Service tax applicability

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

20 May 2011 Service tax is a destination based tax. Then why it is applicable on provision of service rather than use of service.

Query with Example. - ABC Ltd is a company based in Delhi. It receives bank guarentee from a banker (Mumbai branch). This guarentee is for its business in J&K.

Whether the banker will charge service tax on it. If yes - why service tax be charged since service tax is destination based tax.

If no. - why not since service is provided in state other than J&K though the use of such service is in J&K.

Pl reply.

U S Sharma

U S Sharma (Expert)
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20 May 2011 the service user is not in J&K,i.e account holder who is issuing the guarantee. so service tax applicable,

mumbai branch is charging service tax for their own services issued in favor of the account holder, who has applied for bank guarantee, irrespective of the fact that in whose favor the guarantee is issued.

however if the guarantee is utilized/ encashed by the J&K party then it may not attract service tax.

Querist : Anonymous

Querist : Anonymous (Querist)

20 May 2011 So you mean, in this case service tax will be charged since the guarentee applicant is in Delhi. This means the location of receipient is criteria for service tax applicability. ( sorry I dont agree since criteria is 'provision of service')

Secondly, if let us assume that service tax is applicable in the above case. Will that help in avoiding service tax if the company asks its banker to issue the bank guarentee from J&K branch for (a) its J&K business, and (b) for its PAN india business.

U S Sharma

U S Sharma (Expert)
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20 May 2011 if the assessee has Bank account in J&K with their address in J&K then no service tax,

as the applicant is not situated in J&K so service tax applicable

take another incident,

you asked your banker to issue DD for a sum or NEFT/RTGS for an beneficiary in J&K, where the bank account branch of J&K is also mentioned,

service tax would be charged on you, for the bank charges in this case also, as the bank is not concerned with J&K party, but with the applicant, and his status is taken in account for the purpose.

U S Sharma

U S Sharma (Expert)
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20 May 2011 Secondly, if let us assume that service tax is applicable in the above case. Will that help in avoiding service tax if the company asks its banker to issue the bank guarentee from J&K branch for (a) its J&K business, and (b) for its PAN india business.
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Banker in J&K will also charge service tax for services rendered on behalf of client in delhi / mumbai. ( normally J&K has special provisions not to act on requests of identities which are not situated in J&K)

Querist : Anonymous

Querist : Anonymous (Querist)

20 May 2011 For Clarity on Facts - ABC has its corporate office in delhi but has branches in vairous parts of the country (including J&K). It applies for BG to banker in Mumbai for use of such guarentee in business in different states.

Can ABC ask its banker not to charge service tax on the bank guarentee number which is relating to J&K with a plea that it is for J&K where service tax is not applicable.

Or is there any other way to avoid such service tax cost since Cenvat credit of such service tax is not eligible to ABC.

U S Sharma

U S Sharma (Expert)
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20 May 2011 in the bank records the applicant is not of J&K, so service tax can not be avoided.

Querist : Anonymous

Querist : Anonymous (Querist)

20 May 2011 Thanks.

New findings - Though Finance Act 1994 is not applicable in the state of J&K, but there is a separate legislature of Goods and Service Tax which levies tax @ 10.5% on such service. Therefore asking the banker for issuing BG from J&K will not help anyways in avoiding additional cost of Service tax.

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