Basic Principles- Service Tax
Madhukar N Hiregange FCA, DISA (ICAI)
& Roopa Nayak ACA
The net of service tax was stated with 3 services in the year 1994 has become wide enough to cover 104 services today. Law being young and having wide applicability over the assessees has created opportunities for the professionals. This article concentrates mainly on Chartered Accountant in practice and also those in Industry for getting the basic concepts of service tax law in brief. It would be ideal to understand the following basic details of service tax, which are important for serving clients / discharging duties liability of the service tax.
- Where the levy is applicable?
- Levy is applicable on whom?
- On which event is the levy applicable?
- What is the value for payment?
- What set – off would be available?
- Basic procedure for registration.
- Procedure for payment of Service Tax.
- Procedure for filing returns.
- Services which a CA can provide.
- Practioner’s Aids.
Where the levy is applicable?
Service tax is imposed under Entry 97 of List I (union List), Seventh schedule to the constitution of India which contains entries like foreign affairs. Entry 97 is a residual entry. The statutory provision of service tax is given under Chapter V of the Finance Act 1994, which extends to whole of India except state of Jammu and Kashmir. This means service tax is applicable only for the transaction happening in India expect for the state of J & K. However on introduction of the section 66A and Taxation of Service (provided for outside India and received in India) Rules 2006 the service received by the non-resident shall also be taxable in the hands of the recipient in India. However whether such extra territorial operation, which beyond the scope of the statue is constitutionally valid, is the question pending to be resolved.
Levy is applicable on whom?
The levy of the service tax is provided under section 66 of the Finance Act. Service tax is a tax levied on the services provider for providing the taxable service as defined under section 65(105) of Finance Act, 1994. Service implies the existence of two parties. Service cannot be given to one self. If there is no service provider and receiver relationship then there is no question of service being provided by one person to any other person. Therefore on having two distinct person viz service provider and service receiver, the person liable to be taxed is the defined service provider. The service provider has to satisfy the definition.
The following are to be kept in mind as regards applicability of levy:
- Earlier a commercial concern rendering a service was taxable; now in most of services any person providing service is taxable.
- Service is taxable if provided by any person in most of the services. Any person includes proprietorship, partnership, charitable institution, cooperative society, Central / State Government, company , body corporate, association or body of individuals (whether incorporated or not).
- The service receiver should ensure that he classifies the service properly to ascertain tax liability.
- Technical assistance provided by a company to another unit of the same company is not subject to service tax. (however this may not be the case in case of holding and subsidiary service)
- Service provided by a club to its members: A club does not have an independent existence apart from its representative members. Whether the same can be taxed as a person is the question to yet to be resolved. However the in the view of the paper writer clubs and associations is not taxable.
- When a parent company has common expenses like electricity, rent and its group companies share such expenses for which debit notes are issued, it is not service provided. However demands in this regard have been raised and the matter is not free from doubt. Wherever it is necessary the same has to be paid under protest.
- Housing society also collecting maintenance from members could be said to be sharing of common expenses and not provision of service. This matter also requires judicial confirmation.
- Liability to pay tax is on service provider: A service provider is one who provides taxable service under Section 65(105) of Finance Act 1994.
- In some exceptional cases service receiver has been made liable to pay service tax as provided u/s 68(2) r/w rule 2(1)(d) of Service Tax Rules. It is termed as reverse charge. This is made applicable in case of Import of Service (Section 66A), Transport of Goods by Road (for defined service receivers), and Sponsorship service.
- Service provider cannot pay tax when service receiver is liable or vice versa.
On which event is the levy applicable?
For any taxation statute, the event of the taxability/levy is very important. Such taxable event in service tax is provision of taxable service. Provision of taxable service in India or even entering into an agreement to provide taxable service is taxable event. Levy is on following basis:
- Entering a contract for service: When a contract for service is entered it is certainly service to be provided. The receipt of advance for the same was brought into the tax net by including the phrase “to be provided “in Section 65(105). Paper writers are of the view that this provision maybe ultravires the Constitution of India may be challenged.
- Provision of service: This happens when contract of service was entered into before the service became a taxable service but service was provided after service became a taxable service
- Date of payment for service received is not relevant factor where services provided earlier (when not liable) and payment being made after such services are made taxable.
- The provision to pay the ST on receipt from the service receiver only postpones tax liability, which is fixed as soon as service is rendered. However if payment is not received at all there is no liability. If payment is received in part then only tax would be paid proportionately.
- Making a bill is not a taxable event but provision of service or entering into a contract for rendering service is taxable event.
- Even if the advance was received before service tax was imposed service tax would be liable for the balance of the amounts receivable under the contract.
