V S Datey
[email protected]
Website – http://www.dateyvs.com
Background
 Service tax introduced in July 1994 on three services –
scope expanded every year and about 117 services were
taxable in year 2011
 Practically, excluding statutory activities, basic
education, medical services and legal services by
individual advocate to individuals, all services were
taxable even prior to 1-7-2012
Classification of services
 Till 1-7-2012, service tax was based on positive list i.e.
service listed are taxed in section 65(105)
 Disputes occur due to wordings in definitions
 Hence, now service tax all services excluding 17
services in negative list of services w.e.f. 1-7-2012 (In
addition there is list of 39 exemptions)
Negative List of Services
 Services by Government, RBI, foreign diplomatic
missions
 Agriculture related services
 Trading is not service
 Activity that results in ‘manufacture’ of goods is not
‘service’
 Advertisement except advertisement on TV and radio
Negative List (Continued)
 Toll charges (but service for collection of toll is
taxable)
 Entertainment, amusement, gambling
 Transmission and Distribution of Electricity (not on
private basis)
 Educational services, training in arts, culture, sports –
no tax on midday meals and school bus services
Negative List (Continued)
 Renting for residential purposes
 Banking services other than interest and inter se sale
or purchase of foreign currency among Banks and
authorised dealers
 Passenger transport except in tourist vehicles and tour
operators
Negative List (Continued)
 Transport of goods by rail, air or inland airways (except
GTA, Courier, and inland waterways)
 No tax on import of goods by air or vessel
 Tax on rail transport on 30% value
 Funeral related services not taxable
Exemptions – Notification No.
25/2012-ST dated 20-6-2012
 Medical services
 Charitable activities
 Religious ceremony and renting of religious places
 Individual advocate and firm of advocates to non-
business entity
 Recreation relating to arts, culture, sports
Exemptions (Continued)
 Copyright, performing arts, sportsman (but not
brand ambassador), sports sponsorship
 Parking services
 Job work of agriculture, textile processing,
diamonds and gemstones, where principal
manufacturer is paying excise duty
 Society to its members upto Rs 5,000 p.m.
 Infrastructure related services
Exemptions (Continued)
 Hotels, guest houses with less than Rs 1,000 per day
tariff
 Goods transport upto Rs 750 per consignee
 Sub brokers, authorised persons, mutual fund agent
exempt
Exemption only to main service
 Reference of main service shall not include reference
to a service which is used for proving that main service
[section 66F(1)]
 Thus, even if main service is exempt, ancillary service
or services of sub-contractors may not be exempt
Registration
 Existing registration Certificate sufficient.
 Advisable file application electronically for
amending registration certificate. Now only
option available is ‘All taxable Services other
than in Negative List’. Click and add. Get
print out of the amended registration
certificate and send copy to department.
Rate of tax, value and rate of exchange
[section 67A]
 Section 67A of Finance Act, 1994 has become effective from
28-5-2012.
 As per section 67A, the rate of service tax, value of a taxable
service and rate of exchange, in force or as applicable at the
time when the taxable service has been provided or agreed
to be provided is relevant.
 Service tax rate as applicable at the time when taxable
service has been provided or agreed to be provided.
 Point of Taxation Rules relevant only to determine due date
of payment of service tax and not rate of service tax, w.e.f.
28-5-2012.
No service tax on new services, if service
provided prior to 1-7-2012
 Many services have become taxable w.e.f. 1-7-2012,
which were not taxable earlier.
 In view of section 67A (which is effective from 28-52012), service tax will not be payable if service (which
was not taxable prior to 30-6-2012) was provided prior
to 1-7-2012, even if payment is received later.
 This will be so even if invoice was issued after 1st July
2012. However, to avoid controversy, it is advisable to
date invoice prior to 30-6-2012 [Note that Point of
Taxation Rules cannot override provisions of section
67A]
Advance received prior to 1-7-2012 in respect of services
which were not taxable earlier
 Many services have become taxable w.e.f. 1-7-2012 which
were not taxable earlier.
 Service tax is leviable on service provided or agreed to be
provided [section 66B]. There cannot be two events for
same taxable service. Hence, logically, the event which
occurs first will determine tax rate i.e. receipt of advance or
provision of service, whichever occurs first will determine
rate and value of service tax [section 67A]
 If advance received prior to 1-7-2012 when service was not
taxable, no tax even if service provided after 1-7-2012.
.
Reverse Charge
 Normally, service tax is payable by service provider.
