SERVICE TAX - BASED ON NEGATIVE LIST APPROACH

CONTENTSService Tax - IntroductionMeaning of ServiceDeclared ServicesWhat Services are TaxableNegative List of ServicesPlace of Provision of ServicePoint of TaxationInterpretation RulesReverse Charge MechanismCENVAT Credit RulesService Tax – Compliance

Service Tax was first introduced vide Finance Act, 1994 and is levied by the Central Government which applies to whole of India except the State of Jammu & Kashmir.

At the inception, only three services were taxable which gradually rose to 119 taxable services by Finance Act, 2011. Government had earned the revenue of Rs.410 crores in FY - 1994-95 which was increased to Rs.95,000 crores (approx) by FY - 2011-12.

In 2012 Service Tax Law attains majority, not only by its age of 18 years but also by its scope which has been enlarged w.e.f. 01-07-12 by way of introduction of Negative List approach for taxing services.

SALIENT FEATURES OF RECENT AMENDMENTS VIDE FINANCE ACT 2012

Tax which was levied on positive list of 119 services shall now be levied on all services except those listed in Negative list and provided in Exemption Notifications. Significance of Classification of Services is washed away but Interpretation Rules were introduced in its place.Provisions of Reverse Charge Mechanism has been widened by bringing more services under its net. Export of Service Rules & Import of Service Rules are no more relevant against which Place of Provisions Rules were introduced.

SERVICE TAX – INTRODUCTION

First time in the history of this law the term “Service” has been defined u/s 65B(44) of the Act inserted w.e.f. 01-07-2012.

By virtue of this section, Service means any ACTIVITY* carried out by a person for another for CONSIDERATION** and includes declared services but shall not include:

An activity which constitutes merely transfer of title in Goods or Immovable Property;

A transaction in money or actionable claims;

Service provided by an employee to the employer under employment;

Fees taken in any Court / Tribunal.

IMPORTANT INGREDIENTS

Activity to be performed by one person to another.

Activity to be performed for Consideration since No Consideration No Tax.

It includes Declared Services and Excludes certain activities.

MEANING OF ‘SERVICE’

*Activity means any act or work undertaken or performed or provision of a facility. ** Consideration means anything is done or abstained from doing for anything in return.

Section 66E of the Act provides certain activities which have been deemed to be service and service tax shall be levied thereon. Following are such activities:

Renting of Immovable Property;Construction* of a Complex, building, civil structure or part thereof, including complex intended for sale except where whole consideration is received after issuance of completion certificate;Temporary transfer or permitting the use or enjoyment of any intellectual rights;Development, Designing, Programming, Up-gradation, Customizing, Adaption, Implementation, Enhancement of Information Technology Software;Agreeing for not doing any act or tolerate any act, or to do an act;Transfer of Goods by way of hiring, licensing without transfer of right to use such goods;Activities in relation to delivery of goods on hire purchase;Service portion in Works Contract; andService portion in an activity where food or any article for human consumption or any drink is supplied in any manner as part of such activity.

DECLARED SERVICES

* Construction includes additions, alterations, replacements or remodeling of any existing civil structure.

Prior to July, 2012 Service Tax was charged on specified list of services. But now chargeability of service tax has been shifted from Positive List to Negative List of approach.

W.e.f. 01-07-2012, Service Tax shall be charged by virtue of Section 66B of the Act which reads as under:

“There shall be levied a 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”

TAX CAN BE LEVIED ON AN ACITIVITY WHEN:

Such Activity is a Service in terms of Section 65B(44) of the Act.

Such service is not mentioned in Negative List.

Such service is provided or agreed to be provided in Taxable Territory.

Such service is provided by one person to another.

WHAT SERVICES ARE TAXABLE

Additionally, Thirty Nine types of services have been exempted from service tax vide Notification No. 25/2012 dated 20.06.2012.

