The definition of Service in Service tax - Issues & Perspectives A presentation by RAVINDRAN PRANATHARTHY B.Sc, M.L, PGDM (Germany), Advocate – Indirect taxes Member- ICAI Indirect Taxes Committee

The changed Service tax….. Ahead of GST curve Vast extent & application High tide of Service sector growth Filling the treasury Road Ahead

The tax model from 1 st July, 2012…. Universal taxation of services except- Non-services under Section 65B (44) Non-taxable Services under Section 66D List of exempted services under notification 25/2012 Services provided & received in non- taxable territory

The way it is statutorily defined……too broadly… “Service" means any activity carried out by a person for another for consideration, and includes a declared service – but does not include Transfer of title in goods or immovable property by way of sale or gift or in any other manner

Defining Service…. Transfer, delivery or supply of any goods which is a Deemed Sale as per clause (29A) of Art 366 of the Constitution Transactions in money (barring money- changing for a fee) Actionable claims

Defining service Provision of services by an employee to an employer in the course of or in relation to his employment Fees “ taken “ in any Court or Tribunal established under any law

Controversial explanatory clause no 3 For the purposes of this Chapter,- (a) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons.

Extra definition added by CBEC education guide……. 2.3: Activity for a consideration The concept ‘activity for a consideration’ involves an element of contractual relationship wherein the person doing an activity does so at the desire of the person for whom the activity is done in exchange for a consideration

The extra definition….. An activity done without such a relationship i.e. without the express or implied contractual reciprocity of a consideration would not be an ‘activity for consideration’ even though such an activity may lead to accrual of gains to the person carrying out the activity.

What is missing in the definition…. Exemption as non-services in Section 65 (44) for the following: Private transactions Transfer of business as a going concern as such or an independent part thereof Mergers & acquisitions of business organizations

Now for the issues….. Will all activities involving contractual reciprocity be taxable, in general terms? Will cases involving absence of contractual reciprocity be immune from service tax?

Some examples….. Liquidated damages for breach of contract Forfeitures {say, an EMD} Quantum Meruit cases Special cases – award/compensation under, say, Estoppel by encouragement and Restitution

Actionable claim Vs Chose in Action Actionable claim is not a service, but goods though excluded in several laws But assignment of actionable claim for a consideration is held to be taxable in the CBEC education guide – how valid? Actionable claim is narrower than chose in action and limited to unsecured debts, does not cover demands & damages

More areas…. Guarantee / Indemnity fees Costs awarded in litigation Exemplary damages Environmental payments – on principles such as polluter pays

Taxable persons…. "Person" includes,- (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a society, (v) a limited liability partnership, (vi) a firm,

Taxable persons…. vii) an association of persons or body of individuals, whether incorporated or not, (viii) Government, (ix) a local authority, or (x) Every artificial juridical person, not falling within any of the preceding sub- clauses;

India defined….. "India" means,- (a) The territory of the Union as referred to in clauses (2) and (3) of article 1 of the Constitution; (b) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976; (80 of 1976.)

India…. (c) The seabed and the subsoil underlying the territorial waters; (d) The air space above its territory and territorial waters; and (e) the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof;

Problem areas in the negative list of services & exempted services Transportation of goods by Road except by a GTA or Courier agency Transfer of a going concern or an independent part thereof Support services provided by government

Taxing ‘private’ justice…. Fees taken in a court or tribunal are non- taxable Arbitration is a statutory mechanism There is no contractual reciprocity between arbitrators and the parties in relation to the fees ‘taken’

Taxing Hire-purchase….. Hire-purchase is primarily a contract of hire that can transform and end in a contract of sale at the conclusion of the hire During the hiring, the possession, use and control of the goods is with the user Such possession and use puts HP cases outside service tax despite section 66E

High tax values in works contract services…. VAT Acts in India have service & service profit portion fixed for varying composite contracts at rates ranging from 15 to 30% (50% for dyeing & printing) of the contract value But Service tax Valuation Rules fix tax values at a higher 40%, 60% & 70% High tax burdens for works/composite contracts in India

Lack of demarcation with VAT Common value chain between VAT & Service tax in several areas such as software, deemed sales SC judgment in Imagic Creative has largely been ignored Software licenses assessed to Kilograms in Customs & Excise tariff entry , taxed in VAT & Service tax too

Negative List…. Negative list of services. 66D. The negative list shall comprise of the following services, namely:- (a) Services by Government or a local authority excluding the following services to the extent they are not covered elsewhere- (i) Services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government

Negative list Services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport; (iii) Transport of goods or passengers; or (iv) Support services, other than services covered under clauses (i) to (iii) above, provided to business entities;

Negative list… b) Services by the Reserve Bank of India; (c) Services by a foreign diplomatic mission located in India;

Negative list Services relating to agriculture or agricultural produce by way of- (i) Agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or seed testing

Negative list (ii) Supply of farm labour; (iii) processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market;

Negative list Renting or leasing of agro machinery or vacant land with or without a structure incidental to its use; (v) Loading, unloading, packing, storage or warehousing of agricultural produce; (vi) Agricultural extension services;

Negative list (vii) Services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce;

Negative list (e)Trading of goods; (f) Any process amounting to manufacture or production of goods; (g) Selling of space or time slots for advertisements other than advertisements broadcast by radio or television;

