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Dear Student,

These are important questions for revising again in last days.

Please do complete course and then refer these Q & A.

Don’t take this as a short-cut.

Although I promise you, these questions are picked after much research and thought. These would be of great assistance.

 

SERVICE TAX

 

Q) Is service Tax levied under authority of Constitution of India? If yes, then explain it.

 

A) Article 265 of the Constitution of India read this as:

"No tax shall be levied or collected except by authority of law."

This implies Government (whether Central or State) can levy tax only when it has power to levy such tax in Constitution.

Powers of Government to make laws are divided in 3 categories:

(a)    List – I : Also known as Union List - It contains the matters in respect of which only the Central Government has the power to make laws.

(b)    List – II : Also known as State List - It contains the matters in respect of which only the State Government has the power to make laws.

(c)    List – III : Also known as Concurrent List - It contains the matters in respect of which both the Central and the State Governments have power to make laws.

 

Entry 92C of Union List read as” Taxes on services”, thereby Central Government has power to levy Tax on Services (i.e. Service Tax can be imposed by Central Government only.).

 

Q) When was service tax introduced? What is the Structure of Service tax law?

A) Service tax was introduced in 1994. Provisions of Service tax are mentioned in Chapter V of the Finance Act, 1994. There is no separate legislation for Service Tax.

 

Rules on service tax

Section 94 of Chapter V and section 96 -I of Chapter VA of the Finance Act, 1994 grants power to the Central Government to make rules for carrying out the provisions of these Chapters. Using these powers, the Central Government has issued several rules, some of which are as follows:

(a)    Services Tax Rules 1994

(b)    Service Tax (Advance Rulings) Rules, 2003

(c)    CENVAT Credit Rules, 2004

(d)    Export of Service Rules, 2005

(e)    Service Tax (Registration of Special Category of Persons) Rules, 2005

(f)     Service Tax (Determination of Value) Rules, 2006; and

(g)    Taxation of Services (Provided from Outside India and Received in India) Rules, 2006

 

Notifications on service tax

Sections 93 and 94 of Chapter V, and section 96-I of Chapter VA of the Finance Act, 1994 empower the Central Government to issue notifications to exempt any service from service tax.

Accordingly, notifications on service tax have been issued by the Central Government from time to time.

 

Circulars or Office Letters (Instructions) on service tax

The Central Board of Excise and Customs issues departmental circulars or instruction letters from time to time to explain the scope of taxable services and the scheme of service tax administration etc.

The circulars clarify the provisions of the Act and thus, bring out the real intention of the legislature. However, the provisions of Act cannot be changed by the departmental circulars.

 

Trade Notices on service tax:

Trade Notices are issued by the Service Tax Commissionerates.

The trade notice define the jurisdiction; identify the banks in which service tax can be deposited; give clarifications regarding service tax matters, etc.

When these Commissionerates receive various instructions from the Ministry of Finance or Central Board of Excise & Customs for effective implementation and administration of the various provisions of service tax law. The same are circulated among the field officers and the instructions which pertain to trade are communicated to them in the form of trade notices. Trade Associations are supplied with the copies of these trade notices. Individual assesses may also apply for copies of trade notices.

 

Q) Explain the applicability of Service tax?

A)  As per section 64 of Finance Act, 1994 states Service Tax extends to the whole of India except the State of Jammu and Kashmir.

Place of business of service provider does not matter for the levy of service tax.

Services provided by a person having his business premises in Jammu & Kashmir and providing taxable services to his clients in other parts of India would be liable for payment of service tax. In other words, office of service provider does not matter for determining liability to pay service tax.

 

Example

S. no.

Office of Service Provider.

Office of Service Receiver

Taxability

1.

Delhi

Delhi

Service tax would be applicable.

2.

Jammu and Kashmir

Any place other than J&K

Service tax would be applicable.

3.

Any place other than  J&K

Jammu and Kashmir

Service tax would NOT be applicable.

 

Notification No. 14/2010-ST., Dated: February 27, 2010

Central Government extends the provisions of Chapter V of the Finance Act, 1994, to the areas specified in column (2) of the Table below, in the continental shelf and exclusive economic zone of India for the purposes as mentioned in column (3) of the said Table:-

Sl.

No.

The areas in the Continental Shelf and the Exclusive Economic Zone of India

Purpose

(1)

(2)

(3)

1

Whole of continental shelf and exclusive economic zone of India

Any service provided for all activities pertaining to construction of installations, structures and vessels for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply there of.

2.

The installations, structures and

vessels within the continental shelf and the exclusive economic zone of India, constructed for the purposes of

prospecting or extraction or production of mineral oil and natural gas

Any service provided or to be provided by or to

such installations, structures and vessels and for

supply of any goods connected with the said

activity.

 

Q) What is the rate at which service tax is to be charged?

A) As per section 66 Service tax shall be levied at the rate of 12% on value of taxable services referred to in section 65(105).

However, vide Notification No. 8/2009 ST dated 24.02.2009 rate of tax has been changed from 12% to 10%. Therefore, new tax rate is 10%.

Education Cess: With effect from 10.09.2004, an education cess has been levied @ 2%, calculated on the service tax on all taxable services.

Secondary and Higher Education Cess: With effect from 11.05.2007, a secondary and higher education cess @ 1% has been imposed on services liable to service tax.

Effective rate of service tax is 10.30% [10% + 2% of 10 + 1% of 10 = 10.30%].

 

Q) Notes – Some exemptions in brief.

A) For detailed exemptions, please refer Service tax & VAT noted by CA. Rajat Mohan.

Exemption

All the taxable services provided by any person to the United Nations or an International Organisation, are exempt from levy of service tax.

All taxable services to any person, by the Reserve Bank of India are exempt from levy of service tax.

Taxable services provided or to be provided by any person, to the Reserve Bank of India when the service tax for such services is liable to be paid by the Reserve Bank of India under section 68(2) read with rule 2 of the Service Tax Rules, 1994 are exempt from levy of service tax.

Taxable services received in India from outside India by the Reserve Bank of India under section 66A of the Finance Act, 1994 are exempt from levy of service tax.

All taxable services provided or to be provided by Technology Business Incubators (TBI)/Science and Technology Entrepreneurship Parks (STEP) have been exempted are exempt from levy of service tax.

