1. V S Datey dateyvs@yahoo.com Website – http://www.dateyvs.com

2. Background Service tax introduced in July 1994 on three services – scope expanded every year and about 117 services were taxable in year 2011 Practically, excluding statutory activities, basic education, medical services and legal services by individual advocate to individuals, all services were taxable even prior to 1-7-2012

3. Classification of services 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)

4. 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’ Advertisement except advertisement on TV and radio

5. Negative List (Continued) Toll charges (but service for collection of toll is taxable) Entertainment, amusement, gambling Transmission and Distribution of Electricity (not on private basis) Educational services, training in arts, culture, sports – no tax on midday meals and school bus services

6. Negative List (Continued) Renting for residential purposes Banking services other than interest and inter se sale or purchase of foreign currency among Banks and authorised dealers Passenger transport except in tourist vehicles and tour operators

7. Negative List (Continued) Transport of goods by rail, air or inland airways (except GTA, Courier, and inland waterways) No tax on import of goods by air or vessel Tax on rail transport on 30% value Funeral related services not taxable

8. Exemptions – Notification No. 25/2012-ST dated 20-6-2012 Medical services Charitable activities Religious ceremony and renting of religious places Individual advocate and firm of advocates to non- business entity Recreation relating to arts, culture, sports

9. Exemptions (Continued) Copyright, performing arts, sportsman (but not brand ambassador), sports sponsorship Parking services Job work of agriculture, textile processing, diamonds and gemstones, where principal manufacturer is paying excise duty Society to its members upto Rs 5,000 p.m. Infrastructure related services

10. Exemptions (Continued) Hotels, guest houses with less than Rs 1,000 per day tariff Goods transport upto Rs 750 per consignee Sub brokers, authorised persons, mutual fund agent exempt

11. 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

12. Registration Existing registration Certificate sufficient. Advisable file application electronically for amending registration certificate. Now only option available is ‘All taxable Services other than in Negative List’. Click and add. Get print out of the amended registration certificate and send copy to department.

13. Rate of tax, value and rate of exchange [section 67A] Section 67A of Finance Act, 1994 has become effective from 28-5-2012. As per section 67A, the rate of service tax, value of a taxable service and rate of exchange, in force or as applicable at the time when the taxable service has been provided or agreed to be provided is relevant. Service tax rate as applicable at the time when taxable service has been provided or agreed to be provided. Point of Taxation Rules relevant only to determine due date of payment of service tax and not rate of service tax, w.e.f. 28-5-2012.

14. No service tax on new services, if service provided prior to 1-7-2012 Many services have become taxable w.e.f. 1-7-2012, which were not taxable earlier. In view of section 67A (which is effective from 28-5- 2012), service tax will not be payable if service (which was not taxable prior to 30-6-2012) was provided prior to 1-7-2012, even if payment is received later. This will be so even if invoice was issued after 1st July 2012. However, to avoid controversy, it is advisable to date invoice prior to 30-6-2012 [Note that Point of Taxation Rules cannot override provisions of section 67A]

15. Advance received prior to 1-7-2012 in respect of services which were not taxable earlier Many services have become taxable w.e.f. 1-7-2012 which were not taxable earlier. Service tax is leviable on service provided or agreed to be provided [section 66B]. There cannot be two events for same taxable service. Hence, logically, the event which occurs first will determine tax rate i.e. receipt of advance or provision of service, whichever occurs first will determine rate and value of service tax [section 67A] If advance received prior to 1-7-2012 when service was not taxable, no tax even if service provided after 1-7-2012..

16. Reverse Charge Normally, service tax is payable by service provider. In case of some services, Service tax is payable (partly or fully) by service receiver under Notification No. 30/2012- ST dated 20-6-2012 effective from 1-7-2012. This is termed as ‘reverse charge’ Reverse charge provisions have been made applicable to works contract service, manpower supply service, security service, directors’ services, renting or hiring of motor vehicle to carry passengers, support services provided by Government and services of Advocates and firms of Advocates w.e.f. 1-7-2012. This is in addition to import of service, sponsorship service, GTA service and services of insurance agent which were already under reverse charge mechanism.

17. No reverse charge, if service provided prior to 1-7-2012 In case of some services, reverse charge mechanism is applicable w.e.f. 1-7-2012 i.e. service tax is payable (partly or wholly) by service receiver. In view of section 67A (which is effective from 28-5-2012), service tax will not be payable by service receiver under reverse charge mechanism, if service was provided prior to 1-7-2012, even if payment is made later. This will be so even if invoice was issued after 1st July 2012. However, to avoid controversy, it is advisable to date invoice prior to 30-6-2012 [Note that Point of Taxation Rules cannot override provisions of section 67A]

18. Precautions where reverse charge is applicable The service receiver, who is liable to pay service tax under reverse charge, cannot avail exemption of Rs 10 lakhs generally available to small service providers. He is liable even if the value services received by him is much less than ` ten lakhs The service receiver is liable to pay service tax (of his portion) even if the service provider is not registered under service tax or is availing exemption available to small service provider. Continued….

