1. OVERVIEW OF COMPOSITION, SERVICE TAX & ABATEMENT
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2. VALUATION OF SERVICE VALUE OF SERVICE FOR PAYMENT OF SERVICE TAX
Gross amount charged by service provider for service provided or to be provided – section 67.
Value of taxable service + service tax = Gross amount charged.
If service tax not charged separately, the gross amount charged should be taken as inclusive of service tax and then back calculations should be made to arrive at value of service and service tax payable thereon.
Amount may be received before, during or after provision of service.
Any specific service not defined w.e.f Hence, scope of service can be determined by mutual agreement between service provider and service receiver.
NO TAX ON VALUE OF GOODS
Price of goods cannot be included in value of services – Bharat Sanchar Nigam Ltd. v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 3 STT 245 (SC 3 member bench).
In Imagic Creative Pvt. Ltd v. CCT (2008) 2 SCC 614 = 12 STT 392 (SC), it has been held that service tax and Vat (sales tax) are mutually exclusive. In case of a composite contract, Vat cannot be imposed on portion relating to value of service. As an obvious corollary, service tax cannot be imposed on value of material.
Section 67 – Service tax only on ‘gross amount charged by service provider for such taxable services provided or to be provided’.
Section 66B – service tax on value of service (i.e. not on value of goods)
ISSUES RELATING TO SOME SERVICES
Spare parts used while repairs –not taxable if billed separately – It is not works contract service.
The reason is that the definition of ‘deemed sale’ in Article 366(29A) does not say that the definition is only for purpose of sales tax. Thus, that definition will be applicable to all contracts executed in India after 1983.
Photography paper or Xerox paper – my view – It is ‘works contract service’ as per definition revised w.e.f
Cleaning material used while providing cleaning services – in my view – includible as it gets consumed and its property is not transferred to the customer (service receiver).
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3. CONSIDERATION OTHER THAN MONEY
Consideration for service – partly money partly other than money – then value of such consideration to be added.
Valuation will be on basis of ‘amount equivalent to consideration’ as provided in section 67(1)(ii) [faulty drafting].
FUEL SUPPLIED TO SERVICE PROVIDER
Fuel supplied to service provider (e.g. for construction equipment, rented vehicle)
In my view if scope of service specifically excludes such supply, its value is not includible
The reason is that w.e.f , any specific service has not been defined – thus, scope of service can be decided by mutual agreement
Valuation Rules
Valuation Rules apply subject to section 67
Gross amount charged for similar services [rule 3(a)]
Equivalent money value of consideration which shall not be less than cost [rule 3(b)]
Distinction between cost and value
Charges which are not part of value of service
Some expense incurred by service provider for administrative convenience and then recovered from service receiver.
Reimbursements of expenses incurred by service receiver which are not part of value of service are not includible.
This is the basic concept of ‘pure agent’ contained in Service Tax Valuation Rules.
Gross Amount charged for service
Service tax is not payable on any other amount charged and/or recovered from service receiver if it is not part of value of taxable service
Examples – Advertisement Agent collecting advertisement charges plus his commission, Air Travel Agent collecting air fare plus his commission, Customs House Agent paying for various expenses incurred by him at Port on behalf of customer and then recovering the same plus his charges
In aforesaid cases, the advertisement charges, air ticket charges or expenses incurred by CHA in port are not part of value of service and hence not includible in value for service tax.
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4. Cost and Expenditure relating to service is includible
Travelling Expenses, hotel expenses incurred by CA, Maintenance Engineer or Management Consultant in the course of providing his service
Out of pocket expenses incurred while providing taxable service – these are includible as service cannot be provided without incurring these expenses.
Now the issue arguable under new provisions w.e.f , as any specific service is not defined – thus it can be argued that scope of service can be fixed by mutual agreement.
Pure Agent
Various charges recovered by service provider from service receiver and paid to concerned third party are not includible in value if these expenses which is not part of service.
Liability of service receiver, but expenses incurred by service provider for administrative convenience and recovered from customer.
