Basics of service tax
This query is : Resolved
03 January 2010
I am new to service tax... i want to learn clearly all the aspect.. plz guide me on the same. - Materials/Files...how to compute cenvat credit..how to adjust..all poss aspects...
03 January 2010
1 Background
Service tax and GST are taxes of 21st century. Service tax was imposed for first time on 3 services w.e.f. 1-7-1994 and its scope is increasing every year. Highlights of service tax are as follows –
Liability of service tax
Service tax is imposed under powers of Entry 97 of List I of Seventh Schedule to Constitution of India. It was introduced w.e.f. 1-7-1994 and its scope is being expanded every year. Service tax is not payable if service is provided in J&K.
Service tax is payable under Finance Act, 1994; on about 109 taxable services as defined in section 65(105) of Finance Act, 1994. ‘Service provided or to be provided’ is ‘taxable event’. Thus, service tax is payable when advance is received.
Service requires two parties. One cannot give service to himself. Service tax cannot be levied on value of goods. Service tax and Vat are mutually exclusive.
General rate of service tax is 10.30% (including education cess and SAH education cess) w.e.f. 24-2-2009 [During period 11-5-2007 to 23-2-2009, it was 12.36%].
Person liable to pay service tax
Service tax is payable by service provider. In few cases, tax is payable by service receiver, under reverse charge method [Section 68(2)].
Value for purpose of service tax
Service tax is payable on gross amount charged for service provided or to be provided [section 67] (excluding material cost). Tax is payable on reimbursement of expenses which are part of service, but not on payments made by service provider as ‘pure agent’ of service receiver.
If value is not ascertainable, valuation can be on basis of similar service or on basis of cost.
Gross amount charged is taken as inclusive of service tax and then tax should be calculated by making back calculations.
Service tax is payable only when bill amount is received from service receiver. However, in case of service provided to associated enterprises, service tax is payable as soon as book entry is made.
Exemption from service tax
Small service providers whose total value of services provided (including exempt and non-taxable services) is less than Rs 10 lakhs in previous year are not required to pay service tax in current financial year till they reach turnover of Rs 10 lakhs. Clubbing provisions can apply. Registration is required if turnover exceeds Rs 9 lakhs per annum.
The exemption is not available if service is provided under brand name of other person.
Services provided to SEZ unit or developer for consumption within SEZ are exempt. In case of specified services utilised for export, refund is admissible.
Services provided by RBI are exempt but service provided to RBI are not exempt.
Classification of service
The classification of services will be determined according to terms specified in various sub-clauses of section 65(105). [section 65A(1)].
If prima facie, a taxable service is classifiable under two or more sub-clauses of section 65(105), classification shall be effected as per following rules – (a) Specific description to be preferred over a general description (b) Classification should be as per essential character in case of composite services (c) Service which appears earlier in list, if service cannot be classified on above basis.
Service should be predominantly a taxable service. An indivisible/composite contract cannot be vivisected and part of it subjected to tax.
Cenvat Credit
Service provider can avail Cenvat credit of service tax paid on input services and excise duty paid on inputs and capital goods. The credit can be utilised for payment of service tax on output services.
Definition of input service is wide. Any service in relation to business is ‘input service’.
Credit can be availed on basis of proper and complete specified original duty paying documents.
If assessee is providing both taxable and exempt services and if input services are common, Cenvat credit can either be taken on proportionate basis or 8% ‘amount’ is required to be paid on exempted services.
Registration
Service provider should register within 30 days from date of commencement of providing taxable service. Application should be in form ST-1 [Rule 4(1)]. Income Tax PAN, address proof, evidence of constitution of firm/company, list of directors/partners are the most important document required. Registration will be deemed to have been granted if not received within seven days [Rule 4(5)].
Person providing services from more than one premises or offices can apply for centralised registration [Rule 4(2)]
Input Service Distributors require registration.
Procedures to be followed
Assessee should prepare invoice in respect of his services. The Invoice should be prepared within 14 days from date of completion of taxable service or receipt of payment towards the value of taxable service, whichever is earlier. Invoice should contain prescribed details [Rule 4A]
If the assessee is an individual or proprietary firm or partnership firm, the tax is payable on quarterly basis within 5 days at the end of quarter (within 6 days in case of e-payment) except in March. Service tax is payable by other assessees by 5th of the month following the month in which payments are received toward value of taxable services (by 6th in case of e-payment) except in March [rule 6(1) of Service Tax Rules].
Service tax on value of taxable services received during month of March or quarter of March is required to be paid by 31st March.
Payment of service tax
Service tax is not payable on basis of amounts charged in the bills/invoice, but only on amounts actually received during the relevant period.
A person liable to pay service tax can pay any amount in advance towards future service tax liability. After such payment he should inform Superintendent of Central Excise within 15 days. When he adjusts the advance, he should indicate details in the subsequent return filed.
Tax is payable by GAR-7 challan using appropriate accounting code. E-payment is compulsory to those who are paying service tax of more than Rs 50 lakhs per annum. For others, e-payment is optional.
Mandatory interest for late payment of service tax is 13% [section 75]. It cannot be reduced or waived.
Returns under service tax
Every person liable to pay service tax has to submit half yearly return in form ST-3 in triplicate within 25 days of the end of the half-year [Rule 7]. Late fees upto Rs 2,000 are payable if return is filed late.
Assessment is basically self assessment. Provisional assessment is permissible.
Demands
The service tax is administered by excise department. Adjudication order is issued by excise officer.
If service tax was short paid, demand can be raised within period of one year from ‘relevant date’. If the short payment or non-payment was on account of suppression of facts or wilful mis-statement with intention to evade, demand can be raised within period of five years.
Order passed by Central Excise Officer can be rectified by him within two years. Only mistake apparent from records can be rectified.
The Commissioner of Central Excise was empowered to revise the orders passed by adjudicating authority subordinate to him within two years of the original order, but not afterwards. No revision could be made if appeal against such order is pending with Commissioner (Appeals). Now, after Budget 2009, provision is made for departmental appeal before Commissioner (Appeals) and provision of revision of order by Commissioner have been omitted.
Penalties and appeals
If service tax is not paid or belatedly paid, penalty will be minimum Rs. 200 per day or @ 2% per month, whichever is higher, starting with the first day after due date till date of actual payment of outstanding amount. Penalty cannot exceed the service tax which was payable.
If non-payment was on account of fraud, suppression of facts etc., penalty shall not be less than amount of service tax but can be upto twice the amount of service tax amount of service tax not levied or not paid or erroneously refunded [section 78].
Penalty can be reduced if sufficient cause is shown [section 80].
Appeal against order of authority lower than Commissioner lies with Commissioner (Appeals) [section 85]. Appeal against order of Commissioner (Appeals) or Commissioner lies with Appellate Tribunal (Customs, Excise and Service Tax Appellate Tribunal) [Section 86]. Further appeal lies with High Court and Supreme Court.
Appeals can be filed both by assessee and department.
Export of Service
No service tax is payable if taxable service is exported as per Export of Service Rules.
No tax is payable on export of service. If paid, it is refundable.
Rebate/refund of service tax paid on input services is obtained if taxable service is exported.
Common conditions in respect of all taxable services, for treating the service as export of service are - (a) The service should be provided from India and used outside India and (b) Payment for such service is received by the service provider in convertible foreign exchange. In addition, there are some conditions based on the category of service (e.g. immovable property outside India, service performed outside India, recipient is located outside India).
Import of service
In case of import of service, tax is payable by recipient of services under method of ‘reverse charge’. Tax should be paid by cash i.e. GAR-7 challan and then Cenvat credit can be availed as it is his input service.
Tax is payable only when service is received in India.
To determine the issue whether a provision of service is ‘import of service’, services have been classified in three categories. Criteria for each category has been specified e.g. immovable property India, service performed in India, recipient is located in India.