 In case of some services, Service tax is payable (partly or
fully) by service receiver under Notification No. 30/2012ST dated 20-6-2012 effective from 1-7-2012. This is termed
as ‘reverse charge’
 Reverse charge provisions have been made applicable to
works contract service, manpower supply service,
security service, directors’ services, renting or hiring of
motor vehicle to carry passengers, support services
provided by Government and services of Advocates and
firms of Advocates w.e.f. 1-7-2012. This is in addition to
import of service, sponsorship service, GTA service and
services of insurance agent which were already under
reverse charge mechanism.
No reverse charge, if service provided prior to
1-7-2012
 In case of some services, reverse charge mechanism is
applicable w.e.f. 1-7-2012 i.e. service tax is payable (partly or
wholly) by service receiver.
 In view of section 67A (which is effective from 28-5-2012),
service tax will not be payable by service receiver under
reverse charge mechanism, if service was provided prior to
1-7-2012, even if payment is made later.
 This will be so even if invoice was issued after 1st July 2012.
However, to avoid controversy, it is advisable to date invoice
prior to 30-6-2012 [Note that Point of Taxation Rules
cannot override provisions of section 67A]
Precautions where reverse charge is
applicable
 The service receiver, who is liable to pay service tax
under reverse charge, cannot avail exemption of Rs
10 lakhs generally available to small service
providers. He is liable even if the value services
received by him is much less than ` ten lakhs
 The service receiver is liable to pay service tax (of
his portion) even if the service provider is not
registered under service tax or is availing
exemption available to small service provider.
Continued….
Precautions where reverse charge is
applicable
 Where service tax is partially payable by service receiver,
the service provider should charge only his portion of
service tax (25% in case of manpower supply service,
security service and 50% in case of works contract
service) and indicate that balance service tax is payable
by service receiver under Notification No. 30/2012-ST
dated 20-6-2012 effective from 1-7-2012.
 Service receiver can be held liable to pay service tax even
if entire service tax was charged and paid by service
provider. Hence, no ‘short cuts’ should be found.
 Where service tax is payable under reverse charge, it
should be paid by cash (i.e. GAR-7 challan only). It
cannot be paid through Cenvat Credit.
Continued….
Precautions where reverse charge is
applicable
 In case of GTA service (tax payable on 25% of value) and
renting of motor vehicle related services (tax payable on
40% of value), abatement is subject to non-availment of
Cenvat credit by service provider. Hence, certificate should
be obtained from service provider (either on the Invoice or
by separate letter) that he has not availed Cenvat credit
(Otherwise, you may be liable to pay service tax on entire
value).
 Note that Cenvat credit on renting of motor vehicle to carry
passengers is not available in most of the cases. Hence, it is
cost to the company.
Reverse charge in case of some specific
services
 In case of manpower supply service, security service, works
contract service and renting of motor vehicle to carry
passengers, service receiver is liable only when he is
business entity registered as body corporate and service
provider is individual, HUF, firm or AOP. In other cases,
the service provider himself is liable.
 Definition of ‘works contract service’ covers both movable
and immovable property related services. Hence, in
addition to construction related services, services like
AMC, job work (where it includes value of material used by
job worker) will get covered under reverse charge
mechanism.
Continued….
Reverse charge in case of some specific
services
 “Supply of manpower” means supply of manpower,
temporarily or otherwise, to another person to work under
his superintendence or control.’ [Rule 2(g) of Service Tax
rules, inserted w.e.f. 1-7-2012].
 In case of services like cleaning, piece rate based contract
work, the service receiver has to ensure that the labour
brought by contractor does not work under the supervision
or control of Principal Employer. The agreement should be
clear on this aspect. Otherwise, the Principal Employer
may be held liable to pay service tax under reverse charge.
Reverse charge in case of renting or hire of
motor vehicle
 In case of renting or hire of motor vehicle, reverse
charge applies only if vehicle is provided with
driver.
 Service tax payable on 40% of value subject to
condition of non-availment of Cenvat credit.
Hence, advisable to get certificate from him that
he has not availed Cenvat. Keep check in
accounting system while passing of Bills.
Continued….
Reverse charge in case of renting or hire of
motor vehicle
 If motor vehicle is provided on hire (operating
lease) without a driver, it is ‘transfer of right to use
goods’. It is deemed sale of goods and then only
State Vat provisions apply and not service tax.
 If the motor vehicle is given on hire without driver,
the person providing such vehicle can claim
exemption from State Vat if his turnover is below
limits specified under State Vat Act [The limit is `
five lakhs in many States].