Section 66D of the Act specifies 17 categories of services on which no tax shall be levied. Following are such categories listed in negative list:

Services by RBI, Foreign Diplomatic Mission in India, Government or Local Authority;

Trading or Manufacture of Goods;

Betting, gambling or lottery & Transmission or distribution of Electricity;

Funeral, burial, crematorium or mortuary services including conveyance of deceased;

Selling of space or time slots for advertisements other than broadcasted by radio or television;

Admission to entertainment events or amusement facilities;

Services relating to agriculture or agricultural produce like supply of farm labour, loading, unloading, storage or warehousing of agricultural produce;

Services by way of:Pre-school education upto higher secondary, education as part of approved vocational course;

Transportation of passengers by state carriage, metro, monorail, metered cabs, radio taxis, inland waterways etc;

Transportation of goods by road except by GTA or Courier agency, inland waterways and railways in coach other than first class or air-conditioned coach;

Extending loans or deposits where consideration is interest or discount, sale/purchase of foreign currency;

Inter se sale or purchase of foreign currency amongst banks or authorized dealers;

Renting of residential dwelling for use of residence & Access to a road or bridge by payment of toll tax.

NEGATIVE LIST OF SERVICES

By virtue of Section 66B of the Act, service tax shall be levied on value of services which are “Provided or agreed to be provided in Taxable Territory”.

Place of Provision of Service Rules applies w.e.f. 01-07-2012 and it provides the circumstances based on which the place where any service has been provided shall be determined.

PLACE OF PROVISION OF SERVICES….

Specific Rule

General Rule

Services Place of Provision

Services by Banks & Financial Institution, Intermediary services, Hiring of means of transport and Online information or database access

Location of Service Provider

Services directly in relation to Immovable Property Location of Immovable Property

Services by way of organization of an event, fair or exhibition Location of such Event or Fair

Services which requires presence of any Person or Goods at place of performance

Location of actual performance of such service

Transportation of Goods except GTA Services Destination of such Goods

Transportation of Passengers Location from where Journey Embarks

In terms of Rule 3, generally the place of provision of any service is the location of Service Receiver.

….PLACE OF PROVISION OF SERVICESLocation of Service Receiver (SR) shall be determined in following manner:

Location of SR shall be the premises for which registration,

centralized or otherwise, has been

obtained.

Location of SR shall be (in chronological order):1. The Location of his Business

Establishment*;2. Location of an Establishment

where services are being used;3. If services are used at more

than one places, then location of establishment which is most directly connected with usage of services;

4. Usual Place of residence of service receiver.

YES NO

*Business Establishment is the place where the essential decisions concerning the general management of the business are adopted. It can be HO, Factory or workshop.

Whether Service Receiver has obtained Single Registration under service tax provisions:

Until March, 2011 service tax liability arose only after receipt of payment from service receiver but since April, 2011 it has been shifted from cash basis to accrual basis.

Point of Taxation Rules, 2011 were introduced w.e.f. 01-04-2011 so as to determine the point at which any service shall be deemed to have been provided and the service tax thereon becomes due.

Three important dates relevant for determining the point of taxation are:Date of InvoiceDate of Payment – Date of Credit to Bank A/c or in Books, whichever is earlier.Date of Completion of Service*

Generally, Point of Taxation (POT) shall be the date of invoice if the same is raised within 30 days of completion of service, otherwise the date of completion of service shall be POT.

However, cases where payment is received in advance against any service then the date of receipt of payment shall be the POT irrespective of the date of invoice.

POINT OF TAXATION….

*In case of continuous supply of service, date of completion of service shall be replaced by date of completion of an event which requires service receiver to make payment.

POT under specified events:

….POINT OF TAXATION

Events:Change in Rate of Tax orIntroduction of New Service

Two out of three dates, occurring either before or after any of such event, shall be considered for determining POT and the date which occurs first shall be the point at which service tax liability arises.

It means the date which occurs first among the two dates falling after/before an event shall be taken as point of taxation and service tax shall be levied accordingly.

For Example:-

XYZ Ltd has rendered taxable services to ABC Ltd in March 2012 for which invoice has been raised on 15-04-2012 and the payment is received on 05-05-2012.

In this case, point of taxation shall be 15-04-12 and the effective rate of tax at such point shall be applied i.e. 12%. Had the payment is received on 31-03-12 then POT shall be 31-03-12 and so service tax shall be charged at the rate of 10% only.

….POINT OF TAXATION

Service provider (individual or partnership firms) having turnover of Rs.50 Lakhs in preceding Financial Year has the option to pay service tax on cash/receipt basis upto the value of services of Rs.50 Lakhs in current year.

POT Rules doesn’t apply in following cases:

POT under Reverse Charge Provisions:

In terms of Rule 7 to POT Rules, where service receiver is liable to pay service tax, the point of taxation shall be the date on which value of service has been paid to service provider.