All taxable services provided or to be provided by an (incubatee) entrepreneur located within the premises of TBI/ STEP have been exempted from the levy of the service tax.

All taxable services provided by any person, for the official use of a foreign diplomatic mission or consular post in India are exempt from levy of service tax.

Service tax shall not be leviable on fee collected by public authorities while performing statutory functions/duties under the provisions of a law.

However, if such authority performs a service, which is not in the nature of statutory activity and the same is undertaken for a consideration not in the nature of statutory fee/levy, then in such cases, service tax would be leviable, if the activity undertaken falls within the ambit of taxable services.

 

Q) Explain Exemption for small service providers?

A) Service tax is fully exempt in respect of the taxable services of aggregate value not exceeding Rs.10,00,000 in any financial year.

Conditions for claiming this exemption

  1. This exemption would not apply in relation services provided by person using the brand name or trade marks of another person.
  2. This exemption would not apply in case where the service tax is paid by persons specified under section 68(2).
  3. Service provider has the option not to avail the exemption contained in this notification. Such option, once exercised in a financial year, shall not be withdrawn during the remaining part of such financial year.
  4. Service provider shall not avail the CENVAT credit of service tax paid on any input services used for providing the taxable service, for which exemption is availed of.
  5. Service provider shall not avail the CENVAT credit on capital goods received in the premises of provider of such taxable service during the period in which the service provider avails exemption from payment of service tax under this notification.
  6. Service provider shall avail the CENVAT credit only on such inputs or input services
    1. Which are received, on or after the date on which the service provider starts paying service tax; and
    2. Which are used for the providing taxable services for which service tax is payable;
  7. Where Service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services; and
  8. Aggregate value of taxable services rendered by Service provider shall not exceed Rs. 10 Lacs in the preceding financial year.

 

Q) Explain Exemption of specified services received by an exporter and used for export of goods under Notification No. 17/2009 dated 07.07.2009.

A) Taxable services specified in column (3) (‘specified services’) received by an exporter and used for export of goods (‘said goods’), are exempt from payment of service tax levied under section 66 and section 66A.

 

Sr.

No.

 

Classification

Taxable Services which are exempt

Conditions

 

1.

General insurance business- 65(105)(d)

Service provided to an

exporter by an insurer (including a reinsurer) carrying on general insurance business in relation to insurance of said goods.

Exporter shall submit document issued by the insurer, including reinsurer, for payment of insurance premium and the document shall be specific to export goods and shall be in the name of the exporter.

2.

Port Services- 65(105)(zn)

Service provided by a port(or any person authorised by the port) in respect of the export of said goods.

 

3.

Technical testing and analysis services- 65(105)(zzh)

Service provided by a technical testing and analysis agency, in relation to technical testing and analysis of said goods.

 

4.

Technical inspection and certification services- 65(105)(zzi)

Service provided by a technical inspection and certification agency in relation to inspection and certification of export goods.

 

5.

Other Port Services- 65(105)(zzl)

Service provided by

other port(or any person authorised by that port) in respect for export of said goods.

 

6.

Transport of goods by road in a goods carriage- 65(105)(zzp)

(i) Service provided for

transport of said goods

from the inland container depot to the port of export;

(ii) Service provided to an exporter in relation to transport of export goods directly from the place of removal, to inland container depot or port or airport, as the case may be, from where the goods are exported.

(i) Exporter shall certify that the benefit of exemption provided vide notification number 18/ 2009 - S.T. has not been claimed; and

(ii) details, those are specified in the invoice of exporter relating to export goods, are specifically mentioned in the lorry receipt and the corresponding shipping bill.

7.

Transport of goods in containers by rail- 65(105)(zzzp)

(i) Service provided for transport of said goods from the inland container depot to the port of export, and

(ii) services provided to an exporter in relation to transport of export goods directly from the place of removal to inland container depot or port or airport, as the case may be, from where the goods are exported.

Invoice issued by the exporter in relation to export goods shall indicate the inland container depot or port or airport from where the goods are exported.

8.

Cleaning activity services- 65(105)(zzzd)

Specialized cleaning services namely disinfecting, exterminating, sterilizing or fumigating of containers used for export of said goods provided to an exporter.

 

9.

Storage or warehouse keeper services- 65(105)(zza)

Service provided for storage and warehousing of said goods.

 

10.

Courier agency services- 65(105)(f)

Service provided by a

courier agency to an exporter in relation to transportation of time sensitive documents, goods or articles relating to export, to a destination outside India.

(i) The receipt issued by the courier agency shall specify the importer-exporter code (IEC) number of the exporter, export invoice number, nature of courier, destination of the courier including name and address of the recipient of the courier; and

(ii) exporter produces documents relating to the use of courier service to export goods.

11.

Custom house agent services- 65(105)(h)

Service provided by a

custom house agent in

relation to export goods exported by the exporter.

Exporter shall produce,-

(i) invoice issued by custom house agent which specifies:

(a) number and date of

shipping bill;

(b) number and date of the invoice issued by the exporter relating to export goods;

(c) details of all the charges, whether or not reimbursable, collected by the custom house

agent from the exporter in relation to export goods;

(ii) details of other taxable services provided by the said custom house agent and received by the exporter, whether or not relatable to export goods.

12.

Banking and other financial services rendered by a banking company or a financial institution- 65(105)(zm)

(i) Service provided in relation to collection of export bills;

(ii) Service provided in relation to advising export letters of credit such as advising commission, confirmation charges; amendment,

(iii) Service of purchase or sale of foreign currency, including money changing provided to an exporter in relation to export goods.

 

13.

Foreign exchange broker- 65(105)(zzk)

Service of purchase or

sale of foreign currency provided to an exporter in relation to export goods.

 

14.

supply of tangible goods for use services- 65(105)(zzzzj)

Service of supply of tangible goods for use, without transferring right of possession and effective control of tangible goods, provided to an exporter in relation to goods exported by the exporter.

 

15.

Clearing and forwarding agent services- 65(105)(j)

Service provided by a clearing and forwarding agent in relation to export goods exported by the exporter.

Exporter shall produce,- (i) Invoice issued by clearing and

forwarding agent for providing

services specified in column

(3) specifying,-

(a) number and date of

shipping bill;

(b) description of export goods;

(c) number and date of the invoice issued by the exporter relating to export goods;

(d) details of all the charges, whether or not reimbursable, collected by the clearing and forwarding agent from the exporter in relation to export goods;

(ii) details of other taxable services provided by the said clearing and forwarding agent and received by the exporter, whether or not relatable to export goods.

16.

Classified under

any sub-clause

of clause (105)

of section 65.

Payment of service tax paid on services commonly known as terminal handling charges.

 

17.

Services of transport of coastal goods, goods through national waterway or inland water. 65(105)(zzzzl)

Services provided for transport of export goods through national waterway, inland water and coastal shipping.

The exporter shall:

 

 

A. General points to be noted for all the above exemptions:

1.   The exemption shall be claimed by the exporter for the specified service received and USED BY HIM FOR EXPORT OF THE SAID GOODS.

2. The exemption claimed by the exporter shall be provided by way of REFUND of service tax paid.

3. The exporter claiming the exemption has actually PAID the service tax on the specified service to its provider.

4. No CENVAT credit of service tax paid has been taken under the CENVAT Credit Rules, 2004.

5. The person liable to pay service tax under section 68 of the Finance Act, 1994 shall not be eligible to claim exemption for the specified service.

6. The manufacturer-exporter, who is registered as an assessee under the Central Excise Act, 1944 or the rules made thereunder, shall claim the exemption by filing a claim for refund of service tax paid on specified service to the Assistant Commissioner/Deputy Commissioner of Central Excise, as the case may be, having jurisdiction over the factory of manufacture, in Form A-l.

7. The exporter who is not so registered under the provisions referred to in point (6) above, shall before filing a claim for refund of service tax, file a declaration in Form A-2 with the Assistant Commissioner/Deputy Commissioner of Central Excise, as the case may be, having the jurisdiction over the registered office or the head office, as the case may be, of such exporter.

8. The Assistant Commissioner/Deputy Commissioner of Central Excise, as the case may be, shall, after due verification, allot a service tax code (STC) number to the exporter [referred to in point (7) above] within seven days from the date of receipt of the said Form A-2.

9.   The exporter, referred to in point (6) or (7) , shall file the claim for refund of service tax to the Assistant Commissioner/Deputy Commissioner of Central Excise, as the case may be, having jurisdiction over the factory of manufacture, registered office or the head office, as the case may be, of such exporter in Form A-l.

10. The claim for refund shall be filed within one year from the date of export of the said goods.

11.For each taxable service specified in column(3) of the Schedule above, the exporter shall enclose all the documents specified in corresponding entry in column (4) of the said Schedule and the Form A-l with the claim of refund.

12.  No refund claim shall be allowed if the same is for an amount less than Rs. 500.

13. Where -

(a)  Total amount of refund sought under a claim is upto 0.25% of the total declared free on board value of export;

(b)  The exporter is registered with Export Promotion Council sponsored by the Ministry of Commerce or the Ministry of Textiles;

(c)  Subject to the provisions of (a) and (b) above, each document specified in clause (b) and in column (4) of the said Table shall be enclosed with the claim;

(d) invoice, bill or challan, or any other document issued in the name of the exporter, showing payment for such service availed and the service tax payable shall be submitted in original after being certified in the manner specified in sub-clauses (e) and (f);

(e) the exporter is a proprietorship concern or partnership firm, the documents enclosed with the claim shall be certified by the exporter himself and where the exporter is a limited company, the documents enclosed with the claim shall be certified by the person authorised by the Board of Directors;

(f) the documents enclosed with the claim shall contain a certificate from the exporter or the authorised person to the effect that specified service, to which the document pertains, has been received, the service tax payable thereon has been paid and the specified service has been used for export of goods under the shipping bill number;

14. Where the amount of refund sought under a claim is more than 0.25% of the declared free on board value of export, such certification, shall be done by the Chartered Accountant who audits the annual accounts of the exporter for the purposes of the Companies Act, 1956 or the Income Tax Act, 1961, as the case may be.

 

B.  How will Assistant Commissioner/Deputy Commissioner of Central Excise check the accuracy of refund claimed by Exporter?

The Assistant Commissioner/Deputy Commissioner of Central Excise, as the case may be, shall, after satisfying himself, -

(i) that the claim filed is complete in every respect;

(ii) that all the documents requiring certification have been filed after due certification; and

(iii) about the arithmetical accuracy of the claim,

shall refund the service tax paid on the specified service within a period of 1 month from the receipt of said claim.

However, where the Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise has reason to believe that the claim, or the enclosed documents are not in order or that there is a reason to deny such refund, he may, after recording the reasons in writing, take action, in accordance with the provisions of the said Act and the rules made there under.

 

C. In what circumstances would refund of service tax be demanded back by service tax authorities?

Where any refund of service tax paid to an exporter but the sale proceeds in respect of the said goods have not been realised by or on behalf of the exporter in India within the period allowed under the Foreign Exchange Management Act, 1999, such service tax refunded shall be recoverable under the provisions of the said Act and the rules made thereunder, as if it is a recovery of service tax erroneously refunded.

 

Q) Explain exemption for Services in relation to ‘transport of goods by road’ and ‘commission paid to foreign agents’ exempted from service tax subject to certain conditions under Notification No. 18/2009 – ST dated 07.07.2009?

A) All taxable services specified in column (3) (‘specified services’) received by an exporter and used for export of goods (‘said goods’), shall be exempt from levy of service tax under section 66 and section 66A.

 

Serial

No.

Classification

Description of the taxable service

Conditions

1.

Transport of goods by road in a goods carriage- 65(105)(zzp)

Service provided to an exporter for transport of the said goods by road from any container freight station or inland container depot to the port or airport, as the case may be, from where the goods are exported; or

Service provided to an exporter in relation to transport of said goods by road directly from their place of removal, to an inland container depot, a container freight station, a port or airport, as the case may be, from where the goods are exported.

The exporter shall have to produce the consignment note, by whatever name called, issued in his name.

 

 

2.

commission paid to foreign agents -65(105)(zzb)

Service provided by a commission agent located outside India and engaged under a contract or agreement or any other document by the exporter in India, to act on behalf of the exporter, to cause sale of goods exported by him.