Nature of levy of Service Tax - Service tax is levied under Entry No. 97 of List I of Seventh Schedule to Constitution of India. The entry reads as follows – ‘Any other matter not included in List II, List III and any tax not mentioned in list II or list III’. (These are called ‘Residual Powers’.)
As per section 65(95) of Finance Act, 1994, ‘service tax’ means tax leviable under the provisions of this Chapter (i.e. Chapter V of Finance Act, 1994). Section 66 (charging section) provides that there shall be levied a tax (service tax) @ 12% of the value of taxable service referred to in various clauses of section 65(105). It will be collected in a manner as may be prescribed.
Taxable Service - As per section 66 of Finance Act, 1994, service tax is payable on ‘taxable service’. Various clauses of section 65(105) of Finance Act, 1994 define each type of ‘taxable service’. The definition is different for each class of services, e.g. as per section 65(105)(a), any service provided by stock broker to any person in connection with sale or purchase of securities listed on a recognised stock exchange will be ‘taxable service’.
Service tax is destination-based consumption tax - Service tax is a destination based consumption tax, as per CBE&C Circular No. 56/5/2003 dated 25-4-2003.
Service implies existence of two parties - Service tax is attracted when there are two parties. One cannot give service to himself.
Cenvat Credit – Assessee is entitled to avail Cenvat credit of excise duty and service tax paid on his inputs, input services and capital goods. This aspect has been discussed in another chapter.
1-1 Rate of Service Tax
Section 66 of Finance Act, 1994 (which is a charging section) states that there shall be levied a tax (hereinafter referred to as the service tax) at the rate of 12% of value of taxable services referred in section 65(105) of Finance Act, 1994. In addition, education cess and SAH education cess is payable. Thus, total service tax was 12.36% during. 11-5-2007 to 23-2-2009.
Service tax rate has been reduced to 10% w.e.f. 24-2-2009 vide Notification No. 8/2009-ST dated 24-2-2009. Thus, total service tax payable is 10.3% in respect of taxable services provided on or after 24-2-2009.
This tax was first time introduced with effect from 1-7-1994 on three services. The rate was 5%. It was subsequently increased to 8% w.e.f. 14-5-2003. It was enhanced to 10% w.e.f. 10-9-2004. Service tax rate was 12% plus education cess of 2% (total 12.24%) w.e.f. 18-4-2006 till 10-5-2007. It was 12.36% during 11-5-2007 to 23-2-2009.
Relevant rate of service tax - The rate relevant is the date on which service was provided. Date of billing or date of receipt of payment is not relevant [see case law under ‘Taxable event’].
Service tax, education cess and SAH education cess to be shown separately in invoice - You have to show service tax, education cess and SAH education cess separately in invoice. You cannot just charge 12.36% as ‘service tax’.
1-2 Taxable Event in Service Tax
Section 66 (which is a charging section), reads, ‘There shall be levied a tax (hereinafter referred to as the service tax) at the rate of ten percent of value of taxable services referred to in sub-clauses (a), (b), - - - (zzzzc) and (zzzzd) of clause (105) of section 65 and collected in such manner as may be prescribed.
Opening sentence of section 65(105) as amended w.e.f. 16-6-2005 reads as follows, ‘taxable service’ means any service provided or ‘to be provided’. Thus, following are taxable events -
(a) Entering into contract for service - Entering into contract for providing service. Once you enter into a contract, it is certainly ‘service to be provided’. (Service tax is actually payable after payment is received, but receipt of advance is not a taxable event. It only defers the liability).
(b) Provision of service - This will happen in cases where contract for providing service was entered into before the service became taxable, but service was provided after the service became a ‘taxable service’.
1-3 Person liable to pay Service tax
In most of the cases, service provider, i.e. person who is providing taxable service is liable to pay service tax. However, in few cases, exceptions have been made and service receiver is made liable to pay service tax. The provision that service receiver is liable to pay service tax is termed as ‘Reverse Charge’. The exceptions are as follows -
Services provided to non-resident - In relation to taxable service provided or to be provided by any person from a country other than India and received by any person under section 66A of Finance Act, service tax is payable by recipient of service [Rule 2(1)(d)(iv)]
Services of insurance agents - In case of insurance auxiliary service by an insurance agent, the tax will be payable by insurance company (general insurance or life insurance as the case may be). The insurance agent is not liable to register and pay tax. [However, the insurance agent is not entitled to avail exemption available to a small service provider].
Consignor/consignee paying freight, in case of GTA services - In case of services of Goods Transport Agency (GTA), service tax is payable by consignor/consignee who is paying freight [rule 2(1)(d)(v)] [However, the consignor/consignee is not entitled to avail exemption available to a small service provider].
Services of Agents of mutual fund - In case of distributors/agents of mutual funds, the liability will be on the recipient of service, namely, mutual funds [Rule 2(1)(vi)] [However, the mutual fund agent is not entitled to avail exemption available to a small service provider].
Body corporate or firm located in India receiving sponsorship service - In case of sponsorship service provided to a body corporate or firm located in India, the body corporate or firm receiving such sponsorship service will be liable to pay service tax [rule 2(1)(d)(vii) inserted w.e.f. 1-5-2006 and amended w.e.f. 1-4-2007]. If the recipient of sponsorship service is located outside India, service tax is required to be paid by the service provider and not by the recipient.
Cenvat credit of tax paid - The Body corporate or firm paying such service tax will be eligible to avail Cenvat credit of the service tax paid, on the basis of TR-6/GAR-7 challan by which the tax is paid [Rule 9(1)(e) of Cenvat Credit Rules, as amended w.e.f. 1-5-2006]. It may be noted that when person receiving service is liable to pay service tax, he is not entitled to exemption which is available to a small service provider.
Large Taxpayer Unit (LTU) - A concept of LTU has been introduced for large taxpayers of direct taxes and indirect taxes. In case of service tax, Large Taxpayer has meaning assigned to it in Central Excise Rules [rule 2(cccc) of Service Tax Rules]. LTU has started functioning in Bangalore w.e.f. 1-10-2006.
1-4 Service on sub-contract basis
CBE&C vide circular No. 999.03/23.8.07 has clarified that a sub-contractor is also a taxable service provider. His services are taxable even if these are used by main provider for completion of his work. The sub-contractor is liable even if the service is input service of the main contractor and main contractor is paying service tax on entire value of contract.
2 Value of Taxable Service
Section 67 of Finance Act, 1994 contains provisions for valuation of taxable services for charging service tax. The highlights of provisions of section 67 as effective from 18-4-2006 are as follows -
Service tax is payable on gross amount charged by service provider for service provided or ‘to be provided’. Thus, tax is payable as soon as advance is received.
‘Value of taxable service’ plus service tax payable is equal to ‘gross amount charged’ [section 67(2)].
Where the consideration for providing services is entirely in money, gross amount charged by service provider of taxable service provided or to be provided by him will be relevant for ‘valuation’ [section 67(1)(i)].
Where the consideration for providing services is not wholly or partly in terms of money, service tax is payable on amount of money, which with addition of tax service tax charged, is equivalent to the consideration [section 67(1)(ii)].
Where consideration is not ascertainable, valuation will be on basis of Valuation Rules [section 67(1)(iii)]
If gross amount charged by service provider is inclusive of service tax (i.e. service tax not charged separately in invoice), value of taxable service will be calculated by back calculations such that with addition of service tax payable, the total is equal to the gross amount charged [section 67(2)].
Gross amount charged for taxable services can be before, during or after provision of service [section 67(3)].
Highlights of service tax valuation rules- In exercise of powers under section 67, Service tax (Determination of Value) Rules, 2006 have been issued w.e.f. 19-4-2006. The Service Tax Valuation Rules provide as follows -
If consideration is not wholly or partly consisting of money, value will be determined by service provider in terms of rule 3.