What is the value for payment?
Section 67 of the Finance Act provides value of services for charging service tax. The amended section reads as” for the purpose of this chapter, the value of such taxable services provided by the service provider would be the gross amount charged by the service provider for such services provided or to be provided by him“
Valuation is as under:
- Service tax is payable on the gross amount charged by the service provider for the service provided or to be provided. When charged along with service tax the gross consideration is net of service tax component to be arrived at on backward calculation .Entire consideration –Rs. 1 Lakhs with ST. Calculation is (1,00,000X10.3)/110.3. Therefore gross value is Rs.90662.
- Where the consideration for providing services is not wholly or partly in terms of money the additional consideration is liable. For example: Consideration receivable is Rs.1 Lakh. Service provider receives in money Rs.60000 and balance in goods from service receiver. ST on Rs.1 Lakh.
- Where the consideration is not ascertainable or If consideration is not wholly or partly consisting of money, value would be determined by service provider in terms of the Service Tax Valuation Rules.
Highlights of Service Tax Valuation Rules
- In terms of per rule 3(a), of Service Tax Valuation Rules, value would be on the basis of the gross amount charged for similar services by the service provider.
- If value cannot be determined on basis of rule 3(a), valuation shall be on basis of equivalent to money value of such consideration which shall not be less than the cost of provision of such services.[Rule 3(b) of Service Tax Valuation Rules].
- Central Excise officer can reject the value determined by service provider and determine value for service tax payment after issuing notice and a reasonable opportunity to assessee of being heard.[Rule 4]
- Rules 5 and 6 make provision for certain inclusions and exclusions for valuation.
- Payment made by service provider and as an agent of service receiver and recovered from service receiver are excluded for purpose of valuation .[Rule 5(2)]
- In case of services provided from out of India the actual consideration received would be relevant for the valuation[Rule7(1)]
- The responsibility of valuation has been cast on service provider.
Valuation when consideration is partly or fully in money:
- Service tax is chargeable on any taxable service on basis of gross amount charged by service provider for such services provided or to be provided by him, when provision of service is for a consideration in money[section 67(1)(i)]
- If consideration is partly in money valuation would be an amount equivalent to consideration as provided in section 67(1)(ii)
- If value of consideration cannot be ascertained then valuation would be done valuation rules as provided in section 67(1)(iii)
Such services means “of a kind specified or understood”- Webster’s Online Dictionary. Thus it is levied only on amount charged to the customer for service.
Valuation for specific instances:
- In relation to advertising agency services, it has been held that cash discounts and incentives received by advertising agency from the media are not includible.
- In case of transaction with associated enterprise any amount credited or debited in the account whether called suspense account or by any other name shall be treated as payment received, once entry is made it would be treated as payment is made or received and service tax would be payable. The entry should be in books of person who is liable to pay service tax(Explanation to Rule 6(1) Service Tax Rules) .Associated enterprises has meaning assigned to it in sec.92A of Income tax Act, 1961
- No service tax on free services or service provided without any consideration.
- At times both VAT/Sales Tax and service tax are payable on the same transaction. Rule 2(A)(i)(i)(a) of Service Tax Valuation Rules and Rule 3(i) of Works Contract (composition scheme for payment of service tax )Rules, 2007 makes it clear that VAT/Sales Tax is not to be included in value for purpose of computation of service tax.
- Life membership fees is to be treated the same way as subscription when received from members and service tax is payable. (assuming that the concept of mutuality is not applicable)
- As per Rule 6(3) if excess tax is paid in respect of service which is not wholly or partially provided for any reason then excess service tax paid can be adjusted against service tax payable for subsequent period if the amount of service tax and value of services is refunded to person from whom it was received. Such refund is permissible only on account of services not provided.
Inclusions and exclusions in value:
- Sec 67(a) states that consideration includes any amount that is payable for taxable services provided or to be provided. The consideration can be received/ given by a third person also.
- In amount charged service tax would not be payable on value of goods, materials sold. There should be documentary evidence to this effect,
- Deduction is not available of value of goods consumed in providing service. Deduction is available for transfer of property involved. Notification 12/2003 or Not.1/2006 provide for the same.
- Where the value of consideration is not ascertainable in terms of money, valuation would be by application of Valuation Rules.
- There should be resemblance between two services to constitute them as similar services. The time, terms of payment must be considered to determine if two services are similar. The paper writer is of the view that no two services even if provided to the same client in the same month would be similar and comparable.
- Equivalent value is not to be less than cost of providing such service.
- All expenditure that have been incurred even when these are recovered separately by the provider of taxable service are covered.
