NEW SERVICE TAX REGIME

w.e.f July 01, 2012

Making Tax Compliance simplified

NEW SERVICE TAX REGIME – EFFECTIVE JULY 1, 2012

NEGATIVE LIST BASED APPROACH

Complete overhaul of taxation of services•From Positive list to Negative list approach•No classification of services required•Replacement of abatement/ exemptions with new abatement and exemptions•Only services rendered in taxable territory are taxable•Place of Provision of Service Rules, 2012 (‘PPSR’) notified to determine the place of performance of service•Import of services and export of services rules rescindedA detailed ‘Education Guide’ issued to explain the concept ofnegative list based approach of service taxation

Section 66B – “There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed”

As per Section 65B(52) - “Taxable territory” means the territory to which provisions of Chapter V of Finance Act, 1994 apply i.e. whole of India excluding the State of Jammu & KashmirAs per Section 66C – The Central Government may by rules determine the place where services are provided or deemed to be provided

CHARGING SECTION

"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include:(a) an activity which constitutes merely,––(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or(ia) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or(ii) a transaction in money or actionable claim ;•a provision of service by an employee to the employer in the course of or in relation to his employment;•fees taken in any Court or tribunal established under any law for the time being in force.

DEFINITION OF “SERVICE”

DEFINITION OF “SERVICE”

Explanation 2 –– For the purposes of this Chapter,—

•an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;

•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 — 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;

Negative list of servicesSr. No. Clause Negative Service Date

01 66D(a) Services by Government or a local authority 01-07-2012

02 66D(b) Services by the Reserve Bank of India 01-07-201203 66D(c) Services by a foreign diplomatic mission located in

India01-07-2012

04 66D(d) Services relating to agriculture 01-07-201205 66D(e) Trading of goods 01-07-201206 66D(f) Any process amounting to manufacture or

production of goods01-07-2012

07 66D(g) Selling of space or time slots for advertisements 01-07-2012

08 66D(h) Service by way of access to a road or a bridge on payment of toll charges

01-07-2012

09 66D(i) Betting, gambling or lottery 01-07-201210 66D(j) Admission to entertainment events or access to

amusement facilities01-07-2012

11 66D(k) Transmission or distribution of electricity 01-07-201212 66D(l) Services by way of education 01-07-201213 66D(m) Services by way of renting of residential dwelling for

use as residence01-07-2012

14 66D(n) Financial Sector 01-07-201215 66D(o) Service of transportation of passengers 01-07-201216 66D(p) Services by way of transportation of goods 01-07-201217 66D(q) Funeral, burial, crematorium or mortuary services 01-07-2012

Mega Exempted Notification Exempted Services

Ch. No. TopicCh. No. 01 Services provided to the United Nations or a specified

international organization Ch. No. 02 Health care services

Ch. No. 03 Veterinary clinic services

Ch. No. 04 Charitable activities

Ch. No. 05 Renting of precincts of a religious place or conduct of any religious ceremony

Ch. No. 06 Advocate or Arbitral Tribunals' Services

Ch. No. 07 Technical testing or analysis of newly developed drugs

Ch. No. 08 Training or coaching in recreational activities

Ch. No. 09 Educational services

Ch. No. 10 Services provided to a recognized sports body

Ch. No. 11 Sponsorship of tournaments or championships

Ch. No. 12 Construction Services - Services provided to the Government or local authority

Ch. No. 13 Specified Construction services

Ch. No. 14 Construction Services - Original works - Others

Ch. No. 15 Copyright

Ch. No. 16 Services by a performing artist in folk or classical art forms

Ch. No. 17 Services by way of collecting or providing news

Ch. No. 18 Renting of a hotel, inn, guest house, club, campsite or other commercial places

Ch. No. 19 Serving of food or beverages by a restaurant, eating joint or a mess

Ch. No. 20 Transportation of goods by rail or a vessel Ch. No. 21 Goods transport agencyCh. No. 22 Renting of Motor Vehicle for transportation of passengers and

goodsCh. No. 23 Transport of passengersCh. No. 24 Motor vehicle parking to general publicCh. No. 25 Services provided in relation to pubic servicesCh. No. 26 General insurance businessCh. No. 27 Services provided by an incubateCh. No. 28 Service by an club/association/society to own membersCh. No. 29 Services by the intermediariesCh. No. 30 Job WorkCh. No. 31 Services by an organizer in respect of a business exhibition outside

IndiaCh. No. 32 Public telephone servicesCh. No. 33 Slaughtering of bovine animalsCh. No. 34 Services provided by person located in a non- taxable territoryCh. No. 35 Public LibrariesCh. No. 36 Services by Employees' State Insurance CorporationCh. No. 37 Services by way of Transfer of a going concernCh. No. 38 Services by way of public conveniencesCh. No. 39 Municipal services

WHAT IS ‘ACTIVITY’?