As per rule 3(a) of Service Tax Valuation Rules, valuation shall be on basis of gross amount charged by service provider for similar services.
If value cannot be determined on basis of rule 3(a), valuation shall be on basis of equivalent money value of such consideration, which shall not be less than cost of provision of such services [rule 3(b) of Service Tax Valuation Rules]
Central Excise Officer can reject ‘value’ determined by service provider and determine ‘value’ for purpose of service tax payment [rule 4].
Rules 5 and 6 make provisions for certain specific inclusions and exclusions for valuation
Payments made by service provider as ‘pure agent’ of service receiver and recovered from service receiver are excluded for purpose of valuation [rule 5(2)]
In case of services provided from outside India, actual consideration received will be relevant for valuation [rule 7(1)].
Amount need not be ‘charged’ by service provider - money paid to third party may also be includible - It is not necessary that the money should be paid to service provider himself. Amount paid even to third party is includible in ‘value’ of service if it is for provision of service and at the instance of service provider.
Service tax payable on net amount excluding Vat/sales tax - Rule 2A(1)(i)(a) of Service Tax Valuation Rules and rule 3(1) of Works contract (Composition Scheme for Payment of Service Tax) Rules, 2007 make it clear that Vat/sales tax is not to be included in value for purpose of service tax. Thus, service tax is payable only on net amount excluding Vat/sales tax payable on the transaction.
Tax payable only on amount actually received - Rule 6(1) of Service Tax Rules makes it clear that service tax is payable on value of taxable services received. Thus, if service provider does not receive any payment from his customer, there is no liability of service tax. Service tax is payable only on ‘value of taxable service’ actually ‘received’, and not on amount ‘billed’.
2-1 Calculation of service tax by back calculations
The gross amount charged can be taken as inclusive of service tax and the ‘value’ and ‘service’ tax is to be calculated by back calculations.
For example, if Bill amount is Rs. 1,000 and service tax is not shown separately in Invoice, the tax payable calculated by a simple mathematical formula is as follows -
Assessable Value = (Cum tax price)/(1 + rate of tax)
Assume that Assessable Value (AV) is equal to ‘Z’.
AV
=
1.000 Z
Duty @ 10.30%
=
0.1030 × Z
Sub-Total
=
1.1030 × Z
Now :
1.1030 × Z
=
1,000
Hence, ‘Z'
=
1,000/1.1030
i.e. Z
=
906.61
Thus, ‘Z’, i.e. Assessable Value is Rs 906.62 and service tax @ 10% will be Rs 90.66. Education cess @ 2% of service tax will be Rs 1.82. SAH education cess is Rs 0.91. Thus, total tax will be Rs 93.39.
If Bill is of Rs 1,103.00 (Rs 1,000 plus service tax of 103.00) and customer pays only Rs 1,000, the ‘value’ will be Rs 906.61 and tax payable will be Rs 93.39 by making back calculations - Para 6.5 of FAQ released by CBE&C in November 2007 (12 STT 1 (St) = 9 STR C3).
2-2 Reimbursement of expenses or ‘Out of pocket’ expenses
The service provider often claims reimbursement of certain expenses incurred by him (like travelling, boarding and lodging, etc.) while providing a taxable service. These are often termed as ‘out of pocket’ expenses. These are really charges for taxable services and are includible.
Reimbursement of expenses incurred on behalf of service receiver not includible - Often, a service provider incurs some expenditure on behalf of service receiver and then recovers the amount from him. Such expenditure is not part of service provided by him to service receiver, but is incurred by him as per business practice or convenience. Following illustrations may clarify the provisions -
Octroi/entry tax amount paid by Clearing & Forwarding Agent, CHA or Transporter on behalf of owner of goods/Principal.
Customs duty, dock dues, demurrage, transport charges etc. paid by Customs House Agent on behalf of client.
Advertisement charges paid by Advertising Agency to newspaper on behalf of clients.
Ticket charges paid by Travel Agent and recovered from his customer.
Reimbursement of godown, salary and loading/unloading expenses by Principal to C&F Agent.
These are not part of service provided and hence are not includible. Rule 5(2) provides that the expenditure or costs that a service provider incurs, as a pure agent of the client, shall be excluded from the value if such service provider fulfils prescribed conditions.
The principle is also discernible from various exclusions as contained in rule 6(2).
2-3 Valuation in case of indivisible contracts
In case of indivisible contracts involving sale of goods plus provision of service, it is difficult to identify service portion.
Exclusion of value of material - Notification No. 12/2003-ST dated 20-6-2003 provides that if the amount charged includes value of goods and materials sold, service tax will not be payable on value of goods and materials sold. There should be documentary evidence showing value of goods and materials sold. This exemption is available only if Cenvat credit of such material is not taken. If such credit was taken, assessee should pay amount equal to the credit. Such payment should be before sale of such goods and materials.
Many exemption notifications provide that exclusion under notification 12/2003-ST is allowable only when the service tax is paid at full rate and any abatement under any other exemption notification is not claimed. Hence, in such cases, notification No. 12/2003-ST is of no use.
In Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 282 ITR 273 = 3 VST 95 = 145 STC 91 = 3 STT 245 = AIR 2006 SC 1383 = 2 STR 161 (SC 3 member bench), it has been clearly held that price of goods cannot be included in value of services. Conclusion (E) of the judgment (para 92 of SCC and para 81 of STT and Taxman) reads as follows, ‘The aspect theory would not apply to enable the value of service to be included in the sale of goods or the price of goods in the value of service’.
All expenditure and costs relating to provision of service incurred by service provider are includible - Rule 5(1) provides that where certain expenditure or costs are incurred by the service provider in the course of providing any taxable service, all such expenditure or costs shall be treated as consideration for the taxable services provided or to be provided and shall be included in the ‘value’ for purpose of charging of service tax on the said service.
This is a general rule which makes it clear that, even when such expenditure or costs are recovered separately by service provider from service receiver, such expenditure or costs must be included in the value of taxable service.
However, expenditure incurred by service provider as ‘pure agent’ of service receiver is not includible, as per rule 5(2).
3 Exemptions from service tax
Central Government can grant partial or total exemption, by issuing an ‘exemption notification’ u/s 93 of Finance Act, 1994. Such exemption may be partial or total. Exemption may be conditional or unconditional. The only limitation is that exemption cannot be granted by Central Government with retrospective effect. There are following general exemptions -
Small service providers - Small units whose turnover less than Rs. eight lakhs per annum are exempt from service tax. Provisions are discussed a little later (The exemption limit was Rs four lakhs upto 31-3-2007).
Export of Services - There is no service tax on export of services, if service is exported as per ‘Export of Service Rules’.
Services to UN Agencies - Services provided to UN and International Agencies are exempt [Notification No. 16/2002-ST dated 2-8-2002].
Exemption to services provided to SEZ – The provision has been drastically changed w.e.f. 20-5-2009. Services provided to Special Economic Zone (SEZ) unit or SEZ developer will be exempt if the services are wholly consumed within SEZ. If the services are consumed wholly or partly outside SEZ, the services will be taxable at the hands of service provider [During the period 3-3-2009 to 20-5-2009, all services provided to SEZ unit or SEZ developer were taxable at the hands of service provider and the SEZ unit/developer was required to claim refund]. Now, w.e.f. 20-5-2009, the service provider to SEZ unit or SEZ developer will have to charge and pay service tax as per normal procedure only when service is wholly or partly consumed outside SEZ. These services will be exempt from service tax at hands of SEZ or SEZ developer by way of refund. The SEZ or SEZ Developer will have to file refund claim as per procedure prescribed in Notification No. 9/2009-ST dated 3-3-2009. If the service is wholly consumed within SEZ, the service provider is not required to charge service tax and hence no question of any refund.
Service provided by SEZ - SEZ is exempt from service tax.