These are not part of value of taxable service and not includible (even if all requirements of pure agent not satisfied).
Requirement of pure agent
Payment to third party on behalf of service provider under authority
Amount to be separately indicated in Invoice
Only actual amount should be recovered
Title in goods and services not held by pure agent
Illustrations of pure agent
Octroi/Entry tax paid by Agent
Customs duty, transport, warehousing charges paid by Custom House Agent (CHA).
Parking fees, toll naka charges by person renting motor vehicle for transport of passengers (rent-a-cab operator).
Air fare/rail fare paid by Agent
Distinction between ‘bundled service’ and service as ‘pure agent’ – Bundled service means all expenses incurred or sub-services provided are part of main service, while in case of ‘pure agent’, the expenses incurred are not part of the  service.
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5. Illustration when payment not as Pure Agent
Rent, telephones, transport expenses incurred by C&F Agent\
Travelling expenses of Auditor, Consulting Engineer, Maintenance Engineer, Management Consultant (now issue arguable)
Charges of salary of labour by Labour Contractor (though in my view, issue is debatable since the service of labour contractor is only to bring labour to the Principal Employer).
 Service provider padding the amounts to be recovered from customer
As per the definition of ‘pure agent’, the amount recovered from customer is not includible  if it is recovered on actual basis.
In many cases (e.g. CHA, goods transport, freight forwarder etc.), the expenses are padded and higher amounts are charged in the Bill.
In Bax Global India v. CST (2008) 13 STT 263 (CESTAT), it was held that if the service provider earns profit on these activities, it is not includible in value of his services – relying on Baroda Electric Meters Ltd. v. CCE 1997 (94) ELT 13 (SC 3 member).
However, surely the issue is litigation prone.
Other provisions in service tax valuation
Service tax is payable on net amount excluding Vat, if payable on that transaction.
Vat payable on service tax amount if State Law definition covers such amount.
Service tax is payable on gross amount including TDS.
No service tax on (really) free services
Service tax, excise duty and customs duty are independent duties.
Rate of customs duty is relevant for valuation in case of export and import of services. In such cases, rate of exchange as notified in Customs Notification is relevant and not RBI reference rate of rates notified by FEDAI or rate at which the amount is credited or debited by the Bank to account of service provider/service receiver.
Composition Schemes
In some cases, finding of value of service is not easy e.g. sale or purchase of foreign exchange, air travel agent – in such cases, optional composition schemes provide
In case of composite contracts, e.g. construction, finding value of service is difficult. In such cases, optional composition schemes are available   
Abatement schemes
In case of some services, abatement is available i.e. part of tax is exempted – e.g. 40% in case of air travel, 25% in case of GTA service
Restrictions on Cenvat Credit
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6. ABATEMENTS AND COMPOSITION UNDER SERVICE TAX
Composition Schemes
In some cases, finding of value of service is not easy e.g. sale or purchase of foreign exchange, air travel agent – in such cases, optional composition schemes provided.
In case of composite contracts, e.g. construction, finding value of service is difficult. In such cases, optional composition schemes are available.
Each contract is a different contract and can be valued on different basis.
1.A Services Under Composition Schemes
Air Travel Agent – 0.6% (domestic travel) – 1.2% (international booking) of basic fare – Rates specified in Rule 6(7)
Sale and Purchase of Foreign Currency – Rates specified in Rule 6(7B)
Life Insurance Service – Rates specified in rule 6(7A)
Lottery Ticket Promotion – Rates specified in Rule 6(7C)
1.B Composition Scheme (Continued)
Restaurant service – On 40% amount excluding Vat
Works Contract Service – On 40%/60%/70% value – Rules 2A of Valuation Rules
25% Abatement Scheme if gross amount includes value of land
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7. ABATEMENTS AND COMPOSITION UNDER SERVICE TAX
Abatement schemes
Notification No. 26/2012-ST dated provides for abatement.
