finanace act 2012 service tax

ByCA. Dhruv Seth

[email protected]

Enabling Service Tax Practice

COVERAGE OF THIS PRESENTATION

•Overview of Indian Tax structure

•Importance of Service Tax

•Definition of “Service”

•Definition of “Declared Service”

•Draft Place of provision of service rules

Overview of the Indian tax structure

POWER TO LEVY

•Article 265 – No tax shall be levied or

collected except by the authority of law

•Article 246 – Distributes legislative powers

•Schedule VII - List I – Center List (97)

List II – State List (66)

List III – Concurrent List (47)

POWER TO LEVYUnion List

State List Concurrent

Income Tax Taxes on Land, BuildingStamp duties other

than duties or fees

collected by means

of judicial stamps,

but not including

rates of stamp duty

(Entry No. 44)

Customs Entry Tax

Excise Excise on Liquor etc

Corporation Tax Tolls

CST VAT

Service Tax Luxury Tax

Stamp Duty on BOE, Cheques etc.

Stamp Duty on documents other than those in List I

DIRECT VIS-À-VIS INDIRECT TAX COLLECTION

Budgeted2012-13

Revised2011-12

Actual 2010-11

Actual 2009-10

Actual 2008-09

• Regressive

• Administrative Cost

• Inflationary

• Growth Oriented

DIRECT VIS-À-VIS INDIRECT

INDIRECT TAX

Excise /

Customs

VAT / CST

Service Tax

BREAKUP OF INDIRECT TAX COLLECTION

Importance of Service Tax

SERVICE TAX VIS-À-VIS GDP

SERVICE WISE CONTRIBUTION 2011-12

MOST TRENDING SERVICES

Service 2010-11

2011-12

% Growth

Construction Residential Complex

1,145.63

2,681.67

234.08%

Air passenger transport service

693.041,273.0

9183.70%

Transport of goods through pipeline

394.34 718.95 182.32%

Broadcasting1,084.1

41,785.8

3164.72%

Credit Card, Debit Card 437.01 697.79 159.67%

Business Support Service2,688.8

64,197.3

3156.10%

Information technology1,742.5

32,641.2

4151.58%

Airport Services 608.44 902.12 148.27%

Advertising 794.291,163.1

1146.43%

Renting of immovable property

2,829.24

4,119.92

145.62%

• From Positive Approach

• To Negative Approach

Define “Service” – 65B (44)

Define “Declared Services” – 65B (22)

Define “Negative Service” – 66D

Notify “Exempt Service” – 12 / 2012

CHANGE

DETERMINATION

Service Sec 65B (44) ?

Declared Service Sec 66E ?

NO

NOYES

Negative ListSec 66D ?

YES

Exemption12/2012 ?

NO

YES

Not Taxable

YES

TaxableNO

There shall be levied a tax (hereinafter referred

to as the Service 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

66B – CHARGING SECTION

Sec 65B (44) of the

Finance Act, 1994

Service

65B(44) – FLOW CHART

Basic Provision

Includes

Exclusions

Further exclusions vide Explanation 1

Explanation 2

Explanation 3 - Deeming

Explanation 4

any activity carried out by a

person for another for

consideration and includes a

declared service but shall not

include….

65B (44) - SERVICE MEANS

65B (44) - ESSENTIALSSe

rvic

eactivity

a person for another

consideration

declared service

• Busy or vigorous action or movement

• The state or quality of being active

• Lively action or movement

ACTIVITY

Activity could be active or passive and

would also include forbearance to act.

Agreeing to the obligation to refrain from

an act or to tolerate an act or a situation

has also been specified as a declared

service under section 66E of the Act.

GUIDANCE NOTE 2 – WHAT IS ACTIVITY?

• Necessary to have two persons

• Has to be carried out for the other

person

• Caveat - Explanation 2(a) of 65B(44)

A PERSON FOR ANOTHER

(i) an individual,(ii) a Hindu undivided family,(iii) a company,(iv) a society,(v) a limited liability partnership,(vi) a firm,(vii) an AOP or BOI, whether incorporated or not,(viii) Government,(ix) a local authority, or(x) every artificial juridical person, not falling within any of the preceding sub-clauses;

SEC 65B(37) - PERSON

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

CONSIDERATION - SEC 2(D)

• Gifts or Donation

• Research

• Charity

SPECIAL CONSIDERATION


Basic Provision

Includes

Exclusions


Explanation 2


Explanation 4

...but shall not include

a.) an activity which constitutes merely –

(i) a transfer of title in goods or

immovable property, by way of sale, gift or

in any other manner; OR

65B (44) - SERVICE CONTINUED

ii.) such transfer, delivery or supply of any

goods which is deemed to be a sale

within the meaning of clause (29A) of

article 366 of the Constitution; OR

iii.) a transaction in money or actionable

claim


b.) a provision of service by an employee to

the employer in the course of or in

relation to his employment ;

c.) fees taken in any court or tribunal

established under any law for the time

being in force.



