Introduction
Service tax concepts have undergone drastic changes from the day of its introduction. It all started with 3 services. Now it is very hard to find a service which is not liable for service tax after introduction of negative list concept under service tax. One reason for this area to see so many changes has been the 60% + contribution of the service sector to our GDP/ economy. The Government therefore has seen this area as one which can be used to boost revenues in order to meet its expenditure targets. Even after 20 years of introduction, the service tax law is not free from litigation. This may be due to law changing frequently, amendment in law consequent to Court or even Tribunal rulings, trigger happy attitude of the target based tax administration. The service provider therefore should be careful in taking decisions and structuring the transactions under service tax. In this material, an attempt has been made to understand the ways in which the service providers could save some cost being a tax compliant assessee.
Tax Planning, Tax Evasion & Tax Avoidance
Tax Planning: Tax planning is arrangement of financial activities in such a way that maximum tax benefits, as provided in the Finance Act and Rules made under are availed to the assessee. It envisages use of certain exemption, selections of valuation method, structuring the transaction and selection of various benefits available under the law. Detailed discussion on Tax Planning under Service tax is made in the later part of the material.
Tax Avoidance: Tax Avoidance refers to the legal means so as to avoid or reduce tax liability, which would be otherwise incurred, by taking advantage of some provision or lack of provision in the law. Thus, in this case tax payer tries to reduce his tax liability but here the arrangement will be legal, but may not be as per intent of the law. Thus, in this case, tax payer does not hide the key facts but is still able to avoid or reduce tax liability on account of some loopholes or otherwise. It is commonly known as ‘bending the law without breaking it'. The Hon’ble Supreme Court in the case of McDowell & Co Limited v CTO [1985] 154 TR 148 held as follows.
“Tax planning may be legitimate provided it is within the framework of law. Colourable devices cannot be part of tax planning and it is wrong to encourage or entertain the belief that it is honorable to avoid payment of tax by resorting to dubious methods.”
Tax Evasion: Tax Evasion term is usually used to mean 'illegal arrangements where liability to tax is hidden or ignored i.e. the tax payer pays less than he is legally obligated to pay by hiding income or information from tax authority. Thus, here the tax liability is reduced by "illegal and fraudulent" means. However, the short payment of Taxes / hiding of Income should be intentional to constitute as a Tax Evasion. Under service tax, as the law is interpretive and based on notifications and case laws, there may be situation where the assessee acted on a bona fie belief on the particular transactions which may be result in evasion of tax. Hence, the intention of the assessee on short payment of Taxes would play a major role in determining whether the short payment is of Tax Evasion or interpretational issues.
Constitutional Validity of Service Tax Levy
In a number of cases, the constitutional validity of service tax has been questioned and the decisions of the High Courts/ Supreme Court have been in favour of revenue. In Tamil Nadu Kalyana Mandapam Assn Vs UOI((2004) (167) ELT 3) S C,, the levy of service tax on mandap keepers and outdoor caterers was upheld by the Supreme Court as a tax on services and not a tax on sale of goods or hire purchase activities. The levy of service tax on professional services of Chartered Accountant, Cost Accountant and Architect was also upheld by the Supreme Court in All India Federation of Tax Practitioners Vs UOI (2007 (07) STR 625-SC)..
Sec 64(1) – Extent, Commencement & Application
Parliament is empowered to make laws with respect to aspects or cause that occur arise or exist or may be expected to do so within territory of India and also with respect to extra territorial aspects or cause that have an impact on or nexus with India. Article 245-taxes not invalid for extra territorial operation
1. Publishing – Marketing outside India – Liable upto 1.10.14.
2. Software server – Tech Mahindra Ltd case – 2014-TIOL-1608-HC-CX
Services by subsidiary not export- Onsite service rendered abroad by subsidiaries located outside india- CENVAT credit refund ineligible prior to 27/02/200 as same does not constitute export as defined in Rule 3(2) of Export Rules 2005- amendment made on 27/02/2010 is not clarificatory in nature.
3. Technical Inspection + Certification – SGS India Pvt Ltd 2014–TIOL-580-HC-ST
Service tax only on services provided in India- Foreigner requisitioning services of appellant to provide import worthiness certificates of sample goods in India - consideration for such services paid in forex is not liable to Service tax.
What is Service?
A new Section 66B has been introduced in this Finance Act and ‘Service’ has been defined in clause (44) of the new section 65B. The definition of service has be divided into three parts i.e. ‘means part’, ‘inclusive part’ and ‘exclusion part’.