 

(1) The exporter shall declare the amount of commission paid or payable to the commission agent in the shipping bill or bill of export, as the case may be.

(2)The exemption shall be limited to one per cent of the free on board value of export goods for which the said service has been used.-

(3) The exemption shall not be available on the export of canalized item, project export, or export financed under lines of credit extended by Government of India or EXIM Bank, or export made by Indian partner in a company with equity participation in an overseas joint venture or wholly owned subsidiary.

(4) The exporter shall submit with the half yearly return after certification of the same as specified in clause (g) of the proviso -

(i) the original documents showing actual payment of commission to the commission agent; and

(ii) a copy of the agreement or contract entered into between the commission agent located outside India and the exporter in relation to sale of export goods, outside India.

 

General conditions to be satisfied for availing the above exemption:

(a) Exemption shall be available to an exporter who,-

(i) informs the Assistant Commissioner/Deputy Commissioner of Central Excise, having jurisdiction over the factory or the regional office or the head office, as the case may be, in Form EXP1, before availing the said exemption;

(ii)  is registered with an export promotion council sponsored by the Ministry of Commerce or the Ministry of Textiles, as the case may be;

(iii)is a holder of Import-Export Code Number;

(iv)is registered under section 69 of the said Act;

(v) is liable to pay service tax under section 68(2), read rule 2(1)(d)(iv) or rule 2(1)(d)(v) of the Service Tax Rules, 1994, for the specified service;

(b) the invoice, bill or challan, or any other document issued by the service provider to the exporter, on which the exporter intend to avail exemption, shall be issued in the name of the exporter, showing that the exporter is liable to pay the service tax in terms of item (v) of clause (a);

(c) the exporter availing the exemption shall file the return in Form EXP2 every six months of the financial year, within fifteen days of the completion of the said six months;

(d) the exporter shall submit with the half yearly return, after certification, the documents in original specified in clause (b) and the certified copies of the documents specified in column (4) of the said Schedule;

 (e) the documents enclosed with the return shall contain a certification from the exporter or the authorised person, to the effect that taxable service to which the document pertains, has been received and used for export of goods by mentioning the specific shipping bill number on the said document.

(f) where the exporter is a proprietorship concern or partnership firm, the documents enclosed with the return shall be certified by the exporter himself and where the exporter is a limited company, the documents enclosed with the return shall be certified by the person authorised by the Board of Directors;

(g) where the amount of service tax in respect of the service specified against serial No. 2 of the Schedule exceeds 1% of the free on board value of the export then, the amount in excess of the said 1% shall be paid within the period specified under rule 6 of the Service Tax Rules, 1994.

 

Q) Explain exemption and refund scheme applicable to developer of SEZ and/or unit of SEZ under notification 9/2009?

A) I have converted this notification into an easier format so that it could be easily understood. In exam do write in tabular form.

Notification  No. 9/2009

Exemption by way of Refund

Exemption

All taxable services

à        specified in section 65(105) of Finance Act, 1944; and

à        Which are provided in relation to the authorised operations in a Special Economic Zone; and

à        Such services are received by developer or units of SEZ, whether or not the said taxable services are provided inside the Special Economic Zone.

Would be exempt from service tax.

Conditions

(a) Developer of SEZ or units of SEZ shall get the list of services required in relation to the authorised operations approved from the Approval Committee (‘specified services’); - [Operations are authorized and services used in relation to these authorized operations should be approved.]

(b) Actual use - Developer of SEZ or units of SEZ claiming the exemption actually uses the specified services in relation to the authorised operations in the SEZ.

(c) Specified services are USED in relation to the authorised operations IN THE SPECIAL ECONOMIC ZONE except for the services consumed wholly within the SEZ.

(d) Developer or units of Special Economic Zone claiming the refund has ACTUALLY PAID the service tax on the specified services;

 

(c) Specified services are CONSUMED WHOLLY WITHIN THE SEZ.

(d) No such requirement.

 

(e) No CENVAT credit of service tax paid on the specified services used in relation to the authorized operations in the Special Economic Zone has been taken under the CENVAT Credit Rules, 2004;

(f) Double benefit will not be available- exemption or refund of service tax paid on the specified services used in relation to the authorized operations in the Special Economic Zone shall not be claimed except under this notification.

(g) Proper accounts - Developer or unit of SEZ shall maintain proper accounts of receipt and utilization of the taxable services for which exemption is claimed.

Other Conditions/ Procedure

(a) Person liable to pay service tax shall pay service tax as applicable on the services provided to developer or units of SEZ.

(b) Developer or units of SEZ shall claim the exemption by filing a claim for refund;

(c) Claim for refund shall be filed to jurisdictional Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise(A.C./D.C.), as the case may be;

(d) Developer or units of SEZ who is not registered under Central Excise Act, 1944 or the Service tax legislation shall, prior to filing a refund claim under this notification, file a declaration in the specified Form(annexed in the notification) with the respective jurisdictional AC/DC of Central Excise; Such AC/DC shall, after due verification, allot a service tax code (STC) number to the developer or units of SEZ within 7 days from the date of receipt of the said Form;

(f) Time-limit for filing refund - Claim for refund shall be filed, within 6 months or such extended period as the AC/DC shall permit, from the date of actual payment of service tax by such developer or unit to service provider;

(g) the refund claim shall be accompanied by the following documents, namely:

(i) Copy of the list of specified services as approved by the Approval Committee;

(ii) documents for having paid service tax;

(iii) a declaration by Developer or unit, that “such service is received by him in relation to authorised operation in Special Economic Zone”.

(h) AC/DC after satisfying himself that the said services have been actually used in relation to the authorised operations in the Special Economic Zone, refund the service tax paid;

(i) where any refund of service tax paid on specified services is erroneously refunded for any reasons whatsoever, such service tax refunded shall be recoverable under the provisions of service tax legislation.

--

 

Q) When was Legal consultancy services introduced? Explain it.

A) Legal consultancy services - This service is new service introduced w.e.f. 1st September, 2009.

 

65(105) "taxable service" means any service provided or to be provided:

(zzzzm) to a business entity, by any other business entity, in relation to advice, consultancy or assistance in any branch of law, in any manner.

