Bimal Jain - ICSI · Workshop on Service Tax & VAT NIRC -ICSI Bimal Jain FCA, ACS, LLB, B.Com...

Workshop on Service Tax & VAT

NIRC -ICSI

Bimal JainFCA, ACS, LLB, B.Com (Hons)

Member of Indirect Tax Committee of PHD Chamber of Commerce FICCI & ASSOCHAM.Member of GST study circle committee of NIRC-ICAIMember of faculties in Indirect tax committee of ICAI/ICSI

1CS Bimal Jain 3/17/2011

Overview of scheme of Service tax & CENVAT Credit RulesRecent changes in Budget 2011‐ in CENVAT Credit Rules w.r.t. input services, Point of Taxation RulesDiscussion on important Services e.g. business support, Business Auxiliary, renting of immoveable property, Works contract, Information technology etc.Service tax refundsAreas where PCS can help ‐ registrations, record maintenance, assessments, litigations and special emphasis on refundsOverview of VAT/ CST lawsSale in the course of import/ Export Levy on intangibles Composition schemes & Works contractAreas where PCS can help ‐ registrations, record maintenance, assessments, litigations


Service tax introduced from Entry no. 97 “taxes on services” of list I of schedule VII to Constitution of India w.e.f 1‐7‐1994. Service tax was implemented across India except the state of J & K

It is governed by chapter V (S.65 to S.96) & VA ( S.96A to 96I w.e.f 14.5.2003) of Finance Act, 1994 & Service Tax Rules, Service tax (Determination of Value) Rules, Taxation of Services(Provided from outside India and Received in India) Rules, Export of Service Rules, Cenvat Credit Rules, Various Notifications/ Circulars issued by CBEC

Taxes on Services only – Not on Goods – Mutually exclusive of VAT‐ “Imagic Creative Pvt. Ltd. CCT (2008) 2 SCC 614” & Destination based Consumption Tax – “ALL India Federation of Tax Practitioners (2007) 7 SCC 527”


Taxable Service – S. 65(105) of the Finance Act – 117 Services

Taxable Event – S.66 of the Finance Act – Charging Section –Service provided or to be provided (16‐6‐2005) – Advance/ Chargeable to Service tax

Present rate of service tax is 10.3% including Ecess & SHEcess w.e.f 24‐2‐2009

No Definition of Service – Economic activity/ Value addition/ Intangible/ Perishable But "exempted services" means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of the Finance Act {U/R 2(d) of CCR, 2004}


Whether following is Service:‐ Sovereign/ Public Service – Not a Business activity‐ Trading – Per se is not Service – “Chetan Traders CCE (2008) 17 STT 318 (CESTAT)” – Whether exempted Service “Orion Appliances Pvt. Ltd. 2009(7)LCX 0230‐ Self Service – Service provided by one Unit to another Unit

of same Company “Senior Technical Manager, IOC Vs. CCE (2009) 19 STT 98 (CESTAT)” – But by one company to another company of same group “RPG Enterprises Vs. CCE (2009) 20 STT 548 (CESTAT)”

‐ Service provided by Club to it’s members – No Service provider – Permanent/ Temporary members – “Fateh Maidan Club”

‐ Retainer/ Contract basis – Employer/Employee‐ Sub‐Contract basis – Service provided on behalf of the

Client ‐ BAS5CS Bimal Jain 3/17/2011

Service Provider Service Service Receiver

Usually payable by the Service Provider on receipt of payment except for Associated enterprises – on booking entry

Except as specified under Reverse charge mechanism –U/S 68(2) ‐ Import of Service & GTA ( Specified categories)

Import of Services – Chargeability whether from 1‐1‐2005 or 18‐4‐2006 “Indian National Ship owners Association (2009) 18 STT 212” BOM HC DB”


Service tax payable on Gross amount charged for taxable Services provided or to be provided – S. 67 of the Finance Act

Payable on reimbursement of expenses which are part of Service but not payable‐ On payment made by Service Provider as Pure Agent of

Service Receiver;‐ On payment made by Service provider to 3rd Parties for

administrative convenience where requirement of Pure Agent is not satisfied

If Value is not ascertainable – Valuation on the basis of similar services or on the basis of value which is not less than cost.

Gross Amount charged for taxable Services – Taken as inclusive of Service tax and then payable amount calculated by back calculations


Turnover < Rs. 10 Lakhs in PY (Including Exempt & non‐taxable Services but registration required if Turnover > Rs. 9 Lakhs PA ‐Optional

No Exemption if Service provided under the brand name of other – Authorised Service Centre

No Exemption if Service tax payable under Reverse Charge Mechanism

Abatement allowed of materials used for the provisions of Services provided no Cenvat credit taken of the same –“Notification no. 12/2003‐ST dated 20‐6‐2003 & Notification no. 1/2006‐ST dated.1‐3.2006”


No Service tax on Export of Services & service provided to UN/ International Agencies

No Service tax on Services provided by RBI

Service provided to SEZ/SEZ’s Developer – No Service tax provided consumed wholly within SEZ – otherwise Refund claim by SEZ


Governed by sub clauses of S. 65(105) of the Finance Act;‐ Specific description preferred over General description –

S. 65(2)(a)‐ Classification as per essential character in case of

composite services – S. 65(2)(b)‐ Service appears earlier in the list of S. 65(105) if Service

cannot classified on above basis –S.65(2)(C)Services should predominantly Taxable Service

Introduction of New Service head means the said Service was not taxable earlier

Service excluded from one head cannot be classified under any other head


A Composite contract consisting of various services cannot be vivisected for the chargeability of Service tax

Indivisible Contract of Goods/ Services can be vivisected and service part of it subject to Service tax;‐ Repairs & Maintenance‐ Abatement for certain Services on materials used ‐ 67%

provided no Cenvat Credit taken‐ Work Contract composition – 4% except Cenvat Credit not

taken for input.