- Where the expenses are incurred by service provider in course of providing taxable service whether supported by a document or included in bill, these are includible in value for computation of service tax.
- When such costs are incurred by service receiver directly it is included and tax is computed on such amount: Section 67(1)(II)
Exception: For costs to be excluded from value the following conditions are to be satisfied
- The service provider acts as a mere agent of recipient of service when he procures goods or services from third party.
- Recipient of service uses the goods which are procured by provider of service as a mere agent of recipient.
- The recipient is liable to make payment to third party
- The recipient authorizes provider to make payment to third party on his behalf
- Recipient of service knows that the goods and services for which payment has been made by service provider would be provided by the third party
- The payment made by the provider of service for goods/services from third party has been separately indicated in invoice issued by provider of service to recipient of service
- Service provider recovers only such amount as has been incurred by him to third party from receiver of service
- The goods or services that are procured by service provider are in addition to services rendered by him.
For purpose of rule 5(2) pure agent means a person who:
- Enters into a contract with receiver of service to act as his pure agent to incur costs in course of providing taxable service neither holds nor intends to hold any title to the goods /services procured or to be procured as pure agent of recipient of service.
- Does not use such goods or services procured
- Receives only actual amount incurred to procure such goods / services
Deduction on account of such payments cannot be denied merely on ground that there is no written agreement, provided evidence is available.
The paper writers of the view that this provision is impracticable as well as liable to be challenged as it goes beyond Section 67 where only the value of services is sought to be captured.
What set – off would be available?
Credit of duty paid on inputs, input services and capital goods: It is used for payment of service tax on output services, which is called setoff of credit.
- Wherever there are activities that are directly or indirectly related to setting up business like setting up office premises or advertising, they would be eligible
- Credit would be available of excise duty on Input goods and consumables used to provide output services except high speed diesel oil, and petrol.
- The duty to extent of 50% of value of duty paid on capital goods would be available for first year and balance in any of subsequent years.
- Credit on motor vehicles which are not capital goods would be available to a service providers of goods transport agency, pandal and shamiana supplier, etc.
- In case service provider provides both exempted as well as taxable services it may so happen that same inputs are used for both. The service provider has following three options from 1-4-08
a. Maintain a separate inventory and account of receipt/use goods / input services used for taxable /exempted output services [Rule 6(2)]
b. Pay an amount equal to 10% of value of goods(if he is a manufacturer) and / or 8% of value of services which are exempted (if he is a service provider)if he does not maintain separate inventory/ records[Rule 6(3)(i)]
c. Pay an amount which is equal to value of proportionate cenvat credit on common input services attributable to exempted final products/ output services[Rule 6(3)(Ii)]
Rules for Availing credit:
- CENVAT credit can be taken instantly in case of inputs as soon as goods reach factory or premises of service provider. For credit on capital goods 50% is available on receipt and 50% in subsequent year of use.
- Credit of input service is taken only after payment is made to service provider of the amount of the bill
- Where there is payment of Education Cess and Secondary and Higher Education Cess on inputs and or input services it can be utilized only for payment of Education, Secondary and Higher Education Cess on outputs and output services respectively
- There is no provision for refund of excess Cenvat credit where the inputs duty, input service tax is more than duty on final goods or output service tax, except in case of export of goods/ services.
As per rule 2(m) of Cenvat credit rules “Input service distributor “ means:
a. Office managing business of producer of products or provider of output service.
b. Which receives invoices issued under Rule 4A of Service Tax Rules towards purchase of input service
c. Issues invoices towards distributing the payments made for credit on said services to manufacturer/ producer as the case may be
d. The office should be registered as an input service distributor if it wants to distribute Cenvat credit
The accounting of service tax credits on basis of documents may be done at head office despite there being branches in different places.
If an input service is used exclusively to provide an exempt good / service such credit would not be distributed as only eligible input services are to be distributed.
Input goods/services are those used in:
a. Providing an output service in relation to its usage by a provider of taxable service
b. Used by manufacturer whether directly or indirectly for manufacture or clearance of final goods upto place of removal
Conditions for utilisation
a. Invoice need not be in name of service provider but should be consigned to him. Capital goods got on lease are eligible for taking credit.
b. Credit on office equipments can be utilized if it is covered in capital goods to output service providers
c. Rule 4(4) of Cenvat credit rules says that depreciation is not to be availed on portion of capital goods cost which consists of Cenvat credit availed
Restriction on taking credit:
Some input services even if partially used for rendering exempt output services/ goods full Cenvat credit can be used for availing as under.