Services provided by RBI exempt - Exemption from service tax has been provided to all taxable services provided by Reserve Bank of India. Services where RBI is liable to pay service tax are also exempt (Notification No. 22/2006-ST dated 31-5-2006 – earlier Notification No. 7/2006-ST dated 1.3.2006).
3-1 General Exemption to small service providers
The small service providers whose turnover of taxable services from one or more premises did not exceed Rs. eight lakhs in 2006-07 will be exempt from service tax in next financial year i.e. in 2007-08 upto the turnover of Rs. eight lakhs. The provisions are prescribed in Notification No. 6/2005-ST dated 1-3-2005 (The exemption limit was Rs four lakhs upto 31-3-2007). However, if value of taxable turnover exceeds Rs 8 lakhs in 2007-08, there will be not exemption at all in 2008-09.
For the purpose of determining eligibility in current year, what is relevant is that ‘aggregate value of taxable services rendered’ in previous financial year should not exceed Rs. eight lakhs, while for purpose of exemption upto first-Rs. eight lakhs in current year, service tax is exempt to the extent of ‘aggregate value not exceeding eight lakhs’, i.e. the sum total of first consecutive payments received during the current financial year.
The exemption to small service providers is available subject to following conditions -
The provider of taxable service shall not avail the CENVAT credit of service tax paid on any input services.
Where a taxable service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services.
The taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; will not be eligible for exemption available to small service providers.
Person providing taxable service in excess of Rs. seven lakhs per annum (but less than Rs. eight lakhs) will have to register with Superintendent of Central Excise under Service Tax provisions [Notification No. 26/2005-ST dated 7-6-2005], though they will be eligible for exemption if turnover is less than Rs. eight lakhs per annum.
3-2 Specific Exemptions
In case of some services e.g. catering services, mandap keeper services and construction services, service tax is payable at lower rates, i.e. partial abatement is available from gross value, vide 1/2006-ST dated 1-3-2006. The lower rate is applicable if the service provider does not avail Cenvat credit of duty/tax on inputs, input services and capital goods. Till 28-2-2006, he was entitled to avail Cenvat credit on input services. W.e.f. 1-3-2006, he cannot avail any Cenvat credit, if he avails the partial abatement.
Some important exemptions are as follows –
Taxable Service
Partial abatement available
Accommodation booking service by tour operator
10% of gross amount charged
Air Travel Agent
Option to pay service tax at flat rate on ‘basic fare’ @ 0.6% in case of domestic booking and 1.2% in case of international booking [rule 6(7) of Cenvat Credit Rules]
Business Auxiliary Service in relation to processing of parts and accessories used in manufacture of cycle, cycle rickshaws and hand operated sewing machines
Tax on 70% of gross amount if gross amount is inclusive of cost of inputs and input services, whether or not supplied by the client (Is it exemption or punishment?)
Erection, Commissioning and installation contract for supply of plant, machinery, equipment or structures plus erection, commissioning and installation services
Tax on 33% of gross amount if gross amount includes value of material
Construction Service
Tax on 33% of gross amount if gross amount includes value of material
Goods Transport Agency (GTA)
Tax only on 25% amount in his invoice [Payment will be made by consignor/consignee who is actually paying freight]
Mandap keeper, hotels and convention services, providing full catering services
Tax on 60% gross amount charged
Outdoor caterer
Tax on 50% amount if he provides full and substantial meal
Pandal and shamiana Service
70% of gross amount charged if full catering service provided
Rent-a-cab operator
Tax payable on 40% of gross amount charged
Tour operator - Package tours (“package tour†means a tour wherein transportation, accommodation for stay, food, tourist guide, entry to monuments and other similar services in relation to tour are provided by the tour operator as part of the package tour to the person undertaking the tour).
Tax is payable only on 25% of gross amount charged w.e.f. 23-8-2007 (till 22-8-2007, tax was payable on 40% of gross amount
Tour operator - providing services solely of arranging or booking accommodation for any person in relation to a tour (If Bill includes cost of accommodation)
Tax is payable only on 10% of gross amount charged
Tour operator – Other than package tours and other than service of booking accommodation where Bill includes cost of accommodation
Tax is payable only on 10% of gross amount charged
Transport of goods in container by rail
Tax payable on 30% of gross amount charged
Services provided to EOU - Services provided to EOU/EHTP/STP/BTP are not exempt from service tax. Para 6.11(c)(v) of Foreign Trade Policy (as amended on 7-4-2006) states that EOU/EHTP/STP/BTP units can avail Cenvat credit of service tax paid. The EOU units can claim rebate of service tax paid on their input services vide rule 5 of Cenvat Credit Rules (as amended on 14-3-2006). Procedure for claiming refund of service tax paid on input services and excise duty on inputs has been specified in notification No. 5/2006-CE(NT) dated 14-3-2006.
No service tax on service provided in J&K - Service tax provisions are not applicable in Jammu and Kashmir. Service tax will not be payable only if service is provided in J&K. If a person from J&K provides service outside J&K in any other part of India, that service will be taxable, as location where service is provided is relevant. Merely because office is situated in J&K does not mean that service is provided in J&K.
4 Classification of service
There are various types of services on which service tax is payable. These are specified in various sub-clauses of section 65(105) of Finance Act, 1994. It is possible that a service may appear to be classifiable under more than one headings. It is necessary to specify the heading under which the service being provided is falling. This is termed as ‘classification’. As per rule 4A(1) of Service Tax Rules, the invoice should indicate description and classification of service.
Principles of classification - The classification of services will be determined according to terms specified in various sub-clauses of section 65(105). [section 65A(1)]. If prima facie, a taxable service is classifiable under two or more sub-clauses of section 65(105), classification shall be effected as per following rules -
The sub-clause which provides most specific description should be preferred over sub-clauses providing a more general description [section 65A(2)(a)]
Classification should be as per essential character in case of composite services. Composite services are those consisting of combination of different services. In case of such services, if the service cannot be classified on the basis of specific description as per section 65A(2)(a) above, it shall be classified as if they consisted of a service which gives them their essential character [section 65A(2)(b)].
Service which appears earlier in list, if service cannot be classified on above basis. If a service cannot be classified on basis of above provisions, the service should be classified under sub-clause which occurs first among the sub-clauses which equally merit consideration [section 65A(2)(c)].
Service which has been specifically excluded in definition of one service cannot be covered under another head - In Dr. Lal Path Lab (P) Ltd. v. CCE (2006) 5 STT 171 (CESTAT), it was held when there is a specific entry for an item in the tax code, same cannot be taxed under any other entry. If a service has been specifically excluded from definition of one service, it cannot be covered under another taxable service.
Introduction of new heading means earlier it was not taxable - In Glaxo Smithkline Pharmaceuticals v. CCE (2005) 1 STT 37 (CESTAT), it has been held that when an existing tariff definition remains same, introduction of new tariff entry would imply that the coverage under new Tariff was not covered by the earlier entry. When new category is introduced, it means that the service was not taxable under old category.
Service should be mainly or principally a taxable service - A composite contract cannot be vivisected and service portion cannot be subjected to tax – Widia GMBH v. CCE (2006) 5 STT 414 (CESTAT) * Blue Star v. CCE (2007) 7 STT 68 (CESTAT). In Daelim Industrial Co. v. CCE 2003 STT 438 = 7 STT 184 (CEGAT), it was held that a works contract cannot be vivisected and part of it subjected to tax.
Service tax and GST are taxes of 21st century. Service tax was imposed for first time on 3 services w.e.f. 1-7-1994 and its scope is increasing every year. Highlights of service tax are as follows –
Liability of service tax
Service tax is imposed under powers of Entry 97 of List I of Seventh Schedule to Constitution of India. It was introduced w.e.f. 1-7-1994 and its scope is being expanded every year. Service tax is not payable if service is provided in J&K.
Service tax is payable under Finance Act, 1994; on about 109 taxable services as defined in section 65(105) of Finance Act, 1994. ‘Service provided or to be provided’ is ‘taxable event’. Thus, service tax is payable when advance is received.