Provided that any service provided by way of appearance before any court, tribunal or authority shall not amount to taxable service.

Explanation. — For the purposes of this sub-clause, "business entity" includes an association of persons, body of individuals, company or firm, but does not include an individual.

No service tax shall be levied in all of the following cases:

(a)              Service provided by way of appearance before any court, tribunal or authority.

(b)              Service provider is an individual.

(c)              Service recipient is an individual.

 

Q) Is service tax chargeable on specified Modular Employable Skill courses ?

A) As per Notification No. 23/2010 - Service Tax, dated 29th April,2010 Central Government, exempts the taxable service referred to in section 65(105)(zzc) when provided in relation to ‘Modular Employable Skill courses’ approved by the National Council of Vocational Training, by a Vocational Training Provider  registered under the Skill Development Initiative Scheme with the Directorate General of Employment and Training, Ministry of  Labour and Employment, Government of India, from the whole of the service tax leviable thereon under section 66 of the Finance Act.

 

Q) What is the status of exemption available to canned software?

A) As per Notification No. 02/2010 - Service Tax, dated 27 February, 2010 exemption has been granted from the levy of service tax Under the category of Information  Technology Software Services for packaged or canned software, intended for single use and packed accordingly, from the whole of service tax, subject to the following conditions, namely:

(i) the document providing the right to use such software, is packed along with the software;

(ii) the manufacturer, duplicator, or the person holding the copyright to software has paid the appropriate duties of excise on the entire amount received from the buyer; and

(iii) the benefit under notification No. 17/2010– Central Excise, dated the 27th February ,2010 is not availed of by the manufacturer, duplicator or the person holding the copyright to software.

 

Q) Is service tax liable to be paid on services provided or to be provided by following:

à        Electronics and Computer Software Export Promotion Council.

à        Indian Oilseeds & Produce Export Association Export Promotion Council.

à        Jute Manufacturers Development Council.

à        Services Export Promotion Council.

à        Wool Industry Export Promotion Council.

A) As Notification No. 35/2009-ST all the above councils have been exempted from levy of service tax. However this exemption shall remain in force till 31.03.2010.

 

Q) What are the due dates for payment of service tax?

A) Rule 6 of Service Tax Rules, 1994 states the provision of payment of service tax which are as given in tables below:

A.         In case assessee is an Individuals, proprietary concerns and partnership firms

Quarters

Due Dates when it paid electronically

Due Dates when paid through other modes

1st April - 30th June

 

6th July

5th July

1st July - 30thSeptember

 

6th October

5th October

1st October - 31st December

6th January

5th January

1st January to 31st March

31st March

31st March

 

B.         In case other assessees

Quarters

Due Dates when it paid electronically

Due Dates when paid through other modes

April

6th May

5th May

May

6th June

5th June

June

6th July

5th July

July

6th August

5th August

August

6th September

5th September

September

6th October

5th October

October

6th November

5th November

November

6th December

5th December

December

6th January

5th January

January

6th February

5th February

February

6th March

5th March

March

31st March

31st March

 

Q) Is E-payment and E-filing necessary under service tax law.

A) E-payment: Vide Notification no. 1/2010 proviso to Rule 6(2) has been altered to provide that an assessee shall be required to deposit the service tax electronically through internet banking if he has paid the total service tax of Rs. 10 Lacs or more (including the amount of service tax paid by utilization of CENAT credit) in the preceding financial year. This is made applicable from 1st April, 2010.

 

E-filing: E-filing was earlier optional for assessees. Vide Notification no. 1/2010 proviso has been inserted in rule 7(2), which has now made electronic filing of returns compulsory for assessees who has paid total service tax of Rs. 10 lacs or more(including the amount of service tax paid by utilization of CENAT credit) in the preceding financial year. This is made applicable from 1st April, 2010.

Q) Define Vocational Training institute?

A) vocational training institute” means an Industrial Training Institute or an Industrial Training Centre affiliated to the National Council for Vocational Training, offering courses in designated trades as notified under the Apprentices Act, 1961.

 

Practical Question)

Virat Kohli & Co., a partnership firm, is providing taxable legal consultancy services, for the second consecutive assessment year. The turn furnishes the following information relating to the services rendered, bills raised, amounts received relating to this service, for the year ended 31.3.2010:

 

(i)

Free services rendered to poor people (Value of the services computed on comparative basis)

40,000

 

(ii)

Advances received from clients for which no taxable service has been

rendered so far

5,00,000

(iii)

Services billed to clients — Gross amount (Service fax has been charged separately in all the bills; the firm follows mercantile system of accounting).

12,00,000

 

(iv)

The firm has received the following amounts during the year:

Relating to taxable services rendered in March. 2009 (excluding service tax at applicable rates and TDS under section 194-J of the IT Act, 1961 to the tune of Rs. 45,320)

5,44,680

 

Relating to taxable services rendered in current year 2009 (excluding service tax at applicable rates and TDS under section 194-Jof the IT Act, 1961 to the tune of Rs. 1,20,000)

(includes Rs. 50, 000 as appearance fee before Labour Court received from another firm)

Service tax has been separately received for applicable items in (iv) above.

9,80,000

You are required to compute the value of taxable services for the year ended 31.3.2010 and the service tax payable.

 

Answer)

Legal consultancy services were brought under service tax net only with effect from 01.09.20O9. Thus, service tax would be leviable only on the services rendered on or after 01.09.2009. All services rendered before 01.09.2009 would be tax neutral as well as all receipts before 01.09.2009 would be tax neutral.

As no dates are mentioned we shall assume all receipts and rendering of services are evenly distributed throughout the year, the calculations have been made on pro-rata basis.

 

Computation of receipts from September, 2009 to March, 2010

Particulars

Receipts

during

April 09 to

August 09

(5 Months)

Receipts

during

September

09 to March

10

(7 Months)

Total

(Rs.)

Free services rendered to poor people

NOT TAXABLE

Advances received from clients

2,08,333

 2,91,667

  5,00,000

Consideration received for services rendered in earlier year [Rs.5,44,680 + Rs.45,320]

2,45,833

 3,44,167

  5,90,000

Consideration received for services rendered in current year excluding fee for appearing before Labour Courts [(Rs.9,80,000 — Rs.1,20,000 Rs.50,000)

 

 

 

4,37,500

 

 

 

 6,12,500

 

 

 

10,50,000

Fee for appearing before Labour Courts Total

NOT TAXABLE

Total

9,12,499

12,77,501

21,90,000

 

(i)        Computation of value of taxable services and service tax payable thereon:

Particulars

      Rs.

