Agarwal Sanjiv & CompanyChartered Accountants

Presents

A Workshop On

Service Tax

Conducted byDr. Sanjiv Agarwal

FCA, FCS

Saturday,20th April, 2013Jaipur © Dr. Sanjiv Agarwal

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SESSION – II

Scope of Taxation of Services

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Scope of Taxation of Services

This Presentation Covers

• Scope of ‘Service’ under New Regime –

Inclusions / Exclusions, Services of Employees/

Directors/ employers /Charge of Tax

• Declared Services including Valuation

• Bundled Services – Classification Issues

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What is Service

‘Service' has been defined in clause (44) of the section 65B and means –

any activity

For a consideration

carried out by a person for another

and includes a declared service (66E)

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Scope of services under Service Tax

Services on which Service Tax shall be attracted comprise of :

Those services which satisfy the definition of service u/s 65B(44) Nine specified declared services u/s 66E Those services which do not find place in negative list of services

u/s 66D Those services which are not exempt from levy of Service Tax

under Notification No. 25/2012-ST dated 20.06.2012

to be contd….

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Services on which no Service Tax shall be payable comprise of :• Services which are specifically excluded from the scope of

definition of service itself u/s 65B(44)• 17 broad services specified in the negative list of services u/s

66D• Services which are exempt from levy of Service Tax under N.

No. 25/2012-ST dated 20.06.2012• Specified services otherwise exempt under specific

notifications• Activities where service provider and service receiver are in

non –taxable territory

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Scope of services under Service Tax

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The New Taxability Concept

Taxable

3. Exemptions (39)

1. Non -

Taxable

territory

(POPS)

2. Negative list (17)

SERVICE FOR A CONSIDERATION

E - MAGIC TEST

E: EmployeeM: MoneyA: Actionable claimG: GoodsI: Immovable propertyC: Court Fee

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What is Service

Activity must be for a consideration (nexus / reciprocity) Activity – includes both activity as well as non-activity Consideration – includes both monetary and non

monetary consideration. Two persons are involved –

Service provider Service receiver

Only services provided by one person to another are taxable

Person – natural as well as artificial

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What is Service

Activity Not defined in the Act In common understanding, activity includes –

An act done A work done A deed done An operation carried out Execution of an act Provision of a facility etc.

Activity could be active or passive and forbearance to act Agreeing to an obligation to refrain from an act or to tolerate

an act or a situation - listed as a declared service u/s 66E

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What is Service

Consideration Means everything received or recoverable in return for a

provision of service which includes -○ Monetary payment○ Non-monetary payment○ Deferred consideration

Under Indian Contract Act, 1872, Consideration means -

“When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise”

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What is Service

Activity for a Consideration Activity should be carried out by a person for a

consideration Activity without consideration like-

○ Donation○ Gifts○ Free charities

outside the ambit of service Charity for consideration would be service and

taxable unless otherwise exempted

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What is ServiceMoney- 65B(33)

“Money" means legal tender, cheques, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheques, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic value

Actionable Claim –Section 3 of Transfer of Property Act, 1882

• Claim to unsecured debts• Claim to beneficial interest in movable property not in possession of

claimant• Right to insurance claim• Arrears of rent• Lottery claims

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What is Service

Tax on Money Remittance (Circular No. 163 dated 10.7.2012) No service tax on foreign currency remitted to India from

overseas Amount of remittance comprises money Service excludes money transactions Even fee for remittance is not taxable (POPS) Sender of money outside India - bank / company

remitting money is located outside India Fee charged by Indian bank - remitter located outside

India (not taxable as per POPS)

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What is Service

Person-65B(37)"person" includes,––

• an individual,• a Hindu undivided family,• a company,• a society,• a limited liability partnership,• a firm,• an association of persons or body of individuals, whether incorporated

or not,• Government,• a local authority, or• every artificial juridical person, not falling within any of the above

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What is ServiceGovernment – Not defined

Section 3 (22) of General Clause Act, 1897

Includes Central/State Government/ Union Territory

Actions taken in the name of President/ Governor

Most of services provided by Government are in

Negative List or reverse charge is applicable

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What is Service : Exclusions

'Service' does not include - any activity that constitutes only a transfer in title of goods or immovable

property by way of sale, gift or in any other manner.

Sale of developed plots is a service (Narne Constructions Pvt. Ltd. v UOI 2013 (29)STR 3 (SC)

a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution

a transaction only in money or actionable claim

a service provided by an employee to an employer in the course of the employment.

fees payable to a court or a tribunal set up under a law for the time being in force

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What is Service

This scope shall not apply to –

a) functions performed by M.P., M.L.A., Members of Panchayats / Municipalities who receive any consideration in performing the functions of that office as such member; or

b) duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

c) duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Government or local authority and who is not deemed as an employee before the commencement of this section.