Service provider should register within 30 days from the date of commencement of taxable services; Filed electronically ‐Form ST‐1 – Deemed granted if not received within 7 days –PAN based registration number given in ST‐2

Centralized Registration – Service Provider providing the services from more than one premises of offices if he has centralized billing or accounting system

Input Service Distributor – HO/ Branch/ Depot can register as ISD and distribute credit to Centre providing taxable services


Service provider should prepare invoice within 14 days from the date of completion of taxable service or receipt of payment towards the value of taxable service, whichever is earlierPayment of Service Tax‐ On Collection basis i.e. receipt of consideration for taxable

Services provided or to be provided except Associated enterprises – payable as soon as book entry made

‐ by 5th from the end of the month (6th in case of e‐payment > Rs.10 Lakhs ) except March – 31st March for all assessee except Individual/ Partnership firm – 5th/ 6th from the end of Qtr

‐ Service tax paid in advance towards future liability – inform the Superintendents of CE within 15 days –Rule 6(1A) & Adjust the same – intimate details in subsequent Return filed

‐ Interest for late payment of Service tax – 13% PA (18%) –S.75 13CS Bimal Jain 3/17/2011

Half Yearly Return – Form ST 3 in triplicate – within 25 days from the end of Half Year – April/ Sep & Oct/March – Late Fees up to Rs. 2000 Service tax administered by the Central Excise Department –Adjudication order passed by Excise OfficerIf Service tax Not paid or Short paid – Demand can be raised with in one year from the relevant dateIf there is Fraud/ Suppression of facts/ Willful mis‐statement with an intention to evade taxes, then Demand can be raised within 5 Yrs from the relevant dateRectification of Order by CE officer – within 2 Yrs only for mistake apparent from the recordsAppeal against Order passed by CE officer – CE (A)/ CESTAT/ HC/ SC – 60 days/ 90 days/ 120 days from the date of order passed


“We are reaching the end of remarkable fiscal year. In a globalised world with its share of uncertainties and rapid changes, this year brought us some more opportunities and many challenges as we moved ahead with steady steps on the chosen path of fiscal

consolidation and high economic growth.”(Extracts from Speech of Mr. Pranab

Mukherjee)


Fiscal Consolidation and GrowthFiscal deficit for FY 2010‐11 – 5.1% (5.5% budgeted) ‐ For FY 2011‐12 Projected at 4.6%of GDP and placed at 4.1% for 2012‐13 and 3.5% for 2013‐14Revenue Deficit estimated at 2.3% of GDP (RE) for FY 2010‐11 and 1.8 per cent for FY 2011‐12Inflation ‐ Primary articles being reported at 18% during the period April to December 2010 as compared to 10%All subsidy related liabilities brought into fiscal accountingIncrease of 18.3 per cent in total Plan allocationIncrease of 10.9 per cent in the Non‐plan expenditureImplementation gaps, leakages from public programsDrift in governance and gap in public accountability ‐Corruption


GDP growth for FY 2010‐11 ‐ estimated at 8.6% (from 8% in 2009‐10)The GDP growth ‐ fairly broad‐based, with Agriculture, Industry and Services growing at 5.4%, 8.1% and 9.6%, respectively

17CS Bimal Jain

Components of India’s GDP

Share in

GDP* FY08 FY09 FY10 Q1

FY11 Q2

FY11 Q3

FY11FY11 (AE)

Agriculture, forestry & fishing 18.0 4.7 1.6 0.2 2.5 4.4 8.9 5.4

Industry (IIP) 19.0 9.5 2.6 10.2 11.6 9.0 5.6 8.0

Of which:

Mining & quarrying 2.0 3.9 3.6 10.6 8.4 7.9 6.0 6.2

Manufacturing 15.0 10.3 2.4 10.8 13.0 9.8 5.6 8.8

Electricity, gas & water supply 2.0 8.5 3.4 6.5 6.2 3.4 6.4 5.1

Construction 7.0 10.0 7.2 6.5 10.3 8.7 8.0 8.0

Services 56.0 10.5 9.6 8.5 9.4 9.9

of which:

Trade, hotel, transport & comm. 28.0 10.7 9.0 9.3 11.0 12.1 9.4 11.0Financing, insurance, real estate & business services 14.0 13.2 7.8 9.7 7.9 8.2 11.2 10.6

Community, social & personal services 14.0 6.7 13.1 5.6 7.8 7.4 4.8 5.7

Overall real GDP 100.0 9.2 6.7 7.4 8.9 8.9 8.2 8.6

3/17/2011

Exports have grown at 29.4% to reach USD 184.6 billion while the imports bill at USD 273.6 billion grew at 17.6%Disinvestment – INR 40,000 Cr ( AE 22,000 Cr FY 2010‐11)Forex reserves increased from USD 279.6 billion at the end of April 2010 to USD 297.3 billion at the end of December 2010Tax to GDP ratio ‐9.6% (Direct Tax – 5.4% & Indirect Tax –4.2%)

Big Ticket Reform: Budget 2011DTC by April, 2012Convergence to IFRS by April, 2011Companies BillGoods & Service Tax (GST) – Indirect Taxes


Lack of uniformity in tax rates

Lack of uniformity in classifications

Different threshold exemption limits

Different taxable events for different taxes o Excise – Manufactureo VAT/CST – Saleo Service tax – Rendering of services

Lack of Uniformity in Forms & Procedure, Appeals, Tax payments, etc.

