Service Tax

Service Tax Legal Framework

There is no Service Tax Act

The service tax is being imposed by amending Finance Act, 1994

Section 66 of Finance Act,1994 is the charging section of
Service Tax.
Service Tax Rules 1994
Service Tax Valuation Rules 2006

Export of Services Rules 2005

Import of Services Rules 2006

No. of Taxable Services

140

117

120

119

106
99

100

100

84
80

75

62
60
52

41
40
26

26

26

18

20

3
0
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2011-12

Service Tax Revenue

(Rs.Crores)
140000

120000

100000

80000

60000

40000

20000

0
1994-95 1995-96 1996-97 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-13

Tax Revenue as %-age of Gross Tax Revenue

Source : Economic Survey, 2012-13

Service for Taxation

Service means any activity carried out by a person for another
for consideration.
It does not include :
(i) A transfer of title in goods or immovable property, by way of sale,
gift or in any manner.

(ii) Service by an employee to the employer in the course of or in

relation to his employment.
(iii) The functions performed by the MPs, MLAs etc.
(iv) The duties performed by any person as a Chairperson/ Member/
Director in a body established by the Central or State Governments or
local authority.

Service Tax

Three services telephone, general insurance, stock brokers serviceswere made taxable in 1994
Service tax is an indirect tax. Though liability is on service provider,
the tax can be collected by him from service receiver
Section 66 of Finance Act, 1994 states that service tax shall be levied
at the rate of 12% of value of taxable services
In addition, education cess (2%) and SAH education cess (1%) is
payable.

Point of Taxation Rules

The time of provision of service will be one of the following dates

(i) Date of issue of invoice , if such invoice is issued within 30 days of
completion of service
(ii) Date of completion of service , if such invoice is not issued within 30
days
(iii) Date on which the payment is received
whichever is the earliest

Negative List Approach

Services by government or local authority
Services by the Reserve Bank of India
Services by foreign diplomatic mission located in India

Services relating to agriculture

Trading of goods
Any process amounting to manufacture or production of goods
Selling of space or time slots for advertisements
Service by way of access to a road or a bridge on payment of toll charges

Betting, gambling or lottery

Negative List Approach

Admission to entertainment events or access to amusement facilities

Transmission or distribution of electricity

Services by way of education

Services by way of renting of residential dwelling for use as residence

Financial sector

Service of transportation of passengers

Services by way of transportation of goods
Funeral, burial , crematorium or mortuary services

Nature of Levy of Service Tax

In respect of each type of service, it is necessary to determine two things

namely,
(a) Taxable Service
(a) Value of Taxable Service

Taxable Service
Service tax is payable on taxable service [Section 66, Finance Act,
1994]
Service is taxable if service is provided by any person.

Any person includes individual, partnership firm, society, company,

body corporate, charitable institutions, cooperative society
Though excise and service tax are administered by same department,
both are independent taxes

Value of Taxable Service

Value of taxable service shall be determined by service provider [Rule

3, Valuation Rules]
Central Excise Officer is authorized to reject the value as determined
by service provider [Rule 4, Valuation Rules]
Service tax is payable on gross amount charged by service provider for
service provided or to be provided [Section 67, Finance Act 1994]

A service provider may agree to give rebate/discounts after preparation

of invoice. In such case, service tax is payable only on net amount.

Value of Taxable Service

The service provider is required to show service tax separately in his

invoice/bill [Section 12A of Central Excise Act.]
If he does not show it separately, the gross amount charged can be
taken as inclusive of service tax and value and service tax can be
calculated by back calculations

Formula :

Tax inclusive price

Assessable Value = -------------------------1 + rate of tax

Computation of Service Tax

Ms.Priya rendered a taxable service to a client.
A bill for Rs.40,000 was raised on 29.4.2009; Rs.15,000 was received
from the client on 1.5.2009 and the balance on 23.5.2009.
No service tax was separately charged in the bill.
Is Ms.Priya liable to pay service tax , even though the same has not been
charged by her?
Yes, she is liable to pay service tax.
Gross amount charged by her is deemed to be inclusive of service tax.

In case she is liable, what is the value of taxable service and service tax
payable?
40,000
Value of taxable service = ----------------- = Rs.35600
1 + 0.1236
Service tax = @12.36% of Rs.35,600 = Rs.4,400

Exemptions from Service Tax

Service providers whose turnover less than Rs.10 lakhs p.a. are exempt
from service tax w.e.f. 1-4-2008
No service tax on export of services
Services provided to UN and International Agencies are exempt
Any taxable service provided to foreign diplomatic mission in India is
exempt vide Notification No. 33/2007 dated 23-5-2007

Exemptions from Service Tax

Services where RBI is liable to pay service tax are exempt

[Notification No. 22/2006-ST dated 31-5-2006]
Statutory activities undertaken by public authorities are not taxable
services [e.g. factories inspector inspecting factories etc.]
No service tax on service provided in J&K
Expenditure incurred by service provider as pure agent is not
includible

Taxable Service
Whether service provided in the State of Andhra Pradesh by a person
having place of business in the state of J&K is taxable?
Yes

Whether service provided in the State of J&K by a person having place

of business in Mumbai is taxable?
No
Service tax is a destination based consumption tax.