Particulars

      Rs.

Free services rendered to poor people

NOT TAXABLE

Taxable advances received from clients during September 09 to March 10

2,91,667

Consideration received for services rendered in earlier year

NOT TAXABLE

Consideration received for taxable services rendered during current year

6,12,500

Fee for appearing before Labour Courts

NOT TAXABLE

Total value of taxable services

9,04,167

Exemption available to Small scale service provider upto Rs. 10 Lacs

(9,04,167)

Value of services on which service tax is payable

Nil



VALUE ADDED TAXES

 

Q)        Explain the 3 variants of Value Added Tax?

A)        VAT has 3variants:

(i)                  Gross product variant - The gross product variant allows deductions for taxes on all purchases of raw materials and components, but no deduction is allowed for taxes on capital inputs. That is, taxes on capital goods such as plant and machinery are not deductible from the tax base in the year of purchase and tax on the depreciated part of the plant and machinery is not deductible in the subsequent years. Capital goods carry a heavier tax burden as they are taxed twice. Modernization and upgrading of plant and machinery is delayed due to this double tax treatment.

(ii)                Income variant – The income variant of VAT on the other hand allows for deductions on purchases of raw materials and components as well as depreciation on capital goods. This method provides incentives to classify purchases as current expenditure to claim set-off. In practice, however, there are many difficulties connected with the specification of any method of measuring depreciation, which basically depends on the life of an asset as well as on the rate of inflation.

(iii)               Consumption variant - Consumption variant of VAT allows for deduction on all business purchases including capital assets. Thus, gross investment is deductible in calculating value added. It neither distinguishes between capital and current expenditures nor specifies the life of assets or depreciation allowances for different assets. This form is neutral between the methods of production; there will be no effect on tax liability due to the method of production (i.e. substituting capital for labour or vice versa). The tax is also neutral between the decision to save or consume.

Among the three variants of VAT, the consumption variant is widely used. reasons for preference of this variant are:

Firstly, it does not affect decisions regarding investment because the tax on capital goods is also set-off against the VAT liability. Hence, the system is tax neutral in respect of techniques of production (labour or capital-intensive).

Secondly, the consumption variant is convenient from the point of administrative expediency as it simplifies tax administration by obviating the need to distinguish between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand.

 

Q)        Explain the methods of Computation of VAT?

There are several methods to calculate the ‘value added’ to the goods for levy of tax. The

three commonly used methods are:

(a) Addition method,

(b) Invoice method and

(c) Subtraction method.

 

(a) Addition method,

This method aggregates all the factor payments including profits to arrive at the total value addition on which the rate is applied to calculate the tax. This type of calculation is mainly used with income variant of VAT.

A drawback of this method is that it does not facilitate matching of invoices for detecting evasion.

 

(b) Invoice method

Under this method, tax is imposed at each stage of sales on the entire sale value, and tax paid at the earlier stage(i.e., at the stage of purchases) allowed as set-off. Thereby at every stage the differential tax is being paid.

At each stage, tax is to be charged separately in the invoice.

In India under the VAT law and under the Central Excise Law this method is followed. This method is also called the 'Tax Credit Method' or 'Voucher Method'.

This is the most common and popular method for computing the tax liability under 'VAT' system.

 

(c) Subtraction method.

This is a very simple method.

Under this method, the tax is charged only on the value added at each stage of the sale of goods. Under this method for imposing tax, 'value added' is simply taken as the difference between sales and purchases.

 

 

Q)        Explain Merits and demerits of VAT scenario?

A)        MERITS OF VAT

1. No tax evasion - It is said that VAT is a logical beauty. Under VAT, credit of duty paid is allowed against the liability on the final product manufactured or sold. Therefore, unless proper records are kept in respect of various inputs, it is not possible to claim credit. Hence, suppression of purchases or production will be difficult because it will lead to loss of revenue. A perfect system of VAT will be a perfect chain where tax evasion is difficult.

2. Neutrality - How much value is added and at what stage it is added in the system of production/distribution is of no consequence. The system is neutral with regard to choice of production technique, as well as business organisation. In short, the allocation of resources is left to be decided by the free play of market forces and competition.

3. Certainty - The VAT is a system based simply on transactions. Thus there is no need to go through complicated definitions like sales, sales price, turnover of purchases and turnover of sales. The tax is also broad-based and applicable to all sales in business leaving little room for different interpretations. Thus, this system brings certainty to a great extent.

4. Transparency - Under a VAT system, the buyer knows, out of the total consideration paid for purchase of material, what is tax component. Thus, the system ensures transparency also.

5. Better revenue collection and stability - There will be a minimum possibility of revenue leakage, since the tax credit will be given only if the proof of tax paid at an earlier stage is produced. This means that if the tax is evaded at one stage, full tax will be recoverable from the person at the subsequent stage or from a person unable to produce proof of such tax payment.

6. Better accounting systems - Since the tax paid on an earlier stage is to be received back, the system will promote better accounting systems.

 

DEMERITS OF VAT

1. Differential rates, exemptions will bring in distortions - The merits accrue in full measure only under a situation where there is only one rate of VAT and VAT applies to all commodities without any question of exemptions whatsoever. Once concessions like differential rates of VAT, composition schemes, exemption schemes, exempted category of goods etc. are built into the system, distortions are bound to occur and the fundamental principle that VAT will totally eliminate cascading effects of taxes will also be subject to qualifications.

2. Accounting cost will increase - For complying with the VAT provisions, the accounting cost will increase. The burden of this increase may not be commensurate with the benefit to traders and small firms.

3. Increase the working capital requirements - Since the tax is to be imposed or paid at various stages and not on last stage, it would increase the working capital requirements and the interest burden on the same. In this way it is considered to be non -beneficial as compared to the single stage-last point taxation system.

4. VAT is a form of consumption tax. Since, the proportion of income spent on

consumption is larger for the poor than for the rich, thereby VAT would impose higher burden on poor.

