V S Datey

Website – http://www.dateyvs.com

Background of service taxTill 1-7-2012, service tax was based on

positive list i.e. service listed are taxed in section 65(105)

Disputes occur due to wordings in definitionsHence, now service tax all services excluding

17 services in negative list of services w.e.f. 1-7-2012 (In addition there is list of 39 exemptions and some activities excluded from definition of service itself)

Constitutional Background India, that is Bharat, shall be a Union of

States [Article 1(1)] Article 246 read with Seventh Schedule gives

bifurcation of powers between Union and State -

List I – Union ListList II – State ListList III – Concurrent List

Taxation in Union List – List I

Income Tax other than agricultural income (Entry 82)

Customs duty (Entry 83)

Excise Duty other than alcoholic liquor (Entry 84)

Stamp duty on specified transactions (Entry 91)

Union List (Continued)Tax on advertisements in

newspapers (Entry 92)Inter State Sales (Entry 92A)Tax on Services (Entry 92C –

not yet effective)

Residual Entry in List IEntry 97 – Any other matter not included in

List II, List III and any tax not mentioned in list II or List III (These are residual powers)

Service tax is imposed under Entry 97. Thus, if a transaction is covered under List II, service tax cannot be imposed.

State List – List IILand Revenue (Entry 45), Agricultural

income (Entry 46)Taxes on land and buildings (Entry 49), tax

on mineral rights (Entry 50)Excise on alcoholic liquors, opium and

narcotics (Entry 51)Octroi and Entry tax (Entry 52)Tax on consumption and sale of electricity

(Entry 53)

State List II (Continued)Sale within State, other than newspapers (Entry 54)

Betting and gambling (Entry 34)

Tax on advertisements other than newspapers (Entry 55)

State List (Continued)Tax on goods or passengers carried by road

or inland waterways [Entry 56]Tax on vehicles [Entry 57]Tolls [Entry 59]Professional Tax [Entry 60]Stamp duty [other than those under Union

List) (Entry 63)

Deemed Sale of goods– Article 366(29A) – 46th Amendment - 1982Compulsory Sale (Now not much relevant)Hire purchase and financial Lease Transfer of right to use (Hire or operating

lease)Goods Involved in works contractSale of food articlesSale among unincorporated bodies

Service tax on portion of deemed sale of goodsService part of Works ContractService part of Food in restaurant or outdoor

catering or catering as part of other services like mandap, shamiana, convention

Overlapping of State Vat and service taxHire purchase and financial leaseOperating Lease (Hire) –Vat and service tax

in different situations – disputes in borderline cases

Temporary transfer of IPR – disputes in borderline cases

Software – entirely goods and service at one and same time

Charging section 66BService tax at the rate of 12% on the value of

all services, other than those services specified in the negative list

provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be

prescribed.

What is service [section 65B(44)]Any activity carries out by one person to

another for considerationConsideration required – may be in cash

or kindNo service tax on free services‘service’ includes ‘declared service’

(deemed service’)Some activities specifically excluded from

definition of ‘service’

What is not service - 1Activity of mere transfer of title in goods or immovable property is not ‘service’

Deemed sale of goods under Article 366(29A) of Constitution of India is not ‘service’

Mere transaction in money is not service.

What is not service - 2Mere Actionable claim – claim of debt or

beneficial interest in movable property, lottery ticket – it is not service

Service - employee to employer – not ‘service’, but service provided by employer to employee is taxable e.g. transport, telephone

Fees paid to Court or Tribunal is not serviceServices of MP, MLA is not service

Mere transaction in money is not serviceAny legal tender (Indian or foreign currency)

is ‘money’Transaction may be by cash, cheque,

promissory note, DD, LC, money order, electronic transfer

Dividend, loans, deposits, repos, reverse repos is mere transaction in money

Transfer of title in goods or immovable propertySimple sale of goods or immovable property not service

Goods include securitiesSale purchase of securities (shares, derivatives) not taxable

Forward contracts, future contracts not taxable

Grant or Donation is not serviceGrant stipulating merely proper usage

of funds and furnishing of account also will not result in making it a provision of service.