Different base for levy of taxes

Cascading effects on costs – Cenvat, CST, etc. ‐??


Roadmap to GST:First Discussions Paper – 10 Nov 2009; 13th FC Report – 15 Dec, 2009; Comments of Dept of Revenue – 25 Jan, 2010Dual GST‐ Intra‐State Sale/Service ‐CGST & SGST ‐ Inter‐State Sale/IGSTConstitutional Amendment Bill – Empowers State to levy Service tax on Services and Central to levy VAT on intra‐State Sale of Goods – to be passed by 2/3 rd Majority in Parliament & Rajya Sabha & approved by minimum 15 StatesNSDL – Mr. Nandan Nilkani ‐ IT Infrastructure – 11 States –June, 2011April 2012 – Expected GST Rate


The rate of Service tax remains unchanged at 10% ad valorem (plus EC & SHE @ 2% & 1% respectively on Service Tax)Introduction of New Taxable Services: Date to be notifiedServices by air‐conditioned restaurants having license to serve liquor – Abatement of 70%/ No Cenvat Credit‐ K. Damodaraswamy Naidu 117 STC 1 (SC) – Article

366(29A)(f) – Supply of foods, liquor or other articles for human consumption as part of or incidental to any service, as Sale

Short‐term accommodation in hotels / inns/ clubs / guest houses etc. Short term accommodation for a continuous period of less than 3 months & Tariff > Rs. 1000/ day –Abatement of 50%/ No Cenvat Credit‐‐ Excluded under Renting Services – Chargeable to luxury tax

– Tata Sky Vs. State of Punjab 38 PHT 160 (P&H) ‐DTH21CS Bimal Jain 3/17/2011

Introductions of Point of Taxation Rules, 2011: 1/4/2011These rules provides for, inter alia, determination of the point of taxation ‐ Earliest of the following dates shall be the relevant date for levy of service tax:‐ date on which service is provided;‐ date of invoice; or‐ date of paymentHybrid system – Cash/ AccrualBilling done prior to 1/4/2011 not covered by these RulesConsequential changes to be made in Service Tax Rules, 2011 –for payment of service tax from receipt of payment to provision of servicesAssociated Enterprises – Point of Taxation ‐ Earliest of date of receipt/ issue of invoice/ Cr or Dr entry in books


Derogatory Changes:Power to issue search warrant U/S 82 ‐ Jt. Commissioner and the execution of search warrant at the level of SuperintendentProvisions relating to prosecution are proposed to be re‐introduced and shall apply in the following situations:

‐ Provision of service without issue of invoice;‐ Availment and utilization of Cenvat credit without actual

receipt of inputs or input services;‐ Maintaining false books of accounts or failure to supply any

information or submitting false information;‐ Non‐payment of amount collected as service tax for a period

of more than six monthsNo power of arrest and the prosecution can be launched only with the approval of Chief Commissioner


Expansion of scope of Existing Services:Club or association service S.65(105)(zzze) ‐ Widened to include services provided to non‐members‐ Fateh Maidan Club Vs. CTO (2008) 12 VST 598 (SC ‐3 Member bench) – “Club is agent of member”Business Support Service S. 65(105)(zzzq) – Widen to cover any kind of operational or administrative assistance Services by legal professionals have been widened to include: (Except Individual to Individual)

‐ advice, consultancy or assistance provided by a business entity to any person;

‐ representational services before any court, tribunal or authority provided by any person to a business entity; and

‐ services provided by arbitrators to business entities


Expansion of scope of Existing Services:

Life insurance business S.65(105)(zx) – ULIP ‐ Risk Cover & Services in relation to Management of Investments provided by an insurer or re‐insurer - No Break‐up: 1.545% of gross amount (1.03%)

Commercial training or coaching service S.65(105)(zzc) ‐ Recognized by the Law‐ Unrecognized coaching/ training provided by any institute

or establishment in any subject or field other than sports


Expansion of scope of Existing Services:Air travel services increased w.e.f 1/4/2011

‐ Domestic (Economy) ‐ From Rs.100 to Rs.150‐ International (Economy) ‐ From Rs.500 to Rs.750‐ Domestic (Other than Economy) – 10.3%

Money Changing Services – Rule 2B of Valuation Rules –Value shall be

‐ Buy/Sell Rate and reference rate declared by RBI‐ If reference rate not available then – Pay 1% on Rupee value of

the Transactions‐ Rate of composition under Rule 6(7B) lowered from 0.25% to

0.1%


Substitution of Existing Services:Authorized Service Stations S.65(105)(zo) ‐ Widened to include i) all persons and service stations, whether authorised or not, ii) engaged in services of repair, reconditioning, restoration or decoration of any motor vehicles except for goods carriage or 3 wheeler auto rickshawHealth Services S.65(105)(zzzzo) – Widen to cover:

‐ Any service provided by a centrally air‐conditioned clinical establishment having more than 25 beds for in‐patient Clinical establishment includes hospital, maternity home, nursing home, dispensary, clinic, sanatorium or any institution providing services for diagnosis, treatment or care for illness,disease, injury, deformity, abnormality or pregnancy in any system of medicine.