5. Administration cost to the State - As a result of introduction of VAT, the administration cost to the State can increase as the number of dealers to be administered will go up significantly.

 

Q)        What are the different stages of VAT ? Can it be said that entire burden falls on the final consumer ?

A) VAT is collected at different stage of sale which are as follows :

Stage I : Sale of raw material to manufacturer

Stage II : Manufacturer sells to wholesaler

Stage III : Wholesaler / Trader sells to consumer.

VAT is paid at different stage and finally collected from ultimate consumer hence it can be said that burden of VAT fall on ultimate consumer.

 

Q)        Discuss filing of Return under VAT.

The respective State-VAT laws require every registered dealer to file VAT-returns periodically (monthly / quarterly / annually). The returns are to be filed in prescribed form within the prescribed time from the end of the period concerned (i.e. within specified days from the end of the month / quarter / year).

The returns are to be accompanied with the challan evidencing payment of VAT. In some states, the return forms are inclusive of challan, in which case, the returns can be filed along with the payment of challan with the treasury. The VAT returns contains requisite details such as details of dealer, details of input-VAT and output VAT, payment of VAT, inventory details etc.

 

Q)        List out six purchases which are not eligible for input tax credit.

Following are the purchases which are not eligible for input tax credit :-

Purchase from unregistered dealers.

Purchases of goods from other states i.e. inter state purchases.

Import of goods from outside the territory of India (commonly known as high seas purchases)

Purchases from registered dealer who has opted for composition scheme.

Purchase of non-credible goods as may be notified by the state government.

Purchases of goods in cases where the selling dealer’s invoice does not show the amount of tax charged separately by such selling dealer.

Q)        Explain the concept of input tax credit on capital goods.

A)           Capital goods, may include plant and machinery, furniture, fixture, electrical installations, vehicles etc. A dealer may be creating capital assets himself by purchasing materials for capital assets like, building materials etc. Normally all the above items are taxable and the dealer has to pay sales -tax on purchase of the above goods. Each State-VAT legislations may define ‘capital goods’ differently.

Procedural requirements for claiming set off of capital goods credit

Barring the items covered by the negative list and subject to retention rules, the dealers are entitled to set off on capital goods like any other purchases. Thus, the dealer will have to bifurcate their purchase into capital goods eligible for set off and capital goods not so eligible.

Dealers will be required to support purchase of capital goods with tax invoice. In the absence of such tax invoice set off will be disallowed. Once a dealer is entitled to set off he has to further comply with the relevant provisions in respect of allowability. If it is subject to certain installments, the dealer will be required to claim set off accordingly in his returns. If the set off is subject to prior permission, the same should be duly obtained.

 

Q)        Explain the composition scheme.

A)        White Paper in relation to composition scheme read as under:

"Small dealers with annual gross turnover not exceeding Rs.50 lakhs who are otherwise liable to pay VAT, shall however have the option for a composition scheme with payment of tax at a small percentage of gross turnover. The dealers opting for this composition scheme will not be entitled to input tax credit."

The Empowered Committee has permitted the States to reduce the rate of composition tax to as low as 0.25 %.

 

Features

(i) a very small tax will be payable;

(ii) there will be a simple return form to cover longer return period.

 

Advantage

It saves a lot of labour and effort in keeping records.

It also simplifies calculation of tax liability of a dealer.

 

Disadvantage

Ineligibility of the dealer to avail input tax credit and issue tax invoices in order to pass on tax credit.

Hence, the dealers desirous of availing input tax credit on their purchases may not prefer to buy from composition dealers.

Loss to the seller - If the composition scheme is availed by a dealer then such dealer cannot avail input tax credit in respect of input tax paid. Hence the dealer will be loosing the input tax credit on purchases made by him. He will not be able to pass on the benefit of input tax credit, which will add to the cost of the goods.

Loss to the purchaser - The purchaser shall not get any tax credit for the purchases made by him from the dealer operating under the composition scheme. Therefore, as soon as a dealer opts for the composition scheme, the VAT chain will be broken, and the benefit of tax paid earlier will not be passed on to the subsequent buyers.

 

It is generally optional for a dealer to opt for this composition scheme. A dealer who intends to avail such composition scheme shall exercise the option in writing for a year or a part of the year in which he gets himself registered. For this the dealer has to intimate to the Commissioner.

If a dealer avails this scheme, he need not maintain any statutory records as prescribed under the Act. Only the records for purchase, sales, inventory should be maintained.

The dealer should not have any stock of goods which were brought from outside the State on the day he exercises his option to pay tax by way of composition and shall not use any goods brought from outside the State after such date. The dealer should also not claim input tax credit on the inventory available on the date on which he opts for composition scheme.

 

Q)        Explain the concept of Goods and Service Tax (GST)?[1]

A)        The Union Finance Minister in his Budget speech for the year 2006-07 has announced 1st April, 2010 as the target date to introduce goods and service tax. But it was delayed and 1st April, 2011 was announced as the new implementation date. Recently Finance Minister has stated that GST would be further delayed in light of no consensus among states.

The ultimate system of indirect taxes in India will be of goods and service tax. Under such a system there will be one central authority administering a uniform goods and service tax. GST would subsume almost all indirect taxes i.e. Excise, Customs and VAT. Input tax credit will be available between goods and services throughout the country. However, such a development will require constitutional amendment. Under such a uniform tax system, there will be no trade barriers like octroi and entry tax. There will be a free flow of trade and commerce through out the length and breadth of the country.

 

Q)        What are the different tax rates under VAT regime?

A)        Categories of tax rates under VAT scenario:

 

A.         Exempted category – There are about 50 commodities comprising of natural and unprocessed products in unorganised sector, items which are legally barred from taxation and items which have social implications. Included in this exempted category is a set of maximum of 10 commodities flexibly chosen by individual States from a list of goods (finalised by the Empowered Committee) which are of local social importance for the individual States without having any inter-State implication. The rest of the commodities in the list will be common for all the States.

B.         4% VAT category - Under 4% VAT rate category, there are largest number of goods, common for all the States, comprising of items of basic necessities such as medicines and drugs, all agricultural and industrial inputs, capital goods and declared goods.

