A Knowledge Workshop-Presentation III dated 14th July,2012
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A Knowledge Workshop-Presentation III dated 14th July,2012

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A Knowledge Workshop on

A Knowledge Workshop on
“New Regime of Service Taxation in India”

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A Knowledge Workshop-Presentation III dated 14th July,2012 A Knowledge Workshop-Presentation III dated 14th July,2012 Presentation Transcript

  • Corporate Knowledge Foundation Presents A Knowledge Workshop On “New Regime of Service Taxation in India” Conducted by Dr. Sanjiv Agarwal FCA, FCSSaturday,14th July,2012New Delhi © Dr. Sanjiv Agarwal
  • Corporate Knowledge Foundation SESSION III Declared Services (Including Valuation) & Bundled Services
  • As defined in clause 44 of section 65B, ‘service’ includes a declared service. There are 9 categories of services or activities as declared servicesimplying that on all such nine declared services, Service Tax shall be payableDoes not include any such transfer, delivery or supply of any goods which isdeemed to be a sale within the meaning of Article 366 (29A) of the Constitutionof India.What is declared services is defined in section 65B (22) to mean any activitycarried out by a person for another person for a consideration and declared assuch under section 66E of the Act.They are amply covered by the definition of service but have been declaredwith a view to remove any ambiguity for the purpose of uniform application oflaw all over the country 3
  • Following constitute Declared Services (Section 66E) Renting of immovable property; Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority; Temporary transfer or permitting the use or enjoyment of any intellectual property right; Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software; 4
  •  Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; Transfer of goods by way of hiring, leasing, licensing or any such manner without transfer of right to use such goods; Activities in relation to delivery of goods on hire purchase or any system of payment by installments ; Service portion in execution of a works contract; Service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as part of the activity. 5
  • Renting of Immovable PropertyRenting of Immovable Property Renting (Section 65B (41)) allowing, permitting or granting access, entry, occupation, usage or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable propertyRenting of certain kinds of immovable properties is specified in the negative list • Renting of vacant land, with or without a structure incidental to its use, relating to agriculture. • Renting of residential dwelling for use as residence • Renting out of any property by Reserve Bank of India • Renting out of any property by a Government or a local authority to a non-business entity 6
  • Renting of Immovable PropertyExemptions to Renting of Immovable property Threshold level exemption up to Rs. 10 lakh. Renting of precincts of a religious place meant for general public is exempt. Renting of a hotel, inn, guest house, club, campsite or other commercial places meant for residential or lodging purposes, having declared tariff of a room below rupees one thousand per day or equivalent is exempt. Renting to an exempt educational institution Municipal taxes (Notification No. 29/2012-ST dated 20.6.2012) 7
  • Renting of Immovable PropertyThe immovable property could be –  factories  office buildings  warehouses  theatres  exhibition halls, and  multiple use buildings.  commercial markets  shops / shopping centre  hotel, guest houses etc  community centre etc Allowing or permitting the usage of immovable property without transferring possession of such property is also renting of immovable property. 8
  • Renting of Immovable Property Nature of Activity TaxabilityRenting of property to educational body Chargeable to service tax; no exemptionRenting of vacant land for animal husbandry Not chargeable to service tax as it is covered in theor floriculture negative list entry relating to agriculturePermitting use of immoveable property for Chargeable to service tax as permitting usage ofplacing vending/dispensing machines space is covered in the definition of rentingAllowing erection of communication tower Chargeable to service tax as permitting usage ofon a building for consideration. space is covered in the definition of rentingRenting of land or building for entertainment Chargeable to service tax as there is no specificor sports exemption.Renting of theatres by owners to film Chargeable to service tax as the arrangementdistributors amounts to renting of immovable property.Renting of immovable property outside India not taxable in India even if owners arein India
  • Construction ActivitiesConstruction Activities [Section 66E (b)]Construction activities means construction of a complex, building,civil structure or a part thereof, including a complex or buildingintended for sale to a buyer, wholly or partly, except where the entireconsideration is received after issuance of completion certificate by thecompetent authority.It includes construction of -  Complex  Building  Civil structure or part thereof  Complex or building intended for sale to a buyer except where entire consideration is received after issuance of completion certificate by the competent authority.Actual sale after construction-if consideration received before suchcompletion will also be taxed. 10
  • Construction Activities Construction is not defined Construction Includes  additions,  alteration,  replacement, or  remodelingof any existing civil structure 11