1. Consulting engineer
3. Interior decorator
4. Management consultant
5. Real estate agent
6. Security agency services
7. Scientific or technical consultancy services
8. Banking and financial services
9. Insurance auxilliary services of life insurance business
10. Erection, commissioning and installation
11. Management, Maintenance or repair
12. Technical testing and analysis
13. Technical inspection and certification
14. Foreign exchange broker
15. Construction service
16. Intellectual property services
The Cenvat credit in respect of above would be denied only when used exclusively for giving fully exempt goods / output services
Basic Procedure for registration
A person liable to service tax has to register with Superintendent of Central Excise under whose jurisdiction the premises fall. He should register within 30 days of date of provision of taxable service in Form S T-1. An acknowledgement would be given on duplicate copy of form by Superintendent of Central Excise. A person should mention in application all services being provided by him.
Documents required for registration:
- A copy of Pan, proof of residence, constitution of applicant.
- Copies may be self certified by applicant. While granting registration the superintendent is not allowed to question the correctness of declaration of service provider.
- The registration certificate would be granted in Form S T-2 within 7 days by Superintendent Of Central Excise.
- If there is any change in name or address of applicant then amendment can be made in certificate.
- If the business is transferred then fresh certificate is necessary. If assessee ceases to carry on business for which he is registered then he needs to surrender his certificate.
- For delay in registration penalty upto Rs 5000 or Rs 200 per day of delay, whichever is higher can be imposed under Section 77(1) of Finance Act, 1994. If assessee can prove that there is reasonable cause for delay for registration then penalty can be waived.
- When any change is to be made to registration certificate there is no need to submit the original registration certificate to the department.
- Registration Is not required if any person providing service is from outside India or a non resident who does not have a office in India
- Registration certificate would not be cancelled if there are any demands pending against the assessee.
Procedure for payment of Service Tax
- Service tax is payable by all assessees (excepting individual, proprietorship or partnership firm) by 5th of month following month in which payments are received towards value of taxable services.(by 6th in case of E-payment).
- In case of individual, proprietorship or partnership firm on a quarterely basis of within 5 days of end of quarter.(within 6 days in case of E-payment), except in March. Service tax on taxable services received in month or quarter ending March is to be paid by end of March by all assesses.
- A person paying service tax amount can do so in advance but within 15 days of payment he has to intimate Superintendent of Central Excise.
- Self adjustment of service tax excess paid in an earlier period :only in case of calculation mistake , exact amount not being known .
- Adjustment upto Rs 1 lakh a month is permissible for relevant month or quarter adjustment can be made in subsequent month or quarter.
- The details of adjustments is to be intimated to superintendent of central excise within a period of 15 days of date of adjustment
- If service tax has been paid in respect of services not provided then either wholly or in part for any reason the service tax excess paid can be adjusted against service tax payable for subsequent period if value of services and tax thereon is refunded to person from whom it is received.
- Where there are two units and excess tax has been paid in one unit and short tax in another then assessee cannot adjust excess tax payment in one unit against tax payable in another unit.
Procedure for filing returns
- Every assessee has to submit half yearly returns in form S T-3 in triplicate within 25 days of end of the half year. Half year means 1st April to 30th September and 1st October to 31st March of financial year.
- There is a a self assessment memorandum in the return and return should be accompanied by a copy of GAR-7 challans evidencing payment of duty.
- The form has been made compatible for E-filing of returns.
- Details in respect of each service are to be provided separately. (Sl. No. 3 of the returns has to be repeated)
- Service tax details and Cenvat credit details are combined.
- Even if assessee provides more than one service he is required to file only one return.
- If a particular service is not provided in a particular period then a nil return needs to be filed.
- Even when there is no turnover assessee would have to file nil return as long as registration certificate is valid. If last date of payment and filing of return is a bank holiday tax can be paid and return submitted on next working day
- The assessee can file a revised return within 90 days of filing of original return says Rule 7B of Service Tax Rules.
- If a mistake comes to notice after 90 days the assessee is required to pay tax by GAR-7 challan and inform department suitably, if he has short paid by mistake. If he has paid excess by mistake he is required to file refund claim
Electronic Filing of Return:
It is optional, it has been introduced from April 2003
Asessee has to apply a month in advance in Annexure 1. He would be given user id, password and technical details. From central server asessee needs to down load forms. After entering necessary details assessee would upload the return in the Computer.
There is a provision for late filing of return with a late fee of upto Rs .2000.
The paper writers hope that more and more professionals start practicing in this area of indirect taxation enabling development of the area. The vision is a simple, clear and transparent law and fair administration. Wish you an empowering and rewarding practice.