What is the scope of the term ‘activity’ in the definition of ‘service’ –

Para 2.1.1 of Education Guide - “the word activity would include an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility etc. It is a term with very wide connotation...Activity could be active or passive and would also include forbearance to act. Agreeing to the obligation to refrain from an act or to tolerate an act or a situation has also been specified as a declared service under section 66E of the Act.”

“FOR CONSIDERATION”

Section 67, Explanation (a) remains unchanged and defines ‘consideration’

• “Consideration” includes any amount that is payable for the taxable services

provided or to be provided - inclusive definition dealing with money

consideration

> Clarified to include monetary consideration and non-monetary consideration

Education Guide - Examples for non-monetary consideration can be:

•Supply of goods or services in return•Refraining or forbearing to do an act•Tolerating an act or a situation•Doing or agreeing to do an act.

“FOR CONSIDERATION”

A agrees to dry clean B’s clothes «—>B agrees to click A’s photograph - a service transaction as per Education Guide

Would any set of reciprocal promises qualify as a ‘service’ transaction and be liable for service tax?

EU VAT jurisprudence provides the following key test:

Is there an intent to create a legally enforceable relationship?

A. renting of immovable property;

B. construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion- certificate by the competent authority

C. temporary transfer or permitting the use or enjoyment of any intellectual property right;

D. development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software;

E. agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

DECLARED SERVICES – SECTION 66E

PLACE OF PROVISION OF SERVICE RULES

Determine the place where services are provided or deemed to be provided

• Section 66C - The Central Government may by rules • PPS Rules shall replace Export Rules and Import Rules under service tax• PPS Rules also define “location of service provider / service receiver”• PPS Rules may also be relevant for determining services wholly consumed within an SEZ and services provided to/ received from J&K

PPS Rules appear to be modeled around the EU VAT Place of Supply Rules

Place of Provision

of Services

Sl. No Rule Place of Provision of Service

Rule 3 General Rule Location of service receiver

If recipient location is not ascertainable in the ordinary course of business

Location of service provider

Specific Rules

Rule 4 Service provided in respect of goods that are required to be made physically available by the service receiver to the service provider to provide the service

Location where the service is performed

Provided when such services are provided from a remote location by way of electronic means

Location where the goods are situated at the time of provision of service

This Rule shall not apply in case of service provided in respect of goods temporarily imported into India for repairs for re-export

Service provided entirely or predominantly in the physical presence of an individual

Location where the service is performed

S No Rule Place of Provision of Service

Rule 5 Immoveable property based services provided directly in relation to an immoveable property (includes grants of right to use immoveable property, services for carrying out or coordination of construction work)

Location or proposed location of immoveable property

Rule 6 Services in relation to an event Location of event

Rule 7 If services referred to in Rule 4,5 or 6 provided in many locations including location in taxable territory

Taxable territory

Rule 8 Where service provider and service receiver are located in the taxable territory (for e.g. A India appoints B India to design a hotel in US – taxable)

Location of service receiver

Rule 9 Services such as specified Banking, Online database, Intermediary services , hiring of means of transport up to one month

Location of service provider

Rule 10 Transport services in relation to goods Destination of goods

Goods transportation agency services Location of service provider

“intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) between two or more persons; but does not include a person who provides the main service on his account

RULE 2 (f) OF PPSR - INTERMEDIARY

PLACE OF PROVISION OF SERVICE - SUMMARY

S No Rule Place of Provision of Service

Rule 11 Passenger transport services Where the passenger embarks

Rule 12 Services provided on board a conveyance

First schedule point of departure

Rule 14 Order of Application of rules Later Rule to supersede

EXPORT OF SERVICES

Provision of any service shall be treated as export of service when

• the provider of service is located in the taxable territory,• the recipient of service is located outside India,• the service is not a service specified in the negative list,• the place of provision of the service as per PPS rules is outside India,• the payment for such service has been received in convertible foreign exchange, and• the provider of service and recipient of service are not merely

establishments of the same legal entity

Place of provision of service outside India Versus Export of services

RULES OF INTERPRETATION

•

Other Points

Rules of Interpretation - Section 66FUnless otherwise specified, reference to a service (i.e. main service) does not include reference to service used to provide the main servicePossibility of differential treatment - most specific description preferred over general descriptionBundled servicesNew concept of bundled services introducedDefined as services containing elements of two or more servicesTaxability•Services which are naturally bundled - Single service based on its essential character•Services which are not naturally bundled - Service which attracts the highest amount of service taxManner of determining if the services are bundled naturally or not also provided

AMENDMENTS IN THE REVERSE CHARGE MECHANISM

Type of Input Service Service Provider

Type

% S T payable by

service recipient

Insurance Agent Insurance Business 100%

Goods Transporter All 100%

Sponsorship All 100%

Services by arbitration Tribunal All 100%

Services by arbitration TribunalSupport services by Govt / Local Authority (except renting and transport of goods)