Means part of the definition
"Service" means any activity carried out by a person for another for consideration. The definition of service has the following essential requirements:
a. It has to be any activity,
b. Such activity has to be carried out by a person,
c. Such person has to carry out the same for another person,
d. Such activity has to be for a consideration
Inclusive part of the definition
Inclusive part of the definition has impact of enlarging the scope of the definition. It gives wider meaning to words or phrases in the statute. When it is used in words or phrases, it must be construed as comprehending not only such things as they signify according to their nature and impact, but also those things which interpretation clause declares they shall include. The definition of service also includes the declared service in the inclusive part. This is done to avoid ambiguity in so far as the activities mentioned under declared services.
Specific exclusions from the definition of service
The definition of ‘service’ as provided in Section 65B (44) specifically excludes certain activities which would not be considered as service. That is to say that these activities when performed/executed shall be out of scope of the service tax levy.
1. an activity which constitutes merely,––
2. a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
3. such transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of article 366 of the Constitution; or
4. a transaction in money or actionable claim;
5. a provision of service by an employee to the employer in the course of or in relation to his employment;
6. fees taken in any Court or tribunal established under any law for the time being in force.
There are three explanations inserted after the means, inclusive and exclusive limbs of the definition of service. They are as follows:
Explanation 1 stipulates that the definition shall not apply to
a. the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members ofother local authorities who receive any consideration in performing the functions of that office as such member; or
b. the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
c. the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section.
Explanation 2 is an exception to the part that there have to be 2 distinct persons for provision of service.
a. an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;
b. an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons.
Explanation 3 stipulates that
A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory.
What would be the Taxable Services?
Earlier, the activities which were specified in sub clauses of section 65(105) were taxable services. If a particular activity was not specified, it was not a taxable service. Now, the taxable services would be the following:
a. Services satisfying definition of service
b. Specified declared services
c. Other than services in the negative list
Declared Services
Declared Services are defined under Section 65B (22) of the Finance Act, 1994 to mean any activity carried out by a person for another person for consideration and declared as such under Section 66E of the Finance Act, 1994. It means for a service to come under the category of declared services, it has to satisfy two basic conditions conjunctively
- it must be an activity by one person to another for consideration
- it must be specified(i.e. declared) under section 66E
What is Negative list?
Section 66D specifies the list of services which are not taxable. Therefore, the services which are covered under the ‘Negative List’ are outside the scope of levy of service tax itself. This is different from exemption, which is actually a part of levy but Central Government gives exemption in public interest.
Thus, the negative list of services implies 2 things-
a Services listed in negative list are not subject to tax.
b. Services not mentioned in the negative or exempted list, are taxable within the definition of service as per sec 65B (44)
Classification of Service:
Earlier, the classification of the service provided should have been with reference to the specific coverage within the 119 alternatives. It was possible that the services provided by one service provider may appear to fall under more than one category of specified services. It was possible that one service provider maybe providing numerous individual services or combined services. He was required to register under all of them.
Where the entry was not clear or more than one classification appeared to be correct, then reference was to be made to Section 65A for the rules of interpretation. Thus, a lot of confusion prevailed here and also litigation.
Now, Section 65A has been scrapped off and the service once identified as taxable, need not be classified into any specific category. Further, there are no guidelines / provisions to determine the eligibility criteria under the various Exemptions available under mega exemption notification no. 25/2012 and the same would be determined by going through the clauses of the agreement and depend on each to each case. Hence, drafting of the agreement would play a crucial role in determining the nature of service and availability of any exemption. Would this avoid the litigation issues to a great extent? We shall soon know.
Exemptions
Under the previous service tax law (i.e., law prevailing upto 30th of June, 2012) there were totally around 88 exemption notifications. Though this new system of tax has come into effect the need for exemptions is not obviated. Some of the existing exemptions have been built into the negative list, while some are continued to be exempted in the current scenario under the new category. For the sake of convenience and simplicity, most of the exemptions now forms a part of one notification which is popularly called as 'Mega Exemption Notification' 25/2012-ST, dated 20th June, 2012.
Point of taxation?
a. Rule 2(e) of Point of Taxation Rules, 2011 defines Point of taxation to mean the point in time when a service has been deemed to have been provided.
b. POTR provides for deeming fiction which means that at POT, it is possible that, the taxable service has not been provided but still the tax has become payable.
c. These rules were introduced w.e.f. 01.04.2011 vide Notification No. 18/2011- ST dated 1.3.2011 as amended by notification 04/2012 ST dated 17th March 2012 and Notification 37/2012 ST dated 20.06.2012.
Place of provision
a. Service Tax leviable on services provided in India
b. The ‘Place of Provision of Services Rules, 2012′ specify the manner to determine the taxing jurisdiction for a service.
Principles of Interpretation 66F
1. Reference to a service shall not include reference to a service which is used for providing main service
2. Differential treatment for any purpose based on description - Category which gives the most specific description will prevail over general description
3. Bundled service – naturally bundled in ordinary course of business then treated as single service which gives such bundle its essential character
4. Bundled service – not naturally bundled in ordinary course of business then treated as single service which results in highest liability of tax
Service tax valuation
1. As per Section 67 and Valuation Rules
2. Value of Taxable Service= Gross amount charged for Service provided or to be provided Less Deductions or abatement, if any
3. Add out of pocket expenses and reimbursable expenses
4. Explanation (a) to the Section 67- Consideration includes
5. Any reimbursable expenditure or cost incurred by the service provider and charged in the course of service (except in such circumstances, and subject to such conditions as may be prescribed under rule 5 of Service Tax (Determination of value) Rules 2006.
If Gross amount charged inclusive of ST, calculate value of Taxable Service by back calculation
Liability as a Service Receiver:
Normally under Service Tax, the Service Provider requires to pay Service Tax on the activity. However, in some cases, the Service Receiver made liable for payment of Service Tax to the department. Further, w.e.f 01-07-2012, new concept of Joint charge introduced where both Service Provider and Service receiver requires to pay Service Tax for few transactions.
Reimbursement of expenses
In terms of Rule 5 all expenditure or cost incurred by the service provider in the course of providing taxable service and borne by the recipient is includable in the taxable value. However in the opinion of authors the provision relating to inclusion of all the costs/expenditure is not in line with the provisions of section 67 as the said amount is not charged for such services. Further also there is no such deeming fiction for the same. The same should be confined only to the costs and expenditure incurred to the extent the same is attributable to the amount charged for the services
In Intercontinental Conslt & Tech (P) Ltd Vs UOI [2012-TIOL-966- HC-Del-ST] held that by including the expenditure and costs, Rule 5(1) goes far beyond the charging provisions and cannot be upheld.
FA 2015 has explained consideration ostensibly to overcome the above decision.
(a) “consideration” includes –
(i) ……………………………..
(ii) any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such conditions, as may be prescribed.( as on August not prescribed)
(iii) ……………………………
Therefore, even reimbursable expenditure to be taxable if Rule 5(2) substantive conditions are not satisfied.
Whether service tax and VAT can be levied on supply of food or drink?
If the entire amount is offered to VAT as a supply of food, levy of the service tax on the same amount would be amounting to a double taxation. The supreme court more than a decade back in K. Damodarasamy Naidu v. State of Tamil Nadu [2000 (117) STC 1 (SC)] has held that the tax is on the supply of food or drink and it is not of relevance that the supply is by way of a service or as part of a service. In our view, therefore, the price that the customer pays for the supply of food in a restaurant cannot be split up. The price provided for food could not be split up between charges for food and charges for services for the purpose of taxation. Applying same analogy, the question of taxing under service tax could be doubtful especially if on the full amount VAT has been paid appropriately.
Kerala High Court Division Bench decision.
In a recent development while dismissing revenue appeal, division Bench of Kerala High Court (2014-TIOL-1913-HC-KERALA-ST) holds States alone have power to impose tax on sale of food and on accommodation. The High Court held:
It cannot be said that there is any service involved in the supply of food and other articles of human consumption in a restaurant. The States alone have the legislative competence to enact any law imposing tax on the said matter.
This decision was by application of the principle that the Constitution is above the law. The Constitution permitted sale of goods during service as taxable as a deemed sale. Necessarily service formed part of deemed sale of goods. Therefore, State Government alone has the competence to enact a law imposing tax on service elements forming part of sale of goods. This could be an indication how the issue of taxability of supply of food and drink may move forward.
At same time as the matter has not yet been confirmed at the highest level of judiciary. In the opinion of the paper writers, restaurants/ hotels could safely rely on this decision. They may as a measure of caution write under an acknowledgement seeking confirmation of their view that there is no liability.
However those who do not wish to have any disputes with the government could err on side of caution and pay the ST wherever the customers are willing to pay.
Applicability of Service tax rate (14% or 12.36%)
Again legislature intervened and introduced Section 67A with effect from 28.05.2012 which says:
-
The rate of service tax,
-
Value of a taxable service and
-
Rate of exchange, if any,
shall be taken as the rate/value in force or as applicable at the time when the taxable service has been provided or agreed to be provided.
Till then it is duty of tax payer to follow the Point of Taxation Rules, 2011 as the tax administering department is keen on implementing POTR, 2011 to harvest more tax revenues.