Valuation of Taxable Service

Valuation

Wholly in Money

Wholly or Partly
not in Money

Gross amount
charged
Similar services
provided to third
party

Market value cannot be

lower than the cost of
provision of the services

Taxable Service : Example

J.C. Professionals, a partnership firm, gives the following particulars
relating to the services provided to various clients by them for the halfyear ended on 30.09.06 :
Total bills raised for Rs.8,75,000
Out of which bill for Rs.75,000 was raised on an approved International
Organisation.
Payments of bills for Rs.1,00,000 were not received till 30.09.06.
Amount of Rs.50,000 was received as an advance from XYZ Ltd. on
25.09.06 to whom the services were to be provided in October, 2006.
You are required to work out :
(a) Taxable value of services
(b) Amount of service tax payable

Taxable Service : Example

Assuming that bill amount is exclusive of service tax, the taxable value
of services =
Bill amount (Rs.8,75,000) Exemption in respect of services provided
to International organization (Rs.75,000) + Amount received in advance
(Rs.50,000) = Rs.8,50,000
Service tax payable = 12.36% of Rs.8,50,000 = Rs.1,05,060

Gross Amount Charged

Hotel Marudhar Palace charges 10% of the bill amount as service
charges and department has asked them to pay service tax on it.

The assessee has submitted that the amount @10% collected from
customers is subsequently disbursed among the staff, therefore it is not
part of their income and cannot be included in the gross amount charged
by them.
Examine the case.
As per section 67, the value of taxable service shall be the gross amount charged by
service provider for the taxable service provided or to be provided by him.
Since the assessee was charging service charges (@10% of bill amount) from its
customers for providing the services, therefore, the said amount was liable to be
included in the gross amount charged.
Therefore, service charges (@10% of bill amount) charged by Hotel Marudhar Palace
are includible in gross amount charged by them and will be liable to service tax.

Works Contract Service

The works contract services was brought under service tax net w.e.f 1.6.2007
Such contract is for the purposes of carrying out
Erection , commissioning or installation of plant, machinery, equipment or
structures
Commercial or industrial construction of buildings, pipelines etc.
Construction of new residential complex
Turnkey projects including engineering, procurement and construction or
commissioning projects
Works contract in respect of roads, airports, railways, transport terminals,
bridges, tunnels and dams are excluded.

Valuation of Works Contract Services

Broadly , two options are available to service provider (a) Value of works contract service determined shall be equivalent to
the gross amount charged for the works contract less the value of
transfer of property in goods involved in the execution of the said
works contract.
(b) Pay service tax under composition scheme at 4.12% of gross
amount charged for works contract (inclusive of education cess and
SAH education cess).

Valuation Rules [Rule 2A]

Value of works contract service shall include
Labour charges for execution of the works
Amount paid to a sub-contractor for labour and services
Charges for planning, designing and architects fees
Charges for obtaining on hire machinery and tools used for the execution of the works
contract
Cost of consumables such as water, electricity, fuel, used in the execution of the works
contract
Cost of establishment of the contractor relatable to supply of labour and services
Profit earned by the service provider relatable to supply of labour and services

Impact of Classification on Service Tax Liability

Particulars
Value of the contract
(exclusive of VAT)
Value of goods
Value of services/labour
charges etc.

Scenario
Scenario 1
Scenario 2
Scenario 3

Scenario 1 (Rs.) Scenario 2

(Rs.)
5,00,000
5,00,000

Scenario 3 (Rs.)

2,00,000
3,00,000

4,00,000
1,00,000

Service tax under Composition

Scheme
5,00,000 * 4.12% = 20,600
5,00,000 * 4.12% = 20,600
5,00,000 * 4.12% = 20,600

3,00,000
2,00,000

5,00,000

Service tax under general

scheme (Rule 2A)
3,00,000*12.36%=37,080
2,00,000*12.36%=24,720
1,00,000*12.36%=12,360

Annual Maintenance Contract

The assessee used to undertake installation of various medical equipments.
Further, it used to enter into Annual Maintenance Contract (AMC) with its customers
for maintenance of such equipments.
As per AMC, the assessee was liable to provide all labour and materials required for
such contract.
The assessee used to bifurcate its receipts as : Materials 70% & Labour 30%.
The assessee claimed abatement of the value of materials/spare-parts used for the
purpose of the contract, as it had paid sales-tax/VAT and service tax was paid under
Management,Maintenance or Repair Service on the balance 30% of gross receipts.
The department denied abatement on the ground that the materials were not sold;in
fact, they were used in providing the maintenance service.
Whether the assessee was entitled to abatement of value of materials?
In AMC , the replacement of spares etc. is considered as sale. Since 70% of the gross
receipts has been charged to sales tax/VAT,so such sale will be outside the scope of levy
of service tax.
Only 30% of the gross receipts can be regarded as value of taxable service liable to
service tax.
Value of material supplied is not includible

