Service Tax – Some Discussion

Employer & Employee

Director Fees

Reverse charge mechanism

Employer & Employee

• A service provided by an employee to an

employer in the course of employment is

outside the purview of service tax.

• What about service provided by employer to

employee ?

One of the ingredients for the taxation is that

such activity should be provided for

consideration.

Service – Employer to employee

• Activities are carried out by the employers forthe employees for a consideration. Suchactivities fall within the definition of “service”and are liable to be taxed unless specified inthe Negative List or otherwise exempted.the Negative List or otherwise exempted.

• services may be provided against a portion ofthe salary foregone by the employee. Suchactivities will also be considered as havingbeen made for a consideration and thus liableto tax.

Service – Employer to employee

• The goods or services provided by employer

to employee for consideration would now not

be construed to be for personal use or

consumption of an employee per se andconsumption of an employee per se and

rather shall be a constituent to the taxable

service provided to an employee. The status

of the employee would be as a service

recipient rather than as a mere employee

when consuming such output service.

Service – Employer to employee

• Services provided free of cost

Services provided by employee to employee

free of cost is not cover under the preview of

service tax as there is NO CONSIDERATIONservice tax as there is NO CONSIDERATION

Examples:

crèche (Playground, nursery, play school, pre-

school playground etc) , gymnasium, health

club, Gift to employee, awards etc.

Service – Employer to employee

• Services provided falling under exemption list:

Services covered under exemption list i.e. part of notification no. 25/2012 – Mega exemption or any other notification or any other notification

Example:

1. Canteen facility without AC and alcoholicfacility

2. Services provided by renting of guesthousefor personal visit, if the rent is less toRs.1000/-

Service – Employer to employee

• Services provided for consideration:

Services provided by employer to employee for consideration or in lieu of salary is taxable

Example:

1. To and fro transportation for consideration;1. To and fro transportation for consideration;

2. Stay is guest house Rs.1,000/- or more;

3. Charges for private usage of official car unless right to use transferred;

4. Training;

5. Recovery of pay for breach of contract;

Service – Employer to employee

• Joint Employment

1) where staff is employed by one or moreemployers who normally share the cost of suchemployment. The services provided by suchemployee will be covered by the exclusionemployee will be covered by the exclusionprovided in the definition of service.

2) The salary and other expenses of the staff onbehalf of other joint employers which are laterrecouped from the other employers on anagreed basis on actual. Such recoveries will notbe liable to service tax as it is merely a case ofcost reimbursement.

Service – Employer to employee

• if the staff has been engaged by one employerand only made available to other for aconsideration, it shall not be a case of jointemployment.

• whereby certain staff belonging to an• whereby certain staff belonging to anorganization is placed at the disposal of asubsidiary company or any other associate orgroup company. Such cases will be covered bythe definition of manpower supply as thecontractual employment continues to be withthe parent company.

Reimbursement of expenses

• Reimbursements of expenditure incurred on by employee behalf of the employer in course of employment would not amount to a “service” per se and hence are non-taxable.

• Reimbursements to ex-employees orpensioners will also be treated at par withthose of current employees when suchreimbursements arise out of the initialemployment contract or are in relation to thatemployment.

Director expenses

• Payment to director is not excluded from servicetax preview so taxable.

• A director may be appointed either in anindividual capacity or to represent an entity(including government) who has either invested(including government) who has either investedin the company or is otherwise authorized tonominate a director.

• Not Applicable to government regulatory bodies.

• Any monetary or non-monetary consideration i.e.Sitting fees, Commission / bonus, Companycar/travel reimbursement etc

Director expenses

• When a director receives payment in his

personal capacity, the same is liable to be

taxed in the hands of the director.

• where the fee is charged by the entity

appointing the director and is paid to suchappointing the director and is paid to such

entity – Taxed in the hands of the entity

• In case of Govt. nominees, the services shall

be deemed to be provided by the Govt. and

liable to be taxed on reverse charge basis.

• Reverse charge mechanism is applicable whenany individual, Hindu Undivided Family orpartnership firm, whether registered or not,including association of persons, located inthe taxable territory to a business entitythe taxable territory to a business entityregistered as a body corporate located in thetaxable territory. (Corporate received servicefrom non-corporate)

• Liability of both service provider and servicereceiver are independent

• Both the service provider and service recipient

are governed by the Point of Taxation Rules

2011 in respect of the service provided or

received by him. Usually it is the invoice orreceived by him. Usually it is the invoice or

date of receipt of payment which is the point

of taxation for the service provider. However

for the service recipient, in terms of rule 7 of

the said rules, point of taxation is when he

pays for the service.

Advocates or arbitral tribunals• Advocates can provide services either as individuals or

as firms. Legal services provided by advocates or partnership firms of advocates are exempt from service tax when provided to the following:

• an advocate or partnership firm of advocates providing legal services (same class of persons)legal services (same class of persons)

• any person other than a business entity

• a business entity with a turnover up to rupees ten lakhs in the preceding financial year

However, in respect of services provided to businessentities, with a turnover exceeding rupees ten lakhs inthe preceding financial year, tax is required to be paidon reverse charge by the business entities. (Businessentity includes sole proprietary as well)

Manpower supply

• The manpower supply is understood to meanwhen one person provides another person withthe use of one or more individuals who arecontractually employed or otherwise engaged bythe first person.the first person.

• There could be certain contracts in which suchmanpower is made available to execute anotherindependent contract by the service provider

• As long as such manpower is not placedoperationally under the superintendence orcontrol of the recipient, it shall not be a case ofmanpower supply