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What is Service

For the purpose of scope of service -

(a) an unincorporated association or a AOP and a member thereof shall be treated

as distinct persons;

(b) an establishment of a person in the taxable territory and any of his other

establishment in a non-taxable territory shall be treated as establishments of

distinct persons.

(c) A person carrying on a business through a branch or agency or

representational office in any territory shall be treated as having an establishment

in that territory

Employer’s Facilities to Employees

Draft Circular (F. No. 354 /127/2012-TRU dated 27.7.2012) issued for clarification on certain activities / facilities / reimbursements to employees by the employers

(a) Treatment of supplies made by the employer to employees

Amount deducted from salary / paid for service provided by the employer

to employee is for consideration and hence taxable

Employer who provides some services free of cost (e.g. crèche,

gymnasium or a health club) are not liable to tax

(b) Treatment of reimbursements made by the employer to the employee

Reimbursements of expenditure incurred on behalf of the employer in

course of employment would not amount to a service, hence non-taxable

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Employer’s Facilities to Employees

(c )Treatment of supplies and reimbursements made by the employer to ex-employees/ pensioners

Same tax treatment for ex- employees of the company – Reimbursement of expenses on behalf of

company – non-taxable ? Facilities for consideration – taxable Facilities free of cost - non taxable ?

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Director’s Services to Company - Taxable

Director’s services to the company are taxable w.e.f 1.7.2012

Sitting fees, commission, bonus, etc. are subject to service tax

W.e.f. 1.7.2012 upto 6.8.2012, service tax was to be deposited by the directors while from 7.8.2012 vide Notification No. 45/2012, Service Tax on such services will be deposited by the company under reverse charge

WTDs /MDs /EDs who are under contractual employment with the company and receive salary or remuneration from the company will not be covered - considered as employees of the company

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Director’s Services to company- Taxable

Interest paid on loan by director to company, dividend on shares, other professional charges on account of services not rendered as a director (in professional capacity) are not liable to Service Tax under reverse charge

In case of nominee director, the nominating company who receives fees will be liable to pay service tax

The invoice / receipt to be issued by the directors within 30 days In case of nominee directors, the invoice will be issued by the

nominating company if payment made to such Company In the case of Government nominees, the services shall be deemed

to be provided by the Government but liable to be taxed under reverse charge basis (support service)

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Examples of new activities which may be taxed

Non commercial construction for non-government purpose Private roads (not meant for general public) Residential construction of more than one unit Commercial artists/performers Film actors/ directors /reality show judges Tourism boats Board director’s sitting fee Non-compete fee Arbitrators to business entities Discourses and lectures/ yoga classes Public parking

to be contd..23

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Examples of new activities which may be taxed

Banking services to Government Unrecognized IPRs Services to RBI Hotel telephone calls Video library facilities by hotels Matrimonial sites Astrologers Laundry services Works contracts for movable properties All sub-contracts except exempted works contracts On board catering and other facilities Executive Lounge at railway station/ airport

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Charge of Service Tax

Section 66 (upto 30.6.2012)

There shall be levied a tax @ 12 percent of the value of taxable services as referred to in section 65(105), i.e., taxable services

Not to apply w.e.f. 1.07.2012

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Charge of Service Tax

Section 66B (W.e.f 1.7.2012)

There shall be levied a tax at the rate of twelve per cent 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

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Charge of Service Tax

Essential ingredients for charge of Service Tax

There should be a service involved Such service should not be one included in the negative list

as defined in section 66D. Services should be provided or agreed to be provided. Services should be provided in the taxable territory only. Services should be provided by one person to another

person. Tax shall be levied on value of services so provided or

agreed to be provided. Collection shall be in prescribed manner.

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Charge of Service Tax

Provided or to be provided v. provided or agreed to be provided Before actual provision of service is made, all relevant

information on chargeable event must be known On account advance payment without any identification of

services or activities may not be liable to service tax Services which have only been agreed to be provided but are yet

to be provided are taxable Receipt of advances for services agreed to be provided become

taxable before the actual provision of service Advances that are retained by the service provider in the event

of cancellation of contract of service by the service receiver become taxable as these represent consideration for a service that was agreed to be provided.

Declared Services

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Clause 44 of section 65B defines service – it includes a declared service.

There are 9 categories of services or activities as declared services implying that on all such nine declared services, Service Tax shall be payable

Does not include any such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of Article 366(29A) of the Constitution of India.

