Service tax Part II

V S Datey

Website – http://www.dateyvs.com

Rate of tax, value and rate of exchange [section 67A]As per section 67A, the rate of service tax,

value of a taxable service and rate of exchange, in force or as applicable at the time when the taxable service has been provided or agreed to be provided is relevant.

Service tax rate as applicable at the time when taxable service has been provided or agreed to be provided.

Point of Taxation Rules relevant only to determine due date of payment of service tax and not rate of service tax

Transitory Provisions If invoice before 1-6-2015 but payment after

1-6-2015, then service tax rate 12.36%If service provided before 1-6-2015, service

tax rate 12.36% even if invoice raised after 1-6-2015

If advance received before 1-6-2015, service tax rate 12.36% even if actual service provided after 1-6-2015

Principle applies to reverse charge alsoPrinciple applies to Swachh Bharat Cess also

Rate of ExchangeRelevant in case of export and

import of serviceRate of Exchange as GAAP i.e. AS-

11 w.e.f. 1-10-2014RBI Reference rate or rates

announced by FEDAI is not relevant or rate at which Bank debited/credited account not relevant

Reverse ChargeNormally, service tax and swachh bharat cess

(SBC) is payable by service provider. In case of some services, Service tax and SBC

is payable (partly or fully) by service receiver under Notification No. 30/2012-ST dated 20-6-2012. This is termed as ‘reverse charge’

Reverse charge provisions have been made applicable to works contract service, manpower supply service, security service, directors’ services, renting or hiring of motor vehicle to carry passengers, support services provided by Government, services of Advocates and firms of Advocates, Mutual Fund, import of service, sponsorship service, GTA service, services of insurance agent

Precautions where reverse charge is applicable The service receiver, who is liable to pay

service tax under reverse charge, cannot avail exemption of Rs 10 lakhs. He is liable even if the value services received by him is much less than Rs ten lakhs

The service receiver is liable to pay service tax and SBC (of his portion) even if the service provider is not registered under service tax or is availing exemption available to small service provider.

Continued….

Precautions where reverse charge is applicable

Where service tax and SBC and SBC is partially payable by service receiver, the service provider should charge only his portion of service tax and indicate that balance service tax is payable by service receiver under Notification No. 30/2012-ST dated 20-6-2012 effective from 1-7-2012.

Service receiver can be held liable to pay service tax even if entire service tax and SBC was charged and paid by service provider. Hence, no ‘short cuts’ should be found.

Where service tax and SBC is payable under reverse charge, it should be paid by cash (i.e. GAR-7 challan only). It cannot be paid through Cenvat Credit. Continued….

Precautions where reverse charge is applicable In case of GTA service (tax payable on 30% of

value w.e.f. 1-4-2015 – earlier 25% of value) and renting of motor vehicle related services (tax payable on 40% of value), abatement is subject to non-availment of Cenvat credit by service provider.

That condition is applicable to service provider and not to service receiver

Note that Cenvat credit on renting of motor vehicle to carry passengers is not available in most of the cases. Hence, it is cost to the company.

Reverse charge in case of some specific servicesIn case of manpower supply service,

security service, works contract service and renting of motor vehicle to carry passengers, service receiver is liable only when he is business entity registered as body corporate and service provider is individual, HUF, firm or AOP.

In other cases, the service provider himself is liable.

Transitory provisions w.e.f. 1-4-2015Continued….

Reverse charge in case of some specific services“Supply of manpower” means supply of

manpower, temporarily or otherwise, to another person to work under his superintendence or control.’ [Rule 2(g) of Service Tax rules, inserted w.e.f. 1-7-2012].

In case of services like cleaning, piece rate based contract work, the service receiver has to ensure that the labour brought by contractor does not work under the supervision or control of Principal Employer. The agreement should be clear on this aspect. Otherwise, the Principal Employer may be held liable to pay service tax under reverse charge.

Works contract serviceService tax on 25%, 30%, 40% and 70% in

different situationsValue of FOC material (like cement, steel etc.

supplied by contractee) and free services (water, canteen, transport, accommodation) is required to be added for composition scheme, at Fair Market Value

Hence, the scheme is risky and should be followed with caution

Deductions for salary of employee when subject to service taxServices provided by employer to

employee are not outside definition of service, i.e. these can be taxable.

Deduction from salary for services like telephones or transport services provided by employer will be subject to service tax.

Deduction for rent for residential quarters will not be subject to service tax as there is no service tax on renting of immovable property.

Salary to PartnersPayment of salary to partner –– but legally

partner is not employee – Remuneration to partner is only share of profit – Hence mere ‘transaction in money’ and not subject to service tax

Alternate argument – By legal fiction – partner and firm are being treated as separate – hence employer employee relation – should not be taxable [seems litigation prone issue]

In any case, exemption of Rs ten lakhs is available to small firms.

Directors’ RemunerationSitting fees and commission to non-

wholetime and independent directors - subject to service tax and Swachh Bharat Cess (SBC)

Executive directors or whole-time directors – If there is Employer Employee Relation, then no service tax

Company has to pay service tax under revere charge mechanism.

Company can avail Cenvat credit

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, 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.

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.

There has to be quid pro quo – payment should be commensurate with services provided

Abatement/ composition schemes GTA service - 30% if no Cenvat

availed w.e.f. 1-4-2015 [earlier it was 25%]

In case of works contract services, 25%, 30%, 40% and 70% schemes (60% scheme abolished w.e.f. 1-10-2014)

Accommodation in hotel, inn, guest house - 60% w.e.f. 1-7-2012 - Cenvat credit of input service available Continued….

Abatement/ composition schemes Restaurant service - 40% with Cenvat credit on

input services, capital goods and input goods excluding food items)

Tax on 60% if provided as outdoor caterer w.e.f. 1-7-2012 - Cenvat credit can be taken of input services, capital goods and input goods except of food items Fair market value of goods and services supplied to be added.

Tax on 70% if provided with convention centre, pandal, shamina etc. as a bundled service, w.e.f. 1-7-2012 - Cenvat credit can be taken of input services, capital goods and input goods except of food items.

Same @ for Swachh Bharat Cess also

Canteen ServicesCanteen in factory or office is not ‘outdoor

catering’ It is actually eating joint or mess – not taxable if no AC

If canteen is AC, no service tax if it is factory and it employs more than 250 persons – in other cases, service tax payable if canteen is AC

If service tax is paid, Cenvat credit of service tax paid on canteen services is not available.

Earlier definition of ‘outdoor catering’ is not applicable w.e.f. 1-7-2012. Hence, we have to go by trade understanding.

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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