Substitution of Existing Services:‐ All diagnostic centers services carrying out diagnosis of

diseases through pathological, bacteriological, genetic, radiological, chemical, bio‐logical investigation or other diagnostic or investigative services with the aid of laboratory or medical equipment

‐ Services provided by doctors, not being employees, providing health‐related services from the premises of a clinical establishment – Employment Vs. Service

‐ Exemption ‐ Medical care provided by an establishment owned or controlled by the Government or local authority has been excluded from the ambit of service tax

‐ 50% AbatementPublic spending on 0.94% of GDP – 61%/China, 53%/Srilanka, 29%/Bhutan and Drugs account for 72% clinical expenses


Amendments in Export of Services Rules, 2005: 1/4/2011Certain Services re‐arranged:

Corresponding changes made in Rule 3 of the Taxation of Services (Provided from outside India and Received in India) Rules, 2006Because of changes made, certain services taxable if recipient located in India even when Service is performed outside India – Hence, necessary exemption granted to these services

29CS Bimal Jain

Name of Services Old Category New CategoryPreferential location and similar services iii iRail Travel Agent iii iiHealth service iii iiCredit rating agency ii iiiMarket research agency ii iiiTechnical testing and analysis ii iiiGoods transport agency ii iiiTransport of goods by air ii iiiOpinion poll ii iiiTransport of goods by rail ii iii

3/17/2011

No Service Tax on Export of Service as per Export of Service Rules, 2005 w.e.f 15‐3‐2005If paid then refundable ‐Rebate/ Refund of Service tax paid on input Services used for export of taxable Services ‐ Notification No. 41/2007‐ST Dated 6/10/2007 Superseded by Notification No. 17/2009‐ST Dated 7/7/2009Meet to satisfy specific & common conditions‐ Rule 3(i) Services related to Immovable Property outside

India‐ Rule 3(ii) Performance: Services partly performed outside

India ‐ Rule 3(iii) Location: Recipient is located outside India & for

business & CommerceCommon Condition for all 3 categories ‐Payment received in convertible FE


http://lawcrux/ST/stncsv/80252.htm

http://lawcrux/ST/stncsv/80252.htm

31CS Bimal Jain

MS USAH Co

Service Recipient

MS SingaporeS Co

Service Recipient

MS IndiaService Provider

Customers/ Beneficiary

India

Product SupportServices

Service Tax 125 Cr + Penalty 125 Cr; Pre deposit ordered – 70 Cr

3/17/2011

Service tax is payable by Service recipient of Services under Reverse Charge mechanism in cash/PLA –GAR 7 then Cenvat credit of the same is availed of the Service tax so paid as it is Input Services

Service tax is payable only when Service is received in India w.e.f 18‐4‐2006 “Indian National Ship owners Association (2009) 18 STT 212” BOM HC DB”

Treat the Services as Import – 3 categories‐ Immovable Property situated in India‐ Services partly performed in India‐ Service recipient is located in India for business &

Commerce


Exemption from Service Tax – w.e.f 1/3/2011Services tax has been exempted on business exhibitions held outside IndiaFollowing works contract services have been exempted:

‐ Construction of residential complexes or completion and finishing of a new complex under ‘Jawaharlal Nehru Urban Renewable Mission’ (JNURM) and ‘Rajiv Awaas Yojana’; and

‐ Services rendered within a port, other port and airport for construction, repair, alteration and renovation of wharves, quays, docks, stages, jetties, piers and railways.General insurance services provided for ‘Rashtriya Swashya Bima Yojna’ have been exemptedTransport of goods by air, road or rail from a place outside India to another destination outside India has been exempted –Import Rules


Exemption from Service Tax – w.e.f 1/3/2011Air fright which is included in the value of goods for levy of customs duty has been exempted from service tax – Import RulesAn exemption of 25% has been allowed on the taxable value provided in respect of services rendered in relation to transport of coastal goods and goods transported through national waterways or inland waterAmendment in Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007:Where CENVAT credit on inputs has been availed on works contract, availment of CENVAT credit on input services is restricted to 40% of tax paid on erection, commissioning and installation, commercial or industrial construction and construction of residential complex w.e.f 1/3/2011


SEZ Refund/ Exemption: – W.e.f 1/3/2011All services received by an entity in a SEZ, which does not haveany other DTA operations shall be considered as ‘wholly consumed’ services in SEZWholly consumed services within SEZ shall be fully exempted including exemption from payment of tax on reverse charge basis under Section 66A of the Finance ActRefund of the remaining services i.e., which are not wholly consumed shall be available on pro rata basis i.e. ratio of SEZ turnover to total turnover; andRule 6(6A) of CCR – Non applicability of Sub Rule (1), (2), (3) & (4) for Service provided without charging Service tax to Developers/ Units of SEZ for their authorised operations


Compliance related Changes:Maximum Penalty for delay in filing of return under Section 70 of the Finance Act is proposed to be increased from INR 2,000 to INR 20,000S. 73(1A) & (2) proposed to be deleted – benefit of reduced Penalty not available in case of fraud, suppression, collusion, etc.S. 73(4A) –Non Fraud Case ‐ Where true and complete records are available and service tax has not been levied, short levied,short paid or erroneously refunded – Pay Service tax and interest voluntarily + Penalty equal to 1% PM of such tax up to a maximum of 25%S.73B & 75 ‐ Interest rate for delayed payment of Service tax increased from 13% to 18% PA except for Tax payer having turnover < Rs. 60 Lakhs during any year(s) covered in the Notice ‐15% PA. – 1/4/2011 36CS Bimal Jain 3/17/2011

S. 76 is proposed to reduce Penalty for failure to pay service tax from INR 200 per day to INR 100 per day or from 2% of tax per month to 1% of tax per monthS.77 Maximum penalty for contravention of various provisions to be increased from INR 5,000 to INR 10,000S.78 Changes in Penalty

‐ Fraud, Suppression, collusion – Up to tax amount‐ True & Complete information – 50% of tax amount but may be

reduced to 25% if tax dues paid with in 1 month together with interest & reduced penalty – 90 days for Tax payer ≤ Rs. 60 LakhsS. 80 amended ‐ the power to waive penalty ‐ information is captured properly in the specified recordsIndividual & Sole Proprietorship ‐ turnover ≤ Rs. 60 Lakhs – Not subject to audit – Whether this Tax audit or Service tax audit


Service Provider can avail Cenvat Credit of‐ Service tax paid on Input Services‐ Excise duty/ CVD paid on Inputs/ Capital Goods

Service Provider can utilized the same for the payment of Service tax on taxable Output Services with few exceptions –GTA, Reverse Charge Payment

To avail Cenvat credit on the basis of proper & specified duty paying documents as per Rule 9 of CCR, 2004‐ Invoice, Supplementary Invoice‐ BE‐ TR 6 Challan/ GAR ‐7, etc.