What is declared services is defined in section 65B(22) to mean any activity carried out by a person for another person for a consideration and declared as such under section 66E of the Act.

They are amply covered by the definition of service but have been declared with a view to remove any ambiguity for the purpose of uniform application of law all over the country

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List of declared services

Following constitute Declared Services (Section 66E)

Renting of immovable property;

Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority;

Temporary transfer or permitting the use or enjoyment of any intellectual property right;

Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software;

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List of declared services

Agreeing to an obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods;

Activities in relation to delivery of goods on hire purchase or any system of payment by installments ;

Service portion in execution of a works contract;

Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity.

Declared Services

Renting of Immovable Property

Renting (Section 65B (41)) -allowing, permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property

Renting of certain kinds of immovable properties is specified in the negative list • Renting of vacant land, with or without a structure incidental to its use,

relating to agriculture.• Renting of residential dwelling for use as residence• Renting out of any property by Reserve Bank of India• Renting out of any property by a Government or a local authority to a

non-business entity

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Declared Services

Renting of Immovable Property

Exemptions to Renting of Immovable property

Threshold level exemption up to Rs. 10 lakh.

Renting of precincts of a religious place meant for general public is exempt.

Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent is exempt.

Renting of immovable property to / by educational institution in respect of exempted education (W.e.f. 1.04.2013)

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Declared Services

Nature of Activity Taxability

Renting of property to educational body Not chargeable to service tax; exemption

Renting of vacant land for animal husbandry or floriculture

Not chargeable to service tax as it is covered in the negative list entry relating to agriculture

Permitting use of immoveable property for

placing vending/dispensing machines

Chargeable to service tax as permitting usage of

space is covered in the definition of renting

Allowing erection of communication tower

on a building for consideration.

Chargeable to service tax as permitting usage of

space is covered in the definition of renting

Renting of land or building for entertainment or sports

Chargeable to service tax as there is no specific

exemption.

Renting of theatres by owners to film distributors

Chargeable to service tax as the arrangement amounts to renting of immovable property.

Renting of immovable property outside India not taxable in India even if owners are in India

Declared Services

Construction Activities [Section 66E (b)]

Construction activities means construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority.It includes construction of -

Complex Building Civil structure or part thereof Complex or building intended for sale to a buyer except where

entire consideration is received after issuance of completion certificate by the competent authority.

Actual sale after construction-if any consideration received before such completion certificate, it will also be taxed.

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Declared Services

Temporary transfer or permitting the use or enjoyment of any intellectual property right [Section 66 E (c)]Intellectual property right’ has not been defined but Intellectual property right includes : Copyright

Patents

Trademarks

Designs

Any other similar right to an intangible property

Declared Services

Intellectual Property Rights

Examples of IPRs Patents - New technical, concepts,

inventions Copyright - Text, graphics, software, data

compilations, art, music Trademarks - Brands (Services/ Products)

image and reputation Confidential Information - Ideas, information, know-how,

processes etc. Design Rights - Form and appearance,

decoration, apparels

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Declared Services

Intellectual Property Rights

What is taxed in IPR

all IPRs (whether recognized in law or not)

excluding copy rights

temporary transfer of IPRs

permitting the use of IPRs

enjoyment of IPRs38

Declared Services

Intellectual Property Rights

Copyrights as IPRs are exempted which include :

literary work

dramatic work

musical work

artistic works

cinematograph films ( for exhibition in halls w.e.f

1.4.2013)

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Declared Services

Transfer of goods by hiring, leasing, licensing [66E(f)]There should be transfer of goods involved Such transfer of goods should be by way of –

hiring leasing licensing, or any such manner

Such transfer should be without transfer of right to use such goods.

Excludes intangible goods Only goods [section 65B(25)] covered

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Declared Services

Transfer of Goods by Hiring etc

Examples of transfer without right to use

Car on hire with driver – right to use not transferred

Conditional supply of equipment – not free to use goods

Bank lockers – possession not transferred to hirer

Scaffolding structure for temporary purpose – no transfer of right /

effective control and possession

Hiring of Pandal / Shamiyana – No effective control

Hiring of audio visual equipment with attendant – no transfer of right

/ possession

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Declared Services

Works Contract [65B(54)]

“Works Contract” means a contract wherein transfer of

property in goods involved in the execution of such contract

is leviable to tax as sale of goods and such contract is for

the purpose of carrying out construction, erection,

commissioning, installation, completion, fitting out, repair,

maintenance, renovation, alteration of any movable or

immovable property or for carrying out any other similar

activity or a part thereof in relation to such property.