Prior to 31.05.2015 tax rate was 12.36% & tax rate from 01.06.2014 is 14%. Service tax rate increased from 12.36% to 14%. Question is for particular transaction whether old rate-12.36% or new rate 14% applies especially in continuing contracts. In case of increasing/decreasing the effective rate of tax, Rule 4 of Point of Taxation Rules, 2011 explains whether old rate has to apply or new rate will apply. For better understanding the rule is explained with examples. The same tabulated as follows:
|
Service provided |
Invoice issued |
Payment received |
Rate |
|
Before the change in rate of tax |
After the change in rate of tax |
After the change in rate of tax |
14% |
|
Before the change in rate of tax |
Before the change in rate of tax |
After the change in rate of tax |
12.36% |
|
Before the change in rate of tax |
After the change in rate of tax |
Before the change in rate of tax |
12.36% |
|
After the change in rate of tax |
Before the change in rate of tax |
After the change in rate of tax |
14% |
|
After the change in rate of tax |
Before the change in rate of tax |
Before the change in rate of tax |
12.36% |
|
After the change in rate of tax |
After the change in rate of tax |
Before the change in rate of tax |
14% |
Service Tax on the construction done for landlords by developer under JDA?
The service tax is leviable on value of services provided by one person to another for a consideration. As per the declared services entry, the activity of the construction of complex for sale would be deemed to be service only if consideration has been received prior to issuance of completion certificate by the competent authority. Consideration includes any amount that is payable for the taxable services where land is included in amount charged from service receiver.
The ST Edu Guide also clarified in Guidance Note 6-para 6.2.1 as follows:
Construction service provided by the builder/developer is taxable in case any part of the payment/development rights of the land was received by the builder/ developer before the issuance of completion certificate and the service tax would be required to be paid by builder/ developers even for the flats given to the land owner.
Though there is a possibility of challenge, there could be a demand of service tax on land owner’s share of constructed area by revenue as the law stands presently after 1.7.2012.
Landlord sell the flats to end buyer- ST impact
The land owner is entitled to certain portion of built up area. When the land owner enters agreement with the interested buyer and he receives payment prior to completion of construction, he is liable to service tax. However if the builder has paid the ST on landlords share the credit of the same would be available to the landlord.
Tax planning under JDA
When to pay service tax
Service tax is payable on land owner share prior to July 2012 also, the service tax could have been paid only at the time when the possession or right in the property of the said flats are transferred to the land owner by entering into a conveyance deed or similar agreement. This view is as per the board circular no.151/2/2012 dated 10.02.2012.
What value shall be considered
Value shall be determined as per guideline value land or Market value or construction cost plus gross profit or first sale price of the similar services or any other method.
Completion certificate from chartered engineer/ architect- no need to wait for Local Authority (BBMP) occupation certificate to decide tax liability
Competent authority means:
Municipal Corporation/ Municipality/ local body/Gram Panchayat/ Cantonment Board/ any other authority authorized to sanction building plan.
Architect/Chartered engineer/ Licensed surveyor of the respective local Body/ Development or planning authority
In these cases there are 2 questions:
a. When is the levy attracted: It could be on date of the JD. If so the question is: ST liable for JDs prior to July 2012? May not be as services agreed to be provided is the earliest point which was before 1.7.2012. Further prior to 1.7.12, the consideration was a “sum” which connotes monetary consideration.
b. When is the amount payable. As per POTR provision of service or receipt of payment or invoicing. Landlords share provided only is LL sells his portion- that could be the date on which developer needs to raise bill on LL. For unsold only at end of the period.
Service Tax on layout development
If Developer is engaged in development and sale of sites and collecting such development costs separately, service tax could be demanded on entire consideration received.
Valuation to discharge service tax liability on plotted development: Period post 1.7.12: There is no clarity on applicability of service tax to transaction of immoveable completed property + few services, to avoid disputes developer could decide to discharge service tax on amounts which are attributable to compound, entrance and land excavation expenses for agreements entered period post 1.7.2012. Here the entire contract would be considered to be transaction in immovable property sale which is a type of works contract and on the taxable service portion of the development service tax paid.
The costing records+ the certificate of chartered engineer could be used to arrive at the values of the immoveable property as at date of the agreement with end buyers + development works of nature of exempted works of road and its sanitary drains, chambers, water lanes, rain drains, STPs, OHTs, bore wells for water sources, electrification which are exempted from service tax. On the balance pay service tax.
Buying agent
There was on-going litigation about the applicability of service tax levy on commission agency services by Indian service providers to foreign principals. The argument was that all services were provided by way of marketing/sales promotion to customers in India, consequently taxable in India. The issue was more or less settled over period of 2006-2014 that services were exports. A reversal in the entire concept has been made whereby Indian commission agents earning valuable foreign exchange would be taxed wef 1.10.14. Therefore those who provided services to exporters abroad and in India were made taxable even if they earned valuable foreign exchange.
POTR important as concluded contracts prior to 1.10.2104 are not liable, even though the receipts would be after October 1st.
Tax planning in buying agent-
Separate agreements for providing support service and intermediary service: There could be a separate agreement for provision of intermediary service. The services of procurement, purchase of apparel and merchandise and its allied activities done to the foreign clients could be said to be facilitating the supply of goods to buying agents clients and considered as intermediary to that extent. Such Services are covered in Rule 9 of POPS. As per which the place of provision of service is location of service provider buying agent in India. The consideration for same could be liable to service tax post 1.10.14. The support service agreement if not bundled is not liable to ST. Further if all conditions of export of services given are satisfied such services could be treated as exports.
