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…..
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Ahead of GST curve
Vast extent & application
High tide of Service sector growth
Filling the treasury
Road Ahead
The tax model from 1st July,
2012….
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Universal taxation of services exceptNon-services under Section 65B (44)
Non-taxable Services under Section 66D
List of exempted services under
notification 25/2012
Services provided & received in nontaxable territory
The way it is statutorily
defined……too broadly…
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“Service" means any activity carried out
by a person for another for consideration,
and includes a declared service – but
does not include
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Transfer of title in goods or immovable
property by way of sale or gift or in any
other manner
Defining Service….
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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 moneychanging for a fee)
Actionable claims
Defining service
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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
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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…….
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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…..
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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….
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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…..
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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…..
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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
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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….
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Guarantee / Indemnity fees
Costs awarded in litigation
Exemplary damages
Environmental payments – on principles
such as polluter pays
Taxable persons….
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"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….
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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 subclauses;
India defined…..
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"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….
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(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
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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….
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Fees taken in a court or tribunal are nontaxable
Arbitration is a statutory mechanism
There is no contractual reciprocity
between arbitrators and the parties in
relation to the fees ‘taken’
Taxing Hire-purchase…..
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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….
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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
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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 4907 00
30, taxed in VAT & Service tax too
Negative List….
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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
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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…
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b) Services by the Reserve Bank of India;
(c) Services by a foreign diplomatic
mission located in India;
Negative list
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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
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(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
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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
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(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
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(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
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(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
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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
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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
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(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
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(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
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(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
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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
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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….
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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…
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(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…
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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
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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…
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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
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"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….
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"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…..
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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 value @40%
Repair & Maintenance of goods –tax value @
70%
Works contract service……
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Other works contracts including Repair
and Maintenance of immovable property,
completion & finishing service thereof –
tax value @60%
No input cenvat credit.
What is “Original” Work?
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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)
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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……
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“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…..
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Know these important Rules….
Rule 1 – Entry into force from 1st April,
2011 - (Optional from 1-7-2011)
Rule 2 – definitions such as associated
enterprise, continuous supply of service,
invoice, point of taxation, taxable
service…
POT Rules…
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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…
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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…
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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…….
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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…
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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…
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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..
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Insurance
GTA
Arbitration
Legal service by advocates/ a firm of
advocates
Manpower supply
Reverse charge…
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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….
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"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…….
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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….
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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…
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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…
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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.