Background of service tax Till 1-7-2012, service tax was based on positive list i.e. service listed are taxed in section 65(105) Disputes occur due to wordings in definitions Hence, now service tax all services excluding 17 services in negative list of services w.e.f. 1-7-2012 (In addition there is list of 39 exemptions and some activities excluded from definition of service itself)
Constitutional Background India, that is Bharat, shall be a Union of States [Article 1(1)] Article 246 read with Seventh Schedule gives bifurcation of powers between Union and State - List I – Union List List II – State List List III – Concurrent List
Taxation in Union List – List I Income Tax other than agricultural income (Entry 82) Customs duty (Entry 83) Excise Duty other than alcoholic liquor (Entry 84) Stamp duty on specified transactions (Entry 91)
Union List (Continued) Tax on advertisements in newspapers (Entry 92) Inter State Sales (Entry 92A) Tax on Services (Entry 92C – not yet effective)
Residual Entry in List I Entry 97 – Any other matter not included in List II, List III and any tax not mentioned in list II or List III (These are residual powers) Service tax is imposed under Entry 97. Thus, if a transaction is covered under List II, service tax cannot be imposed.
State List – List II Land Revenue (Entry 45), Agricultural income (Entry 46) Taxes on land and buildings (Entry 49), tax on mineral rights (Entry 50) Excise on alcoholic liquors, opium and narcotics (Entry 51) Octroi and Entry tax (Entry 52) Tax on consumption and sale of electricity (Entry 53)
State List II (Continued) Sale within State, other than newspapers (Entry 54) Betting and gambling (Entry 34) Tax on advertisements other than newspapers (Entry 55)
State List (Continued) Tax on goods or passengers carried by road or inland waterways [Entry 56] Tax on vehicles [Entry 57] Tolls [Entry 59] Professional Tax [Entry 60] Stamp duty [other than those under Union List) (Entry 63)
Deemed Sale of goods– Article 366(29A) – 46th Amendment - 1982 Compulsory Sale (Now not much relevant) Hire purchase and financial Lease Transfer of right to use (Hire or operating lease) Goods Involved in works contract Sale of food articles Sale among unincorporated bodies
Service tax on portion of deemed sale of goods Service part of Works Contract Service part of Food in restaurant or outdoor catering or catering as part of other services like mandap, shamiana, convention
Overlapping of State Vat and service tax Hire purchase and financial lease Operating Lease (Hire) –Vat and service tax in different situations – disputes in borderline cases Temporary transfer of IPR – disputes in borderline cases Software – entirely goods and service at one and same time
Charging section 66B Service tax at the rate of 12% on the value of all services, other than those services specified in the negative list provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.
What is service [section 65B(44)] Any activity carries out by one person to another for consideration Consideration required – may be in cash or kind No service tax on free services ‘service’ includes ‘declared service’ (deemed service’) Some activities specifically excluded from definition of ‘service’
What is not service - 1 Activity of mere transfer of title in goods or immovable property is not ‘service’ Deemed sale of goods under Article 366(29A) of Constitution of India is not ‘service’ Mere transaction in money is not service.
