OVERVIEW OF COMPOSITION,
SERVICE TAX & ABATEMENT
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A. VALUATION OF SERVICE
1. VALUE OF SERVICE FOR PAYMENT OF SERVICE TAX
a. Gross amount charged by service provider for service provided or to be provided –
section 67.
b. Value of taxable service + service tax = Gross amount charged.
c. If service tax not charged separately, the gross amount charged should be taken as
inclusive of service tax and then back calculations should be made to arrive at
value of service and service tax payable thereon.
d. Amount may be received before, during or after provision of service.
e. Any specific service not defined w.e.f. 1-7-2012. Hence, scope of service can be
determined by mutual agreement between service provider and service receiver.
2. NO TAX ON VALUE OF GOODS
a. Price of goods cannot be included in value of services – Bharat Sanchar Nigam Ltd.
v. UOI (2006) 3 SCC 1 = 152 Taxman 135 = 3 STT 245 (SC 3 member bench).
b. In Imagic Creative Pvt. Ltd v. CCT (2008) 2 SCC 614 = 12 STT 392 (SC), it has been
held that service tax and Vat (sales tax) are mutually exclusive. In case of a
composite contract, Vat cannot be imposed on portion relating to value of service.
As an obvious corollary, service tax cannot be imposed on value of material.
c. Section 67 – Service tax only on ‘gross amount charged by service provider for such
taxable services provided or to be provided’.
d. Section 66B – service tax on value of service (i.e. not on value of goods)
3. ISSUES RELATING TO SOME SERVICES
a. Spare parts used while repairs –not taxable if billed separately – It is not works
contract service.
b. The reason is that the definition of ‘deemed sale’ in Article 366(29A) does not say
that the definition is only for purpose of sales tax. Thus, that definition will be
applicable to all contracts executed in India after 1983.
c. Photography paper or Xerox paper – my view – It is ‘works contract service’ as per
definition revised w.e.f. 1-7-2012
d. Cleaning material used while providing cleaning services – in my view – includible as
it gets consumed and its property is not transferred to the customer (service
receiver).
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4. CONSIDERATION OTHER THAN MONEY
a. Consideration for service – partly money partly other than money – then value of such
consideration to be added.
b. Valuation will be on basis of ‘amount equivalent to consideration’ as provided in
section 67(1)(ii) [faulty drafting].
5. FUEL SUPPLIED TO SERVICE PROVIDER
a. Fuel supplied to service provider (e.g. for construction equipment, rented vehicle)
b. In my view if scope of service specifically excludes such supply, its value is not
includible
c. The reason is that w.e.f. 1-7-2012, any specific service has not been defined – thus,
scope of service can be decided by mutual agreement
6. Valuation Rules
a.
b.
c.
d.
Valuation Rules apply subject to section 67
Gross amount charged for similar services [rule 3(a)]
Equivalent money value of consideration which shall not be less than cost [rule 3(b)]
Distinction between cost and value
7. Charges which are not part of value of service
a. Some expense incurred by service provider for administrative convenience and then
recovered from service receiver.
b. Reimbursements of expenses incurred by service receiver which are not part of value
of service are not includible.
c. This is the basic concept of ‘pure agent’ contained in Service Tax Valuation Rules.
8. Gross Amount charged for service
a. Service tax is not payable on any other amount charged and/or recovered from
service receiver if it is not part of value of taxable service
b. Examples – Advertisement Agent collecting advertisement charges plus his
commission, Air Travel Agent collecting air fare plus his commission, Customs House
Agent paying for various expenses incurred by him at Port on behalf of customer and
then recovering the same plus his charges
c. In aforesaid cases, the advertisement charges, air ticket charges or expenses incurred
by CHA in port are not part of value of service and hence not includible in value for
service tax.
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9. Cost and Expenditure relating to service is includible
a. Travelling Expenses, hotel expenses incurred by CA, Maintenance Engineer or
Management Consultant in the course of providing his service
b. Out of pocket expenses incurred while providing taxable service – these are includible
as service cannot be provided without incurring these expenses.
c. Now the issue arguable under new provisions w.e.f. 1-7-2012, as any specific service is
not defined – thus it can be argued that scope of service can be fixed by mutual
agreement.
10. Pure Agent
a. Various charges recovered by service provider from service receiver and paid to
concerned third party are not includible in value if these expenses which is not part of
service.
b. Liability of service receiver, but expenses incurred by service provider for
administrative convenience and recovered from customer.
c. These are not part of value of taxable service and not includible (even if all
requirements of pure agent not satisfied).