In case of some services, abatement is available i.e. part of tax is exempted – e.g. 40% in case of air travel, 25% in case of GTA service, 40% in case of renting or hire of motor vehicle to carry passengers.
Restrictions on Cenvat Credit
In some cases, abatement scheme is used as composition scheme
2.A Abatements
Mandap, Shamiana or convention along with food – 70% of amount
Chit Related Services – 70% – No Cenvat
Financial leasing and hire purchase – Management fee, processing fees plus 10% of interest
Renting of motor vehicle – 40% – No Cenvat [reverse charge in some cases]
Renting of hotels, guest houses, clubs – 60%
Tour Operator – Package Tour – 25%, mere booking of hotel (including room rent charges) – 10%, Other cases – 40%
Rail Transport  of goods and AC/First class passengers – 10% w.e.f [if not further extended]
GTA – 25% – No Cenvat
Passenger transport by air – 40% – Cenvat of only input services allowable
2.B Valuation under rule 6
Some abatements and compositions are subject to condition of non-availment of Cenvat
In such cases, if Cenvat credit is taken, valuation for purpose of rule 6 of Cenvat Credit Rules (for payment of 6% ‘amount’ or reversal of Cenvat) as per provisions in those Rules
2.C Abatement and Exemption Schemes at a glance
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8. PARTIAL ABATEMENT/ COMPOSITION SCHEMES RELEVANT NOTIFICATION / RULE
2.C Abatement and Exemption Schemes at a glance
TAXABLE SERVICES
PARTIAL ABATEMENT/ COMPOSITION SCHEMES
CONDITIONS
RELEVANT NOTIFICATION / RULE
Accommodation booking service by tour operator
10% of amount charged (Abatement Scheme, though really it is composition scheme)
No Cenvat Credit. Invoice should be inclusive of cost of accommodation
Sr. No. 11(ii) of Notification No. 26/2012-ST dated
Air Travel Agent
Option to pay service tax at flat rate on ‘basic 0.6% in case of domestic booking and 1.2% in case of international booking – plus education cess (Composition Scheme)
No restriction on availment of Cenvat credit
Rule 6(7) of Service Tax Rules
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, pandal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises
Tax on 70% of amount charged including fair value of goods and services supplied by service receiver (to service provider) under same or different contract
(Composition Scheme)
Cenvat credit of input services and capital goods is available. Cenvat credit on food items (covered under Chapters 1 to 22 of CETA) not available. Cenvat credit of other inputs is available.
Sr. No. 4 of Notification No. 26/2012-ST dated
Chit related services
Tax on 70% of amount charged (Abatement Scheme)
No Cenvat Credit allowed
Sr. No. 8 of Notification No. 26/2012-ST dated
Financial leasing and hire purchase
Tax on lease management fee, processing fee, documentation charges and administrative fee plus 10% of interest
No restriction on availment of Cenvat Credit
Sr. No. 1 of Notification No. 26/2012-ST dated
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9. Sr No. 12 of Notification No. 26/2012-ST dated 20-6-2012
Construction of a complex, building, civil structure or a part thereof, intended for a sale to a buyer, wholly or partly, if value of land is included in the amount charged from the service receiver
Tax on 25% of amount charged including fair market value of all goods and services supplied by recipient (termed as Abatement Scheme – actually it is composition scheme)
Cenvat credit of input services and capital goods can be taken but not of input goods
Sr No. 12 of Notification No. 26/2012-ST dated
Foreign Currency – sale and purchase
At slab rates prescribed under rule 6(7B)on total gross amount of currency exchanged (Optional Composition Scheme)
No restriction on availment of Cenvat Credit
Rule 6(7B) of Service Tax Rules
Value is difference between  buying or selling rate and RBI reference rate (Normal Scheme of valuation)
Rule 2B of Service Tax (Determination of Value)  Rules
Life Insurance
3% of net premium (excluding investment or savings part, if such amount is informed to policy holder)  – If not so informed, 3% in first year and 1.5% in subsequent years(Composition Scheme)
Rule 6(7A) of Service Tax Rules
Lottery ticket promotion
` 7,000 or ` 11,000 per ` 10 lakhs of tickets printed by State lottery  (Composition Scheme)
Rule 6(7C) of Service Tax Rules
Outdoor caterer
Tax on 60% amount excluding State Vat (Composition Scheme) (Till , it was 50%)
Cenvat credit of input services and capital goods is available. Cenvat credit on food items (covered under Chapters 1 to 22 of CETA) not available. Cenvat credit of other inputs is available.
