Service tax Overview

V S Datey
Website –
 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
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 42 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
 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
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
 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
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
 Software – entirely goods and service at one and same
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
 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
 Deemed sale of goods under Article
366(29A) of Constitution of India is
not ‘service’
 Mere transaction in money is not
What is not service - 2
 Mere Actionable claim – claim of debt or beneficial
interest in movable property, lottery ticket – it is not
 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
 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
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
 Thin distinction between sponsorship and
Negative List of Services
 Services by Government, RBI, foreign diplomatic
 Agriculture related services
 Trading is not service
 Activity that results in ‘manufacture’ of goods is not
 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
 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
 Funeral, burial or crematorium related services not
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
 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
Rate of tax, value and rate of exchange
[section 67A]
 Section 67A of Finance Act, 1994 has become effective from
 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.
Rate of Exchange
 Relevant in case of export and import of service
 Rate of Exchange will be as per rules to be notified
 At present, it is as per Customs Provisions i.e. as
notified by CBE&C – usually at the beginning of every
 W.e.f. 1-10-2014, it will be as per GAAP i.e. AS-11
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. 30/2012ST dated 20-6-2012 effective from 1-7-2012.
 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.
Precautions where reverse charge is
 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 Rs 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.
Precautions where reverse charge is
 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.
Reverse charge in case of some specific
 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
Reverse charge in case of some specific
 “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.
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
 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, though not legally
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 Rs
five lakhs in many States].
 Issue if employee on tour and then submits bill of
renting for reimbursement
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].
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.
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
 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.
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
 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.
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 Rs ten lakhs is available
to small firms.
Directors’ Remuneration
 Sitting fees and commission to non-wholetime and
independent directors - should be subject to service
 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
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.
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
 Accidental damages not relatable to provision of
service are not subject to service tax.
Abatement/ composition schemes w.e.f. 1-72012
 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, 25%, 30%, 40% and
70% schemes (33% scheme abolished w.e.f. 1-7-2012, 60%
scheme abolished w.e.f. 1-10-2014)
 Accommodation in hotel, inn, guest house - 60% w.e.f. 17-2012 - Cenvat credit of input service available [It was
50% without Cenvat credit upto 30-6-2012]
Abatement/ composition schemes w.e.f. 1-72012
 Restaurant service - 40% with Cenvat credit on input
services, capital goods and input goods excluding food
items) 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 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].
Canteen Services
 Canteen in factory or office is not ‘outdoor catering’ It
is actually eating joint or mess – not taxable if no AC
 If canteen is AC, no service tax if it is factory and it
employs more than 250 persons – in other cases,
service tax payable if canteen is AC
 If service tax is paid, 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
Cenvat Credit
 Cenvat Credit of input goods, input services and
capital goods
 Principle same as that of State Vat
Conventional Tax System
Value Added
Add Tax 10%
Tax credit System under Vat
Transaction without VAT
Transaction With VAT
Add Tax
Cenvat - Highlights
 Credit of excise duty on inputs and capital goods and
service tax on input services
 Credit of excise duty and service tax inter-changeable
 One to one co-relation not required in Vat/Cenvat
 Instant Credit
 Cenvat credit only on basis of specified documents
 Cenvat credit to be taken within 6 months
Cenvat credit of input service
 Cenvat credit can be taken on receipt of invoice of
service provider
 However, if payment is not made within 3 months, the
Cenvat credit is required to be reversed.
 If later payment made, Cenvat credit can be taken
 No such restriction in case of excise duty on inputs and
capital goods
Wasteful Expenditure as per department for noneligibility of Cenvat credit
 Open society - Building for office or factory is a waste –
expenditure relating to setting up unit – not eligible
 Motor vehicle, taxi is luxury – Cenvat not allowed –
service tax on air travel permitted
 Employee benefit is a luxury – canteen, club, LTA,
group insurance
 Consumables eligible as input for service provider, but
not parts, steel, cement etc.
Exempted goods and services
 Rule 6 applies where both exempted goods and taxable
goods are manufactured or exempted and taxable
services provided
 Three options – (a) Maintain separate inventory and
records (b) Pay 6% amount on exempted goods and
exempted services (c) Proportionate reversal of Cenvat
Input Service Distributor
 HO or Branch or Depot can pass on credit to factories.
 They have to register, file returns etc.
 Monthly Invoice
 No credit where input service exclusively for exempted
goods or exempted service
 Distribution on turnover basis
 On basis of turnover of previous year
Revamp accounting system
 Design accounting codes of suppliers to identify whether
they are individual, HUF, partnership firm, body corporate
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
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.
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.
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.
 Thanks
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