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Service Tax on Related parties (Service Tax)

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( Author )
04 April 2008

I have a query with regard to Union Budget 2008 changes.

The explanation to sec.67 has been amended to include the following:

(7b) "associated enterprise" has the meaning assigned to it in section 92A of the Incometax Act, 1961;

(c) "gross amount charged" includes payment by cheque, credit card, deduction from
account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account, whether called “Suspense account” or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.’

In view of the above change, let us consider a scenario. I am a service provider. I provide services to A (related party) and B (not a related party). I send an invoice for services rendered to both A and B. The invoice is for 100000 service rendered and service tax @ 12% which is 12000, for a total of 112000.

Now, should i pay the service tax on the transaction with A immediately, without waiting for A to pay me the amount?

In respect of B, i would be paying the amount of 12000 service tax, only after B pays me the amount of 112000.

Because of the budget changes, am i liable for service tax as soon as i treat A as my Debtor (being a related party)?

Can someone please clarify? That would greatly help.

Thanks in advance.

Best Regards / VIjay


S.Srinivasaraghavan

( Expert )
05 April 2008

1.In the case of A (related)yes.
2.In the case of B (unrelated)yes.


R.V.RAO

( Expert )
05 April 2008

SERVICE TAX ACT DOES NOT PROVIDE ANY EXCEPTIONS TO RELATED OR UNRELATED PARTIES.
EVEN IF YOU ARE NOT A REGD. SERVICE PROVIDER, AND EVEN IF YOU COLLECT THE SERV. TAX NOW OR LATER OR EVEN IF YOU ARE UNABLE TO COLLECT THE SERV. TAX OR FAIL TO COLLECT FOR WHATEVER REASON , IF THE SEVICE IS A CHARGEABLE SERVICE AND TAXABLE,YOU MUST BILL THE SAME AND DEPOSIT BY DUE DATE.( AT PRESENT THERE ARE NEARLY 109 SERVICES TAXABLE).
THE AS RELATING TO INCOME TAX ACT DOES NOT APPLY TO SERV. TAX ACT.
R.V.RAO


Arbind Aggarwal

( Expert )
07 April 2008

What you have written is correct, but these changes will come into effect from the date of enactment of Finance Act which is enacted after The President Of India signes it.Generallythis happens somewhere in middle of May.


Vijayaganesh Sampathkumar

( Author )
08 April 2008

Dear Sirs,
Thanks for your response. I really appreciate it. However, i shall provide some more details about what is still bothering me..

1) My understanding is that Rule 6(1) of the service tax rules,1994 is the basis for paying service tax only upon receipt of payments.

2) The following is an explanation given at Taxmann website, quoting a departmental clarification letter and budget 2008 changes. Please note that this is only an extract, and the full details can be read at the following link:
QUOTE:
As an anti-avoidance measure, it is proposed to clarify that service
tax is leviable on taxable services provided by the person liable to
pay service tax even if the amount is not actually received, but the
amount is credited or debited in the books of account of the service
provider. In other words, service tax is required to be paid after
receipt of payment or crediting/debiting of the amount in the books
of accounts, whichever is earlier. However, this provision is restricted
to transaction between associated enterprises. This provision
shall also apply to service tax payable under reverse charge
method (Section 66A) as taxable services received from associated
enterprises. For this purpose section 67 and rule 6(1) are being
amended.
UNQUOTE
(Source - http://www.taxmann.net/Budget2008/GST4.pdf ) Please refer 3rd para under departmental clarification.

There is one amendment to Rule 6 in union budget 2008 (http://www.servicetax.gov.in/notifications/notfns-2k8/st04-2k8.pdf). This change is not for Associated enterprises transactions. However, i do not see any changes to rule 6 for associated enterprises..

Hence my doubt is.. Since the Rule 6(1) is not yet amended (for addressing the Associated Enterprises part..), would it not override the Sec.67 change and i need not pay Service Tax on transactions with Associated enterprises, unless i receive the money from them?

I might be missing the very obvious here. But please help me in understanding this correctly.

Thank you very much for your patience and valuable time.

Thanks / Vijay



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