Service tax valuation for works contract
The basic requirement is that the activity should be subject to sales tax. However, definition of works contract under service tax and CST/ State VAT is quite different. Buildings and structures on land means not only buildings or structures attached to earth but also things permanently fastened to a building or structure attached to earth. Pure labour contracts are not works contracts
Calculate value of service and pay service tax
i) Value of service = Gross amount – value of property in goods
ii) If not (i) value of service shall be
- For execution of original works => 40% of total amount shall be value
- For other works contract (maintenance or repair or reconditioning or restoration or servicing of any goods, etc) => 70% of total amount shall be value
"original works" means-
(i) all new constructions;
(ii) all types of additions and alterations to abandoned or damaged structures on land that are required to make them workable;
(iii) erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise;
In case of works contract services being provided, the service provider has the option of paying service tax on the value of services. If he is unable to identify the value of services and materials used, then the service tax shall be paid after claiming abatement specified in the Service Tax Valuation Rules, 2006. Sometimes, claiming abatement could add substantially to the cost of services. Therefore, it is suggested to ascertain the value of materials and services separately to save on local sales tax and service tax. This would also avoid the objection from the customers leading to delayed payment of the bills.
Free supply of goods - value of taxable services?
The material is not includable as the same is not consideration for the services unless the services is that of service element in works contract, where value is being computed based on fixed percentage. However if the total consideration agreed includes such value and later the same is supplied free of cost, then there is possibility of being considering that the said amount is to be included in the total value on which service tax has to be paid.
Further recently LB in Bhayana Builders Pvt Ltd Vs CST2013-TIOL-1331-CESTAT-DEL-LB held that for the purpose of Service Tax valuation, the value of goods and materials supplied free of cost by a service recipient to the provider of the taxable construction service, would be outside the taxable value or the gross amount charged.
Job Work Activity:
Job Work carried out at the Factory: Normally, some of the manufacturers would also carry out the Job work process to their customer and charge their customers for the Job work charges / labour charges. In this transaction, there are two possibilities.
Process undertaken by Job worker amounting to manufacture: If the process undertaken by the Job worker amounts to manufacture, then the transaction would cover under the purview of Central Excise. The manufacturer may examine option of claiming the exemption under notification no. 214/86 CE.
Process undertaken by the Job worker not amounting to manufacture: If the process undertaken by the Job worker not amounts to manufacture, then transaction is liable for Service Tax. However, exemption is available under notification no.25/2012 ST to the manufacturer i.e. as follows.
“30.Carrying out an intermediate production process as job work in relation to -
“(c) Any goods on which appropriate duty is payable by the principal manufacturer;”
The exemption is available to the Job worker subject to the condition that, principal manufacturer would pay the Central Excise Duty on the final product. Further, there is no clarity in the exemption notification if the manufacture exports the goods. However, as per the many decisions of the Tribunal (under the old Service Tax law) exemption is also available if the principal manufacturer exports the goods.
Aspect of CENVAT Credit: If the manufacturer undertaking Job work avails the exemption under this entry for the Job work carried, then the provision of Rule 6 of CENVAT Credit Rules, 2004 may applicable and he is not eligible to avail the CENVAT Credit pertaining to the Job work Income. However, in the context of exemption under notification issued under Central Excise for Job work charges, the Hon’ble Tribunal in the case of M/s Sterlite Industries (I) Ltd Vs Commissioner of Central Excise, Pune 2005 (183) ELT 353 (Tri-LB), held that the manufacturer is eligible to take the CENVAT Credit for the Job work activity. However, presently, there is no clarity on applicability of the said decision and aspect of reversal of CENVAT Credit for Job work exemption under Service Tax. Hence, to be on the conservative side, the Job workers who were claiming exemption under Service Tax for Job work Income may reverse the CENVAT Credit under Rule 6 under protest.
Tax planning in this area: If the principal manufacturer is eligible to take the benefit of CENVAT Credit and there is no accumulation of CENVAT Credit for the said manufacturer, then the Job worker instead of claiming the exemption under notification 25/2012 ST for Job work activity may also examine not to claim the exemption notification. If this is adopted, there is no requirement to take risk on the applicability of Rule 6 of CENVAT Credit Rules, 2004 as well as passing on the duty benefit to customer can be the result.
Non Compete fees:
As explained earlier, under the new Service Tax law w.e.f. 01-07-2012, any activity is liable for Service Tax except provided under the Negative List. Further, one of the clauses in the Declared Service reads as follows.