Definition of Inputs/ Input Services – AmendedCENVAT credit allowed on CG used outside the factory of the manufacturer for generation of electricity used captively within the factoryThe definition of inputs ‐ Substituted to include:‐ All goods used in the factory of the manufacturer;‐ Accessories and goods cleared along with the final product,

provided value of such goods / accessories is included in the value of the final product;

‐ Goods used for providing free warranty for final products, where value of such warranty is included in the price of the final product and is not charged separately from the customer;

‐ All goods used for generation of electricity or steam for captive use


‐ All goods used for providing any output service; andCertain goods specifically excluded from Inputs:

‐ Light diesel oil, high speed diesel oil and motor spirit (petrol);‐ Goods used for civil construction of a civil structure by a

manufacturer or service provider, except for situations where such goods are used in provision of specified construction services;

‐ Motor vehicles;‐ Capital goods except when used as parts or components in the

manufacture of final product;‐ Food items, goods used in guest houses, residential colonies,

clubs and clinical establishment, used primarily for personal use or consumption by employees


‐ Goods which do not have any relationship with the manufacture of final products

The definition of Input services ‐ Amended to exclude services such as architect’s, commercial construction, etc., which pertain to construction of building, structure or support structure for capital goods, unless the same are used in provision of specified servicesFurther, expression ‘activities relating to business’ ‐ deleted from the inclusive part of the definition and ‘business exhibition’ and ‘legal services’ added in the list of services provided in the inclusive listServices relating to motor vehicles, such as rent‐a‐cab, supply of tangible goods for use, insurance or repair of vehicle would not qualify as an input service, except in respect of output services where credit of motor vehicle is permitted as ‘capital goods’ 41CS Bimal Jain 3/17/2011

Services used primarily for personal use or consumption of employees not qualify as an input service ‐ Services such as outdoor catering, beauty treatment, health services, membership of clubs etc., not constitute an input serviceExempted goods provided under the Credit Rules has been amended to include goods on which a concessional rate of Central Excise duty of 1% has been levied under Notification No 1/2011–CE dated 1 March 2011Manufacturer engaged in the manufacture of such exempted goods would not be able to discharge its obligation through utilization of CENVAT creditExempted services has been amended to include services which are partially exempted (on which abatements are prescribed) and on which CENVAT credit is not permitted to be availed or utilized ‐ Trading has been defined as an exempted service under the Credit Rule 42CS Bimal Jain 3/17/2011

Rule 6 of the Credit Rules – Takes Cenvat Credit on Inputs/ Input Services used for dutiable goods & taxable services but in case of both Dutiable/ Exempted goods or taxable or exempted Services ‐Manufacturer / Service provider can avail credit and follow any of the 3 options for reversal of inadmissible credits

‐ Maintain separate accounts for receipt, consumption and inventory of inputs and would be eligible to claim the CENVAT credit only of inputs used in relation to manufacture of dutiable goods / taxable service

‐ & With respect to input services, a manufacturer / output service provider ‐ required to follow the formula

prescribed for proportionate reversal under Rule 6(3A) of the Credit Rules


‐ Not able to maintain separate accounts – then pay 5% of exempted goods or exempted service (earlier 6%)

‐ Follow excel formula as determined under rule 6 (3A)

Rule 6(3A) – Value of Trading Services = SP less PP of Goods & Value of services covered under composition scheme defined

Banking or financial Institutions – Common Services used for investment/ interest income – Pay 50% of credit availed on Inputs/ Input Services & ULIP or Insurance Company ‐ Pay 20% of credit availed on Inputs/ Input Services

Rule 6(5) – allowing credit of 16 services – deleted


A service provider providing services to a unit located in a SEZor a developer of a SEZ would not be treated as an exempt service For SEZ – Rule 6(6A) inserted

Rule 3 (5B) ‐ Manufacturer / Output service provider who either partially or completely writes‐off or makes a provision of the value of any input or capital good (after claiming CENVAT credit on the same) to pay an amount equivalent to the entire CENVAT credit availed. Earlier, on such good, a manufacturer / output service provider was required to pay an amount in proportion to the value written off


Manufacturer / Service provider who has returned any payment towards an input service would be required to pay an amount equivalent to the CENVAT credit on the amount returnedQuarterly return being filed by a Manufacturer availing exemption under a notification would require to be submitted within 10 days as opposed to the earlier period of 20 daysFollowing Activities / processes amounting to ‘Manufacture’:‐ Labelling / re‐labelling or packing / re‐packing from bulk

packages into retail packs ‐ Chapter 22 (Beverages, Spirits and Vinegar) and activities such as affixing of brand names, in case of goods specified in Chapter 63 (Branded Textile articles; Conversion of ores to concentrates in case of

items specified in Chapter 26 (Mineral ores etc.) & Process of Galvanization in relation to iron and steel products falling under Chapter 72