Service requires two parties. One cannot give service to himself. Service tax cannot be levied on value of goods. Service tax and Vat are mutually exclusive.
General rate of service tax is 10.30% (including education cess and SAH education cess) w.e.f. 24-2-2009 [During period 11-5-2007 to 23-2-2009, it was 12.36%].
Person liable to pay service tax
Service tax is payable by service provider. In few cases, tax is payable by service receiver, under reverse charge method [Section 68(2)].
Value for purpose of service tax
Service tax is payable on gross amount charged for service provided or to be provided [section 67] (excluding material cost). Tax is payable on reimbursement of expenses which are part of service, but not on payments made by service provider as ‘pure agent’ of service receiver.
If value is not ascertainable, valuation can be on basis of similar service or on basis of cost.
Gross amount charged is taken as inclusive of service tax and then tax should be calculated by making back calculations.
Service tax is payable only when bill amount is received from service receiver. However, in case of service provided to associated enterprises, service tax is payable as soon as book entry is made.
Exemption from service tax
Small service providers whose total value of services provided (including exempt and non-taxable services) is less than Rs 10 lakhs in previous year are not required to pay service tax in current financial year till they reach turnover of Rs 10 lakhs. Clubbing provisions can apply. Registration is required if turnover exceeds Rs 9 lakhs per annum.
The exemption is not available if service is provided under brand name of other person.
Services provided to SEZ unit or developer for consumption within SEZ are exempt. In case of specified services utilised for export, refund is admissible.
Services provided by RBI are exempt but service provided to RBI are not exempt.
Classification of service
The classification of services will be determined according to terms specified in various sub-clauses of section 65(105). [section 65A(1)].
If prima facie, a taxable service is classifiable under two or more sub-clauses of section 65(105), classification shall be effected as per following rules – (a) Specific description to be preferred over a general description (b) Classification should be as per essential character in case of composite services (c) Service which appears earlier in list, if service cannot be classified on above basis.
Service should be predominantly a taxable service. An indivisible/composite contract cannot be vivisected and part of it subjected to tax.
Cenvat Credit
Service provider can avail Cenvat credit of service tax paid on input services and excise duty paid on inputs and capital goods. The credit can be utilised for payment of service tax on output services.
Definition of input service is wide. Any service in relation to business is ‘input service’.
Credit can be availed on basis of proper and complete specified original duty paying documents.
If assessee is providing both taxable and exempt services and if input services are common, Cenvat credit can either be taken on proportionate basis or 8% ‘amount’ is required to be paid on exempted services.
Registration
Service provider should register within 30 days from date of commencement of providing taxable service. Application should be in form ST-1 [Rule 4(1)]. Income Tax PAN, address proof, evidence of constitution of firm/company, list of directors/partners are the most important document required. Registration will be deemed to have been granted if not received within seven days [Rule 4(5)].
Person providing services from more than one premises or offices can apply for centralised registration [Rule 4(2)]
Input Service Distributors require registration.
Procedures to be followed
Assessee should prepare invoice in respect of his services. The Invoice should be prepared within 14 days from date of completion of taxable service or receipt of payment towards the value of taxable service, whichever is earlier. Invoice should contain prescribed details [Rule 4A]
If the assessee is an individual or proprietary firm or partnership firm, the tax is payable on quarterly basis within 5 days at the end of quarter (within 6 days in case of e-payment) except in March. Service tax is payable by other assessees by 5th of the month following the month in which payments are received toward value of taxable services (by 6th in case of e-payment) except in March [rule 6(1) of Service Tax Rules].
Service tax on value of taxable services received during month of March or quarter of March is required to be paid by 31st March.
Payment of service tax
Service tax is not payable on basis of amounts charged in the bills/invoice, but only on amounts actually received during the relevant period.
A person liable to pay service tax can pay any amount in advance towards future service tax liability. After such payment he should inform Superintendent of Central Excise within 15 days. When he adjusts the advance, he should indicate details in the subsequent return filed.
Tax is payable by GAR-7 challan using appropriate accounting code. E-payment is compulsory to those who are paying service tax of more than Rs 50 lakhs per annum. For others, e-payment is optional.
Mandatory interest for late payment of service tax is 13% [section 75]. It cannot be reduced or waived.
Returns under service tax
Every person liable to pay service tax has to submit half yearly return in form ST-3 in triplicate within 25 days of the end of the half-year [Rule 7]. Late fees upto Rs 2,000 are payable if return is filed late.
Assessment is basically self assessment. Provisional assessment is permissible.
Demands
The service tax is administered by excise department. Adjudication order is issued by excise officer.
If service tax was short paid, demand can be raised within period of one year from ‘relevant date’. If the short payment or non-payment was on account of suppression of facts or wilful mis-statement with intention to evade, demand can be raised within period of five years.
Order passed by Central Excise Officer can be rectified by him within two years. Only mistake apparent from records can be rectified.
The Commissioner of Central Excise was empowered to revise the orders passed by adjudicating authority subordinate to him within two years of the original order, but not afterwards. No revision could be made if appeal against such order is pending with Commissioner (Appeals). Now, after Budget 2009, provision is made for departmental appeal before Commissioner (Appeals) and provision of revision of order by Commissioner have been omitted.
Penalties and appeals
If service tax is not paid or belatedly paid, penalty will be minimum Rs. 200 per day or @ 2% per month, whichever is higher, starting with the first day after due date till date of actual payment of outstanding amount. Penalty cannot exceed the service tax which was payable.
If non-payment was on account of fraud, suppression of facts etc., penalty shall not be less than amount of service tax but can be upto twice the amount of service tax amount of service tax not levied or not paid or erroneously refunded [section 78].
Penalty can be reduced if sufficient cause is shown [section 80].
Appeal against order of authority lower than Commissioner lies with Commissioner (Appeals) [section 85]. Appeal against order of Commissioner (Appeals) or Commissioner lies with Appellate Tribunal (Customs, Excise and Service Tax Appellate Tribunal) [Section 86]. Further appeal lies with High Court and Supreme Court.
Appeals can be filed both by assessee and department.
Export of Service
No service tax is payable if taxable service is exported as per Export of Service Rules.
No tax is payable on export of service. If paid, it is refundable.
Rebate/refund of service tax paid on input services is obtained if taxable service is exported.
Common conditions in respect of all taxable services, for treating the service as export of service are - (a) The service should be provided from India and used outside India and (b) Payment for such service is received by the service provider in convertible foreign exchange. In addition, there are some conditions based on the category of service (e.g. immovable property outside India, service performed outside India, recipient is located outside India).
Import of service
In case of import of service, tax is payable by recipient of services under method of ‘reverse charge’. Tax should be paid by cash i.e. GAR-7 challan and then Cenvat credit can be availed as it is his input service.
Tax is payable only when service is received in India.
To determine the issue whether a provision of service is ‘import of service’, services have been classified in three categories. Criteria for each category has been specified e.g. immovable property India, service performed in India, recipient is located in India.
Nature of levy of Service Tax - Service tax is levied under Entry No. 97 of List I of Seventh Schedule to Constitution of India. The entry reads as follows – ‘Any other matter not included in List II, List III and any tax not mentioned in list II or list III’. (These are called ‘Residual Powers’.)
As per section 65(95) of Finance Act, 1994, ‘service tax’ means tax leviable under the provisions of this Chapter (i.e. Chapter V of Finance Act, 1994). Section 66 (charging section) provides that there shall be levied a tax (service tax) @ 12% of the value of taxable service referred to in various clauses of section 65(105). It will be collected in a manner as may be prescribed.
Taxable Service - As per section 66 of Finance Act, 1994, service tax is payable on ‘taxable service’. Various clauses of section 65(105) of Finance Act, 1994 define each type of ‘taxable service’. The definition is different for each class of services, e.g. as per section 65(105)(a), any service provided by stock broker to any person in connection with sale or purchase of securities listed on a recognised stock exchange will be ‘taxable service’.