What is not service - 2 Mere Actionable claim – claim of debt or beneficial interest in movable property, lottery ticket – it is not service Service - employee to employer – not ‘service’, but service provided by employer to employee is taxable e.g. transport, telephone Fees paid to Court or Tribunal is not service Services of MP, MLA is not service
Mere transaction in money is not service Any legal tender (Indian or foreign currency) is ‘money’ Transaction may be by cash, cheque, promissory note, DD, LC, money order, electronic transfer Dividend, loans, deposits, repos, reverse repos is mere transaction in money
Transfer of title in goods or immovable property Simple sale of goods or immovable property not service Goods include securities Sale purchase of securities (shares, derivatives) not taxable Forward contracts, future contracts not taxable
Grant or Donation is not service Grant stipulating merely proper usage of funds and furnishing of account also will not result in making it a provision of service. Donations are not consideration unless the receiver is obligated to provide something in return Thin distinction between sponsorship and donation
Negative List of Services Services by Government, RBI, foreign diplomatic missions Agriculture related services Trading is not service Activity that results in ‘manufacture’ of goods is not ‘service’ Sale of space for Advertisement in print media in negative list – other taxable w.e.f. 1-10-2014
Negative List (Continued) Toll charges (but service for collection of toll is taxable) Entertainment, amusement, gambling Transmission and Distribution of Electricity (Electricity is goods – further it is in List II – hence no serviced tax even if done on private basis) Recognised Educational services, training in arts, culture, sports – no tax on midday meals and school bus services
Negative List (Continued) Renting for residential purposes Interest and inter se sale or purchase of foreign currency among Banks and authorised dealers not taxable – other banking services taxable Passenger transport except in tourist vehicles and tour operators and w.e.f. 11-7-2014 – on air conditioned contract carriages
Negative List (Continued) Transport of goods by road (except GTA, Courier) No tax on transport of goods from outside India to import of goods by air or vessel upto customs station in India Funeral, burial or crematorium related services not taxable
Declared Services Renting of immovable property, construction, software, hiring, leasing, hire purchase, service portion of works contract, service portion of supply of food are ‘declared services’ [section 66E] [really some of these are ‘deemed services’ as these are partly covered under List II i.e. State List]
Exemptions – Notification No. 25/2012-ST dated 20-6-2012 Medical services Specified Charitable activities Religious ceremony and renting of religious places Individual advocate and firm of advocates to non- business entity or business entity with turnover less than Rs 10 lakhs – in other cases - the business entity is liable to pay service tax under reverse charge Recreation relating to arts, culture, sports
Exemptions (Continued) Copyright, performing arts, sportsman (but not brand ambassador), sports sponsorship Job work of agriculture, textile processing, diamonds and gemstones Job work - where principal manufacturer is paying excise duty Society to its members upto Rs 5,000 p.m. Infrastructure related services for public use
Exemptions (Continued) Hotels, guest houses with less than Rs 1,000 per day tariff Restaurants without AC or central heating Goods transport upto Rs 750 per consignee Sub brokers, authorised persons, mutual fund agent exempt
Small Service provider Exemption if value of taxable services provided in previous financial year did not exceed Rs 10 lakhs Clubbing provisions applicable Service should not be under brand name of other Each co-owner of immovable property can claim exemption
Exemption only to main service Reference of main service shall not include reference to a service which is used for proving that main service [section 66F(1)] Thus, even if main service is exempt, ancillary service or services of sub-contractors may not be exempt
Two Exceptions to section 66F Works contract service provided by sub-contractor to main contractor exempt if main contractor is exempt from service tax under works contract service When the sub-contractor himself is providing ‘main service’ which is exempt
Works contract service In case of finishing service relating to immovable property (like painting, flooring etc.), service tax payable on 70% of value w.e.f. 1-10-2014 [Till 1-10-2014, it was 60%]. Value of FOC material (like cement, steel etc. supplied by contractee) was required to be added for composition scheme. To overcome this provision, some service receivers were charging for such supply but at very low price. To get over such tax planning, it has been provided that ‘Fair Market Value’ of material and services supplied by contractee should be added.
Agreeing to Tolerate an Act or Situation Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act is ‘declared service’. Non compete fees, Demurrage, Booking cancellation charges, cheque return charges will be subject to service tax. Late Delivery charges, penalties, forfeiture of deposit or advance as penalty for violation of terms of contract will be subject to service tax. Continued….
Agreeing to Tolerate an Act or Situation Rework charges, deductions on account of quality issues may be subjected to service tax. Notice pay recovered from employees, penalty imposed o employees Better if the service provider issues credit note instead of service receiver issuing debit note or making deduction. Accidental damages not relatable to provision of service are not subject to service tax.
Two safety nets in law Law is new and many ambiguities are there. Disputes are possible. Law may get settled after 8 or 10 years but assessee has to take decision today itself on course of action. Hence, two safety nets are available. No demand beyond 18 months if no suppression of facts, wilful misstatement, fraud – penalty not imposable – otherwise demand can be upto 5 years and mandatory penalty equal to tax. Hence, advisable to make full disclosure to department, wherever in doubt. Usually not advisable to ask for clarification, as generally clear answers are not given. Continued….
Two safety nets in law (Continued) No penalty if service tax with interest paid before show cause notice and intimation given to department, except in cases of suppression of facts, wilful misstatement, fraud or collusion. Hence, if short payment was noticed either during your internal audit or during audit by service tax department (or even during visit of preventive people - usually called ‘raid’), pay service tax with interest and intimate department. Then penalty cannot be imposed.