19. Precautions where reverse charge is applicable Where service tax is partially payable by service receiver, the service provider should charge only his portion of service tax (25% in case of manpower supply service, security service and 50% in case of works contract service) and indicate that balance service tax is payable by service receiver under Notification No. 30/2012-ST dated 20-6-2012 effective from 1-7-2012. Service receiver can be held liable to pay service tax even if entire service tax was charged and paid by service provider. Hence, no ‘short cuts’ should be found. Where service tax is payable under reverse charge, it should be paid by cash (i.e. GAR-7 challan only). It cannot be paid through Cenvat Credit. Continued….

20. Precautions where reverse charge is applicable In case of GTA service (tax payable on 25% of value) and renting of motor vehicle related services (tax payable on 40% of value), abatement is subject to non-availment of Cenvat credit by service provider. Hence, certificate should be obtained from service provider (either on the Invoice or by separate letter) that he has not availed Cenvat credit (Otherwise, you may be liable to pay service tax on entire value). Note that Cenvat credit on renting of motor vehicle to carry passengers is not available in most of the cases. Hence, it is cost to the company.

21. Reverse charge in case of some specific services In case of manpower supply service, security service, works contract service and renting of motor vehicle to carry passengers, service receiver is liable only when he is business entity registered as body corporate and service provider is individual, HUF, firm or AOP. In other cases, the service provider himself is liable. Definition of ‘works contract service’ covers both movable and immovable property related services. Hence, in addition to construction related services, services like AMC, job work (where it includes value of material used by job worker) will get covered under reverse charge mechanism. Continued….

22. Reverse charge in case of some specific services “Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.’ [Rule 2(g) of Service Tax rules, inserted w.e.f. 1-7-2012]. In case of services like cleaning, piece rate based contract work, the service receiver has to ensure that the labour brought by contractor does not work under the supervision or control of Principal Employer. The agreement should be clear on this aspect. Otherwise, the Principal Employer may be held liable to pay service tax under reverse charge.

23. Reverse charge in case of renting or hire of motor vehicle In case of renting or hire of motor vehicle, reverse charge applies only if vehicle is provided with driver. Service tax payable on 40% of value subject to condition of non-availment of Cenvat credit. Hence, advisable to get certificate from him that he has not availed Cenvat. Keep check in accounting system while passing of Bills. Continued….

24. Reverse charge in case of renting or hire of motor vehicle If motor vehicle is provided on hire (operating lease) without a driver, it is ‘transfer of right to use goods’. It is deemed sale of goods and then only State Vat provisions apply and not service tax. If the motor vehicle is given on hire without driver, the person providing such vehicle can claim exemption from State Vat if his turnover is below limits specified under State Vat Act [The limit is ` five lakhs in many States]. Issue if employee on tour and then submits bill of renting for reimbursement

25. Works contract service Revised definition of works contract service covers works contracts relating to both movable and immovable property (Till 30-6-2012, these covered only immovable property)..Comprehensive AMC, job work using own material (.e.g. job of painting car when the job worker uses his own paint), can get covered, in addition to construction services. Hence, service tax payable on 70% of value [Till 30-6-2012, there was no specific provision for these services]. Continued….

26. Works contract service In case of finishing service relating to immovable property (like painting, flooring etc.), service tax payable on 60% of value w.e.f. 1-7-2012 [Till 30-6-2012, there was no specific provision for these services] 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.

27. Deductions for salary of employee when subject to service tax Services provided by employer to employee are not outside definition of service, i.e. these can be taxable. Deduction from salary for services like telephones or transport services provided by employer will be subject to service tax. Deduction for rent for residential quarters will not be subject to service tax as there is no service tax on renting of immovable property. Continued….

28. Deductions for salary of employee when subject to service tax Deduction for canteen or food facility will not be subject to service tax as the service of food is not in AC or centrally heated restaurant with bar. In fact, whether canteen is restaurant or outdoor catering is debatable issue. No service tax on statutory deductions like PF, ESIC, TDS etc. Penalty imposed on employee may be subject to service tax. Notice pay recovered from employee should be subject to service tax.

29. Perquisites to employee subject to service tax? CBE&C has issued a draft circular on 27-7-2012, which states that services provided by employer to employee against a portion of the salary foregone by the employee will be considered as having been made for a consideration and thus liable to tax. Perquisites like use of car, telephone, gas, driver, gardener etc. can come under mischief of this service, since usually these are considered while calculating CTC (Cost to Company) in respect of an employee. Continued….