Service tax is destination-based consumption tax - Service tax is a destination based consumption tax, as per CBE&C Circular No. 56/5/2003 dated 25-4-2003.
Service implies existence of two parties - Service tax is attracted when there are two parties. One cannot give service to himself.
Cenvat Credit – Assessee is entitled to avail Cenvat credit of excise duty and service tax paid on his inputs, input services and capital goods. This aspect has been discussed in another chapter.
1-1 Rate of Service Tax
Section 66 of Finance Act, 1994 (which is a charging section) states that there shall be levied a tax (hereinafter referred to as the service tax) at the rate of 12% of value of taxable services referred in section 65(105) of Finance Act, 1994. In addition, education cess and SAH education cess is payable. Thus, total service tax was 12.36% during. 11-5-2007 to 23-2-2009.
Service tax rate has been reduced to 10% w.e.f. 24-2-2009 vide Notification No. 8/2009-ST dated 24-2-2009. Thus, total service tax payable is 10.3% in respect of taxable services provided on or after 24-2-2009.
This tax was first time introduced with effect from 1-7-1994 on three services. The rate was 5%. It was subsequently increased to 8% w.e.f. 14-5-2003. It was enhanced to 10% w.e.f. 10-9-2004. Service tax rate was 12% plus education cess of 2% (total 12.24%) w.e.f. 18-4-2006 till 10-5-2007. It was 12.36% during 11-5-2007 to 23-2-2009.
Relevant rate of service tax - The rate relevant is the date on which service was provided. Date of billing or date of receipt of payment is not relevant [see case law under ‘Taxable event’].
Service tax, education cess and SAH education cess to be shown separately in invoice - You have to show service tax, education cess and SAH education cess separately in invoice. You cannot just charge 12.36% as ‘service tax’.
1-2 Taxable Event in Service Tax
Section 66 (which is a charging section), reads, ‘There shall be levied a tax (hereinafter referred to as the service tax) at the rate of ten percent of value of taxable services referred to in sub-clauses (a), (b), - - - (zzzzc) and (zzzzd) of clause (105) of section 65 and collected in such manner as may be prescribed.
Opening sentence of section 65(105) as amended w.e.f. 16-6-2005 reads as follows, ‘taxable service’ means any service provided or ‘to be provided’. Thus, following are taxable events -
(a) Entering into contract for service - Entering into contract for providing service. Once you enter into a contract, it is certainly ‘service to be provided’. (Service tax is actually payable after payment is received, but receipt of advance is not a taxable event. It only defers the liability).
(b) Provision of service - This will happen in cases where contract for providing service was entered into before the service became taxable, but service was provided after the service became a ‘taxable service’.
1-3 Person liable to pay Service tax
In most of the cases, service provider, i.e. person who is providing taxable service is liable to pay service tax. However, in few cases, exceptions have been made and service receiver is made liable to pay service tax. The provision that service receiver is liable to pay service tax is termed as ‘Reverse Charge’. The exceptions are as follows -
Services provided to non-resident - In relation to taxable service provided or to be provided by any person from a country other than India and received by any person under section 66A of Finance Act, service tax is payable by recipient of service [Rule 2(1)(d)(iv)]
Services of insurance agents - In case of insurance auxiliary service by an insurance agent, the tax will be payable by insurance company (general insurance or life insurance as the case may be). The insurance agent is not liable to register and pay tax. [However, the insurance agent is not entitled to avail exemption available to a small service provider].
Consignor/consignee paying freight, in case of GTA services - In case of services of Goods Transport Agency (GTA), service tax is payable by consignor/consignee who is paying freight [rule 2(1)(d)(v)] [However, the consignor/consignee is not entitled to avail exemption available to a small service provider].
Services of Agents of mutual fund - In case of distributors/agents of mutual funds, the liability will be on the recipient of service, namely, mutual funds [Rule 2(1)(vi)] [However, the mutual fund agent is not entitled to avail exemption available to a small service provider].
Body corporate or firm located in India receiving sponsorship service - In case of sponsorship service provided to a body corporate or firm located in India, the body corporate or firm receiving such sponsorship service will be liable to pay service tax [rule 2(1)(d)(vii) inserted w.e.f. 1-5-2006 and amended w.e.f. 1-4-2007]. If the recipient of sponsorship service is located outside India, service tax is required to be paid by the service provider and not by the recipient.
Cenvat credit of tax paid - The Body corporate or firm paying such service tax will be eligible to avail Cenvat credit of the service tax paid, on the basis of TR-6/GAR-7 challan by which the tax is paid [Rule 9(1)(e) of Cenvat Credit Rules, as amended w.e.f. 1-5-2006]. It may be noted that when person receiving service is liable to pay service tax, he is not entitled to exemption which is available to a small service provider.
Large Taxpayer Unit (LTU) - A concept of LTU has been introduced for large taxpayers of direct taxes and indirect taxes. In case of service tax, Large Taxpayer has meaning assigned to it in Central Excise Rules [rule 2(cccc) of Service Tax Rules]. LTU has started functioning in Bangalore w.e.f. 1-10-2006.
1-4 Service on sub-contract basis
CBE&C vide circular No. 999.03/23.8.07 has clarified that a sub-contractor is also a taxable service provider. His services are taxable even if these are used by main provider for completion of his work. The sub-contractor is liable even if the service is input service of the main contractor and main contractor is paying service tax on entire value of contract.
2 Value of Taxable Service
Section 67 of Finance Act, 1994 contains provisions for valuation of taxable services for charging service tax. The highlights of provisions of section 67 as effective from 18-4-2006 are as follows -
Service tax is payable on gross amount charged by service provider for service provided or ‘to be provided’. Thus, tax is payable as soon as advance is received.
‘Value of taxable service’ plus service tax payable is equal to ‘gross amount charged’ [section 67(2)].
Where the consideration for providing services is entirely in money, gross amount charged by service provider of taxable service provided or to be provided by him will be relevant for ‘valuation’ [section 67(1)(i)].
Where the consideration for providing services is not wholly or partly in terms of money, service tax is payable on amount of money, which with addition of tax service tax charged, is equivalent to the consideration [section 67(1)(ii)].
Where consideration is not ascertainable, valuation will be on basis of Valuation Rules [section 67(1)(iii)]
If gross amount charged by service provider is inclusive of service tax (i.e. service tax not charged separately in invoice), value of taxable service will be calculated by back calculations such that with addition of service tax payable, the total is equal to the gross amount charged [section 67(2)].
Gross amount charged for taxable services can be before, during or after provision of service [section 67(3)].
Highlights of service tax valuation rules- In exercise of powers under section 67, Service tax (Determination of Value) Rules, 2006 have been issued w.e.f. 19-4-2006. The Service Tax Valuation Rules provide as follows -
If consideration is not wholly or partly consisting of money, value will be determined by service provider in terms of rule 3.
As per rule 3(a) of Service Tax Valuation Rules, valuation shall be on basis of gross amount charged by service provider for similar services.
If value cannot be determined on basis of rule 3(a), valuation shall be on basis of equivalent money value of such consideration, which shall not be less than cost of provision of such services [rule 3(b) of Service Tax Valuation Rules]
Central Excise Officer can reject ‘value’ determined by service provider and determine ‘value’ for purpose of service tax payment [rule 4].
Rules 5 and 6 make provisions for certain specific inclusions and exclusions for valuation
Payments made by service provider as ‘pure agent’ of service receiver and recovered from service receiver are excluded for purpose of valuation [rule 5(2)]
In case of services provided from outside India, actual consideration received will be relevant for valuation [rule 7(1)].
Amount need not be ‘charged’ by service provider - money paid to third party may also be includible - It is not necessary that the money should be paid to service provider himself. Amount paid even to third party is includible in ‘value’ of service if it is for provision of service and at the instance of service provider.