SIM Card
Smartphone is in the business of providing mobile telephone service.
The assessee sells SIMCARDS to its mobile telephone subscribers
for a price.
Smartphone pay service tax on the activation and other charges.
On the SIMCARDS sold to the customers, VAT under the applicable
State law is paid.
The departments view is that the SIMCARD is used for provision of
mobile services and is a part of the service and therefore the value of
the SIMCARD has to be included in the category of
telecommunication services for purpose of service tax.
Whether the view taken by the department is correct?
SIM Cards An essential part of service Value of SIM Cards not
liable to sales tax; liable to service tax
[Idea Mobile Communication v.CCEx (2011)SC]

Pure Agent
Mr. Y , an architect, finds a client Mr.A who needs services of architect as well as
interior decorator.
Mr.A asks Mr.Y to find an interior decorator on his behalf, decide the terms of his
engagement and also his remuneration, make payment to him on his (Mr.As) behalf and
provide a consolidated bill, showing relevant break ups, to him (Mr.A).
Mr.Y finds an interior decorator Mr.Z, whose remuneration is fixed at Rs.2,00,000
(inclusive of all taxes).

Mr.Y charges Rs.8 lakhs towards the value of taxable service provided by him.
Compute the amount of service tax to be charged in the bill by Mr.Y if the bill amount
includes Rs.2,00,000 additional towards the cost of interior decoration.

Bill amount includes only the actual cost of interior decorator.

Since Mr.Y has acted as pure agent of Mr.A, he will get deduction of such cost.
Value of taxable service provided by Mr.Y = 10,00,000 2,00,000= Rs.8,000,00,
on which service tax = 8,000,00 x 12.36% =Rs.98,880

Export & Import of Services

Meaning of Export of Taxable Services

If service is exported, there is no service tax liability

Following conditions are common in respect of all taxable services :

(a) The service should be provided from India and used outside India
[rule 3(2)(a) of Export of Services Rules]

(b) Payment for such service is received by the service provider in

foreign exchange [rule 3(2)(b) of Export of Services Rules]

Meaning of Import of Taxable Services

Services provided from outside India and received in India.
Section 66A (1) of Finance Act, 1994 provides that where any service is

(a) provided or to be provided by a person who has established a business

or has a fixed establishment from which the service is provided or to be
provided or has his permanent address or usual place of residence, in a
country other than India, and
(b) received by a person who has his place of business, fixed
establishment , permanent address or usual place of residence, in India,
such service shall be treated as taxable service.
The provision that service receiver is liable to pay service tax is termed
as Reverse Charge.

Export & Import of Services : Classifications

Export of Services
(1)Services in relation to
immovable property
situated abroad

Import of Services
(2) Services in relation to
immovable property
situated in India

(3)Services which are

atleast partly performed
outside India

(4) Services which are

performed at least partly in
India

(5) Services provided from (6) Services from outside

India but recipients are
India but recipients are
located outside India
located in India

Export of Service?
Microsoft India was providing marketing support service in India to
its holding company in USA and subsidiary in Singapore.

The service was provided to customers of the holding company in USA

and subsidiary in Singapore.
In this case, Microsoft Operation P.Ltd., Singapore (MO, Singapore)
entered into Market Development Agreement with Microsoft , India.
Both are subsidiaries of Microsoft Corporation , USA.
MO , Singapore will supply Microsoft products to customers in India.
Microsoft India is required to provide product support services and
consulting services for Microsoft products.

Export of Service?
Microsoft India is also required to market Microsoft products supplied
by MO, Singapore.

For various services provided by assessee (Microsoft India), payment

will be made by MO, Singapore on the basis of expenses incurred by
assessee plus 10% for product support and consulting services and plus
15% in case of marketing of Microsoft products.
Payment was obviously in freely convertible foreign currency.
Assessee claimed that the service is export of service and exempt.
Commissioner, in effect, held that the services are used in India and
hence is not export of service.

Export of Service Basic Issue

The basic issue for consideration is whether service of Microsoft
India is used outside India.
Who is the user of service provided by Microsoft , India ?
The customers in India received products from Microsoft, Singapore
and not from Microsoft , India.
Thus , their primary of contact was with Microsoft, Singapore.
Indian customers did not make any payment to Microsoft, India.
Payment for services was made by Microsoft, Singapore to Microsoft,
India in foreign exchange.

Negative List
Services in way of : Extending deposits, loans or advances in so far as the consideration is
represented by way of interest or discount;
Sale or purchase of foreign currency amongst banks or authorized
dealers of foreign exchange or amongst banks and such dealers

Service Tax on Food Served in Air Conditioned Restaurants

Charges for the food served in a restaurant is a composite charge for the food as well
as the services.
Bifurcation of the total bill into two parts i.e. value of goods sold and value of services
provided is very difficult.
In case of composite charge, the government announces an abatement scheme wherein
taxes are not levied on the total amount but only on a certain portion of the total
amount.
As per rule 2C in Determination of Value Rules, Service Tax should be charged only on
40% of the food bill (incl. Service Charge) and not on the total bill.
So, only 4.94% Service Tax on restaurant (i.e. 40% of 12.36%) shall be chargeable.
However, in case the food is not being served in a restaurant and is being served as part
of outdoor catering , Service Tax should be levied on 60% of the total bill.