Note on Service Tax – Retainership of Consultant

The retainership is covered by the ambit of service tax and would be covered under the definition of Management consultant.

Management consultant as defined under the statute

Date of Introduction: 16.10.1998 vide Notification No.53/98-ST dt.07.10.1998.

 Definition:

“Management Consultant” means any person who is engaged in providing any service, either directly or indirectly, in connection with the management of any organization in any manner and includes any person who renders any advice, consultancy or technical assistance, relating to conceptualizing, devising, development, modification, rectification or upgradation of any working system of any organization.

(Section 65(37) of Finance Act, 1994 as amended)

In view of the above definition any service provided by a person in the above descriptive nature will render it taxable

Exemption

• Exemption limit extended in budget 2007-08 upto Rs. 8 Lakhs w.e.f. 01/04/2007
• In view of budget changes for 07-08 threshold limits for seeking registration by Small Service providers has been raised from 3 Lakhs to 7 Lakhs

Abatement

No abatement of any kind is available to this service; any amount received in cash or otherwise would form a part of the taxable amount towards service charges and subject to service tax. The new valuation rules 2006 explicitly denies any abatement (this includes reimbursements of any kind)

Reimbursement has been done away with effect from 18/04/2006 and any amount recovered, as reimbursement will be subject to levy of service tax

Agreement Clause

Agreement should clearly spell out the service charges to avoid ambiguity from valuation point of view so as not to draw any liabilities at a future stage.

Suggestion for Reimbursement:

• Service Receiver to hire vehicle for the purpose of travel by the consultant.
• The bills raised by the service provider to be in the name of Service Receiver
• Service Receiver to pay the service provider
• Service Receiver can avail the credit of service tax
• This will also reduce cost as rent a cab service is subject to an abatement of 60% and service tax is leviable only on 40% of the charges
• If reimbursed the entire amount will form a part of service tax and will also result in double taxation. Since no credit would be admissible to the consultant as he would be exercising the Small Service Provider threshold exemption of Rs. 8 Lacs.

For eg: For example, if the consultant hires a vehicle through travel agent for Rs 10,000 and pays Rs 494/- as service tax (@0.40 per cent) to carryout a professional assignment, he ends up paying service tax again on the entire amount of reimbursement sought i.e., while seeking reimbursement of Rs 10,060 from client, he shall have to charge and pay service tax again @12.36% being Rs. 1236/-.

Cenvat Credit

Management consultant is one of the 16 Categories eligible for 100% Cenvat Credit

The views expressed are individual