 Issue if employee on tour and then submits bill of
renting for reimbursement
Works contract service
 Revised definition of works contract service
covers works contracts relating to both movable
and immovable property (Till 30-6-2012, these
covered only immovable property).
 .Comprehensive AMC, job work using own
material (.e.g. job of painting car when the job
worker uses his own paint), can get covered, in
addition to construction services. Hence, service
tax payable on 70% of value [Till 30-6-2012, there
was no specific provision for these services].
Continued….
Works contract service
 In case of finishing service relating to immovable property
(like painting, flooring etc.), service tax payable on 60% of
value w.e.f. 1-7-2012 [Till 30-6-2012, there was no specific
provision for these services]
 Value of FOC material (like cement, steel etc. supplied by
contractee) was required to be added for composition
scheme. To overcome this provision, some service receivers
were charging for such supply but at very low price. To get
over such tax planning, it has been provided that ‘Fair
Market Value’ of material and services supplied by
contractee should be added.
Deductions for salary of employee when
subject to service tax
 Services provided by employer to employee are not
outside definition of service, i.e. these can be
taxable.
 Deduction from salary for services like telephones
or transport services provided by employer will be
subject to service tax.
 Deduction for rent for residential quarters will not
be subject to service tax as there is no service tax
on renting of immovable property.
Continued….
Deductions for salary of employee when
subject to service tax
 Deduction for canteen or food facility will not be
subject to service tax as the service of food is not in
AC or centrally heated restaurant with bar. In fact,
whether canteen is restaurant or outdoor catering
is debatable issue.
 No service tax on statutory deductions like PF,
ESIC, TDS etc.
 Penalty imposed on employee may be subject to
service tax.
 Notice pay recovered from employee should be
subject to service tax.
Perquisites to employee subject to service
tax?
 CBE&C has issued a draft circular on 27-7-2012,
which states that services provided by employer
to employee against a portion of the salary
foregone by the employee will be considered as
having been made for a consideration and thus
liable to tax.
 Perquisites like use of car, telephone, gas, driver,
gardener etc. can come under mischief of this
service, since usually these are considered while
calculating CTC (Cost to Company) in respect of
an employee.
Continued….
Perquisites to employee subject to service
tax?
 It may be noted that services provided by
employee to employer are excluded from definition
of ‘service’ itself. It is well settled that
consideration can be in cash or kind. In my view,
the perquisites provided by employer to employee
is not service provided by employer to employee,
but part of consideration for services of employee
[Of course, litigation is possible].
Salary to Partners
 Payment of salary to partner –– but legally partner
is not employee – Remuneration to partner is only
share of profit – Hence mere ‘transaction in
money’ and not subject to service tax
 Alternate argument – By legal fiction – partner and
firm are being treated as separate – hence
employer employee relation – should not be
taxable [seems litigation prone issue]
 In any case, exemption of ` ten lakhs is available to
small firms.
Directors’ Remuneration
 Sitting fees and commission to non-wholetime and
independent directors - should be subject to service
tax
 Executive directors or wholetime directors – If there is
Employer Employee Relation, then no service tax
 Company has to pay service tax under revere charge
mechanism. Company can avail Cenvat credit
Continued….
Agreeing to Tolerate an Act or Situation
 Agreeing to the obligation to refrain from an act,
or to tolerate an act or a situation, or to do an act is
‘declared service’.
 Demurrage, Booking cancellation charges, cheque
return charges will be subject to service tax.
 Late Delivery charges, penalties, forfeiture of
deposit or advance as penalty for violation of terms
of contract will be subject to service tax.
Continued….
Agreeing to Tolerate an Act or Situation
 Rework charges, deductions on account of quality
issues may be subjected to service tax.
 Better if the service provider issues credit note instead
of service receiver issuing debit note or making
deduction.
 Accidental damages not relatable to provision of
service are not subject to service tax.
Changes in abatement/ composition schemes
w.e.f. 1-7-2012
 GTA service - 25% if no Cenvat availed - Hence,
certificate should be obtained from GTA that he has not
availed Cenvat credit [Till 30-6-2012, the condition about
non-availment of Cenvat credit was not there]
 In case of works contract services, in addition to 40%
schemes, schemes of 60% and 70% introduced w.e.f. 1-72012 as explained above.
 In construction service, 33% scheme is not there w.e.f. 17-2012. Hence, advisable to make invoice upto 30-6-2012.