11. Requirement of pure agent
a.
b.
c.
d.
Payment to third party on behalf of service provider under authority
Amount to be separately indicated in Invoice
Only actual amount should be recovered
Title in goods and services not held by pure agent
12. Illustrations of pure agent
a. Octroi/Entry tax paid by Agent
b. Customs duty, transport, warehousing charges paid by Custom House Agent (CHA).
c. Parking fees, toll naka charges by person renting motor vehicle for transport of
passengers (rent-a-cab operator).
d. Air fare/rail fare paid by Agent
e. Distinction between ‘bundled service’ and service as ‘pure agent’ – Bundled service
means all expenses incurred or sub-services provided are part of main service, while in
case of ‘pure agent’, the expenses incurred are not part of the service.
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13. Illustration when payment not as Pure Agent
a. Rent, telephones, transport expenses incurred by C&F Agent\
b. Travelling expenses of Auditor, Consulting Engineer, Maintenance Engineer,
Management Consultant (now issue arguable)
c. Charges of salary of labour by Labour Contractor (though in my view, issue is
debatable since the service of labour contractor is only to bring labour to the
Principal Employer).
14. Service provider padding the amounts to be recovered from customer
a. As per the definition of ‘pure agent’, the amount recovered from customer is not
includible if it is recovered on actual basis.
b. In many cases (e.g. CHA, goods transport, freight forwarder etc.), the expenses are
padded and higher amounts are charged in the Bill.
c. In Bax Global India v. CST (2008) 13 STT 263 (CESTAT), it was held that if the service
provider earns profit on these activities, it is not includible in value of his services –
relying on Baroda Electric Meters Ltd. v. CCE 1997 (94) ELT 13 (SC 3 member).
d. However, surely the issue is litigation prone.
15. Other provisions in service tax valuation
a.
b.
c.
d.
e.
f.
Service tax is payable on net amount excluding Vat, if payable on that transaction.
Vat payable on service tax amount if State Law definition covers such amount.
Service tax is payable on gross amount including TDS.
No service tax on (really) free services
Service tax, excise duty and customs duty are independent duties.
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.
16. Composition Schemes
a. In some cases, finding of value of service is not easy e.g. sale or purchase of foreign
exchange, air travel agent – in such cases, optional composition schemes provide
b. In case of composite contracts, e.g. construction, finding value of service is difficult. In
such cases, optional composition schemes are available
17. Abatement schemes
a. In case of some services, abatement is available i.e. part of tax is exempted – e.g. 40%
in case of air travel, 25% in case of GTA service
b. Restrictions on Cenvat Credit
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B. ABATEMENTS AND COMPOSITION UNDER SERVICE TAX
1. Composition Schemes
a. In some cases, finding of value of service is not easy e.g. sale or purchase of foreign
exchange, air travel agent – in such cases, optional composition schemes provided.
b. In case of composite contracts, e.g. construction, finding value of service is difficult. In
such cases, optional composition schemes are available.
c. Each contract is a different contract and can be valued on different basis.
1.A
Services Under Composition Schemes
i.
Air Travel Agent – 0.6% (domestic travel) – 1.2% (international booking)
of basic fare – Rates specified in Rule 6(7)
ii.
Sale and Purchase of Foreign Currency – Rates specified in Rule 6(7B)
iii.
Life Insurance Service – Rates specified in rule 6(7A)
iv.
Lottery Ticket Promotion – Rates specified in Rule 6(7C)
1.B
Composition Scheme (Continued)
i.
Restaurant service – On 40% amount excluding Vat
ii.
Works Contract Service – On 40%/60%/70% value – Rules 2A of
Valuation Rules
iii.
25% Abatement Scheme if gross amount includes value of land
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B. ABATEMENTS AND COMPOSITION UNDER SERVICE TAX
2. Abatement schemes
a. Notification No. 26/2012-ST dated 20-6-2012 provides for abatement.
b. In case of some services, abatement is available i.e. part of tax is exempted – e.g. 40%
in case of air travel, 25% in case of GTA service, 40% in case of renting or hire of motor
vehicle to carry passengers.
c. Restrictions on Cenvat Credit
d. In some cases, abatement scheme is used as composition scheme
2.A
2.B
2.C
Abatements
i.
Mandap, Shamiana or convention along with food – 70% of amount
ii.
Chit Related Services – 70% – No Cenvat
iii.
Financial leasing and hire purchase – Management fee, processing
fees plus 10% of interest
iv.