Basic Provision

Includes

Exclusions


Explanation 2


Explanation 4

Nothing in this clause shall apply to

a.) M.P. / M.L.A. / Local authorities

b.) Person holding post pursuance to the

provisions of the Constitution

c.) Chairperson / Member / Director of a

body established by the CG / SG

65B (44) – EXPLANATION 1

Transaction in money shall not include any

activity relating to the use of money for

conversion by cash or by any other mode,

from one form, currency or denomination, to

other form, currency or denomination for

which a separate consideration is charged.


a.) an unincorporated association or a body of

persons, as the case may be, 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

establishment of distinct persons.


Sec 65B (22) of the

Finance Act, 1994

Declared Service

Sec 65B (22) of the Finance Act, 1994

“Means any activity carried out by a

person for another person for

consideration and declared as such in

Section 66E”

DECLARED SERVICE

a. Renting of Immovable Property

b. Construction of a complex, building

c. Temporary transfer of IPR

d. Development, design etc. IT Software

e. Agreeing to refrain or tolerate

SECTION 66E

f. Transfer of goods without transfer of

right of such goods

g. Activities in relation to hire purchase

h. Service portion in execution of Works

Contract

i. Service portion of food being served

SECTION 66E

Renting of Immovable Property

- Sec 66D(M) – Negative List –

Renting of residential dwelling for

use of residence

SECTION 66E (a)

Agreeing to the obligation

to refrain from an act OR

to tolerate an act or a situation OR

to do an act.

SECTION 66E (e)

Transfer of goods by way of hiring,

leasing, licensing, or in any manner

such manner without transfer of

right to use such goods.

SECTION 66E (f)

BSNL Vs. UOI (2006) 145 STC 91 (SC)

a) There must be goods available for deliveryb) The identity of the goods must be certainc) All permissions and license required should be

available to the transfereed) It must be a transfer of right to use and not

merely a license to use the goodse) The owner cannot transfer the right to anyone

else till it is with the original transferee

TRANSFER OF RIGHT - TESTS

Activities in relation to delivery of

goods on hire purchase or any

system of payment by installments.

SECTION 66E (g)

Service portion in the execution of a

works contract

- Works contract definition 65B(54)

- Notification 24/2012 dated 06-06-

2012 superseding 11/2012

SECTION 66E (h)

a.) Pay on service portion of contract

OR

SECTION 66E (h)

Works Contract Value of Service portion

Original Works contract 40% of the total amount

Maintenance or repair or servicing of any goods

70% of the total amount

All other works contract 60% of the total amount

Sec 66F of the Finance Act, 1994

Bundled Service

66F. (1) Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service.

(2) Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.

SEC 66F – BUNDLED SERVICE

Explanation.— For the purposes of sub-section (3), the expression "bundled service" means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.’;


a. if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character;

b. if various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax.


Service vis-à-vis Sales / Manufacturing

Term “Sale” as in 4(3) of the Sale of

Goods Act, 1930

• “where under a contract of sale the

property in the goods is transferred

from the seller to the buyer, the contract

is called a sale.”

SERVICE VIS-À-VIS SALE

In 'State of Punjab and Haryana V. Associated Hotels of

India Limited' - AIR 1972 SC 1131 the Supreme Court

held that a contract for sale is one whose main object

is the transfer of property in, and the delivery of the

possession of a chattel as a chattel to the buyer. Where

the principal object of the work undertaken by the

payee of the price is not the transfer of a chattel, the

contract is one of work and labor.


Important traits

1.) Transfer of property as a chattel

2.) When the property in the transaction passes

3.) Identifiable existence prior to delivery

4.) Proportion of value of material and service

5.) Substance and not the form


Sec 66D(f) – Negative List - Any process amounting to

manufacture or production of goods

Sec 65B(40) of the Finance Act

“Process amounting to manufacture or production of goods”

means a process on which duties of excise are leviable under

Sec 3 of the Central Excise Act, 1944 or any process

amounting to manufacture of narcotics on which duties are

leviable under the state act”

SERVICE VIS-À-VIS MANUFACTURE

• Sec 3 of the Central Excise Act, 1944

(a) a duty of excise to be called the Central

Value Added Tax (CENVAT)] on all excisable

goods (excluding goods produced or

manufactured in special economic zones)

which are produced or manufactured in India


• Manufacture Sec 2f of Central Excise

• UOI vs. DCM AIR 1963 SC 791 SC

“manufacture implies a change but every

change is not manufacture. A new and

different article must emerge having a

distinctive name, character or use”


• Deemed manufacture is not covered by the

above

• Over 35 processes have been specified or (b)