U/S 65(105) (zzzz)– 1 June 2007 – Constitutional Validity:Renting per se is ServiceState Subject –Entry 49 of List II – State ListHome Solution Retail India Ltd and Others vs. Union of India mere renting of immovable property – not taxableService tax is Value Added Tax and applicable on Service Act of renting of immovable property not provide any value addition in lease ‐ the right of possession is transferred;The Hon’ble court has not given judgment on validity of Section 65 (105) (zzzz) of the Finance Act but quashed or set aside the operative part of the Notification No. 24/2007‐ST dated 22/05/2007 and Circular No. 98/1/2008‐ST dated 04/01/2008 which entails levy of service tax on renting of immovable property


Constitutional Validity: Disputes persists18‐4‐2009: Home Solution Retail India Ltd and Others Vs. UOI15‐7‐2009: Instruction no. 336/10/2009‐TRU – legislative intention of service tax on rentingBudget 2010: Retrospective Amendments w.e.f 1‐6‐2007 18‐5‐2010: Renting per se not Service by Delhi HC ‐ Home Solution Retail India Ltd and Others Vs. UOI 7‐6‐2010: AP HC –Trent Ltd. Vs. UOI – Retrospective amendment not valid but pay after 1‐4‐201022‐11‐2010: P&H HC – Shubh Timb Steel Ltd. Vs. UOI – Held Valid


Who is liable for Service tax: Service Provider/ Service Recipient‐ Pearey Lal Bhawan Association Vs M/s Satya Developers

Pvt Ltd (2011‐TIOL‐114‐HC‐DEL):‐ Service recipient is required to pay ST to service provider even if contract did not specifically mention it; it is service which is taxed, and levy necessarily means that user has to bear it: Delhi HC

‐ Thermal Contractors Association V/s. Director, Rajya Vidyut Utpadan Limited (2006 (4) STR 18(All ‐ HC) – Service Provider is liable


Issues: Double Taxation under Central Laws – Excise duty/ Service TaxPackaged software Vs. Customized softwarePhysical Delivery Vs. Electronic downloadService Vs. Goods ‐ Service Tax/ VAT or CST ‐ Mutually exclusive of VAT‐ “Imagic Creative Pvt. Ltd. CCT (2008) 2 SCC 614”Customs Duty: Goods – Physical Form/IT Software Goods: Physical FormExcludes Download from Internet/FTP vide Circular no. 58/ 2000‐Cus. dated 10 July 2000 (‘the Circular No. 58/2000’) read with RBI Circular 8/2006‐2007 BCD: FREE


Excise: Manufacture/ IT Software Packaged or Canned Software ‐ 8523 80 20 Manufacture: “recording” of sound or other phenomena shall amount to manufacture” – CIT Vs. Oracle software India (2010) 250 ELT 161 (SC)IT Software: “any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of an automatic data processing machine”Packaged Software: a software developed to meet the needs of variety of users, and which is intended for sale or capable of being sold, off the shelf ‐ Excisable Customized Software: any custom designed software ,developed for a specific user or client),other than packaged software or canned Software ‐Nil


Service Tax: w.e.f 16‐5‐2008 ‐ to any person, by any other person in relation to information technology software including,— “Packaged/Customized Software”development of IT Softwarestudy, analysis, design and programming of IT Softwareadaptation, upgradation, enhancement, implementation and other similar services related to IT Softwareproviding advice, consultancy and assistance on matters related to IT Softwareproviding the right to use information technology software for commercial exploitation including right to reproduce, distribute and sell IT softwareproviding the right to use information technology software supplied electronically


Clarification on whether Excise duty and Service tax payable –Notification no. 22/2009‐CE and 80/2009‐Cus dated 7‐7‐2009 ‐Value of software split into software media & right to use

Single Use packaged software – Notification no. 2/2010‐ST & 17/2010‐ST dated 27‐2‐2010 – No Service tax payable if excise duty/ CVD paid – Rescinded 51/2010‐ST & 52/2010‐ST dated 21‐12‐2010

Other packaged software –Notification no. 17/2010‐CE & 31/2010‐Cus dated 27‐2‐2010 – Excise duty payable for transfer of right to use of such software ‐ Rescinded 35/2010‐CE & 126/2010‐Cus dated 21‐12‐2010


Notification no. 53/2010‐ST dated 21‐12‐2010: the Service tax exemption granted in relation to providing right to use packaged or canned software upon following conditions:‘Packaged or canned software’ as specified goods subject to MRP based levy with abatement of 15 percent vide Notification No. 30/ 2010‐Central Excise (N.T.) dated 21 December 2010appropriate duties of excise or customs (including CVD) on such value have been paid; andservice provider declares on the invoice that no amount in excess of the retail sale price has been recovered from the customer


Payments of service tax and VAT are mutually exclusive “Imagic Creative Pvt. Ltd”Software –Goods & Supplied under EULA is Sale/Service and Constitutional Validity of levy of Service tax on IT Software‐“Infotech Software Dealers Association Vs. UOI”Upheld the validity of levy under Entry 97 (Residue)EULA – Right to use of software –Source code with OwnerSoftware – Packaged/ Customized – ‘Goods‘ ‐ tangible property or an intangible property provided it has (a) utility (b) capable of being bought and sold (c) capable of transmitted, transferred, delivered, stored and possessedSoftware – Right to use of Copyright Goods but Sale/ Service depends upon individual contract


Software is goods when recorded on a mediaTata Consultancy Services Vs. State of Andhra Pradesh [2004 (178) E.L.T. 22 (S.C.) Bharat Sanchar Nigam Limited Vs. UOI [2006 (2) S.T.R. 161 (S.C.) Sale or Right to use –Deemed Sale U/A 366(29A)(d) ‐ full possession and effective control is given to the transferee bothcovers for chargeability of VAT/CST

