Service Tax – Part IIIV S DATEY

Description of ServiceDescription of service has been provided at various places in service tax provisions – (a) Negative list of services (b) Declared list of services (c) Services exempted by a notification (d) Place of Provision of Service Rules to determine where the service is provided (e) In Service Tax Rules, Cenvat Credit Rules, Service Tax Valuation Rules etc.

Bundled ServicesIn some cases, a composite service may consist of two or more different services, termed as ‘bundled services’. Naturally Bundled service – description on basis of essential character Cargo handling versus goods transport serviceAirlines providing food, video facilityBoarding schools, tunrkey projectsAir transport service provider providing door delivery

Valuation of ServiceGross amount charged by service provider for service provided or to be provided – section 67 Value of taxable service + service tax = Gross amount chargedAmount may be received before, during or after provision of serviceBharat Sanchar Nigam Ltd. v. UOI (2006) (SC 3 member bench) - price of goods cannot be included in value of services.

Valuation RulesoValuation Rules apply subject to section 67 and 66BoGross amount charged for similar services [rule 3(a)]oEquivalent money value of consideration which shall not be less than cost [rule 3(b)]oDistinction between cost and value

Gross amount charged for serviceService tax not payable on any other amount charged and/or recovered from service receiver if it is not part of value of taxable service Examples – Advertisement Agent, Air Travel Agent, Customs House AgentParking fees, toll naka charges by rent-a-cab operator

Cost and Expenditure relating to service includibleoTravelling Expenses, hotel expensesoOut of pocket expenses includible.oReimbursement of expenses incurred by service receiveroSpecific provision made in rules w.e.f. 1-6-2015oConcept of ‘pure agent’

Illustration of Pure AgentoEntry tax, transport charges paid by AgentoCustoms duty, transport, warehousing charges paid by CHAoParking fees, toll naka charges by rent-a-cab operatoroAir fare/rail fare paid by AgentoRent, telephones, transport expenses incurred by C&F Agent

Illustration when not ‘Pure Agent’Travelling expenses of Auditor, Consulting Engineer, Maintenance Engineer, Management Consultant – provision held invalid by Delhi HC – but rule amendedOut of pocket expensesCharges of salary of labour by Labour Contractor (Issue debatable)

Other Provisions relating to valuationService tax is payable on net amount excluding Vat, if payable on that transaction Vat really not payable on service tax – but States taking different viewsNo service tax on free services, if they are really freeService tax, excise duty and customs duty are independent duties.

Point of Taxation‘Point of taxation’ means the point in time when a service shall be ‘deemed to have been provided’ [Rule 2(e) of Point of Taxation Rules, 2011]. This point will determine due date of payment of service tax.Rate of tax as per section 67A and not as per POT Rules.

General Rule of TaxationoThe general rule is that the time of provision of service will be Date of invoice if issued within 30/45 days [rule 3(a)]oIf invoice not issued within 30/45 days, date of completion of provision of service is Point of TaxationoIf advance is received, that date is Point of Taxation even if invoice is not issued

Continuous Supply of ServicesConstruction, telecom, works contract, renting, insurance, security are continuous service where service continues for more than 3 monthsCompletion of each event as specified in contract will be POT (e.g. plinth, first slab, second slab, plaster etc.) or monthly/quarterly as per agreementEvent complete only when measurement, quality testing is completed, as per CBE&C circular

Point of Taxation when service tax payable under reverse chargeDate of payment is POT if payment is made to service provider within 3 monthsIf payment not made to service provider within three months, service tax becomes dueIn case of Associated Enterprises (group companies), when service provider is outside India, date of credit in books of account of person receiving the service or date of payment whichever earlier is Point of Taxation [second proviso to rule 7]

Point of Taxation in case of small service providersIn case of individuals, partnership firms and LLP (but not HUF), POT is date of receipt of payment, if value of services in previous year was less than Rs 50 lakhs (on optional basis. He can pay on accrual basis)

Issue of Credit NoteService provider can refund the payment received to service provider, or issue credit note in following situations – (a) if service is not provided partly or fully or (b) amount of invoice is re-negotiated due to deficient provision of service or any terms contained in the contract. After such refund or credit note, assessee can take self credit of excess service tax paid by him when he had issued the invoice/Bill/Challan [Rule 6(3)].Adjustment not permissible for bad debts

Place of Provision of Service RulesAs per section 65B, service tax is payable when service is provided in taxable territory. Taxable territory is whole of India plus 200 nautical miles inside the sea minus J&KPlace of Provision of Service relevant for export and import of service, services provided to and from SEZ and J&KIt is also relevant when assessee does not have centralised registrationLocation of service provider or service receiver is where he is registered under service taxIf not registered, then his place of business or fixed establishment will be his location

POPS RulesoSubsequent specific Rules would prevail over earlier rules [Rule 14] – Latter the betteroServices provided on board a conveyance – first point of departure is POPS [Rule 12]oTransport of passengers – POPS where journey starts [Rule 11]oTransport of goods – POPS where goods destined [Rule 10] oServices of Banks to account holders, Online Information and Data Access or Retrieval, intermediary, hiring of means of transport upto one month - location of service provider is POPS [Rules 9 ]