C.         12.5% category - The remaining commodities, common for all the States, fall under the general VAT rate of 12.5%.

D.        1% Category - The special rate of 1% is meant for precious stones, bullion, gold and silver ornaments etc.

E.         Non-VAT goods - Petrol, diesel, ATF, other motor spirit, liquor and lottery tickets are kept outside VAT. The States may or may not bring these commodities under VAT laws. However, it is agreed that all these commodities will be subjected to 20% floor rate of tax.

 

Illustration on VAT[2]

A is a trader selling raw materials to a manufacturer of finished products. He imports his stock-in-trade as well as purchases the same in the local markets. If the rate of VAT is assumed to be 12.50% ad valorem, he will pay VAT as under:

Particulars

   (Rs.)

A's cost of imported materials (from other State)

10,000

A will deposit Rs.1250 duty on the above. Since, this is not a State VAT it will form a cost of input

1250

A's cost of local materials (VAT charged by local suppliers Rs.2,500. Since the credit of this would be available it will not be included in cost of input)

20,000

Other expenditure (such as for storage, transport, interest, etc.)

incurred and profit earned by A.

  8,750

Sales price of goods

40,000

VAT on the above @ 12.50%

  5,000

Invoice value charged by A to the manufacturer, B

45,000

 

I . A's liability for VAT

Particulars

   Rs.

VAT on the sales price (Output tax)

5,000

Less: Set-off of VAT paid on purchases (Input Tax)

 

On imported goods                                                                           Nil

 

On local goods                                                                              2,500

2,500

Net Tax Payable

2,500

Note: In the above illustration (as well as in illustrations that follows) it is assumed that set off of VAT paid on imported goods from outside countries or other States is not allowed.

II.  Now B manufactures finished products from the raw materials purchased from A and other materials purchased from other suppliers. His liability would be as under:

Particulars

   (Rs.)

B’s cost of raw materials

(VAT recovered by A Rs.5,000)

40,000

 

B’s cost of other materials

(i).   Local Purchases

(VAT charged on the above Rs.2,500)

(ii).   Inter- State Purchases[3]

(CST paid Rs.400 on purchase value of Rs. 10000. Toal cost 10400)

 

20,000

 

10,400

 

Manufacturing and other expenses incurred and profit earned by B

29,600

Sale price of finished product

1,00,000

VAT @ 12.5%

12,500

Invoice value charged by B to the wholesaler, C

1,12,500

 

 B's liability for VAT

Tax on the sales price (Output tax)

12,500

Less: Set-off of VAT on Purchases (Input tax)

 

To A                                                                                                 5,000

 

To other suppliers                                                                            2,500

7,500

Net Tax Payable

5,000

 

III.       C, after repacking the goods into other packing, sells the finished product to a retailer. The following would be the position:

Particulars

   (Rs.)

 

C's cost of goods

(VAT recovered by B Rs.12, 500)

1,00,000

 

Cost of packing material

(VAT charged on the above Rs. 250)

2,000

Expenses incurred and profit earned by C

18,000

Sale price of goods

1,20,000

VAT on the above

15,000

Invoice value charged by C to D, a retailer

1,35,000

 

C’s liability for VAT

Tax on the sales price (Output tax)

15,000

Less: set-off of VAT paid (Input tax)

 

To B                                                                                        12,500

 

To other suppliers                                                                        250

12,750

Net Tax payable

2,250

 

 



THE LAST WORD

Hello Students,

Friends you must be feeling very tense.  This tension is created by the institute to develop more capabilities in you, so that you are prepared for the future challenges. 

It is said that the maximum development of the world took place during two world wars.  Because it is only during challenges that our mind becomes creative and our capabilities increase.

 

Before the examination day

1.       Don’t waste any time on checking the paper of Cost & FM.  Just think what next.

2.       Keep in mind that the person who starts early always stays ahead.  So don’t get relaxed.  Don’t think you have two days and you will work slowly.  Don’t unduly stick to one topic.

3.       Allocate time for each and every topic before starting the revision and don’t at all exceed those limits. Following should be a tentative time plan for revision:[4]

 

Service Tax & VAT                                                   4 hr

Residential Status                                                    30 minutes

Salary                                                                     3 hr

House Property                                                        1 hr

Capital Gain                                                            4 hr

PGBP                                                                     5 hr

Other Sources                                                         30 minutes

Clubbing & C/f                                                         30 minutes

Deductions                                                              2 hr

Trust and Agricultural                                               30 minutes

Other Miscellaneous                                                1 hr      

Total                                                                       22 hrs        q        

4.       Don’t try to recall the things; just try to read the topic.  Just keep on reading, don’t think whether you will be able to recall or not in the examination hall.  You will be definitely able to recall the topics provided you have gone through that topic before examination day. 

 

5.       Don’t at all compromise on your sleep. If you are fresh then you will solve even the most difficult questions. If you are not then GOD HELP YOU.

 

 

So, please, take proper sleep and not only in this paper but in all the papers.

 

In the examination hall:-

(i)      Don’t rush to attempt the question paper.  First go through the entire question paper and select your best and shortest possible question. (5-7 min.)

 

(ii)    Even in the most difficult papers, there are always few questions which are very easy.  If you once start doing easy questions, your confidence boosts up and you are able to do even the difficult ones.  Therefore, instead getting demoralized from difficult questions, try to search for the easier ones.

 

(iii)  Allocate time for each question and don’t exceed the limits.

 

(iv)   Don’t leave numerical questions for the end, try to attempt them somewhere in the middle.

And finally friends, it is said that great battles are always won at the end.  You still have lots of time. If you work with regularity and discipline then your success is definite.  Relax and work hard.

 

Feel Free to Contact me anytime, if you think I could be of any Help on any matter.

 

Best wishes,

Cheers

RAJAT MOHAN AGGARWAL

Ph: 9910044223




[1] It gives me immense pleasure to GST would be a new tax which would change the face of India in global market. I have written a book on this topic ‘Illustrated guide to Goods and Service Tax’, it is one of the best available books on GST in India.

[2] This is not a question. It is just a complete illustration. This will develop you for practical questions in exams.

[3] Credit / set off for tax paid on inter-State purchases (inputs) is not allowed.

[4] Assumed 1 day leave is available between exams. 

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