State of Madras v. Gannon Dunkerley & Co. Ltd. 2002‐TIOL‐493‐SC‐CT‐LB – Sale Vs. Service: Agreement to transfer title/ Supported by consideration, and Actual transfer of title in the goods.


http://www.taxindiaonline.com/RC2/subCatDesc.php3?subCatDisp_Id=50&filename=legal/sc/2002/2002-TIOL-493-SC-CT-LB.htm



Any service in relation to,‐‐ promotion or marketing or sale of goods produced or provided by or belonging to the client; or

‐ promotion or marketing of service provided by the client; or‐ any customer care service provided on behalf of the client; or‐ procurement of goods or services, which are inputs for the client; or

‐ production or processing of goods for, or on behalf of, the client;] or

‐ provision of service on behalf of the client; or‐ a service incidental or auxiliary to any activity specified in sub‐clauses (i) to (vi), such as billing, issue or collection or recovery, etc., and includes services as a commission agent, but does not include any activity that amounts to manufacture of excisable goods


VAT


59

Value Added

Tax

Value Added

Tax

CS Bimal Jain 3/17/2011

60

COUNTRY YEARFRANCE 1885JAPAN 1989PAKISTAN 1990BANGLADESH 1991CHINA 1994SRI LANKA 1995INDIA 2003

ORIGIN OF VAT


Objects

61

MAKES INDIAMAKES INDIASINGLESINGLE

ECONOMYECONOMYTRANSPARENCYTRANSPARENCY

INCREASEDINCREASEDTAX BASETAX BASE

NO NO CASCADINGCASCADING

EFFECTEFFECT

NEUTRALITY NEUTRALITY ININ

INDIRECT INDIRECT TAXESTAXES

NO REVENUENO REVENUELEAKAGELEAKAGE

REWARDSREWARDSPRODUCTIVITYPRODUCTIVITY

COMPETITIVECOMPETITIVEPRICESPRICES

VATVATRESULTSRESULTS

MAKES INDIAMAKES INDIASINGLESINGLE

ECONOMYECONOMY


62

Raw Material Raw Material ProducerProducer

GoodsGoodsManufacturerManufacturer

WholesalerWholesaler

RetailerRetailer

HappyHappyConsumerConsumer

Sale Rs 150Sale Rs 150Gross VAT Rs 15Gross VAT Rs 15

Net VAT Rs 5Net VAT Rs 5(15(15--10)10)

Sale Rs 100Sale Rs 100(VAT Rs 10)(VAT Rs 10)


Net VAT Rs 3Net VAT Rs 3(18(18--1515)


Net VAT Rs 2Net VAT Rs 2(20(20--18)18)

ASSUMING A VAT @10%

ASSUMING A VAT @10%


63

Input and Output Tax Input and Output Tax

Input Tax Output Tax

VAT paid by a registered Dealer on

taxable input purchases for business

VAT charged by a registered Dealer on sales made by the

business to its customers

Raw Mate

rials

Trading Goods Capital Goods

Consumables

Sales


64

ELIGIBLE PURCHASES FOR AVAILING INPUT TAX CREDIT

‐ For sale/resale within the State;‐ For sale to other parts of India in the course of inter‐state or commerce;

‐ to be used as‐(a) containers or packing materials;(b) raw materials; or(c) consumable stores,

‐ For being used in the execution of a works contract;‐ to be used as capital goods required for the purpose of manufacture or resale of taxable goods;

‐ to be sold in the course of export out of the territory of India;‐ For making zero‐rated sales


65

Common goods used for taxable goods and tax‐ free goods

Taxable goods mean goods other than the goods which are specified in the Schedule for tax‐free goods

Where the purchases goods are used partially for the purpose specified above, input tax credit shall be allowed proportionate to the extent the purchases are used for the purposes specified above.


66

PURCHASES NOT ELIGIBLE FOR INPUT TAX CREDIT

Input tax credit may not be allowed in the following circumstances;‐ Purchases from unregistered dealers;‐ Purchases from registered dealer who opt for

composition scheme’ under the provisions of the Act;‐ Purchase of goods as may be notified by the State Government; ‐ Purchase of goods where invoice does not shown the amount of taxseparately;

‐ Goods imported from outside the territory of India (commonly known as high seas purchases);

‐ Goods imported from other States viz. inter‐State purchases.


67

REFUND TO EXPORTERS

The White Paper provides for the grant of refund of input tax paid if the goods are exported out of the country ‐ within a specified period from the end of the period in which the transaction for export took placeDeemed Exports/ Physical Exports/ EOU/ SEZ


68

COMPOSITION SCHEME FOR SMALL DEALERS

STATE LAWS TO PROVIDE FOR COMPOSITION SCHEME ‐ The States have to provide composition scheme for small dealer’s i.e. the dealer whose total turnover exceeds Rs.5 lakhs but does not exceed Rs.50 lakhs. Such a dealer would have an option to pay a composite amount of tax based on its annual gross turnover at the applicable rate subjectIn such cases a dealer shall not be entitled to input tax credit on inputsDealer shall not be authorized to issue vat able invoices.