“(e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;”
If the manufacturer during the course of business entered an agreement for ‘Non Competence’ of his business in any of the locality, then such transaction may be covered under the above limb of the declared Service. Hence, the manufacturer before entering such transaction requires inserting Service Tax clauses in the agreement and Service Tax to be recovered from the customer.
Recovery for Termination of Employment agreement:
The Employment agreement of the many of the companies contains the ‘Notice period’ for termination of employment and employee requires to comply with such Notice period requirement. If the employee violates such clauses of the employment agreement, then Employer would recover certain amount from the employees. This activity (even though there is no element of Service involved from Employer to Employee) may be liable for Service Tax under the above limb of the declared Service. However, to avoid burden of taxes, manufacturer has the following options.
a. Intimate the department on their understanding of non applicability of the transaction and decision of nonpayment of Service Tax.
b. Payment of Service Tax under protest and claim refund once the matter is settled.
c. Insertion of Taxation clause in the agreement and recovering Service Tax from the employees.
Tax Planning: In this area, manufacturer may also examine for Tax Planning so that there may not be applicable of Service Tax on such recovery fees taken from employee. Normally, the employment agreement contains the employee to pay certain sum to the employer for the violation of the Employment agreement. Instead of this, the agreement can be drafted in such a way that, the salary payable to the employee would be reduced so that this activity would result in paying of lesser amount of salary for termination of the employment agreement and there may not be applicability of Service Tax.
Benefits provided to the Employee:
Many of the manufacturers would provide benefits to the employee such as Cab facility, Canteen facility, Insurance facility etc and such cost would be recovered from the employees from their salary. It is pertinent to note here that one of the clauses contained in the negative list mentions Services provided by the Employee to the Employer and services provided by the Employer to the Employee is neither covered under the Negative List nor covered under any exemption notification. Manufacturer has the following options for the recovery of the amounts from the employee for providence of various benefits.
1. If the actual amount incurred for providing such facility is recovered from the employee, then manufacturer can treat the activity as pure agent and the transaction is not liable for Service Tax subject to satisfaction of conditions.
2. Also examine of claiming exemption under notification no.25/2012 ST such as exemption for Canteen facility if there is no AC facility in the Canteen etc.
3. If Taxable, insert taxation clauses in the employment contract and also can recover the Service Tax component from the Employee so that there is no burden of Taxes on the Employer.
4. Tax planning for availment of CENVAT Credit on these services provided to the employees.
Other tax planning / Cost control
1. Decision on availment / non-availment of exemption from service tax
Any assessee intending to avail exemption should ensure that all the conditions specified in the respective notification are substantially complied. Court has ruled that exemptions should be read strictly. Otherwise the exemption may be denied resulting in payment of the service tax with out of pocket expenses added with interest and penalties if applicable. The concept of Cenvat credit has led to a position where the service recipient would be admissible for the credit in most cases. Therefore, the decision as to availment of exemption should consider the effect of non-eligibility of credit on availing the exemption. The consumer of the service would also require understanding the taxability of or exemption/partial exemptions for the specified services/ service providers so as to compute their cost impact.
In case where the credits involved usually are substantially high, it is beneficial to opt for availment of credits rather than availment of exemption. Therefore, appropriate decision is to be taken in this regard after having considered all the factors involved in the business in this respect. Unlike Central excise law, it is not mandatory for the service provider for claiming exemption as there is no condition in the law.
Non availment of capital goods credit, input credit (where eligible) as well as input service credit directly hits the margin of the service provider.
2. Drafting of agreements
Drafting of an agreement with the clients plays an important role in determining the taxability aspect under Service Tax. Drafting of the agreement should be done after considering the clients profile, vendor understanding and all the facts of the case which would result in reduction of payment of service tax. Omission of the fact in the agreement that the applicable taxes would be collected extra could make a huge difference to the margin of the assessee. The nature of work and service should also be carefully defined in the agreement considering the provisions of service tax. For example, mentioning the scope of service as “Online information Services” instead of “Online consultancy Services” could make a substantial difference to the taxation of services. If the “Online information Services” are provided by a service provider from India to receiver outside India, then there would be liability of service tax as the place of provision of service would be in India according to Rule 9 of Place of Provision of Service Rules 2012. If the same is consultancy service, then the same might not be liable if the same is covered under Rule 3 of Place of Provision of Service Rules 2012.
Note: The agreements to be drafted based on the truth and factual reality rather than based on tax rates or POPS.