Donations are not consideration unless the receiver is obligated to provide something in return

Thin distinction between sponsorship and donation

Negative List of ServicesServices by Government, RBI, foreign

diplomatic missionsAgriculture related servicesTrading is not serviceActivity that results in ‘manufacture’ of goods

is not ‘service’Sale of space for Advertisement in print

media in negative list – other taxable w.e.f. 1-10-2014

Negative List (Continued)Toll charges (but service for collection of toll

is taxable)Entertainment, amusement, gamblingTransmission and Distribution of Electricity

(Electricity is goods – further it is in List II – hence no serviced tax even if done on private basis)

Recognised Educational services, training in arts, culture, sports – no tax on midday meals and school bus services

Negative List (Continued)Renting for residential purposesInterest and inter se sale or purchase of

foreign currency among Banks and authorised dealers not taxable – other banking services taxable

Passenger transport except in tourist vehicles and tour operators and w.e.f. 11-7-2014 – on air conditioned contract carriages

Negative List (Continued)Transport of goods by road (except GTA,

Courier)No tax on transport of goods from outside

India to import of goods by air or vessel upto customs station in India

Funeral, burial or crematorium related services not taxable

Declared ServicesRenting of immovable property,

construction, software, hiring, leasing, hire purchase, service portion of works contract, service portion of supply of food are ‘declared services’ [section 66E]

[really some of these are ‘deemed services’ as these are partly covered under List II i.e. State List]

Exemptions – Notification No. 25/2012-ST dated 20-6-2012Medical servicesSpecified Charitable activitiesReligious ceremony and renting of religious

placesIndividual advocate and firm of advocates to

non-business entity or business entity with turnover less than Rs 10 lakhs – in other cases - the business entity is liable to pay service tax under reverse charge

Recreation relating to arts, culture, sports

Exemptions (Continued)Copyright, performing arts, sportsman (but

not brand ambassador), sports sponsorshipJob work of agriculture, textile processing,

diamonds and gemstonesJob work - where principal manufacturer is

paying excise dutySociety to its members upto Rs 5,000 p.m.Infrastructure related services for public

use

Exemptions (Continued)Hotels, guest houses with less than

Rs 1,000 per day tariffRestaurants without AC or central

heatingGoods transport upto Rs 750 per

consigneeSub brokers, authorised persons,

mutual fund agent exempt

Small Service provider Exemption if value of taxable services

provided in previous financial year did not exceed Rs 10 lakhs

Clubbing provisions applicableService should not be under brand

name of otherEach co-owner of immovable property

can claim exemption

Exemption only to main serviceReference of main service shall not include

reference to a service which is used for proving that main service [section 66F(1)]

Thus, even if main service is exempt, ancillary service or services of sub-contractors may not be exempt

Two Exceptions to section 66FWorks contract service provided by sub-

contractor to main contractor exempt if main contractor is exempt from service tax under works contract service

When the sub-contractor himself is providing ‘main service’ which is exempt

Works contract serviceIn case of finishing service relating to immovable

property (like painting, flooring etc.), service tax payable on 70% of value w.e.f. 1-10-2014 [Till 1-10-2014, it was 60%].

Value of FOC material (like cement, steel etc. supplied by contractee) was required to be added for composition scheme. To overcome this provision, some service receivers were charging for such supply but at very low price. To get over such tax planning, it has been provided that ‘Fair Market Value’ of material and services supplied by contractee should be added.

Agreeing to Tolerate an Act or SituationAgreeing to the obligation to refrain from

an act, or to tolerate an act or a situation, or to do an act is ‘declared service’.

Non compete fees, Demurrage, Booking cancellation charges, cheque return charges will be subject to service tax.

Late Delivery charges, penalties, forfeiture of deposit or advance as penalty for violation of terms of contract will be subject to service tax. Continued….

Agreeing to Tolerate an Act or SituationRework charges, deductions on account of

quality issues may be subjected to service tax.

Notice pay recovered from employees, penalty imposed o employees

Better if the service provider issues credit note instead of service receiver issuing debit note or making deduction.

Accidental damages not relatable to provision of service are not subject to service tax.

Two safety nets in law

Law is new and many ambiguities are there. Disputes are possible. Law may get settled after 8 or 10 years but assessee has to take decision today itself on course of action. Hence, two safety nets are available.

No demand beyond 18 months if no suppression of facts, wilful misstatement, fraud – penalty not imposable – otherwise demand can be upto 5 years and mandatory penalty equal to tax.

Hence, advisable to make full disclosure to department, wherever in doubt. Usually not advisable to ask for clarification, as generally clear answers are not given.

Continued….

Two safety nets in law (Continued)

No penalty if service tax with interest paid before show cause notice and intimation given to department, except in cases of suppression of facts, wilful misstatement, fraud or collusion.

Hence, if short payment was noticed either during your internal audit or during audit by service tax department (or even during visit of preventive people - usually called ‘raid’), pay service tax with interest and intimate department. Then penalty cannot be imposed.

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