69

VAT ProceduresRegistration

‐ Any dealer is liable to pay tax‐ Purchase and sale of goods in the State ‐ If gross annual turnover exceed Rs.5 Lacs, however Empowered Committee of State Finance Ministers subsequently allowed the States to increase the threshold limit for the small dealers to Rs.10 lakhs

‐ New dealer will be allowed 30 days time from the date of liability to get registered

‐ An application for registration should be made to the VAT Commissioner

‐ Fails to obtain registration under the VAT Act, he may be registered compulsorily by the Commissioner/result in attracting default penalty and forfeiture


70

VAT ProceduresCancellation of registration

‐ Discontinuance of business; or Disposal of business; or

‐ Transfer of business to a new location; or‐ Annual turnover of a manufacturer or a trader dealing in designated goods or services falling below the specified amount.


71

TAX PAYER’S IDENTIFICATION NUMBER (TIN)

TIN (Tax Payer’s identification Number) is a code to identify a tax payerIt is the registration number of the dealerThe taxpayer’s identification number will consist of 11 digit numerals throughout the countryFirst two characters will represent the State code, The set‐up of the next nine characters will be, however, different in different StatesTIN facilitate computer applications


72

Stat

e C

ode

Stat

e C

ode

Cha

rge

Cod

eC

harg

e C

ode Number ProperNumber Proper

Act Identification CodeAct Identification Code

Che

ck D

igits

Che

ck D

igits

1 9 4 8 2 0 1 7 0 6

STRUCTURE OF PROPOSED 11 DIGIT REGISTRATION NUMBER

STRUCTURE OF PROPOSED 11 DIGIT STRUCTURE OF PROPOSED 11 DIGIT REGISTRATION NUMBERREGISTRATION NUMBER

4

VAT=0VAT=0 SST=1SST=1 CST=2CST=2


73

VAT INVOICE

Name and address of the selling dealer;Registration number of the selling dealer;Name and address of the purchasing dealer;Registration number of the purchasing dealer;Pre‐printed or self generated serial number;Date of issue;Description, quantity and value of goods sold;Signature of dealer or his/her representative.


74

RECORDS

Purchase records/ Sales recordsInput & Output VAT accountSeparate record of any Exempt saleCopies of all invoices issuedCopies of all credit and

debit notes issued, in chronological order;


75

RETURNS

Simple forms of returns ‐ to be filed monthly/quarterly/ annually as per the provisions of the State Acts/RulesReturns will be accompanied with the payment challanRequisite details such as output tax liability, value of input tax credit, payment of VAT etcIn case any mistake in original, dealer can be file Revised ReturnEvery return furnished shall be scrutinized expeditiously with in the prescribed time limit from the date of filing the return


76

Audit

Correctness of self‐assessment will be checked through a system of Departmental AuditCertain percentage of the dealers will be taken up for audit every year on a scientific basisApart from the departmental audit many States have also incorporated the concept of audit of accounts by chartered accountantsAuditing for all types of dealers may not be necessary ‐ The selection of cases for auditing has to be made in accordance with the criteria of the size of dealers


77

Tax Rates Under VAT

Exempted category 4% VAT category12.5% category1% Category ‐ precious stones, bullion, gold and silver ornaments etc.Non‐VAT goods ‐ Petrol, diesel, ATF, other motor spirit, liquor and lottery tickets are kept outside VAT ‐ agreed that all these commodities will be subjected to 20% floor rate of tax


‐ Article 286(1)(b) of Constitution of India prohibits imposition of sales tax on import and export by State Government

‐ Article 286(2) authorizes Parliament to formulate principles fordetermining when sale is in the course of import/export i.e. Section 5 of CST Act has been enacted

‐ Export sale and sale in the course of export – the term ‘sale during export’ is much broader than ‘export sale’. ‘Sale during export’ includes not only direct exports, but also

(a) Sale by transfer of documents after goods cross customs frontier

(b) Penultimate sale for export (c) Export with help of agent


‐ Other important points:

• Sale should occasion the export• Sale to foreign tourist is not ‘sale in course of export’• Goods should be destined to foreign country, though actual reaching of destination not necessary.

• Exports with help of agents permissible• Penultimate sale for export – Form H• Purchase prior to penultimate sale not exempt• Pre‐existing arrangement essential• Purchase of packing material for export permissible


A sale or purchase of goods is deemed to be in course of import of the goods into the territory of India, only if

‐ the sale or purchase either occasions such import or‐ is effected by a transfer of documents of title to goods

before the goods have crossed the customs frontiers of India [section 5(2) of CST Act].

Imports could be ‐ Direct imports‐ Imports through agent

‐ Import by transfer of documents – High Seas Sale


• Other important points: ‐ Privity of contract between the ultimate buyer and exporter

necessary

‐ Sale of Goods stored in customs bonded warehouse ‐Kiran Spinning Mills v. CC 1999(113) ELT 753 (SC 3 member bench), it has been held that goods continue to be in customs barrier when they are in customs bonded warehouse. Import would be completed only when goods cross customs barrier and not when they land in India or enter territorial waters.

‐ Sale after Import is a distinct sale

CS Bimal Jain81

3/17/2011

High Seas Sale means the Sale of goods between the original importer of goods and the buyer, after

‐ the dispatch of goods from the dispatch port and before the entry of the same in the territorial water of the importing country.

High Seas is referred as International Waters ‘Not Belonging to any one nation’


83

DISCLAIMEROur views expressed herein are based on the facts and assumptions indicated above. The views cannot be considered as an authorized representation, warranty or guarantee that the revenue authorities or the courts will concur with the same. The views are based on the existing provisions of law and its interpretation, which are subject to change from time to time. The views contained may not be used or reproduced in whole or in part or otherwise referred to in any document or delivered to any one without our prior written consent.


THANK YOU…….

Bimal Jain,650, Pocket –VMayur Vihar, Phase –IDelhi – 110 091 (India)Email: [email protected]: 9810604563


mailto:[email protected]

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