Renting of motor vehicle – 40% – No Cenvat [reverse charge in some
cases]
v.
Renting of hotels, guest houses, clubs – 60%
vi.
Tour Operator – Package Tour – 25%, mere booking of hotel (including
room rent charges) – 10%, Other cases – 40%
vii.
Rail Transport of goods and AC/First class passengers – 10% w.e.f. 1-102012 [if not further extended]
viii.
GTA – 25% – No Cenvat
ix.
Passenger transport by air – 40% – Cenvat of only input services
allowable
Valuation under rule 6
Some abatements and compositions are subject to condition of nonavailment of Cenvat
ii.
In such cases, if Cenvat credit is taken, valuation for purpose of rule 6
of Cenvat Credit Rules (for payment of 6% ‘amount’ or reversal of
Cenvat) as per provisions in those Rules
i.
Abatement and Exemption Schemes at a glance
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2.C
Abatement and Exemption Schemes at a glance
TAXABLE SERVICES
Accommodation
booking service by tour
operator
PARTIAL ABATEMENT/
COMPOSITION
SCHEMES
CONDITIONS
10% of amount charged
(Abatement Scheme,
though really it is
composition scheme)
No Cenvat Credit.
Invoice should be
inclusive of cost of
accommodation
RELEVANT
NOTIFICATION / RULE
Sr. No. 11(ii) of
Notification No. 26/2012ST dated 20-6-2012.
Air Travel Agent
Option to pay service tax
at flat rate on ‘basic
fare’ @ 0.6% in case of
domestic booking and
1.2% in case of
international booking –
plus education cess
(Composition Scheme)
No restriction on
availment of Cenvat
credit
Rule 6(7) of Service Tax
Rules
Bundled service by way
of supply of food or any
other article of human
consumption or any
drink, in a premises (
including hotel,
convention center, club,
pandal, shamiana or any
other place, specially
arranged for organizing
a function) together with
renting of such premises
Tax on 70% of amount
charged including fair
value of goods and
services supplied by
service receiver (to
service provider) under
same or different
contract
(Composition Scheme)
Cenvat credit of input
services and capital
goods is available.
Cenvat credit on food
items (covered under
Chapters 1 to 22 of
CETA) not available.
Cenvat credit of other
inputs is available.
Sr. No. 4 of Notification
No. 26/2012-ST dated 206-2012
Chit related services
Tax on 70% of amount
charged (Abatement
Scheme)
No Cenvat Credit
allowed
Sr. No. 8 of Notification
No. 26/2012-ST dated 206-2012.
Financial leasing and hire
purchase
Tax on lease
management fee,
processing fee,
documentation charges
and administrative fee
plus 10% of interest
No restriction on
availment of Cenvat
Credit
Sr. No. 1 of Notification
No. 26/2012-ST dated 206-2012
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Construction of a
complex, building, civil
structure or a part
thereof, intended for a
sale to a buyer, wholly or
partly, if value of land is
included in the amount
charged from the service
receiver
Tax on 25% of amount
charged including fair
market value of all
goods and services
supplied by recipient
(termed as Abatement
Scheme – actually it is
composition scheme)
Cenvat credit of input
services and capital
goods can be taken but
not of input goods
Sr No. 12 of Notification
No. 26/2012-ST dated 206-2012
Foreign Currency – sale
and purchase
At slab rates prescribed
under rule 6(7B)on total
gross amount of
currency exchanged
(Optional Composition
Scheme)
No restriction on
availment of Cenvat
Credit
Rule 6(7B) of Service Tax
Rules
Foreign Currency – sale
and purchase
Value is difference
between buying or
selling rate and RBI
reference rate (Normal
Scheme of valuation)
No restriction on
availment of Cenvat
Credit
Rule 2B of Service Tax
(Determination of
Value) Rules
Life Insurance
3% of net premium
(excluding investment or
savings part, if such
amount is informed to
policy holder) – If not so
informed, 3% in first year
and 1.5% in subsequent
years(Composition
Scheme)
No restriction on
availment of Cenvat
Credit
Rule 6(7A) of Service Tax
Rules
Lottery ticket promotion
` 7,000 or ` 11,000 per `
10 lakhs of tickets printed
by State
lottery (Composition
Scheme)
No restriction on
availment of Cenvat
Credit
Rule 6(7C) of Service Tax
Rules
Tax on 60% amount
excluding State Vat
(Composition Scheme)
(Till 1-7-2012, it was 50%)
Cenvat credit of input
services and capital
goods is available.
Cenvat credit on food
items (covered under
Chapters 1 to 22 of
CETA) not available.
