Enabling Practice in Service Tax – Part -II
Madhukar N Hiregange FCA
This article is a sequel to the article on opportunities and enabling practice hosted a few days back. This provides the questions a practitioner should ask and a little information on what he should know.
Background: Service tax when first introduced was levied on three services—telephone, non-life insurance and stock-broking. The rate of tax was pegged at a modest 5%. The tax came into effect on July 1, 1994. Service tax collection in the first year (nine month period) was merely Rs 407 crore.
Reason for introduction : The service sector has emerged as an important area of economic activity. Its share in the country’s Gross Domestic Product (GDP) has increased from about 28% in 1951, to over 56% as of now. The government decided to tax this important sector with the aim of raising resources and increasing the tax-GDP ratio.
Areas Covered : Successive FMs have been increasing the tax ambit by adding more services to the list. Presently, 104+ services are taxed. Major services that are currently taxed include real estate, transportation, telephone, insurance, brokerage, banking and financial services, courier, port services, etc. Some of the minor activities on which service tax has been recently imposed include, health services, incomplete sale of immovable property etc.
Professionals Knowledge needs:
It would be ideal to understand the following basic details of service tax which are important for serving clients covered under the service tax .
ü Where the levy is applicable?
ü On Whom the levy is applicable?
ü On which event is the levy applicable?
ü What is the value for payment?
ü What set – off would be available?
Where the levy is applicable?
Service tax is imposed under Entry 97 of List I (union List), Seventh schedule to the constitution of
Service tax is a tax on service and not on sale of goods. VAT and service tax are mutually exclusive. If contract is composite sales tax cannot be imposed on value of services. However we find in ITSS, Copyright, IPR this principle is being violated.
On Whom the levy is applicable?
Service tax is a tax leviable on the services provided by the Service provider which comes under taxable service 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 there is no question of service being provided by any person to any other person.
ü Earlier in many entries only commercial concerns rendering a service were taxable. Now in most of services any person providing service is taxable. An individual doing business on a large scale can be commercial concern. A proprietor is liable to service tax.
ü Any person: It would include proprietorship, partnership, charitable institution, cooperative society, Central / State Government, company, body corporate, association or body of individuals (whether incorporated or not).
ü The service receiver should ensure that he/she classifies the service properly as this would enable him to ascertain his/her tax liability correctly.
ü Technical assistance provided by a company to its own division /constituent being another unit of the company is not subject to service tax as the service provider – receiver relationship is absent.
ü Service provided by a club to its members: A club does not have an existence apart from its members hence it should not be taxed as an Mandap keeper.
ü 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 only common expenses and no real service being provided. However matter is under dispute and requires judicial confirmation.
ü Housing society also collecting maintenance from members it is only sharing of common expenses and not provision of service. Also being disputed.
ü 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. As per the Section in some cases services are taxable even if provided by any person to a client or a customer. However in some cases it is taxable even if provided to any person .The rates of tax would be at rate prevailing under section 66, which is presently 10%.The Education Cess of 2% and Secondary and Higher Education Cess would be payable on the tax at 1% and total service tax including cess is 10.3%
ü In some exceptional cases service receiver has been made liable to pay service tax. It is termed as reverse charge.
- When a taxable service is rendered or to be rendered by a person from a country other than India and received by any person under Sec.66A of Finance Act , service tax is payable by recipient of service. This is covered by import of services. For example, an Indian company has engaged services of engineering of a foreign consultant at its plant location in India. In terms of section 66A read with Rules, it is considered as a service provided from out of India and received in India.
Service provided by insurance agents: In case of auxiliary services of an insurance agent tax is payable by insurance company. The insurance agent is not liable to register or to pay tax.
Consignor/Consignee paying freight in case of GTA services: In case of services of goods transport agency service tax is payable by consignor / consignee who is paying freight.
Services of agent of a mutual fund: In case of distributors / agents of a mutual fund liability is on recipient of service , namely mutual fund
Body corporate or firm in India receiving sponsorship service: The receiving firm/body corporate is liable to service tax, in India. If the recipient of service of sponsorship is located out of India then the provider of such service is liable to pay service tax , in India
ü Cenvat Credit of tax paid: The body corporate or firm which pays service tax is eligible to avail the credit of such tax paid vide GAR 7 Challans. But when the receiver of service is liable to discharge liability in some instances as provided in law, he is not eligible to avail credit of such tax paid?. That is to say input credit cannot be utilized for payment of input services.