Negative list (h) Service by way of access to a road or a bridge on payment of toll charges; (i) Betting, gambling or lottery; (j) Admission to entertainment events or access to amusement facilities; (k) Transmission or distribution of electricity by an electricity transmission or distribution utility;

Negative list Services by way of- (i) Pre-school education and education up to higher secondary school or equivalent; (ii) Education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force;

Negative list iii) Education as a part of an approved vocational education course; Services by way of renting of residential dwelling for use as residence; (n) Services by way of- (i) Extending deposits, loans or advances in so far as the consideration is represented by way of interest or discount;

Negative list (ii) Inter se sale or purchase of foreign currency amongst banks or authorized dealers of foreign exchange or amongst banks and such dealers;

Negative list (o) Service of transportation of passengers, with or without accompanied belongings, by- (i) a stage carriage; (ii) Railways in a class other than- (A) First class; or (B) An airconditioned coach;

Negative list (iii) Metro, monorail or tramway; (iv) Inland waterways; (v) Public transport, other than predominantly for tourism purpose, in a vessel between places located in India; and (vi) metered cabs, radio taxis or auto rickshaws;

Negative list p) Services by way of transportation of goods- (i) By road except the services of- (A) a goods transportation agency; or (B) a courier agency;

Negative list ii) by an aircraft or a vessel from a place outside India to the first customs station of landing in India; or (iii) by inland waterways; (q) Funeral, burial, crematorium or mortuary services including transportation of the deceased.

Declared Services…. Declared services. 66E. The following shall constitute declared services, namely:- (a) Renting of immovable property; (b) Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority.

Declared services… (c) Temporary transfer or permitting the use or enjoyment of any intellectual property right; (d) Development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software;

Declared services… e) Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; (f) Transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods;

Declared services g) Activities in relation to delivery of goods on hire purchase or any system of payment by instalments; (h) Service portion in the execution of a works contract;

Declared services… i) Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.

Defining a Business entity….too broadly for comfort "Business entity" means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession;

Works Contract as defined now……a mixed bag…. "works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

Works contract service….. Taxation when the gross amount charged can be split between material and service portions Otherwise abatement option, as follows: Works contracts relating to – Original works – tax Repair & Maintenance of goods –tax 70%

Works contract service…… Other works contracts including Repair and Maintenance of immovable property, completion & finishing service thereof – tax No input cenvat credit.

What is “Original” Work? All new construction All types of addition, alteration to abandoned or damaged structures on land that are required to make them workable Erection. Commissioning or installation of plant, machinery or equipments or structures, whether prefab or otherwise

What is “total amount charged” ( Tax value) The sum total of the gross amount charged for the works contract, and The fair market value of all goods & services supplied in relation to the works contract Less – The amount charged for such goods The amount of VAT levied, if any

Renting as now defined…… “Renting" means allowing, permitting or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property;

Point of Taxation Rules….. Know these important Rules…. Rule 1 – Entry into force from 1 st April, (Optional from ) Rule 2 – definitions such as associated enterprise, continuous supply of service, invoice, point of taxation, taxable service…

POT Rules… Rule 3 – Determination of point of taxation: Earliest of the following: Date of issue of invoice for the service provided or to be provided Date of completion of service, where invoice is not issued within 30 days of completion of the service

POT Rules… Receipt of payment for the service before issue of invoice or completion of service, and this will include any advance payment for the provision of service Rule 4 – point of taxation in case of change of tax rate Rule 5 – point of taxation in case of new services

POT Rules… Rule 6 – Point of taxation in the case of continuous supply of services - omitted Rule 7 – Point of taxation for specified services and persons Rule 8 – Point of taxation for IPRs Rule 9 – Transitional provisions

Place of Provision of Service Rules……. Location of the service recipient is the general norm POP for performance –based services POP for services relating to immovable property POP for services related to events POP for multi-location services

PPS Rules… POP when both service provider asnd recipient are located in the same taxable territory POP for specified services: BFS Online Info, Database access or retrieval services Intermediary services Services of hiring of transport vehicles for upto one month

PPS Rules… POP for Goods Transportation services POP for GTA services POP for Passenger transportation service POP for services provided on board a conveyance Order of application of Rules

Services giving rise to reverse charge on service recipients.. Insurance GTA Arbitration Legal service by advocates/ a firm of advocates Manpower supply

Reverse charge… Hiring of motor vehicles Works contractor service Sponsorship Support services by government Company Directors Security service Import of service from abroad

Input services…for cenvat credit…. "input service" means any service,- (i) used by a provider of output service for providing an output service; or (ii) used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal,

Input services specifically included……. and includes services used in relation to -modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry, security, business exhibition, legal services, inward transportation of inputs or capital goods and outward transportation upto the place of removal;

Input services do not include…. services provided by way of renting of a motor vehicle, in so far as they relate to a motor vehicle which is not a capital goods; or (BA) service of general insurance business, servicing, repair and maintenance, in so far as they relate to a motor vehicle which is not a capital goods, except when used by -

Input services excluded… a) a manufacturer of a motor vehicle in respect of a motor vehicle manufactured by such person ; or (b) an insurance company in respect of a motor vehicle insured or reinsured by such person; or

Excluded input services… such as those provided in relation to outdoor catering, beauty treatment, health services, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefits extended to employees on vacation such as Leave or Home Travel Concession, when such services are used primarily for personal use or consumption of any employee.