Service tax payable on net amount excluding Vat/sales tax - Rule 2A(1)(i)(a) of Service Tax Valuation Rules and rule 3(1) of Works contract (Composition Scheme for Payment of Service Tax) Rules, 2007 make it clear that Vat/sales tax is not to be included in value for purpose of service tax. Thus, service tax is payable only on net amount excluding Vat/sales tax payable on the transaction.
Tax payable only on amount actually received - Rule 6(1) of Service Tax Rules makes it clear that service tax is payable on value of taxable services received. Thus, if service provider does not receive any payment from his customer, there is no liability of service tax. Service tax is payable only on ‘value of taxable service’ actually ‘received’, and not on amount ‘billed’.
2-1 Calculation of service tax by back calculations
The gross amount charged can be taken as inclusive of service tax and the ‘value’ and ‘service’ tax is to be calculated by back calculations.
For example, if Bill amount is Rs. 1,000 and service tax is not shown separately in Invoice, the tax payable calculated by a simple mathematical formula is as follows -
Assessable Value = (Cum tax price)/(1 + rate of tax)
Assume that Assessable Value (AV) is equal to ‘Z’.
AV
=
1.000 Z
Duty @ 10.30%
=
0.1030 × Z
Sub-Total
=
1.1030 × Z
Now :
1.1030 × Z
=
1,000
Hence, ‘Z'
=
1,000/1.1030
i.e. Z
=
906.61
Thus, ‘Z’, i.e. Assessable Value is Rs 906.62 and service tax @ 10% will be Rs 90.66. Education cess @ 2% of service tax will be Rs 1.82. SAH education cess is Rs 0.91. Thus, total tax will be Rs 93.39.
If Bill is of Rs 1,103.00 (Rs 1,000 plus service tax of 103.00) and customer pays only Rs 1,000, the ‘value’ will be Rs 906.61 and tax payable will be Rs 93.39 by making back calculations - Para 6.5 of FAQ released by CBE&C in November 2007 (12 STT 1 (St) = 9 STR C3).
2-2 Reimbursement of expenses or ‘Out of pocket’ expenses
The service provider often claims reimbursement of certain expenses incurred by him (like travelling, boarding and lodging, etc.) while providing a taxable service. These are often termed as ‘out of pocket’ expenses. These are really charges for taxable services and are includible.
Reimbursement of expenses incurred on behalf of service receiver not includible - Often, a service provider incurs some expenditure on behalf of service receiver and then recovers the amount from him. Such expenditure is not part of service provided by him to service receiver, but is incurred by him as per business practice or convenience. Following illustrations may clarify the provisions -
Octroi/entry tax amount paid by Clearing & Forwarding Agent, CHA or Transporter on behalf of owner of goods/Principal.
Customs duty, dock dues, demurrage, transport charges etc. paid by Customs House Agent on behalf of client.
Advertisement charges paid by Advertising Agency to newspaper on behalf of clients.
Ticket charges paid by Travel Agent and recovered from his customer.
Reimbursement of godown, salary and loading/unloading expenses by Principal to C&F Agent.
These are not part of service provided and hence are not includible. Rule 5(2) provides that the expenditure or costs that a service provider incurs, as a pure agent of the client, shall be excluded from the value if such service provider fulfils prescribed conditions.
The principle is also discernible from various exclusions as contained in rule 6(2).
2-3 Valuation in case of indivisible contracts
In case of indivisible contracts involving sale of goods plus provision of service, it is difficult to identify service portion.
Exclusion of value of material - Notification No. 12/2003-ST dated 20-6-2003 provides that if the amount charged includes value of goods and materials sold, service tax will not be payable on value of goods and materials sold. There should be documentary evidence showing value of goods and materials sold. This exemption is available only if Cenvat credit of such material is not taken. If such credit was taken, assessee should pay amount equal to the credit. Such payment should be before sale of such goods and materials.
Many exemption notifications provide that exclusion under notification 12/2003-ST is allowable only when the service tax is paid at full rate and any abatement under any other exemption notification is not claimed. Hence, in such cases, notification No. 12/2003-ST is of no use.
In Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 282 ITR 273 = 3 VST 95 = 145 STC 91 = 3 STT 245 = AIR 2006 SC 1383 = 2 STR 161 (SC 3 member bench), it has been clearly held that price of goods cannot be included in value of services. Conclusion (E) of the judgment (para 92 of SCC and para 81 of STT and Taxman) reads as follows, ‘The aspect theory would not apply to enable the value of service to be included in the sale of goods or the price of goods in the value of service’.
All expenditure and costs relating to provision of service incurred by service provider are includible - Rule 5(1) provides that where certain expenditure or costs are incurred by the service provider in the course of providing any taxable service, all such expenditure or costs shall be treated as consideration for the taxable services provided or to be provided and shall be included in the ‘value’ for purpose of charging of service tax on the said service.
This is a general rule which makes it clear that, even when such expenditure or costs are recovered separately by service provider from service receiver, such expenditure or costs must be included in the value of taxable service.
However, expenditure incurred by service provider as ‘pure agent’ of service receiver is not includible, as per rule 5(2).
3 Exemptions from service tax
Central Government can grant partial or total exemption, by issuing an ‘exemption notification’ u/s 93 of Finance Act, 1994. Such exemption may be partial or total. Exemption may be conditional or unconditional. The only limitation is that exemption cannot be granted by Central Government with retrospective effect. There are following general exemptions -
Small service providers - Small units whose turnover less than Rs. eight lakhs per annum are exempt from service tax. Provisions are discussed a little later (The exemption limit was Rs four lakhs upto 31-3-2007).
Export of Services - There is no service tax on export of services, if service is exported as per ‘Export of Service Rules’.
Services to UN Agencies - Services provided to UN and International Agencies are exempt [Notification No. 16/2002-ST dated 2-8-2002].
Exemption to services provided to SEZ – The provision has been drastically changed w.e.f. 20-5-2009. Services provided to Special Economic Zone (SEZ) unit or SEZ developer will be exempt if the services are wholly consumed within SEZ. If the services are consumed wholly or partly outside SEZ, the services will be taxable at the hands of service provider [During the period 3-3-2009 to 20-5-2009, all services provided to SEZ unit or SEZ developer were taxable at the hands of service provider and the SEZ unit/developer was required to claim refund]. Now, w.e.f. 20-5-2009, the service provider to SEZ unit or SEZ developer will have to charge and pay service tax as per normal procedure only when service is wholly or partly consumed outside SEZ. These services will be exempt from service tax at hands of SEZ or SEZ developer by way of refund. The SEZ or SEZ Developer will have to file refund claim as per procedure prescribed in Notification No. 9/2009-ST dated 3-3-2009. If the service is wholly consumed within SEZ, the service provider is not required to charge service tax and hence no question of any refund.
Service provided by SEZ - SEZ is exempt from service tax.
Services provided by RBI exempt - Exemption from service tax has been provided to all taxable services provided by Reserve Bank of India. Services where RBI is liable to pay service tax are also exempt (Notification No. 22/2006-ST dated 31-5-2006 – earlier Notification No. 7/2006-ST dated 1.3.2006).
3-1 General Exemption to small service providers
The small service providers whose turnover of taxable services from one or more premises did not exceed Rs. eight lakhs in 2006-07 will be exempt from service tax in next financial year i.e. in 2007-08 upto the turnover of Rs. eight lakhs. The provisions are prescribed in Notification No. 6/2005-ST dated 1-3-2005 (The exemption limit was Rs four lakhs upto 31-3-2007). However, if value of taxable turnover exceeds Rs 8 lakhs in 2007-08, there will be not exemption at all in 2008-09.