ü Service provider cannot pay tax when service receiver is liable. Where agreement with a foreign company provides that service receiver being foreign company has to file returns .Held: Service receiver is agent of service provider and liable prior to 16-8-02.
ü When services are provided by central / state Government it is taxable unless the context requires otherwise. When statuatory authorities perform duties that are mandatory like a factory inspector inspecting factories, these are not services being performed for a consideration. These are sovereign function hence, not taxable .
ü Where a taxable service is provided for cash deferred payment or any other valuable consideration by an unincorporated association/ body of persons to its members such is taxable.
ü Joint Venture partners providing service is not taxable as there is no service provider and receiver and one partner of the venture is not providing service to the other.
ü A person who undertakes work on sub-contract basis and not from client is taxable in respect of services provided to such client. [ prior to 23.8.2007 they were not liable] The main contractor can avail the credit.
On which event is the levy applicable?
Opening sentence of Sec.65(105) reads as follows “Taxable service” means any service provided or to be provided. The words to be provided have been added with effect from 16.6.05, provision of taxable service in
Section 66A (relates to service tax on the import of service), states that when a service provider has no place of business in India and receiver of service has a establishment in India then such service provided or to be provided would be a taxable service.
ü 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 bought into the tax net by including the phrase – to be provided in Sec 65….
ü 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
ü Date of payment for service received is not relevant factor where Assessee has received technical service from foreign company prior to imposition of service tax. Payment being made after such services are rendered taxable. Held :Such services is not taxable
ü Receipt of payment from service receiver only postpones tax liability , which is fixed as soon as service is rendered
ü Taxable event is when the contract is entered. Rate of service tax would be rate prevailing on date when contract is entered into.
ü When service is provided before service becomes taxable but the payment is received after service becomes taxable, service tax in respect of receipt of earlier period is not payable. Making a bill is not a taxable event but provision of service or entering into a contract for rendering service is taxable event.
ü Even if the advance was received before service tax was imposed service tax would be imposed if service was provided after service tax on it became effective.
What is the value for payment?
Section 67 of the Finance Act provides for the valuation of services to charge service tax. The amended section reads as follows:” 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“ .
The highlights of the new provisions of section 67 as effective from 18.4.06 are as follows:
· Service tax is payable on gross amount charged by the service provider for the services provided or to be provided, Thus tax is payable as soon as the advance is received.
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 Lakh with ST. Calculation is Rs. 1 Lakhs x *10.3/110.3.Therefore gross value is Rs.90,662/-
· Where the consideration for providing services is not wholly or partly in terms of money, service tax is payable on the amount of money which with the addition of the additional consideration is equivalent to the consideration.
Consideration receivable is Rs.1 Lakh. Service provider receives in money Rs.60, 000 and balance in goods from service receiver. ST on Rs. 1 Lakhs.
· Where the consideration is not ascertainable then valuation is done under the Valuation Rules.
IIf consideration is not wholly or partly consisting of money, value would be determined by service provider in terms of Rule 3 of the service tax valuation rules
As per rule 3(a), of Service Tax Valuation Rules , value would be on the basis of 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 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
The responsibility of valuation has been cast on service provider.
Value 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, such service means service of the kind on which service tax is payable. It is levied only on amount charged to the customer for service. Service tax is payable on value of taxable service and not on the entire contract value.
In Hotel Mela Plaza V, CCE(2005) assessee was charging service charge which was later distributed as tips to employees. Held: Service tax was payable on gross amount hence chargeable on service charges also.
· In relation to advertising agency services, it has been held that cash discounts and incentives received by advertising agency from the media is not includible in “value“ as these have no relation to services being provided. Target incentives and gifts received from principal and not billed to clients are not includible in assessable value.
In case of transaction with associated enterprises 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
· Even if amount is charged to any other person other than the receiver of service tax becomes payable. For example: When during the free service period of warranty of motor vehicles, even though receiver of service gets service free of cost, the manufacturer of motor vehicles pays the amount to the service provider.
