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CA Sunil GabhawallaS B Gabhawalla & Co
Chartered Accountants
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Tax on all services provided in the taxableterritory
Attaches itself to the service rather than to aperson
Multiple Point Taxation based on the conceptof value addition
Therefore effectively a consumption tax
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Tax attaches to the place of consumption therefore destination based
Export of Services exempted from tax andeligible for rebates/refunds of input taxes
Import of Services liable for payment of taxunder reverse charge mechanism
Is the place of consumption same as the placeof consumer?
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Territorial Frontiers.
INDIA
OUTSIDEINDIA
C -FCo A FCo
B - ICo
Construction ContractUS$ 100 (MaterialUS$ 60 Labour
US$40)
Construction SubContract US$ 75(Material US$ 50
Labour US$ 25)
Delivery of MaterialsActual Performance of Work
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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 $40 to A?
Is B liable for payment of service tax as an importer of services? Is B eligible for export incentives as an exporter of services?
Can there be different set of answers?
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Territorial Frontiers.
OUTSIDEINDIA
INDIAC -ICo A ICo
B - FCo
Construction ContractUS$ 100 (MaterialUS$ 60 Labour
US$40)
Construction SubContract US$ 75(Material US$ 50
Labour US$ 25)
Delivery of MaterialsActual Performance of Work
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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?
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Applies towhole of
India (excl.J&K)
Applies totaxableservicesprovided
Applies totaxable services
provided inwhole of India
(excl. J&K)
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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 Service
Provider located outside India
No Major Impact more confusing due to use ofword provisioninstead of receipt
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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 Indian
Currency
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 between
Branches
Impacted Imports only Impacts Imports as well as
Exports
Also impacts transfers inter se
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Description Rule
General Rule Location of Service Receiver. In case
the location of the service receiver is
not available, then Location of service
provider
Services provided in respect of goods that are required tobe made physically available by the service receiver to
the service provider, in order to provide the service
Place of Performance
When such services are provided from a remote location
by way of electronic means.
Location of goods at the time of
provision of service
Services provided entirely or predominantly, in theordinary course of business, in the physical presence of
an individual, represented either as the service receiver
or a person acting on behalf of the receiver
Place of Performance
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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 in
taxable territory
Location of service receiver
Specified services:
a) Banking & Financial Services
b) Online Information and Database access or retrieval
services
c) Intermediary services
d) 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
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Old Provisions New Provisions
Generic Issues
Service Provider and ServiceRecipient in same location
Debatable if the serviceis rendered abroad
Taxable even if servicerendered abroad
India Specific Definitions(like telecommunicationservices)
Earlier not taxable Now Taxable in view ofnegative list
Category Specific Issues
Technical Testing andAnalysis
Recipient Based Performance Based
Service Intermediaries Recipient Based Provider Based
Online Information andDatabase Access
Recipient Based Provider Based
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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
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General Principle (Forward ChargeMechanism) Service Provider to collect from Service Recipient
and pay tax to the Government
Service Recipient is not accountable to theGovernment directly
Reverse Charge Mechanism Service Recipient called upon to directly pay tax to
the Government
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Need for Reverse Charge Mechanism Legal Provisions Section 68
Independent Liability of Service Provider andService Recipient
Not Similar to Tax Deduction at Source
Variations
Full / Partial Reverse Charge Mechanism Comprehensive / Selective Reverse Charge
Mechanism
Too Onerous a Responsibility?
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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 providers 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?
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Description of Service Liability ofService Provider Liability of ServiceRecipient
Compone
nt
Effective
Rate
Componen
t
Effective
Rate
Only Non Corporate Service Providers and Corporate
Service RecipientsRent-a-Cab on abated value NIL NIL 100% 4.944%
Rent a-Cab on non abated
value
60% 7.416% 40% 4.944%
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Net Impact on Service Recipient is the same4.944%
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
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Description of Service Liability ofService Provider Liability of ServiceRecipient
Compone
nt
Effective
Rate
Componen
t
Effective
Rate
Only Non Corporate Service Providers and Corporate
Service RecipientsSupply of Manpower 25% 3.09% 75% 9.27%
Security Services (only w.e.f.
07.08.2012)
25% 3.09% 75% 9.27%
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Definition
supply of manpower means supply of manpower, temporarily or otherwise, toanother 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
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Description of Service Liability of ServiceProvider Liability of ServiceRecipient
Works Contract Services Component
Effective Rate Component Effective Rate
Only Non Corporate Service Providers and Corporate Service RecipientsNature of Works
Contract
Presumptive
Value ofService
Effective
Tax Rate
Original Works
(Construction of
new immoveable
property)
40% 4.944% 50% 2.472% 50% 2.472%
Works Contracts
relating to
moveable assets
70% 8.652% 50% 4.326% 50% 4.326%
Other Works
Contracts
60% 7.416% 50% 3.708% 50% 3.708%
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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 issuematerials and services
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Definition: 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 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
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Contract for Sale Contract for Work
Labour ContractsIndirect Transfer ofProperty in Goods
Accretion
Also WC underService Tax Law
Original Works
40%
Others
60%
Accession
Also WC underService Tax Law
70%
Blending
Not Works Contractunder Service Tax
Law
Contract for OtherServices
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Example IncomeTax 94C
VAT 29A
Service Tax65B(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
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Example IncomeTax 94C
VAT 29A
Service Tax65B(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
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Valuation Options
Value adopted forState VAT purposes
to be reduced
Actual Value ofmaterials to be
reduced
If not possible,adopt presumptive
Value
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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 issuematerials and services
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General (Liability of the Service Recipient Only)Description of Service Liability of
Service
Provider
Liability of Service
Recipient
Component Effective Rate
Sponsorships 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%
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Onerous Obligation
How to handle implementation Manual ERP/System Driven
Possibility of Mistakes very common
Will the Department provide an HUG in case ofsuch mistakes?
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