For the purpose of determining eligibility in current year, what is relevant is that ‘aggregate value of taxable services rendered’ in previous financial year should not exceed Rs. eight lakhs, while for purpose of exemption upto first-Rs. eight lakhs in current year, service tax is exempt to the extent of ‘aggregate value not exceeding eight lakhs’, i.e. the sum total of first consecutive payments received during the current financial year.
The exemption to small service providers is available subject to following conditions -
The provider of taxable service shall not avail the CENVAT credit of service tax paid on any input services.
Where a taxable service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services.
The taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; will not be eligible for exemption available to small service providers.
Person providing taxable service in excess of Rs. seven lakhs per annum (but less than Rs. eight lakhs) will have to register with Superintendent of Central Excise under Service Tax provisions [Notification No. 26/2005-ST dated 7-6-2005], though they will be eligible for exemption if turnover is less than Rs. eight lakhs per annum.
3-2 Specific Exemptions
In case of some services e.g. catering services, mandap keeper services and construction services, service tax is payable at lower rates, i.e. partial abatement is available from gross value, vide 1/2006-ST dated 1-3-2006. The lower rate is applicable if the service provider does not avail Cenvat credit of duty/tax on inputs, input services and capital goods. Till 28-2-2006, he was entitled to avail Cenvat credit on input services. W.e.f. 1-3-2006, he cannot avail any Cenvat credit, if he avails the partial abatement.
Some important exemptions are as follows –
Taxable Service
Partial abatement available
Accommodation booking service by tour operator
10% of gross amount charged
Air Travel Agent
Option to pay service tax at flat rate on ‘basic fare’ @ 0.6% in case of domestic booking and 1.2% in case of international booking [rule 6(7) of Cenvat Credit Rules]
Business Auxiliary Service in relation to processing of parts and accessories used in manufacture of cycle, cycle rickshaws and hand operated sewing machines
Tax on 70% of gross amount if gross amount is inclusive of cost of inputs and input services, whether or not supplied by the client (Is it exemption or punishment?)
Erection, Commissioning and installation contract for supply of plant, machinery, equipment or structures plus erection, commissioning and installation services
Tax on 33% of gross amount if gross amount includes value of material
Construction Service
Tax on 33% of gross amount if gross amount includes value of material
Goods Transport Agency (GTA)
Tax only on 25% amount in his invoice [Payment will be made by consignor/consignee who is actually paying freight]
Mandap keeper, hotels and convention services, providing full catering services
Tax on 60% gross amount charged
Outdoor caterer
Tax on 50% amount if he provides full and substantial meal
Pandal and shamiana Service
70% of gross amount charged if full catering service provided
Rent-a-cab operator
Tax payable on 40% of gross amount charged
Tour operator - Package tours (“package tour†means a tour wherein transportation, accommodation for stay, food, tourist guide, entry to monuments and other similar services in relation to tour are provided by the tour operator as part of the package tour to the person undertaking the tour).
Tax is payable only on 25% of gross amount charged w.e.f. 23-8-2007 (till 22-8-2007, tax was payable on 40% of gross amount
Tour operator - providing services solely of arranging or booking accommodation for any person in relation to a tour (If Bill includes cost of accommodation)
Tax is payable only on 10% of gross amount charged
Tour operator – Other than package tours and other than service of booking accommodation where Bill includes cost of accommodation
Tax is payable only on 10% of gross amount charged
Transport of goods in container by rail
Tax payable on 30% of gross amount charged
Services provided to EOU - Services provided to EOU/EHTP/STP/BTP are not exempt from service tax. Para 6.11(c)(v) of Foreign Trade Policy (as amended on 7-4-2006) states that EOU/EHTP/STP/BTP units can avail Cenvat credit of service tax paid. The EOU units can claim rebate of service tax paid on their input services vide rule 5 of Cenvat Credit Rules (as amended on 14-3-2006). Procedure for claiming refund of service tax paid on input services and excise duty on inputs has been specified in notification No. 5/2006-CE(NT) dated 14-3-2006.
No service tax on service provided in J&K - Service tax provisions are not applicable in Jammu and Kashmir. Service tax will not be payable only if service is provided in J&K. If a person from J&K provides service outside J&K in any other part of India, that service will be taxable, as location where service is provided is relevant. Merely because office is situated in J&K does not mean that service is provided in J&K.
4 Classification of service
There are various types of services on which service tax is payable. These are specified in various sub-clauses of section 65(105) of Finance Act, 1994. It is possible that a service may appear to be classifiable under more than one headings. It is necessary to specify the heading under which the service being provided is falling. This is termed as ‘classification’. As per rule 4A(1) of Service Tax Rules, the invoice should indicate description and classification of service.
Principles of classification - The classification of services will be determined according to terms specified in various sub-clauses of section 65(105). [section 65A(1)]. If prima facie, a taxable service is classifiable under two or more sub-clauses of section 65(105), classification shall be effected as per following rules -
The sub-clause which provides most specific description should be preferred over sub-clauses providing a more general description [section 65A(2)(a)]
Classification should be as per essential character in case of composite services. Composite services are those consisting of combination of different services. In case of such services, if the service cannot be classified on the basis of specific description as per section 65A(2)(a) above, it shall be classified as if they consisted of a service which gives them their essential character [section 65A(2)(b)].
Service which appears earlier in list, if service cannot be classified on above basis. If a service cannot be classified on basis of above provisions, the service should be classified under sub-clause which occurs first among the sub-clauses which equally merit consideration [section 65A(2)(c)].
Service which has been specifically excluded in definition of one service cannot be covered under another head - In Dr. Lal Path Lab (P) Ltd. v. CCE (2006) 5 STT 171 (CESTAT), it was held when there is a specific entry for an item in the tax code, same cannot be taxed under any other entry. If a service has been specifically excluded from definition of one service, it cannot be covered under another taxable service.
Introduction of new heading means earlier it was not taxable - In Glaxo Smithkline Pharmaceuticals v. CCE (2005) 1 STT 37 (CESTAT), it has been held that when an existing tariff definition remains same, introduction of new tariff entry would imply that the coverage under new Tariff was not covered by the earlier entry. When new category is introduced, it means that the service was not taxable under old category.
Service should be mainly or principally a taxable service - A composite contract cannot be vivisected and service portion cannot be subjected to tax – Widia GMBH v. CCE (2006) 5 STT 414 (CESTAT) * Blue Star v. CCE (2007) 7 STT 68 (CESTAT). In Daelim Industrial Co. v. CCE 2003 STT 438 = 7 STT 184 (CEGAT), it was held that a works contract cannot be vivisected and part of it subjected to tax.
Message likes :
1 times
03 January 2010
i think this is longest answer.
06 January 2010
Too long
You need to be the querist or approved CAclub expert to take part in this query .
Click here to login now
Click here to login now
Similar Resolved Queries
Unanswered Queries
- Is this income indian or foreign income?
- ITC temporary reversal and reclaim
- GST on export of services and Input Credit
- RCM applicability on Rent Paid by Registered Person to Unregistered Landlord for Residental Building
- Applicable TDS rate for sale of property in Nov 2024
- Inventory of finished goods
- Tds on building rent monthly
- RCM INVOICING FROM NOV-2024
- Should I report my US salary for January, February, March in Schedule FA?
- Can we claim ITC of Feb-2024 in the month of November-2024 which was not claimed by oversight
- LAST YEAR 2022-23 ITC IN NEXT YEAR 2023-24 REPORITNG IN GSTR-9
- MIS MATCH OF INVOICE NUMBER
- IGST Credit-Show cause notice issued-confusion
- Issue of gst e invoice
- How to adjusted advances given or receipt
- Foreign vendor without PAN unable to to register due to non receipt of OTP on foreign number ?
- 133(6) DIN INVALID format error - ->WHERE TO REPLY 133(6) notice?
- Query for dubts
- Regarding einvoice taken on nil rated sales
- Strategical investment in Public listed company
Trending Online Classes
CAclubindia