· No service tax on free services. In Bharathi Cellullar Ltd V CCE(2005) It was held that no service tax is payable if SIM cards are given free as bonus because when value of service is zero tax on service would also be zero
· Amount received indirectly is not taxable: In CKP Mandal V CCE: CKP mandal a mandap keeper had entered into an exclusive contract with other contractor with an exclusive right to render service of catering and decoration to hirer of community hall,. The contractor had also given a donation of 8.35 lakhs to the appellants as contribution to corpus of CKP Mandal. It was held that amount is not received with reference to service of mandap keeper provided by appellant hence not taxable.
· In Lincoln Helios (
· Sometimes both Vat/Sales Tax and service tax are payable on the same transaction .Rule 2(A)(!)(i)(a) of Service Tax Valuation Rules and Rule 3(!)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 .
· Service tax is payable not on basis of services billed but on basis of value of taxable service actually received, thus if service provider does not receive any payment from service receiver there is no liability to service tax. A service provider may agree to a discount on the bill in such a case tax is leviable on net amount. If such discount is given after the payment of the invoice amount and tax is paid then a question of making adjustment would arise.
· 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.
· There is no service tax on cash discount since it is a income for payment of bills in advance and not from services tax rendered to clients.
· The service provider is required to show separately the amount of service tax in his bill as per Section 12Aof Central Excise Rules having been made applicable to service tax. This is to enable service receiver to avail credit of service tax that has been paid by service provider.
· In some cases like rendering of services from out of
· The gross amount charged can be taken as inclusive of service tax and value and service tax is to be calculated by back calculations. For example : If service tax amount is not indicated in invoice separately then tax payable is calculated by a simple formula as follows:
Assessable Value=(Cum Tax Price)/(1+ Rate Of Tax)
· 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 case of indivisible contracts it is difficult to identify service portion. Specific provision made in rule 2A of service valuation rules would apply. In BSNL Ltd V. UOI, It has been held that price of goods cannot be included in value of services. In Imagitic Creative Pvt Ltd V. CCT(2008), Held that Service Tax and Vat are mutually exclusive. In composite contract Vat cannot be imposed on value of taxable service,and service tax cannot be imposed on value of material .In case of AMC if sales tax / vat has been paid on the value of components it is not chargeable to service tax.
· Exclusion of value of material: If amount charged includes value of material sold service tax would not be payable on value of goods , materials sold. There should be documentary evidence to this effect, Such exemption is available only if cenvat credit of such material is not taken. If credit is taken assessee has to pay excise duty equal to credit taken before sale of such goods and materials
Deduction is not available of value of goods consumed in providing service. Deduction is available for value of 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. When consideration is not even partly in money then value has to be determined by valuation rules and not by rule 3
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· There should be resemblance between two services to constitute them as similar services .The time, place of providing service, nature of service and total business with customers , terms of payment must be considered to determine if two services are similar services.
· Where equivalent value is not to be less than cost of providing such service cost is to be determined based on normal principle costing.
· All expenditure that have been incurred by provider of service are to be included in valuation of taxable service. Even when these are recovered separately by the provider of taxable service they 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
· In Malabar Management Services Vs CST, The value of salaries was reimbursed by the bank and assessee was marketing the products of the bank .A prima facie view that such amounts are taxable is correct
· When such costs are incurred by service receiver directly it is included and tax is computed on such amount :Section 67(1)(II)
· Reimbursement of expenses incurred on behalf of receiver are not includible like :
ü Octroi /Entry Tax paid on behalf of owner of goods by transporter of goods or CHA or clearing and forwarding agent
ü Customs duty, dock dues, demmurage, transport charges paid by a customs house agent on behalf of client
ü Advertising charges paid by advertising agency to newspaper on behalf of the clients
ü Ticket charges paid by travel agent and recovered from customer
ü Reimbursement of salary, loading, unloading expenses by principal to agent in case of C & F services
· For costs to be excluded from value the following conditions are to be satisfied
ü The service provider acts as a mere agent of recipient of service when he procures goods or services from third party
ü Recipient of service uses the goods which are procured by provider of service as a mere agent of recipient
ü The recipient is liable to make payment to third party
ü The recipient authorizes provider to make payment to third party on his behalf
ü 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
ü 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
ü Service provider recovers only such amount as has been incurred by him to third party from receiver of service
ü The goods or services that are procured by service provider are in addition to services rendered on his own account
· For purpose of rule 5(2) pure agent means a person who :
ü 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
ü Does not use such goods or services procured
ü 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 of such agreement is available, which could be gathered by conduct of parties or general trade or even business practice
What set – off would be available?
