Service tax applicability

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K Lakshmi

Internal Auditor

23 Points Posted on 09 February 2011

A public ltd co. intends to enter into a franchise agreement. My queries :

1. It collects a deposit, which will be non-refundable, provided the prospective franchisee meets the requirements/ conditions. If those conditions are not met, the deposit is refunded and there would be no further legal binding on both the parties. Whether service tax needs to be collected on the advance? What would be the accounting treatment of this advance?

2. Course materials would be given to the franchisee as part of the license agreement. Such materials could be either the franchisor's own content or that of microsoft/ oracle, etc. Whether service tax needs to be collected on this course materials sold?

3. Franchisee would collect fee from students which will comprise of components like courseware, tuition fee, royalty payable to franchisor, etc. Whether franchisee needs to collect service tax on the whole amount from students or on the fee excluding courseware component?

4. Are there any list of vocational training exempt from service tax?

5. What are the states in India which are exempt from service tax?

Tks in advance for yr time and replies.

Replies (2)

Pavan Jain S

Chartered Accountant

1445 Points Posted on 09 February 2011

1. Service tax has to be paid on non refundable deposit. The deposit becomes refundable only on happening of certain future event, which is contingent. As on this date, it has to be reasonably presumed that the franchisee shall comply with all the terms and conditions. The service tax so collected has to be paid. In future, if the deposit becomes refundable, the assessee can adjust the service tax so paid on the deposit with any service tax liability.

2. The answer to this query shall depend upon the fact whether separate charges are paid for the said sale of course materials?

3. The franchisee has to collect service tax on entire fee component. He can claim credit on the service tax paid to the franchisor under the head franchise services.