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Overview of Service Tax

July 24th, 2015

1 Background of service tax

¨     There is no Service Tax Act. Finance Act, 1994 is amended from time to time to make provisions relating to service tax.

¨     General rate is 14% w.e.f. 1-6-2015.

[earlier it was 12.36% plus education cess of 2%, plus SAH education Cess 1% Total – 12.36% w.e.f. 1-4-2012 and upto 1-6-2015)

¨     3 services were made taxable in July 1994. About 117 services covered till 2011

¨     Till 1-7-2012, service tax was based on positive list i.e. service listed in section 65(105) of Finance Act, 1994 were taxed.

¨     Disputes were occurring due to broad and vague wordings in definitions of various services.

¨     Now tax is payable on all services excluding those in negative list w.e.f. 1-7-2012.

2 Analysis of Charging section 66B of Finance Act, 1994

¨     Service tax at the rate of 12% on the value of all services, other than those services specified in the negative list

¨     Service provided or agreed to be provided

¨     In the taxable territory (Broadly, India plus 200 nautical miles inside the sea minus Jammu and Kashmir is ‘taxable territory’).

¨     By one person to another (Two persons required. One cannot provide service to oneself. Exception is that services by branch in India and branch of same entity outside India will be two different persons).

¨     And collected in such manner as may be prescribed (i.e. by making Rules)

¨     ‘Agreed to be provided’ is to cover situations where advance is received prior to provision of service. In that case, service tax is payable on receipt of advance (This is not so in case of State Vat or Excise) — In fact it can be argued that if agreement was executed before imposition of service tax, then no service tax is payable at all

3 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.

¨     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.

4 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 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 and headaches, it is advisable to date invoice prior to 30-6-2012.

5 Advance received prior to 1-7-2012

¨     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.

¨     This is also provided in Rule 5(b) of Point of Taxation Rules which provides that if advance was received prior to 30-6-2012, service tax will not be payable if invoice issued within 14 days [Relief in case of services newly taxable]

¨     To avoid misuse, it has been provided that if assessee claims receipt of advance, the amount must be credited in his bank account within 4 days i.e. maximum before 4-7-2012 [In any case, now validity of cheque is only for 3 months]

6 Rate of Exchange

¨     Relevant in case of export and import of service

¨     Rate of Exchange as per GAAP i.e. AS -11.

¨     RBI Reference rate or rates announced by FEDAI is not relevant or rate at which Bank debited/credited account not relevant

7 Mega Exemption Notification

¨     In addition to services under Negative List, about 47 services exempted under Mega Exemption Notification No. 25/2012-ST dated 20-6-2012 (effective from 1-7-2012) are not taxable.

¨     We will see details under respective service heads

8 Abatements

¨     In case of some services, abatement is available under Notification No. 26/2012-ST dated 20-6-2012, subject to some restrictions on Cenvat Credit.

¨     In such cases, service tax is payable only on lower amount i.e. abated amount – e.g. on renting of vehicle service tax is payable on 40% of amount if Cenvat Credit is not availed.

9 Valuation and Description of Service

¨     Valuation will be as per section 67 of Finance Act, 1994 read with Valuation Rules

¨     Interpretation of description of service (classification of service) based on principles indicated in section 66F of Finance Act, 1994

10 Constitutional Background

¨     Many of provisions in service tax are based on provisions and restrictions in Constitution. Hence, necessary to understand some concepts of service tax.

¨     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 as follows –

¨     List I – Union List – Only Central Government can pass law

¨     List II – State List – Only State Government can pass law

¨     List III – Concurrent List – Both Central and State Government can pass law

11 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)

¨     Tax on advertisements in newspapers (Entry 92)

¨     Inter State Sales (Entry 92A)

¨     Tax on Services (Entry 92C – not yet effective)

¨     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)

12 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)

¨     Sale within State, other than newspapers (Entry 54)

¨     Betting and gambling (Entry 34)

¨     Tax on advertisements other than newspapers (Entry 55)

¨     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)

13 List III – Concurrent List

¨     Stamp duty is the only subject under taxation where some transactions are with Central Government (like stamp duty on receipts, bills of exchange, LC, transfer of shares, debentures, proxies) and balance powers are with States

14 Service tax imposed under Residual Entry in List I

¨     Service tax is presently imposed under Entry 97 of List I i.e. residual entry – It includes taxes covered in List II or List III.

¨     The implication is that if a transaction is fully covered under List II i.e. State List, service tax cannot be imposed.

¨     Thus, service tax cannot be imposed on sale of goods, deemed sale of goods, advertisements other than newspapers, tolls, consumption and sale of electricity etc.

¨     Overlapping in some cases – e.g. software, advertisements on TV and radio, sale of food.

15 Deemed Sale of goods – Article 366(29A) – 46th Amendment – 1982

¨     Concept of deemed sale introduced in 1982 vide 36th Amendment by introducing Article 366(29A) in Constitution of India.

¨     The deemed sale covers various transactions for purpose of sales tax though these are not ‘sale’ as per Sale of Goods Act.

¨     Sales tax can be imposed and in fact is imposed on these transactions.

16 Transactions covered under ‘deemed sale’

¨     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

¨     Supply of food by way of or as part of service or in any other manner

¨     Sale among unincorporated bodies

17 Service tax on portion of deemed sale of goods

¨     The ‘deemed sale’ as aforesaid has been specifically excluded from definition of ‘service’ itself vide section 65B(44) of Finance Act, 1994 introduced w.e.f. 1-7-2012.

¨     However, on some portion of ‘deemed sale’, service tax is imposed.

¨     Works contract is a composite contract which comprises of goods plus service but where the intention is not to sale ‘goods’ as ‘goods’. Examples are – sale of constructed flat, painting of car, taking Xerox copy or photograph etc.

¨     In such cases, Service tax is imposed on service portion of Works Contract and State Vat is imposed on goods portion.

¨     Service portion in activity of supply of food in any manner as part of that activity (like serving of food in restaurant or outdoor catering or catering as part of other services like mandap, shamiana, convention) is subject to service tax. State Vat is payable on goods portion.

18 Overlapping of State Vat and Service tax

¨     Hire purchase and financial lease – State Vat is payable on hire purchase and financial lease. In addition, service tax is payable on administrative charges, documentation charges, inspection charges etc. plus 10% of interest portion of the periodic instalment

¨     Operating Lease (Hire) –Vat is payable when possession and control is handed over to customer (e.g. crane or motor vehicle given without operator or driver) while service tax is payable when possession and control is not transferred (i.e. crane or motor vehicle is given with operator or driver)

¨     Transfer of Intellectual Property Right (IPR) – If temporary – service tax, If permanent – State Vat is payable.

¨     Software (both packaged and tailor made) has been held as goods  – then Vat should apply – However, in many cases, both Vat and service tax is paid – mainly because the seller of software does not want to take risk and buyer of software is not in dictating position.

19 Conclusion

¨     We saw some basic aspects of service tax relating to Constitution and taxability.

¨     Provisions relating to definition of service, negative list, declared service, interpretation of description of service, reverse charge, exemptions and abatements will be seen in subsequent chapters.

 

 

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