3.Opting for feasible method in Rule 6 of Cenvat Credit Rules
The taxable service provider is providing exempted services or processing exempted goods including trading activity, then he would not be able to avail and utilise all inputs and input service credits. He would have the following options in such cases:
- Separate Record ( Using costing principles)
- Pay 6% amount and avail common credits
- Proportionate Credit Availment
4.Refund of service tax paid on inputs and input services
As per Rule 5 of Cenvat Credit Rules 2004, the exporter of services can claim refund for duty paid on inputs and input services used while providing export service subject to fulfilment of conditions specified in Notification No.27/2012-CE dated 18.6.2012. The service provider should ascertain if all the services are being exported on fulfilment of conditions specified in Rule 6A of Service Tax Rules 1994. The exporter shall opt for the refund within a time limit of one year. Otherwise, he would not be able to encash the credits unless there are services provided in the domestic market. Most of the service providers miss out on claiming the refund of excise duty paid on inputs though eligible. This could add huge value to the entity. Please note that the duty paid on capital goods would not be eligible for refund under Rule 5 of CCR 2004. For capital goods, the service providers may explore the option of procuring the goods under EPCG scheme wherein customs duty would be exempted.
Note: As on date refunds are delayed and difficult to be sanctioned therefore good documentation, constant on record follow up would be imperative.
5.Complying with law to avoid additional cost – Interest, penalty etc.
Many a times the dealer incurs cost in form of interest, penalty etc. which could be as a result of non / short payment of tax, delay in payment of taxes, claiming excess input setoff, misuse of statutory forms etc. It is necessary that the assessee is aware of basic provisions on applicability of interest and penalty for non compliance with the law. The rate of interest for delayed payment of tax was 18% per annum till 30th September 2014. However, with effect from 1st October 2014, the interest rate would be as follows:
|
SI No |
Period of Delay |
Rate of Simple Interest |
|
1 |
Upto Six months |
18% |
|
2 |
More than six months and upto 1 year |
18 per cent for the first six months of delay and 24 per cent for the delay beyond six months. |
|
3 |
More than 1 year |
18 per cent for the first six months of delay; 24 per cent for the period beyond six months up to one year and 30 per cent for any delay beyond one year. |
Therefore, the assessee needs to be more compliant with respect to payment of taxes in order to avoid unnecessary cost in form of interest. In case, the assessee has provided taxable service not exceeding Rs 60 lakh during any financial year covered under the notice or in the preceding financial year then the interest would be payable 3% less of normal rates.
The facility of payment under protest to stop the interest clock from ticking could also be a good option in cases of doubt.
6.Availment of SSP Exemption Vis-à-vis Payment of Duty:
Under the service tax law, there is an exemption from payment of service tax for Small Scale service provider upto Rs.10Lakhs in a financial year subject to satisfaction of conditions prescribed in the notification 33/2012 ST. The one of the conditions is the assessee is not eligible to avail the CENVAT Credit Input Services which is used for providing service..
Before adopting the exemption, the assessee requires to do the feasible study whether to avail the exemption or to pay service tax form Rs.1. The various factors to be considered in the feasible study are as follows.
1. Type of Contract – Whether Inclusive of tax / Exclusive of tax
2. Eligibility of CENVAT Credit to the Customer
3. Quantum of CENVAT Credit available on the Capital Goods used in the course of provision of service
After considering the above facts, the service provider would come to a conclusion whether to claim exemption or to pay the tax.
7.Tax Planning for the Export Transactions:
As the intention of the government is not to export the Taxes and Levies, the Government has introduced various Tax Incentives for the manufacturer who is exporting the goods to abroad. The illustrative lists of schemes available are;
Export benefits:
a) Served From India Scheme
b) Refund under Rule 5 of CENVAT Credit Rules, 2004
c) Procurement of Capital goods under EPCG Scheme
d) Benefits for registered as a Star Status Export House
However, the Exporter of service is not eligible to avail all the benefits at a time and only few of the benefits would be available. However, the benefits available would not be the same under each scheme and the same may vary. Accordingly, the Exporter requires do the feasible study and should determine the best scheme / set of scheme considering the commercial and procedural feasibilities and the same may be adopted.
8.Handling of departmental interactions efficiently and effectively
The service provider or manufacturer should ensure that all the departmental queries are efficiently and effectively answered. In case of audits, a person having decent knowledge of taxation shall attend the auditors from the department. Otherwise, the same could lead to unnecessary disputes which could add to cost in form of legal charges, tax / interest / penalty payments. It is not a bad idea to have a system of internal audit in the area of indirect tax compliance which could add lot of benefits.
It has been experienced that putting all communication with the revenue officers on record on a continuous basis leads to less interference as well as a good defence at the time of dispute if any.
9.Intimation to the department
Now a days, as in the most of the transactions there will be a ambiguity in getting the benefit / reducing the cost, in such a situation it is always better to intimate the department on understanding of the transactions. Now a days, such intimation provided to the department can also be considered as one of the Tax Planning methods as it safeguard the service provider from the department alleging suppression of facts and invoking extended period of limitation.
