television.
  8. toll charges while crossing road, bridge etc*
  9. Betting, gambling, lottery*
  10. Entertainment events, amusement parks*
  11. Electricity transmission
  12. Education upto higher secondary and vocational centres. (Coaching classes have to pay service tax, except those making less than 10 lakhs)
  13. Renting property for residential purpose. (In other words – renting hotel room=service tax applies but then “EXEMPTION” given to rooms below Rs.1000).
  14. Financial sector- bank loans, deposits etc. (Although bank has to pay corporate tax on its profits)
  15. Passenger transport via road and inland waterway* (But airplane, Rail tickets in firstclass/AC have to pay service tax)
  16. goods transport
  17. Funeral services.

*because under 7th Schedule, State Governments have the power to collect taxes over them.

Budget 2014: Service Tax provisions

Jaitley kept service tax unchanged
A. Service tax 12.00%
B. Education cess 2%
C. Secondary and Higher education Cess 1%
effective service tax (A+B+C) 12.36%
  • Some books mention education cess =3%, because they count (B+C = 2+1 =3%)
  • Cess applies as “tax on tax” therefore 3% of 12%=12.36% (And not 12+2+1=15%)
  • In excise and custom duty the tax rates vary according to item. But in service tax, all services face same uniform rate of 12.36%.
Budget 2014 announcements
will levy service tax from “EXEMPTED” following
  1. Ads on online sites
  2. Rent-a-car, radio-taxis
  3. drug testing on humans
  4. AC contract carriages
  1. Desi Tour operator selling foreign trip package to foreign tourist (e.g. Yatra.com, Makemytrip.com)
  2. Biomedical waste treatment
  3. Micro-insurance upto 50,000 rupees
  4. Cotton storage, loading, warehousing

Jaitley expects to collect ~2.15 lakh crores from service tax (Budget estimate 2014).

Tax Collection Ranking
2013(Actual) Corporation > IT > Excise > Custom > Service > Wealth
2014(Estimate) Corporation > IT > Service > Excise > Custom > Wealth

Service sector vs GDP, Employment

  • Ranking Service sector GDP: USA  (1)> Japan(2) > China (3)>..>India (12)
  • Overall GDP: USA  (1)> Japan(2) > China (3)>..>India (10)
Service sector’s share
Share In GDP Share In Employment
  1. Services (60%)
  2. Industries (26%)
  3. Agri (14%)
  1. Agri. (49%)
  2. Services (27%)
  3. Industries (24%)

 

Ranking: Growth rate within service sector (%)
Sector (highest to lowest) 2013
  1. Financing, insurance, real estate, & business services
12.9
  1. Community, social & personal services
5.6
  1. Trade, hotels, transport, storage, & communication
3

 

Service sector: growth in States
doubt digit growth lowest ~5% growth
  • Goa due to tourism
  • Tripura due to banking-insurance
  • Arunanchal Pradesh
  • Kerala

Service sector as part of states’ GSDP: highest in Delhi & Chandigarh

Service sector: FDI

List not exhaustive- only focusing on “services”- not manufacturing etc.

100%
  • Single brand retail (automatic upto 49%, beyond that need Government approval)
  • E-commerce sites (business2business only)
74% private banks,  DTH, Mobile TV
51% multibrand retail
49% insurance, private security, commodity exchange
20% Public sector banks.
prohibited lottery, betting, gambling

Service sector receives ~45% of total FDI inflows in India.

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