Cenvat credit of other
inputs is available.
Rule 2C of Service Tax
(Determination of Value)
Rules
Outdoor caterer
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Tax payable on 40% of
amount
charged (Abatement
Scheme)
No Cenvat credit
available
Sr. No. 9 of Notification
No. 26/2012-ST dated 206-2012
Restaurant service
Tax on 40% amount
excluding State Vat
(Composition Scheme)
(Till 1-7-2012, it was 30%)
Cenvat credit of input
services and capital
goods is available.
Cenvat credit of excise
duty on food items
(covered under
Chapters 1 to 22 of
CETA) not available.
Cenvat credit of other
inputs is available.
Rule 2C of Service Tax
(Determination of Value)
Rules
Renting of hotels, inns,
guest houses, clubs,
campsites or other
commercial places
meant for residential or
lodging purposes
Tax payable on 60% of
amount charged
(Abatement Scheme) (Till
1-7-2012, the tax
payable was on 50%
amount).
Cenvat Credit of input
services allowable but no
Cenvat credit of inputs
and capital goods
Sr. No. 6 of Notification
No. 26/2012-ST dated 206-2012
Tour operator – Package
tours (“package tour”
means a tour wherein
transportation,
accommodation for
stay, food, tourist guide,
entry to monuments and
other similar services in
relation to tour are
provided by the tour
operator as part of the
package tour to the
person undertaking the
tour).
Tax is payable on 25% of
gross amount charged
(Abatement Scheme)
No Cenvat credit
available.
Bill to be inclusive of all
charges for the tour.
Sr. No. 11(i) of
Notification No. 26/2012ST dated 20-6-2012
Tour operator – providing
services solely of
arranging or booking
accommodation for any
person in relation to a
tour (If Bill includes cost
of accommodation)
Tax is payable on 10%
of amount charged
(Abatement Scheme)
No Cenvat credit
available.
Bill to be inclusive of
charges for such
accommodation
Sr. No. 11(ii) of
Notification No. 26/2012ST dated 20-6-2012
Renting of motor vehicle
designed to carry
passengers
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Tour operator – Other
than package tours and
other than service of
booking
accommodation where
Bill includes cost of
accommodation
Tax is payable on 40% of
amount charged
(Abatement Scheme)
No Cenvat credit
available.
Bill to be inclusive of all
charges for the tour
Sr. No. 11(iii) of
Notification No. 26/2012ST dated 20-6-2012
Transport of goods by
rail
Tax payable on 30% of
amount charged
(Abatement Scheme)
No restriction on
availment of Cenvat
Credit
Sr. No. 2 of Notification
No. 26/2012-ST dated 206-2012
Transport of goods by
road by Goods Transport
Agency (GTA)
Tax payable on 25% of
amount charged
(Abatement Scheme)
No Cenvat Credit
available (Certificate
should be taken from the
GTA that he has not
availed Cenvat credit, as
tax is payable by service
receiver under reverse
charge – this headache
was not there earlier)
Sr. No. 7 of Notification
No. 26/2012-ST dated 206-2012
Transport of goods in a
vessel from one port in
India to another
Tax payable on 50% of
amount charged
(Abatement Scheme)
No Cenvat Credit
available)
Sr. No. 10 of Notification
No. 26/2012-ST dated 206-2012
Transport of passengers
by air
Tax payable on 40% of
amount charged
(Abatement Scheme)
Cenvat Credit of input
services allowable but no
Cenvat credit of inputs
and capital goods
Sr. No. 5 of Notification
No. 26/2012-ST dated 206-2012
Transport of
passengers by rail
Tax payable on 30% of
amount charged
(Abatement Scheme)
No restriction on
availment of Cenvat
Credit
Sr. No. 3 of Notification
No. 26/2012-ST dated 206-2012
Works Contract Service
Tax on value of service
calculated as per rule
2A(i) or Tax on
25%/40%/60% of gross
amount charged as
specified in rule 2A(ii)
(Composition Scheme)
Tax on 25% of amount
charged including fair
market value of all
goods and services
supplied by recipient
(termed as Abatement
Scheme – actually it is
composition scheme)
Cenvat credit of input
services and capital
goods is available.
Cenvat credit of excise
duty on goods, the
property of which is
transferred is not
available. Cenvat credit
of other inputs (like
consumables) is
available
Rule 2A of Service Tax
(Determination of Value)
Rules
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Telefax: 011-46664600, 29245500/5522/5533
Email: akg@akgindia.in
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