Intermediary ServicesServices of intermediary covered under rule 9(c) of Place of Provision of Service Rules“Intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of service or a supply of goods between two or more personsServices of Commission Agent in India taxable w.e.f. 1-10-2014. Services of foreign Commission Agent not taxable w.e.f. 1-10-2014

Sequence of Rules in reverse directionTaxable territory (India) is place of provision if both service provider and receiver in taxable territory rule 8] (even if service is provided outside the taxable territory) Taxable territory is place of provision of service, if even partly it is in taxable territory as per rules 4,5 or 6 [Rule 7]Services relating to admission or organisation of events – where the event takes place [rule 6]

POPS Rules in sequenceServices relating to immovable property – where immovable property is situated [Rule 5]Performance on goods supplied by service receiver or performance where physical presence of service receiver is required – place of performance of service [Rule 4]Location of service receiver is place of provision of service if no other rule applies[Rule 3]. This is residual rule

Basic Procedures PAN based registration

Invoice

Payment of service tax – monthly by companies, LLP and HUF – quarterly by proprietary and partnership firms

Return – half yearly by 25th April and 25th October in form ST-3

Adjudication and appeals Demand within 18 months but within five years if there is suppression of facts, wilful misstatement or fraud

Adjudication by excise authority (mostly farce)

Appeal before Commissioner (Appeals) and then finally before CESTAT

Appeal before High Court and Supreme Court

Cenvat Credit•Cenvat is to avoid cascading effect of taxes•Vat was introduced in France in 1954•Vat got momentum when European Union (EU) [that time European Common Market] made Vat compulsory•In Indis, Modvat introduced in 1985 and State Vat in 2005

Conventional Tax SystemDetail A B C

Purchases - 110 165

Value Added 100 40 35

Sub-Total 100 150 200

Add Tax 10% 10 15 20

Total 110 165 220

Tax credit System under Vat  Transaction without

VATTransaction With

VATDetails A B A BPurchas

es- 110 - 100

Value Added

100 40 100 40

Subtotal

100 150 100 140Add

Tax10 15 10 14

Total 110 165 110 154

Highlights

Instant CreditCredit of (a) excise duty on inputs (b) Excise duty on capital goods and (c) service tax on input servicesCredit of excise duty and service tax inter-changeableOne to one co-relation not required in Vat/Cenvat

Eligible duty paying documentsoOriginal or Duplicate Invoice, Dealer’s Invoice, Bill of Entry, Supplementary InvoiceoXerox not permitted. Endorsed Invoice/Bill of Entry permissibleoDefect in document – Permission of AC/DC required to avail Cenvat Credit

Ineligible Input Services•Rent-a-cab services, insurance of motor vehicles, repair of motor vehicles not eligible, except where motor vehicle is eligible as ‘capital goods’•Architect and Construction services for building, civil structure, laying of foundation or structures for capital goods – except when used for construction itself•Canteen, club membership of employees, insurance of employees, LTA of employees – not eligible

Capital Goods Capital goods (machinery, plant, spare parts of machinery, tools, dies, etc. ) as defined in rule 2(a),eligible.

Capital goods should be used in the factory. Sending to job worker permissible

Motor vehicles and office equipment – mostly not eligible 50% credit is available in current year and balance in subsequent financial year or years, except in case of SSI

Capital Goods Assessee should not claim depreciation on duty portion on which he has availed Cenvat credit

Only those defined as capital goods eligible – check chapter heads

Steel, cement for construction not eligible Spare parts, components, tools covered under the definition though normally not capitalised in books of account

Zero rated and exempt transactionsBasic principle is that Cenvat credit available only when tax payable on final product or output servicesIn zero rated transaction, tax not payable on final product, but Credit of input taxes is available (e.g. exports)In ‘exempted transaction’, tax is not payable on final product and input credit is not available

Rule 6 of Cenvat Credit Rules Rule 6 applies where both exempted goods and taxable goods are manufactured or exempted and taxable services provided

Options are available to assessee – (a) Maintain setarate records for exempted and taxable (b) Pay 6% amount on exempted goods and services (c) Proportionate reversal

Option once availed cannot be changed during financial year

No reversal in case of zero rated transactions Export of goods and export of services Supplies to SEZ, EOU Goods supplied against international competitive bidding, goods supplied to UN organisations, foreign diplomats Provision of services to SEZ (where exemption is available)

Input Service Distributor – Rule 7 HO or Branch or Depot can pass on credit to factories. They have to register, file returns etc. Monthly Invoice No credit where input service exclusively for exempted goods or exempted service

Distribution on turnover basis On basis of turnover of previous month/quarter

Refund of Cenvat Credit – Rule 5 Refund of Cenvat credit on proportionate basis of exports of goods and services. General Experience is bad – some excuse is found to reject the refund claim Advisable to avail Cenvat credit wherever possible

ThanksThank youWish you safe journey of tough road of service taxWebsite – www.dateyvs.com