10.Effective Internal Control
Having an effective internal control system in place reduces some of the common frauds or errors so committed in an organisation like, pilferage of stock, theft, embezzlement of cash etc. Apart from this, key staff shall know the implication of indirect tax. At times the material & procurement team, not being able to understand the indirect tax implications agrees to some conditions to quickly procure the materials but does not realize that the impact of tax may make the order a loss from the concerns perspective. The smart procurer can save the company anywhere between 10 to 20 percent by ensuring seamless credit and adequate documentation. The purchase planning, materials, procurement executive therefore for being able to be company centric, negotiate better and quote properly would need to have some specialised knowledge of indirect taxes which would help him to discharge his function in a value additive manner.
The internal audit scope should include the checks related to IDT as it constitutes around 25% of the top line.
11.Optimum Utilization of Cenvat Credit
Under Cenvat Credit scheme the excise duty paid on inputs and capital goods, service tax paid on input services could be availed and utilised for payment of service tax or central excise duty thereby reducing cost to the organisation. A proper system is to be put in place to ensure no Cenvat credit is missed out on and that there is no scope for any accumulation of credits thereby ensuring optimum utilisation of Cenvat credit. Now as there is a time limit of 1 year from the date of document for claiming the Cenvat credit, the assessee needs to more proactive in this regard. Further, now after budget 2015 mere wrong availment of credit would also lead to additional cost in form of penalty. Wrong availment and utilisation would lead to cost in form of interest as well as penalty. Consulting a professional in case of doubtful credits would be a prudent idea. Following are few of the aspects that would ensure optimum utilisation would be as mentioned hereunder:
a. Standard Operating Procedure for availment of credit
b. Planning of ISD Registration or Centralised registration where required
c. Safety of Cenvat credit invoices with a system of instructing the vendors to rectify the defective invoices if any which otherwise could lead to denial of credits
d. Asking job worker to charge excise duty or service tax – to reduce the cost of his taxes.
e. Importance of training to concerned employees
12.Service tax payment in case of reverse / partial reverse charge mechanism
There are many services on which the service receiver would be liable to discharge the service tax which is popularly known as reverse / partial reverse charge which was earlier applicable only on very few services like GTA, Sponsorship Services. After changes in the service tax law from 01.07.2012, the notification which applies to reverse charge as well as joint charge is Notification No. 30/2012-ST dated 20.06.2012 as amended from time to time. As per the said notification, GTA services, Manpower supply services, Security services, works contract services etc are liable for service tax in the hands of the recipient of services either fully or partially. Most of these services are liable only if received by a body corporate from individual/firm/HUF/AOP. Following are few of the common errors which are to be avoided in compliance of reverse / partial reverse charge which otherwise could add on the cost of the assessee:
a. Paying service tax on pure labor contract as works contract services without understanding that works contract service involves both materials as well as labor
b. Claiming wrong abatement. For ex, paying service tax on 70% value instead of 30% on GTA services by claiming abatement of 30%. The abatement available is 70% and therefore, tax is payable only on 30% value.
c. Paying service tax on all services received from abroad without examining if the place of provision is in India or not. Many times assessee ends up paying service tax though not liable.
d. Paying service tax under joint charge mechanism even when services are being provided by body corporate though liability is only when services provided by individual, HUF or partnership firm.
e. Not amending the service tax registration certificate to include services on which service tax payable under reverse charge mechanism.
f. Not claiming the Cenvat credit of tax paid on services under reverse charge/joint charge mechanism by ascertaining the eligibility of such services.
g. Paying service tax on whole amount to service provider and paying service tax again under partial reverse charge. In such cases, the service recipient shall instruct the service provider to charge tax only on value on which he is liable considering Notification no.30/2012 ST
13.Standard Operating Procedure for availment of Cenvat Credit
As explained above CENVAT Credit on Input Services plays important role in determining the profitability to the manufacturers. Hence, in the initial state itself, manufacturers require to have a proper system for availment of CENVAT Credit on all the eligible Input Service Credits. Eg: Many manufacturers were not availed the CENVAT Credit on the Service Tax liability under Reverse charge and still many are thinking that CENVAT Credits paid under Joint charge is not eligible. To clear these ambiguities, if the proper system / Standard Operating Procedure implemented, then there would not be less scope for loss of credits. Further, the manufacturer also eligible to avail the CENVAT Credit on the CHA Service paid at the time of Import
Conclusion:
i. Tax Planning & Cost Control is possible for each & every transaction. Extent can vary.
ii. To be planned at the initial stage of the project for optimising tax impact for the project s as well as for the product.
iii. Expert Knowledge is required.
v. To be reviewed at the regular intervals due to changing laws.
v. To be intimated to jurisdictional officer under speed post seeking confirmation in case of doubt.
Acknowledgements to CA Prakash N for collating this article.
CA Madhukar N Hiregange
Tags :Service Tax
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