 Accommodation in hotel, inn, guest house - 60% w.e.f. 17-2012 - Cenvat credit of input service available [It was
50% without Cenvat credit upto 30-6-2012]
Continued….
Changes in abatement/ composition schemes
w.e.f. 1-7-2012
 Restaurant service - 40% with Cenvat credit on input
services, capital goods and input goods excluding food
items) [It was 30% without Cenvat credit upto 30-6-2012].
Fair market value of goods and services supplied to be
added.
 Tax on 60% if provided as outdoor caterer w.e.f. 1-7-2012 Cenvat credit can be taken of input services, capital goods
and input goods except of food items [It was 50% without
Cenvat credit upto 30-6-2012]. Fair market value of goods
and services supplied to be added.
 Tax on 70% if provided with convention centre, pandal,
shamina etc. as a bundled service, w.e.f. 1-7-2012 - Cenvat
credit can be taken of input services, capital goods and
input goods except of food items [It was 60% earlier].
Canteen Services
 Whether canteen in factory or office is ‘restaurant’ or
‘outdoor catering’ is highly debatable issue. It is
actually eating joint or mess – not taxable
 If canteen is held as ‘outdoor catering’, fair market
value of goods and services supplied will have to be
added. Further, Cenvat credit of service tax paid on
canteen services is not available.
 Earlier definition of ‘outdoor catering’ is not applicable
w.e.f. 1-7-2012. Hence, we have to go by trade
understanding.
Input Service Distributor
 Calculations of distribution of Cenvat Credit by
Input Service Distributor (ISD)
 In case of multi-locations of branches, advisable to
transfer all credit to HO and then transfer on basis
of turnover.
 If accurate monthly calculations are difficult,
distribute as accurately as possible. Keep
distribution of March pending and do it only after
accounts are finalised.
Major changes which need immediate
attention
 Agreeing to the obligation to refrain from an act,
or to tolerate an act or a situation, or to do an act is
‘declared service’. Many unexpected activities can
come under this definition.
 Provisions of reverse charge have been extended to
many services.
 Deductions from salary of employees, deduction
from Bills of suppliers etc., extra charges recovered
in sales invoices or debit notes will need close
scrutiny.
Continued….
Major changes which need immediate
attention
 Point of Taxation Rules not applicable to
determine rate of service tax w.e.f. 28-5-2012.
 Deductions from bills of vendors need scrutiny to
see whether they come under ‘refraining from act’
 Extra charges levied in Sales Invoices need close
scrutiny
 Accounting system will need revamp to ensure
capture of transactions subject to service tax or
reverse charge.
Scrutiny of ledger of Sundry Creditors and
sundry creditors
 Check for deductions made from Invoices of
suppliers and service providers. Design codes to
capture such transactions in Debit Notes.
 Check extra charges levied on the customer in
invoices or through debit notes. Design accounting
codes to capture such transactions.
 Normal price reductions or increases after
negotiations is a normal business transaction. It is
not refraining from act or tolerate an act.
Revamp accounting system
 Design accounting codes of suppliers to identify whether
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they are individual, HUF, partnership firm, body corporate
etc.
Design accounting codes to identify transactions where
reverse charge mechanism applicable.
Codes for deductions made from salary of employees.
Codes on basis of availability or non-availability of Cenvat
credit.
Identify exempted services and exempt goods for purpose
of rule 6 of Cenvat Credit Rules.
Keep check list in accounting system itself for passing of
bills or entering a transaction in books of account.
Two safety nets in law
 Law is new and many ambiguities are there. Disputes are
possible. Law may get settled after 8 or 10 years but assessee
has to take decision today itself on course of action. Hence,
two safety nets are available.
 No demand beyond 18 months if no suppression of facts,
wilful misstatement, fraud – penalty not imposable –
otherwise demand can be upto 5 years and mandatory
penalty equal to tax.
 Hence, advisable to make full disclosure to department,
wherever in doubt. Usually not advisable to ask for
clarification, as generally clear answers are not given.
Continued….
Two safety nets in law (Continued)
 No penalty if service tax with interest paid before
show cause notice and intimation given to
department, except in cases of suppression of
facts, wilful misstatement, fraud or collusion.
 Hence, if short payment was noticed either during
your internal audit or during audit by service tax
department (or even during visit of preventive
people - usually called ‘raid’), pay service tax with
interest and intimate department. Then penalty
cannot be imposed.
Thanks
 Thanks
 You can post your queries at
www.taxmann.com/servicetaxqueries.a
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