Rule 2C of Service Tax (Determination of Value) Rules
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10. Renting of motor vehicle designed to carry passengers
Tax payable on 40% of amount charged  (Abatement Scheme)
No Cenvat credit available
Sr. No. 9 of Notification No. 26/2012-ST dated
Restaurant service
Tax on 40% amount excluding State Vat (Composition Scheme) (Till , it was 30%)
Cenvat credit of input services and capital goods is available. Cenvat credit of excise duty on food items (covered under Chapters 1 to 22 of CETA) not available. Cenvat credit of other inputs is available.
Rule 2C of Service Tax (Determination of Value) Rules
Renting of hotels, inns, guest houses, clubs, campsites or other commercial places meant for residential or lodging purposes
Tax payable on 60% of amount charged (Abatement Scheme) (Till , the tax payable was on 50% amount).
Cenvat Credit of input services allowable but no Cenvat credit of inputs and capital goods
Sr. No. 6 of Notification No. 26/2012-ST dated
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 on 25% of gross amount charged (Abatement Scheme)
No Cenvat credit available.
Bill to be inclusive of all charges for the tour.
Sr. No. 11(i) of Notification No. 26/2012-ST dated
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 on 10% of  amount charged (Abatement Scheme)
Bill to be inclusive of charges for such accommodation
Sr. No. 11(ii) of Notification No. 26/2012-ST dated
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11. Tax is payable on 40% of amount charged (Abatement Scheme)
Tour operator – Other than package tours and other than service of booking accommodation where Bill includes cost of accommodation
Tax is payable on 40% of amount charged (Abatement Scheme)
No Cenvat credit available.
Bill to be inclusive of all charges for the tour
Sr. No. 11(iii) of Notification No. 26/2012-ST dated
Transport of goods  by rail
Tax payable on 30% of amount charged (Abatement Scheme)
No restriction on availment of Cenvat Credit
Sr. No. 2 of Notification No. 26/2012-ST dated
Transport of goods  by road by Goods Transport Agency (GTA)
Tax payable on 25% of amount charged (Abatement Scheme)
No Cenvat Credit available (Certificate should be taken from the GTA that he has not availed Cenvat credit, as tax is payable by service receiver under reverse charge – this headache was not there earlier)
Sr. No. 7 of Notification No. 26/2012-ST dated
Transport of goods  in a vessel from one port in India to another
Tax payable on 50% of amount charged (Abatement Scheme)
No Cenvat Credit available)
Sr. No. 10 of Notification No. 26/2012-ST dated
Transport of passengers by air
Tax payable on 40% of amount charged (Abatement Scheme)
Cenvat Credit of input services allowable but no Cenvat credit of inputs and capital goods
Sr. No. 5 of Notification No. 26/2012-ST dated
Transport of passengers  by rail
Sr. No. 3 of Notification No. 26/2012-ST dated
Works Contract Service
Tax on value of service calculated as per rule 2A(i) or Tax on 25%/40%/60% of gross amount charged as specified in rule 2A(ii) (Composition Scheme)
Tax on 25% of amount charged including fair market value of all goods and services supplied by recipient (termed as Abatement Scheme – actually it is composition scheme)
Cenvat credit of input services and capital goods is available. Cenvat credit of excise duty on goods, the property of which is transferred is not available. Cenvat credit of other inputs (like consumables) is available
Rule 2A of Service Tax (Determination of Value) Rules
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12. E-10A, Kailash Colony, Greater Kailash – 1, New Delhi – 110048
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