30. Perquisites to employee subject to service tax? It may be noted that services provided by employee to employer are excluded from definition of ‘service’ itself. It is well settled that consideration can be in cash or kind. In my view, the perquisites provided by employer to employee is not service provided by employer to employee, but part of consideration for services of employee [Of course, litigation is possible].

31. Salary to Partners Payment of salary to partner –– but legally partner is not employee – Remuneration to partner is only share of profit – Hence mere ‘transaction in money’ and not subject to service tax Alternate argument – By legal fiction – partner and firm are being treated as separate – hence employer employee relation – should not be taxable [seems litigation prone issue] In any case, exemption of ` ten lakhs is available to small firms.

32. Directors’ Remuneration Sitting fees and commission to non-wholetime and independent directors - should be subject to service tax Executive directors or wholetime directors – If there is Employer Employee Relation, then no service tax Company has to pay service tax under revere charge mechanism. Company can avail Cenvat credit Continued….

33. 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’. 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….

34. Agreeing to Tolerate an Act or Situation Rework charges, deductions on account of quality issues may be subjected to service tax. 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.

35. Changes in abatement/ composition schemes w.e.f. 1-7-2012 GTA service - 25% if no Cenvat availed - Hence, certificate should be obtained from GTA that he has not availed Cenvat credit [Till 30-6-2012, the condition about non-availment of Cenvat credit was not there] In case of works contract services, in addition to 40% schemes, schemes of 60% and 70% introduced w.e.f. 1-7- 2012 as explained above. In construction service, 33% scheme is not there w.e.f. 1- 7-2012. Hence, advisable to make invoice upto 30-6-2012. Accommodation in hotel, inn, guest house - 60% w.e.f. 1- 7-2012 - Cenvat credit of input service available [It was 50% without Cenvat credit upto 30-6-2012] Continued….

36. Changes in abatement/ composition schemes w.e.f. 1-7-2012 Restaurant service - 40% with Cenvat credit on input services, capital goods and input goods excluding food items) [It was 30% without Cenvat credit upto 30-6-2012]. Fair market value of goods and services supplied to be added. Tax on 60% if provided as outdoor caterer w.e.f. 1-7-2012 - Cenvat credit can be taken of input services, capital goods and input goods except of food items [It was 50% without Cenvat credit upto 30-6-2012]. Fair market value of goods and services supplied to be added. Tax on 70% if provided with convention centre, pandal, shamina etc. as a bundled service, w.e.f. 1-7-2012 - Cenvat credit can be taken of input services, capital goods and input goods except of food items [It was 60% earlier].

37. Canteen Services Whether canteen in factory or office is ‘restaurant’ or ‘outdoor catering’ is highly debatable issue. It is actually eating joint or mess – not taxable If canteen is held as ‘outdoor catering’, fair market value of goods and services supplied will have to be added. Further, Cenvat credit of service tax paid on canteen services is not available. Earlier definition of ‘outdoor catering’ is not applicable w.e.f. 1-7-2012. Hence, we have to go by trade understanding.

38. Input Service Distributor Calculations of distribution of Cenvat Credit by Input Service Distributor (ISD) In case of multi-locations of branches, advisable to transfer all credit to HO and then transfer on basis of turnover. If accurate monthly calculations are difficult, distribute as accurately as possible. Keep distribution of March pending and do it only after accounts are finalised.

39. Major changes which need immediate attention 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’. Many unexpected activities can come under this definition. Provisions of reverse charge have been extended to many services. Deductions from salary of employees, deduction from Bills of suppliers etc., extra charges recovered in sales invoices or debit notes will need close scrutiny. Continued….

40. Major changes which need immediate attention Point of Taxation Rules not applicable to determine rate of service tax w.e.f. 28-5-2012. Deductions from bills of vendors need scrutiny to see whether they come under ‘refraining from act’ Extra charges levied in Sales Invoices need close scrutiny Accounting system will need revamp to ensure capture of transactions subject to service tax or reverse charge.

41. Scrutiny of ledger of Sundry Creditors and sundry creditors Check for deductions made from Invoices of suppliers and service providers. Design codes to capture such transactions in Debit Notes. Check extra charges levied on the customer in invoices or through debit notes. Design accounting codes to capture such transactions. Normal price reductions or increases after negotiations is a normal business transaction. It is not refraining from act or tolerate an act.

42. Revamp accounting system Design accounting codes of suppliers to identify whether they are individual, HUF, partnership firm, body corporate etc. Design accounting codes to identify transactions where reverse charge mechanism applicable. Codes for deductions made from salary of employees. Codes on basis of availability or non-availability of Cenvat credit. Identify exempted services and exempt goods for purpose of rule 6 of Cenvat Credit Rules. Keep check list in accounting system itself for passing of bills or entering a transaction in books of account.

43. 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….

44. 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.

45. Thanks You can post your queries at www.taxmann.com/servicetaxqueries.a spx