All 100%

Services by advocate / law firm Individual / Law firm 100%

Vehicle HiringIndividual/HUF/Firm/AOP

100%

Supply of ManpowerIndividual/HUF/Firm/AOP

75%

Works ContractIndividual/HUF/Firm/AOP

50%

From a service provider located in J&K/outside India and received by a person in India

All 100%

VALUATION RULES Important inclusions ■amount realized as demurrage

Important exclusions ■ interest on delayed payment of any consideration for the

provision of services or sale of property

■ accidental damages due to unforeseen actions not relatable to the provision of service

■ subsidies and grants disbursed by the Government, not directly affecting the value of service

Section 65B(54) of the Finance Act,2012):

"works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable

property or for carrying out any other similar activity or a part thereof in relation to such property”

The Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 stands withdrawn AMC contracts for goods also as works contract - entitled for abatement

New valuation rules for works contract prescribed under the Service Tax Valuation Rules

Definition of “works contract”

Old Scheme New Scheme

Composition scheme - Option to pay tax at 4.80% on contract value

No composition scheme w.e.f July 1, 2012 Identified value for services Else, value of service is deemed to be: • 40% of gross amount in case of original work • 70% of gross amount in case of works contract for maintenance, repair or reconditioning or restoration or servicing of goods •60% of gross amount in all other cases

Credit restriction of 60% under Composition Scheme for specified services

Full credit now available on all input services

Notification No. 26/2012- Service Tax - ABATEMENT

Sl.No. Description of Taxable service

Percent-Age of Taxable

Conditions

1 Services in relation to financial leasing including hire purchase

10 Nil.

2 Transport of goods by rail 30 Nil.

3 Transport of passengers, with  or without accompanied belongings by rail

30 Nil.

4 Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises ( including hotel, convention center, club, pendal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises

70 (i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

5 Transport of passengers by air, with or without accompanied belongings

40 CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

6 Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes.

60 Same as above.

7 Services of goods transport agency in relation to transportation of goods.

25 CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

8 Services provided in relation to chit 70

Same as above.

9Renting of any motor vehicle designed to carry passengers

40Same as above.

10 Transport of goods in a vessel 50

Same as above.

11  Services  by a tour

operator in relation to,-

(i)  a package tour

25

(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.(ii) The bill issued for this purpose indicates that it is inclusive of charges for such a tour.

(ii)  a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour

 

10(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

(ii) The invoice, bill or Chelan issued indicates that it is towards the charges for such accommodation.(iii) This exemption shall not apply in such cases where the invoice, bill or Chelan issued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.

(iii) any services other than specified at (i) and (ii) above.

40(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.(ii) The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.

12. Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority

25 (i) CENVAT credit on inputs used for providing the taxable service has not been taken under the provisions of the CENVAT Credit Rules, 2004.(ii) The value of land is included in the amount charged from the service receiver.

Service Provider Turnover in Previous Yr.

Payment of Service Tax

Individual or firm including partnership firm

Not exceeding Rs.50 lakh On receipt of consideration ( cash

basis)

Individual or firm including partnership firm

Exceeding Rs.50 lakh On point of taxation (accrual basis )

Other than the above Without any limit On point of taxation (accrual Basis)

PAY SERVICE TAX ON CASH BASIS FROM 1ST APRIL, 2012.

SERVICE TAX RETURNS to be Notified

Monthly

Returns

Qrtrly. Returns

All assessees who paid service tax of Rs. 25 lacks or more during the previous year.

Yes No

Existing all assessees who paid service tax less than Rs.25 lacks during the previous year

No Yes

New assessees other than individual and firms even if service tax liability for the financial year is less than Rs.25 lacks

Yes No

Individual or firms who paid service tax of Rs.25 lacks or more in the previous year.

Yes No

Accounting Code for Service Tax – Effect from 1-7-2012

Name of Services

Accounting Codes

Tax Collection

Primary Education CESS

Secondary Education CESS

Other Receipts

Penalties

All Taxable Services

00441089 00440298 00440426 00441090 00441093

Note : Other Receipt for payment of interest, etc.

Casual employees covered; contractual outside

Services provided outside the terms of employment will be taxable e.g.

―Private coaching beyond school hours when under no obligation under the contract taxable

―Bonus, overtime and termination amount not taxable

―Non-compete taxable

Employee to employer:

Expenses recovered from employees for private use of company facilities: taxable unless otherwise exempt; can take Cenvat credit if employee registered

―Canteen charges (usually exempt unless AC and alcoholic liquor being served) ―To and fro transportation will be taxable;

―Stay in guest house Rs 1000 per day or more taxable

―Charges for private use of official car: taxable unless “right to use”

―Training: taxable

―Recovery of pay for breach of contract: taxable

Not excluded and thus taxable

Employer to employee..

Payments to Directors...

Applicable to all kinds of directors except of government regulatory bodies

Any monetary or no-monetary consideration

Director’s fee

Commission/bonus

Company car/ travel reimbursements

Not excluded and thus taxable: