CA Sunil GabhawallaS B Gabhawalla & Co
Chartered Accountants
Tax on all services provided in the taxable territory
Attaches itself to the ‘service’ rather than to a ‘person’
Multiple Point Taxation based on the concept of value addition
Therefore effectively a consumption tax
2
Tax ‘attaches’ to the place of consumption –therefore destination based
Export of Services exempted from tax and eligible for rebates/refunds of input taxes
Import of Services liable for payment of tax under reverse charge mechanism
Is the place of consumption same as the place of consumer?
3
Territorial Frontiers….
INDIA
OUTSIDE INDIA
C -FCo A – FCo
B - ICo
Construction Contract US$ 100 (Material US$ 60 LabourUS$40)
Construction Sub Contract US$ 75 (Material US$ 50 Labour US$ 25)
Delivery of MaterialsActual Performance of Work
For the material component, Is B importing goods worth $50 from C? Is B exporting goods worth $60 to A?
Is B liable for import duties? Is B eligible for export incentives?
For the services component, Is B importing services worth $25 from C? Is B exporting services worth $40 to A?
Is B liable for payment of service tax as an importer of services? Is B eligible for export incentives as an exporter of services?
Can there be different set of answers?
5
Territorial Frontiers….
OUTSIDE INDIA
INDIAC -ICo A – ICo
B - FCo
Construction Contract US$ 100 (Material US$ 60 LabourUS$40)
Construction Sub Contract US$ 75 (Material US$ 50 Labour US$ 25)
Delivery of MaterialsActual Performance of Work
For the material component, Is A importing goods worth $60 from B? Is C exporting goods worth $50 to B?
Is A liable for import duties? Is C eligible for export incentives?
For the services component, Is A importing services worth $40 from B? Is C exporting services worth $25 to B?
Is A liable for payment of service tax as an importer of services? Is C eligible for export incentives as an exporter of services?
Is there double taxation?
Can there be different set of answers?
7
Applies to whole of
India (excl. J&K)
Applies to taxable services provided
Applies to taxable services
provided in whole of India
(excl. J&K)
8
Transaction either covered or not covered
Based on Place of Provision of Services Rules
Concepts of Import / Export of Service deleted Export of Service concept still relevant for CENVAT
Credit/Rebates
Reverse Charge Mechanism applicable, if ServiceProvider located outside India
No Major Impact – more confusing due to use ofword “provision” instead of “receipt”
Old Provisions New Provisions
Basis of Determination Separate Rules for Import and Export based on category of service
Common Rules based on substance of transaction
Services rendered to foreign clients
Not Liable for Payment of service tax
Not Liable for Payment of Service Tax since territory outside India
Impact of receipt in IndianCurrency
Taxable Still Not Taxable but,reversal of CENVAT Credit required
Services from foreign vendors Liable for Payment under RCM
Liable for Payment under RCM
Transactions with J&K Not Applicable Applicable
Transactions betweenBranches
Impacted Imports only Impacts Imports as well as ExportsAlso impacts transfers inter se
Description Rule
General Rule Location of Service Receiver. In casethe location of the service receiver isnot available, then Location of serviceprovider
Services provided in respect of goods that are required tobe made physically available by the service receiver tothe service provider, in order to provide the service
Place of Performance
When such services are provided from a remote locationby way of electronic means.
Location of goods at the time ofprovision of service
Services provided entirely or predominantly, in theordinary course of business, in the physical presence ofan individual, represented either as the service receiveror a person acting on behalf of the receiver
Place of Performance
Description Rule
Services in relation to immovable property Location of Immovable property
Services in relation to Events where the event is actually held
When Service Provider and Service Receiver are located intaxable territory
Location of service receiver
Specified services:
a) Banking & Financial Servicesb) Online Information and Database access or retrieval
servicesc) Intermediary servicesd) Hiring of means of transport
Location of Service Provider
Service of Transport of Goods Destination of Goods
Goods Transport Agency Location of Service Recipient
Passenger Transportation Place of Origin
On Board a conveyance Place of Origin
…Place of Provision of Services Rules
Old Provisions New Provisions
Generic Issues
Service Provider and Service Recipient in same location
Debatable if the service is rendered abroad
Taxable even if service rendered abroad
India Specific Definitions (like telecommunication services)
Earlier not taxable Now Taxable in view of negative list
Category Specific Issues
Technical Testing and Analysis
Recipient Based Performance Based
Service Intermediaries Recipient Based Provider Based
Online Information and Database Access
Recipient Based Provider Based
In case of multiple establishments, place ofestablishment more closely connected withthe activity to be considered
How to determine the place of establishmentmore closely connected? Invoice Contract Payment Debit to Accounts (Bearing of Cost) Actual Performance/Consumption of the Service
General Principle (Forward Charge Mechanism) Service Provider to collect from Service Recipient
and pay tax to the Government Service Recipient is not accountable to the
Government directly
Reverse Charge Mechanism Service Recipient called upon to directly pay tax to
the Government
Need for Reverse Charge Mechanism Legal Provisions – Section 68 Independent Liability of Service Provider and
Service Recipient Not Similar to Tax Deduction at Source
Variations Full / Partial Reverse Charge Mechanism Comprehensive / Selective Reverse Charge
Mechanism Too Onerous a Responsibility?
Service Tax to be paid as a service recipient Service Recipient may account for the service either as Expenses Capital Asset/ CWIP Asset/Liability (specially reimbursement of expenses)
Invoicing Issues: What should the service provider’s invoice contain? How to account in books? What are the Income Tax TDS obligations
CENVAT Credit Related Issues Whether CENVAT can be utilised for paying this tax? Having paid this tax, whether CENVAT can be claimed?
Description of Service Liability of Service Provider
Liability of Service Recipient
Component
Effective Rate
Component
Effective Rate
Only Non Corporate Service Providers and Corporate Service Recipients
Rent-a-Cab on abated value NIL NIL 100% 4.944%Rent –a-Cab on non abated value
60% 7.416% 40% 4.944%
Net Impact on Service Recipient is the same 4.944%
What is covered? Taxis Radio Cabs Employee Leased Cars Long Term Car Leases General Tourist Cars taken on lease Buses for Staff Transportation Reimbursement claimed by employees
No CENVAT Credit is available
Description of Service Liability of Service Provider
Liability of Service Recipient
Component
Effective Rate
Component
Effective Rate
Only Non Corporate Service Providers and Corporate Service Recipients
Supply of Manpower 25% 3.09% 75% 9.27%Security Services (only w.e.f. 07.08.2012)
25% 3.09% 75% 9.27%
Definition “supply of manpower” means supply of manpower, temporarily or otherwise, to
another person to work under his superintendence or control Effective from 07.08.2012 – also includes security services “Security Services” means services relating to the security of any property,
whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity
Controversy between a manpower supply service and the basic service (matter in Supreme Court) Labour Contractor Labour Supplier Housekeeping Agency Data Entry Operators Accounts Outsourcing Industrial Labourers
Impact of Valuation where salaries/ESIC/PF paid by the company
Description of Service Liability of Service Provider
Liability of Service Recipient
Works Contract Services Component
Effective Rate Component Effective Rate
Only Non Corporate Service Providers and Corporate Service RecipientsNature of WorksContract
PresumptiveValue ofService
EffectiveTax Rate
Original Works(Construction ofnew immoveableproperty)
40% 4.944% 50% 2.472% 50% 2.472%
Works Contractsrelating tomoveable assets
70% 8.652% 50% 4.326% 50% 4.326%
Other WorksContracts
60% 7.416% 50% 3.708% 50% 3.708%
Issues – Concept Works Contract is complex concept Interpretation of works contract vs. labour contracts Whether all works contracts are liable for RCM?
Issues – Valuation Valuation of Works Contracts can result in difficulties Choice of Valuation Option independent of each other Debates will increase on account of free issue
materials and services
Definition: Contract wherein transfer of property in goods
involved in the execution of such contract is leviableto tax as sale of goods and such contract is for thepurpose of carrying out construction, erection,commissioning, installation, completion, fitting out,repair, maintenance, renovation, alteration of anymoveable or immoveable property or for carrying outany other similar activity or a part thereof in relationto such property
Vivisection Value of goods liable for VAT Service Component can be taxed under Service Tax
Contract for Sale Contract for Work
Labour Contracts Indirect Transfer of Property in Goods
Accretion
Also WC under Service Tax Law
Original Works
40%
Others
60%
Accession
Also WC under Service Tax Law
70%
Blending
Not Works Contract under Service Tax
Law
Contract for Other Services
Example Income Tax 94C
VAT –29A
Service Tax – 65B(44)
Treated as Works Contracts under all laws
Erection of Power Plant (on turnkey basis) Yes Yes Yes
Annual Maintenance Contracts (Comprehensive)
Yes Yes Yes
Repairs of Motor Cars (with materials) Yes Yes Yes
Treated as Works Contracts under IT & VAT Law but not under Service Tax Law
Printing Contracts Yes Yes No
Photography Contracts Yes Yes No
Example Income Tax 94C
VAT –29A
Service Tax – 65B(44)
Treated as Works Contracts under IT Law but not under Service Tax or VAT Law
Construction Work undertaken on labour job basis without any transfer of material
Yes No No
Annual Maintenance Contracts (NonComprehensive)
Yes No No
Not treated as Works Contracts under any of the laws
Sale of Computer with free installation No No No
Catering Contracts No No No
Software Licenses No No No
Valuation Options
Value adopted for State VAT purposes
to be reduced
Actual Value of materials to be
reduced
If not possible, adopt presumptive
Value
Issues – Concept Works Contract is complex concept Interpretation of works contract vs. labour contracts Whether all works contracts are liable for RCM?
Issues – Valuation Valuation of Works Contracts can result in difficulties Choice of Valuation Option independent of each other Debates will increase on account of free issue
materials and services
General (Liability of the Service Recipient Only)Description of Service Liability of
Service Provider
Liability of Service Recipient
Component Effective RateSponsorships NIL 100% 12.36%Arbitral Tribunal NIL 100% 12.36%Individual or Firm of Advocates NIL 100% 12.36%
Support Service (Other than renting)by Government or Local Authority
NIL 100% 12.36%
Foreign Service Providers NIL 100% 12.36%
Goods Transport Agency Services NIL 100% 3.09%
Directors (w.e.f. 07.08.2012) NIL 100% 12.36%
Onerous Obligation
How to handle implementation Manual ERP/System Driven
Possibility of Mistakes very common
Will the Department provide an HUG in case of such mistakes?