Credit of duty paid on inputs, input services and capital goods: A provider of taxable service has to charge service tax in his invoice however he gets credit of duty paid on inputs, capital goods and input services. This is termed as Cenvat credit. 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 these 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, Example of capital goods:Plant , machinery, dies
· Credit on motor vehicles which are not capital goods would be available to a service providers of goods transport agency, pandal and shamiana supplier , courier agency, tour operator ,rent a cab, handler of cargo.
· No credit is available if output service is exempt from tax
· In case service provider provides both exempted as well as taxable services it may so happen that same inputs are used both for providing taxable and exempt services. In such cases the service provider has following three options from 1-4-08
ü Maintain a separate inventory and account of receipt/use goods / input services used for taxable /exempted output services[Rule 6(2)]
ü Pay an amount equal to 5% of value of goods(if he is a manufacturer) and / or 6% 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)]
ü Pay an amount which is equal to value of proportionate cenvat credit attributable to exempted final products/ output services[Rule 6(3)(Ii)]
· Cenvat credit can be taken instantly in case of inputs as soon as goods reach factory or premises of service provider
· 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 exports where rebate of input service tax and duty paid on inputs can be obtained.
· As per rule 2(m) of Cenvat credit rules “Input service distributor “ means
ü Office managing business of producer of products or provider of output service
ü Which receives invoices issued under Rule 4A of Service Tax Rules towards purchase of input services
ü Issues invoices towards distributing the payments made for credit on said services to manufacturer/ producer as case may be
ü 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 .This is just an option given to assessee. Entire input tax credit may be utilized in one factory. No need of one to one relationship between inputs/input services and output / output services
· If an input service is used exclusively to provide an exempt good/service such credit would not be distributed
Input service is any service 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
· Invoice need not be in name of service provider. Capital goods got on lease , hire purchase are eligible for taking credit.
· Credit on office equipments can be utilized if it is covered in capital goods to output service providers
· 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:
· Inputs /capital goods procured from EOU cenvat credit is available only partially as per formula. Rule 3(7)(a) of Cenvat credit Rules.
· Cenvat credit of Education Cess and SAH cess (paid on inputs and /or input services)can be utilized only for payment of Education and SAH cess on final product and /or output services.
· Some input services even if partially used for rendering exempt output services / goods full Cenvat credit can be used for availing as under.
ü Consulting engineer
ü Interior decorator
ü Management consultant
ü Real estate agent
ü Security agency services
ü Scientific or technical consultancy services
ü Banking and financial services
ü Insurance auxilliary services of life insurance business
ü Erection, commissioning and installation
ü Maintenance or repair
ü Technical testing and analysis
ü Technical inspection and certification
ü Foreign exchange broker
ü Construction service
ü Intellectual property services
The Cenvat credit in respect of above would be denied only when used exclusively for giving fully exempt goods / output services
Rule 6(6) of Cenvat Credit Rules says that Rules 6(1),6(2), 6(3),6(4) are not applicable if excisable final goods are dispatched without payment of duty in following instances:
In following cases assessee need not reverse duty or pay any amount:
ü Final product to EOU, SEZ, EHTP, STP
ü Final product to UN or an international organization for use in projects funded by them, which are exempt from duty
ü When final product is exported under bond without payment of duty
ü Gold or silver in manufacture of copper or zinc by smelting
ü Goods supplied against international competitive bidding vide Notification no.6/2006
This provision does not apply to service providers
This part of the article clarifies some of the important aspects of service tax. For more details alternative thoughts/ ideas a good updated commentary maybe referred.
The paper writer hopes 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. Wishing you an empowering and rewarding practice.
Note: Understanding service tax available in file section. More information would be available.