Repacking, relabeling, putting or altering

MRP in case of articles covered under MRP

valuation provisions [clauses (ii) and (iii) of

section 2(f) of Central Excise Act]


DRAFTPlace of Provision of Service Rules, 2012

(POP – 2012)

• Levy tax based on jurisdiction of consumption

• Do not charge tax on Export of services

• Levy tax on Import of services

• Avoid taxation in multiple jurisdictions

• Avoid non-taxation in all jurisdictions

• Tax B2B - based on location of customers

• Tax B2C - based on location of service providers

BASIC TAXING PHILOSOPHY – POP 2012

Location of Service Receiver and Provider

- Registered - its location is the registered premises

- Not registered - its location could be:

a) Business establishment; OR

b) Fixed establishment; OR

c) Business / Fixed Establishment most directly

concerned with use / provision of service; OR

d) Usual place of residence / place of incorporation

BASIC TAXING PHILOSOPHY – POP 2012

LOCATION – POP 2012

Registered in India

Location is India

Yes

Business Establishme

nt ?

No

NoFixed

Establishment ?

NoUsual Place of

Residence - India ?

No

Location not India

Fixed Establishment

abroad ?

Yes Establishment

more directly concerned

Yes

Location would be business

establishmentNo

Another Fixed Establishment ?

Yes

Establishment more directly

concerned

Yes

Fixed Establishment

No

Location is India

Yes

Rule 3 - Place of provision generally

The place of provision of a service shall be the

location of the service receiver;

Provided that in case the location of the service

receiver is not available in the ordinary course of

business, the place of provision shall be the

location of the service provider.

BASIC RULES – POP 2012

Rule 8 - Place of provision of services where provider

and receiver are located in taxable territory

Place of provision of a service, where the location of the

service provider as well as that of the service receiver is

in the taxable territory, shall be the location of the service

receiver.

BASIC RULES– POP 2012

Rule 14 - Order of application of rules

Notwithstanding anything stated in any rule,

where the provision of a service is, prima facie,

determinable in terms of more than one rule, it

shall be determined in accordance with the rule

that occurs later among the rules that merit equal

consideration.

BASIC RULES – POP 2012

STRUCTURE – POP 2012

Particulars Description Rule

Location of Service Receiver

General Rules 3, 8 & 14

Location of Service Provider

Where location not available

Specific Rule for five specified

Proviso – 3

9

Various Other Specific Rules for seven specified services

4 to 6, 7, 10 to 12

The place of provision of following services shall

be the location where the services are actually

performed, namely -

1.) Goods Physically made available by receiver

EXCEPT – E-SERVICES where goods located

2.) Supply of goods along with service

3.) Service in physical presence of individual

RULE 4 – POP 2012

The place of provision of services provided directly in

relation to an immovable property, including services –

• Experts and estate agents

• Provision of hotel accommodation

• grant of rights to use immovable property,

• services for carrying out or coordination of construction

work, including architects / int. decorators

shall be the place where the immovable property is

located or intended to be located.

RULE 5 – POP 2012

The place of provision of services provided by way of

admission to, or organization of –

• a cultural, artistic, sporting, scientific, educational,

or entertainment event,

• or a celebration, conference, fair, exhibition,

• or similar events, and of services ancillary to such

admission,

shall be the place where the event is actually held.

RULE 6 – POP 2012

Where any service referred to in rules 4, 5, or 6 is

provided at more than one location, including a

location in the taxable territory, its place of

provision shall be the location in the taxable

territory where the greatest proportion of the

service is provided.

RULE 7– POP 2012

The place of provision of following services shall be the location of the service provider:-

• Services provided by a banking company to account holders;

• Telecommunication services provided to subscribers;

• Online information and database access or retrieval services;

• Intermediary services;

• Service consisting of hiring of means of transport, upto a period of one month.

RULE 9 (SPECIFIED SERVICES) – POP 2012

Rule 10. The place of provision of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of the goods:

Provided that the place of provision of services of goods transportation agency shall be the location of the person liable to pay tax.

Rule 11. The place of provision in respect of a passenger transportation service shall be the place where the passenger embarks on the conveyance for a continuous journey.

RULE 10 & 11– POP 2012

Place of provision of services provided on board a conveyance

Place of provision of services provided on board a conveyance during the course of a passenger transport operation, including services intended to be wholly or substantially consumed while on board, shall be the first scheduled point of departure of that conveyance for the journey.

RULE 12– POP 2012

Powers to notify description of services or circumstances for certain purposes.

In order to prevent double taxation or non-taxation of

the provision of a service, or for the uniform

application of rules, the Central Government shall

have the power to notify any description of service or

circumstances in which the place of provision shall be

the place of effective use and enjoyment of a service.

RULE 13– POP 2012

THANK YOU

finanace act 2012 service tax

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