However, if payment is not made to service provider within six months from the date of invoice then POT shall be deemed to be the date of invoice of input services.

Cases where services are received from an associated enterprises located outside India, POT shall be the date of debit in books of accounts of service receiver or date of payment whichever is earlier.

Prior to July, 2012 section 65A of the Act provides the principles for classification of service based on which services are to be classified under 119 clauses of section 65(105) of the Act.

Now w.e.f. 01-07-2012 section 66F of the Act laid down the principles for interpreting the description of services and also the classification in case of bundled services.

Rule: 1

Input services used for providing main service shall not infer its taxability from the main service. Thus, services used for providing exempted service may not necessarily be exempted.

Rule: 2

Cases where differential treatment is possible based on the descriptions of services then services with Specific description shall be preferred over general description.

INTERPRETATION RULES….

Eg. Services like security services provided in relation to collection of Toll Tax for access of any road, a non-taxable service, shall not be considered as Non-taxable.

Eg. Services of a real estate agent in relation to an immovable property located outside India shall not be considered as non-taxable service since the more specific description for such service is intermediary services and place of provision of such service is place of its performance and not the location of the property and thus services are taxable.

….INTERPRETATION RULES

Naturally Bundled

• Where services are bundled naturally then it shall be treated as single service which gives such bundle the essential character*.

• Eg. Services by way of Rail Travel in AC coach along with Food. Here services are naturally bundled so tax shall be levied only on rail travel and not on catering service.

Unnaturally Bundled

• Where services are unnaturally bundled in ordinary course of business then it shall be treated as the service which results in highest service tax liability.

• Eg. House is rented for residence on one floor and for commercial purpose on other. Here services are unnaturally bundled so tax shall be levied on whole consideration of renting.

Cases where bundle of services are provided then tax on services shall be dealt in given manner:

*It has been clarified that the service which provides economic value to the service recipient will be considered as essential service for the purpose of classification.

Section 68(2) of the Act provides that any person other than the service provider may be liable to pay service tax on such services in such manner as may be prescribed.

The Scope of such section has been widened w.e.f. 01-07-2012 by way of introducing more services under Reverse Charge Provisions through Notification No. 30/2012.

SALIENT FEATURES

Liability to pay service tax has been shifted, wholly or partly, from service provider to service receiver.

Business Entities are now made liable to pay service tax, consequently, the burden of individual service providers to comply with the provisions of Service Tax Regime have been reduced. In some cases partnership firms have also been relieved from this burden.

REVERSE CHARGE MECHANISM

Service receiver shall remain be liable to pay tax even if service provider has not charged service tax on its invoices since threshold limit of Rs.10 Lacs does not apply under Reverse Charge Provisions.

S. No

Services Provided By Description of Service

Service Provided To

Liability on Service

Provider (%)

Liability on Service

Receiver (%)1

Any person Sponsorship ServiceBody Corporate or Partnership Firm Nil 100%

2 Goods Transport

Agency Transport of Goods by Road ServiceConsignor or

Consignee Nil 100%3 Director of a

Company Any Taxable Service (w.e.f. 07-08-12) Company Nil 100%4

Individual, HUF, Firm,

AOP

Renting or hiring of motor vehicle to carry passenger on abated value i.e. 40%

Body Corporate or Company

Nil 100%Renting or hiring of motor vehicle to carry passenger on non abated value 60% 40%

5

Supply of Manpower Service 25% 75%6

Security Services (w.e.f. 07-08-12) 25% 75%7

8Works Contract Service 50% 50%

Extent of service tax payable by Service Provider and Service Receiver

REVERSE CHARGE MECHANISM

S. No

Services Provided By Description of Service Service Provided To

Liability on Service

Provider (%)

Liability on Service

Receiver (%)9

Insurance Agent Insurance Auxiliary ServicePerson carrying

Insurance Business Nil 100%10 Any person in non

taxable territory Any Taxable ServiceAny person in

taxable territory Nil 100%11 Arbitral Tribunal Legal Service

Business Entity*

Nil 100%12 Individual or

Firms of Advocate Legal Service Nil 100%13

Government** or Local Authority

Support services by Government or local authority Nil 100%

Extent of service tax payable by Service Provider and Service Receiver

REVERSE CHARGE MECHANISM

*Business Entity: It includes an association of persons, body of individuals, company or firm but does not include an individual ** Government: It means both Central & State Govt. and includes its departments but does not include the corporations/regulatory bodies formed under Central or State Acts or institute set up by State/Central Acts.