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Declared Services

Works Contract covers Construction Erection Commissioning Completion Fitting out Repair Maintenance Renovation Alteration, or Any other similar activity or part there of

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Declared Services

Some issues in works contracts

Labour contracts Excluded

Repair & Maintenance of motor vehicles

yes if property in goods transferred in execution of WC

Construction of pipeline / conduit yes, structures on land

Painting / repair / renovation of building , wall tiling, flooring etc.

yes if involves provision of material also

Erection/commissioning installation of plant/ machine etc

yes if transfer of property in goods is involved and machinery etc

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Declared ServicesValue of service portion in execution of work contract = gross amount charged for works

contact less value of transfer of property in goods involved in execution of works contract

Gross amount includes Gross amount does not include

Labour charges for execution of the works Amount paid to a sub-contractor for labour and servicesCharges for planning, designing and architect’s fees

Value of transfer of property in goods involved in the execution of the said works contract.where value added tax or sales tax has been paid or payable on the actual value of property in goods transferred in the execution of the works contract, then such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred in the execution of the said works contract. (Rule 2A explanation)

Cost of establishment of the contractor relatable to supply of labour and services and other similar expenses relatable to supply of labour and services

Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract

Profit earned by the service provider relatable to supply of labour and services

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Declared Services

Alternative valuation model (Rule 2A of Valuation Rules) Where works contract is for… Value of the service portion shall

be…

(A) execution of original works forty percent of the total amount charged for the works contract

(B) maintenance or repair or reconditioning or restoration or servicing of any goods

seventy per cent of the total amount charged including such gross amount

(C) in case of other works contracts, not included in serial nos. (A) and (B) above, including contracts for maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings.

sixty percent of the total amount charged for the works contract

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Declared Services

Valuation of service portion in Works Contract Total Value = Sum total of

+ gross amount charged + value of goods and services supplied free of

cost for use in or in relation to execution of WC whether us same contract /any other contract

+ value of land charged as part of total consideration

- amount charged for such goods / services, if any

- VAT levied, if any If value of FOC goods / services is not ascertainable, it will be

determined on basis of fair market value having close resemblance FMV based on generally accepted accounting principles No Cenvat available on goods / inputs used in works contract

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Bundled Services

Principles of Interpretation of specific description of services [section 66F] Section 65A dealing with classification of taxable services omitted w.e.f.

1.7.2012 useful in deciding whether a service falls in negative list / exemptions /

declared services composite v bundled service bundled service –

collection of services / tied up services more than one service element of one service combined with element of provision of other

service (s). Examples - Mailing done by RTI, Air traveling and catering therein Earlier issue – which taxable service Now – whether any activity is a ‘service’ or not a ‘service’.

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Bundled Services

Rule 1 Reference to main service can not be used for services used for providing the main service If some service is provided with reference to provision of main service, it does not be come main service, Related services do not take the colour of main service. Examples

Provision of access to any road or bridge on payment of toll Security services IT related services Contract commission

Transportation of passengers by rail ○ Air travel agency ○ Tour operators

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Rule 2

Most specific description to be preferred over more general

description for services capable of differential treatment for

any purpose based on its description

Examples

Real estate agent for immovable property

• If taxed as intermediary, his location is important

• If taxed as immovable property, location of property is important

Outdoor catering by pandal & shamiana / convention to be taxed as

specific combined entry exist for abatement and not as individual

services

Bundled Services

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Rule 3Taxability of naturally bundled services in ordinary course of business

If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential characterPerception of service provider / service receiver Trade practice Example

• Packaged hotel accommodation for convention delegates may include

Hotel room accommodationBreakfast Tea / coffee during conference

to be contd…

Bundled Services

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Bundled Services Access to gym / health club / pool Internet Business centre Sight seeing

Could be considered as naturally bundled convention services as each activity is taxable but does not provide essential character and taxed accordingly

Indicators of naturally bundled services There is a single price or the customer pays the same amount, no matter

how much of the package they actually receive or use The elements are normally advertised as a package. The different elements are not available separately. The different elements are integral to one overall supply – if one or more is

removed, the nature of the supply would be affected. Each case to be individually examined

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Bundled ServicesRule 4 Taxability of services not naturally bundled in ordinary

course of business If various elements of a bundled service are not naturally

bundled in the ordinary course of business, it shall be treated as provision of a service which attracts the highest amount of service tax.

Examples Renting of two floors or two portions of building by a common

agreement (treated as commercial use) Management of event covering advertisement, promotion, space

booking, photography, videography, public relation etc.

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THANK YOU

FOR

YOUR

PRECIOUS TIME

AND

ATTENTION

Dr. Sanjiv Agarwal

FCA, FCS, Jaipur

asandco@gmail.com

sanjivservicetax@gmail.com