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SERVICE TAX - BASED ON NEGATIVE LIST APPROACH

CONTENTS
Service Tax - Introduction Meaning of Service Declared Services What Services are Taxable Negative List of Services Place of Provision of Service Point of Taxation Interpretation Rules Reverse Charge Mechanism CENVAT Credit Rules Service Tax Compliance

SERVICE TAX INTRODUCTION


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.

MEANING OF SERVICE
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.
*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.

DECLARED SERVICES
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, Implementation, Enhancement of Information Technology Software;
Agreeing for not doing any act or tolerate any act, or to do an act;

Adaption,

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

WHAT SERVICES ARE TAXABLE


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

NEGATIVE LIST OF SERVICES


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.

PLACE OF PROVISION 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.
General Rule In terms of Rule 3, generally the place of provision of any service is the location of Service Receiver.
Services Services by Banks & Financial Institution, Intermediary services, Hiring of means of transport and Online information or database access Services directly in relation to Immovable Property Services by way of organization of an event, fair or exhibition Services which requires presence of any Person or Goods at place of performance Transportation of Goods except GTA Services Transportation of Passengers

Specific Rule
Place of Provision Location of Service Provider Location Property of Immovable

Location of such Event or Fair Location of actual performance of such service Destination of such Goods Location from where Journey Embarks

.PLACE OF PROVISION OF SERVICES


Location of Service Receiver (SR) shall be determined in following manner:
Whether Service Receiver has obtained Single Registration under service tax provisions:

YES
Location of SR shall be the premises for which registration, centralized or otherwise, has been obtained.

NO
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.

*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.

POINT OF TAXATION.
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 Invoice Date 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.
*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.

.POINT OF TAXATION
POT under specified events:
Events:
Change in Rate of Tax or Introduction 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 3103-12 and so service tax shall be charged at the rate of 10% only.

.POINT OF TAXATION
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.

POT Rules doesnt apply in following cases:


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.

INTERPRETATION RULES.
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.
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.
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.
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
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.

REVERSE CHARGE MECHANISM


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. 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.

REVERSE CHARGE MECHANISM


Extent of service tax payable by Service Provider and Service Receiver
Liability on Liability on Service Service Provider (%) Receiver (%) Nil 100%

S. Services No Provided By 1

Description of Service

Service Provided To Body Corporate or Partnership Firm Consignor or Consignee Company

Any person Sponsorship Service 2 Goods Transport Agency

Transport of Goods by Road Service

Nil
Nil Nil

100%
100% 100% 40% 75% 75% 50%

Director of a Company Any Taxable Service (w.e.f. 07-08-12) Renting or hiring of motor vehicle to carry passenger on abated value i.e. 40% Renting or hiring of motor vehicle to Individual, carry passenger on non abated value HUF, Firm, AOP Supply of Manpower Service Security Services (w.e.f. 07-08-12) Works Contract Service

4
5 6

Body Corporate or Company

60% 25% 25% 50%

7
8

REVERSE CHARGE MECHANISM


Extent of service tax payable by Service Provider and Service Receiver
Liability on Service Provider (%) Nil Nil Nil Business Entity* Nil Liability on Service Receiver (%) 100% 100% 100% 100%

S. Services Provided No By 9

Description of Service

Service Provided To
Person carrying Insurance Business Any person in taxable territory

Insurance Agent Insurance Auxiliary Service 10 Any person in non taxable territory Any Taxable Service 11 12 13 Arbitral Tribunal Legal Service

Individual or Firms of Advocate Legal Service


Support services by Government** or Government or local Local Authority authority

Nil

100%

*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.

LIABILITYAS SERVICE RECEIVER


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.

CENVAT CREDIT RULES


Point at which CEVNAT Credit can be availed:
CENVAT Credit on inputs can be availed immediately after the receipt of goods in the premises of Service Receiver (SR).

Inputs

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 Capital subsequent years subject to possession of such goods. Goods
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 Input with in 3 months from the date of invoice then CENVAT so claimed shall be reversed. Services

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.

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 or Maintain separate accounts of CENVAT utilized for exempted & taxable services and take credit of CENVAT utilized for taxable services or Reverse 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.
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)

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.

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.