Points to Remember:Cases where contract price of any service is inclusive of service tax then service receiver should make a deduction of service tax (payable by SR) from the payments made to its service providers.

Liability to pay service tax under Reverse Charge shall arise in the month following the month in which value of service has been paid to service provider. In case payment is not made in six moths then such liability shall be discharged from date of invoice.

Service Receiver shall remain be liable to pay service tax on any advance payments made to Service provider before availing any of the Specified service.

For example:-

Mr. A has supplied manpower to XYZ Ltd in June 2012 for which invoice dated 10-07-2012 for Rs.10,000 without charging service tax and payment to Mr. A is made on 15-08-2012.

In this case, point of taxation shall be 15-08-12 and service tax of Rs.927 (10000*12.36%*75%) shall be payable by XYZ Ltd and Mr. A is not required to pay any service tax.

LIABILITYAS SERVICE RECEIVER

Negative List of Input Services:No CENVAT Credit can be availed on following input services:

Works Contract Service & Construction services so far as the same are used for construction of civil structure or laying of foundation or structures for support of capital goods. It means CENVAT Credit can be availed on other works contract services like repair & maintenance of equipments etc.Services by way of Renting, General Insurance and Repair & Maintenance of a Motor Vehicle except where motor vehicle is a capital good.Services used primarily for personal use or consumption of any employee like membership of a club, health / life insurance, outdoor catering, beauty treatment and others.

Point at which CEVNAT Credit can be availed:

Inputs •CENVAT Credit on inputs can be availed immediately after the receipt of goods in the premises of Service Receiver (SR).

Capital Goods •CENVAT Credit of 50% of the duty paid on Capital Goods can be availed in the financial year in which such goods are received by SR. The remaining Credit can be availed in subsequent years subject to possession of such goods.

Input Services •CENVAT Credit on input services can be availed on or after the receipt of invoice of input service. In case payment of value of service & service tax is not made to service provider with in 3 months from the date of invoice then CENVAT so claimed shall be reversed.

CENVAT CREDIT RULES

Reversal of CENVAT Credit: In terms of Rule 6 of CCR, if an assessee is providing taxable as well exempted service then CENVAT Credit shall not be allowed on such quantity of input services which are used in relation to provision of exempted services.

Rule 6 of CCR, 2004 provides following three options to reverse such CENVAT credit: Pay duty @ 6% on the value of exempted goods or services orMaintain separate accounts of CENVAT utilized for exempted & taxable services and take credit of CENVAT utilized for taxable services orReverse proportionate amount of CENVAT Credit which is attributed to exempted service.

CENVAT Credit of service tax paid under Reverse Charge:In such cases, Service receiver can avail CENVAT Credit in two following parts.

In terms of Rule 9(e) of CCR, a challan evidencing the payment of service tax by the service recipient is a valid document for claiming the CENVAT Credit.

CENVAT CREDIT RULES

I:At the time of booking

of Invoice (To the extent tax is charged

in Invoice)

II: At the time of making

payment of Service Tax (To the extent tax is paid as

Service Recipient)

SERVICE TAX COMPLIANCE

Every person providing taxable service shall issue an Invoice or bill with in 30 days from the date of completion of service or receipt of any payment whichever is earlier.

Payment of Service Tax shall be made by 5th / 6th of the month following the month or quarter, as the case may be, in which liability to pay tax arises but service tax liability for the month of March shall be paid by 31st March only. Delayed payment shall be made along with interest @ 18% p.a.

Every assessee* has to furnish Half - Yearly Service Tax Returns by 25th of October / April electronically. It was proposed in the Finance Act, 2012 that the Service Tax Returns are to be filled Monthly / Quarterly instead of Half Yearly. However, such provisions have not been inserted in the Act un-till now.

Every assessee* has to maintain the records for five years immediately after the financial year to which such records pertain.

* Assessee means a person liable to pay service tax and includes his agent.

PREPARED BY:-CA ASHISH GUPTA

B-116, Ist Floor, Amar Colony, Lajpat Nagar-IV, New Delhi

(M) +91-9891670570(E) info@ashishca.com

(W) www.ashishca.com

Disclaimer: This presentation is provided purely for your information and knowledge. Information provided in this presentation do not purport or should not be treated as legal opinion in the fact specific situations that may effect you and your business.