  • Construction ActivitiesWho is Competent Authority to Issue Completion Certificate Government Any authority authorized to Issue CC under any law In absence of any requirement to issue CC, • architect under Architect Act, 1972 • Chartered Engineer register with 10E • licensed surveyor (of local body / development or planning authority) 12
  • Construction ActivitiesResidential Complex Complex comprising of one or more buildings having more than one residential unit Even two units would be called ‘complex’ Single residential unit – self contained residential unit designed for use, wholly / principally, for residence of one finely Original work – new construction and all type of addition / alteration to abandoned / damaged structures on land as are required to make them workable / erection , commissioning, installation. 13
  • Intellectual Property RightTemporary transfer or permitting the use or enjoyment of anyintellectual property right [Section 66 E (c)]Intellectual property right’ has not been defined but Intellectual PropertyRight includes :• Copyright Patents Trademarks Designs Any other similar right to an intangible property 14
  • Intellectual Property RightExamples of IPRs Patents - New technical concepts, inventions Copyright - Text, graphics, software, data compilations, art, music Trademarks - Brands (Services/ Products) image and reputation Confidential Information - Ideas, information, know-how etc. Design Rights - Form and appearance, decoration 15
  • Intellectual Property RightWhat is taxed in IPR all IPRs (whether recognized in law or not) excluding copy rights temporary transfer of IPRs permitting the use of IPRs enjoyment of IPRs 16
  • Intellectual Property RightCopyrights as IPRs are exempted which include : literary work dramatic work musical work artistic works cinematograph films 17
  • Information Technology SoftwareInformation Technology software related services [section 66E(d)] It includes following in relation to Information Technology Software (ITS) –  Development  Design  Programming  Customization  Adaptation  Upgradation  Enhancement 18 
  • Information Technology SoftwareITS is defined in Section 65B(28)ITS is a representation Representation in ITS should be of any of the following – • Instruction • Data • Sound • Image • Source code • Object code Such items represented should be recorded in a machine readable form, Such items represented and recorded should be capable of being manipulated. They should provide interactivity by way of a – • computer, or • automatic data processing machine, or 19
  • Information Technology SoftwareScope of ITS ServiceDesign - plan, schemeProgramming - process of writing a computer programmeCustomisation - modifying to meet a specific requirementAdaptation - change to suit, adoptUpgradation - raising standard, improving quality / version / featuresEnhancement - in value, content, qualityImplementation - execution 20
  • Obligations / ActionsAgreeing to obligation to refrain from on Act / to tolerate Actor situation / to do an Act [section 66E(e)]Following activities if carried out by a person foranother for consideration would be treated asprovision of service - Agreeing to the obligation to refrain from an act. Agreeing to the obligation to tolerate an act or a situation. Agreeing to the obligation to do an act. 21
  • Obligations / ActionsExamples of Obligations / Actions non compete fees for agreeing not to compete compensation on termination of business agreements advance forfeited for cancellation of agreement to provide a service. forfeiture of security deposit for damages done by service receiver in course of receiving of services. cancellation charges being charged by airlines, hotels etc. consideration for non-appearance in a court of law or withdrawal of suit. demurrage charges or detention charges 22
  • Transfer of GoodsTransfer of goods by hiring, leasing, licensing [66E(f)]There should be transfer of goods involved Such transfer of goods should be by way of –  hiring  leasing  licensing, or  any such manner Such transfer should be without transfer of right to use such goods. Excludes intangible goods Only goods [section 65B(25)] covered 23
  • Transfer of GoodsTransfer of right to use Taxable only when transfer of right to use goods is there Constitutional / legal concept Can be determined when agreement in read in whole, not just one clause Transfer of right to use is deemed sale u/a 366(29A) of Constitution If owner retains effective control, no transfer of right can take place Service excludes deemed sale u/a 366(29A) 24
  • Transfer of GoodsTests laid down by Supreme Court in BSNL v UOI [(2006)2 STR 161(SC)] There must be goods available for delivery ; There must be consensus ad idem as to the identity of the goods; The transferee should have legal right to use the goods – consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee; For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute, viz., a ‘transfer of the right to use’ and not merely a license to use the goods; Having transferred, the owner cannot again transfer the same right to others 25
  • Transfer of GoodsArticle 366 (29A) of Constitution of India, as amended by Constitution (46thAmendment) Act, 1982, w.e.f 2.2.1983"Tax on the sale or purchase of goods" includes- a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, deferred payment or other valuable consideration; a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract; a tax on the delivery of goods on hire-purchase or any system of payment by installments; a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration; to be contd…… 26
  • Transfer of Goods a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration; a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxicating) , where such supply or service is for cash, deferred payment or other valuable consideration,and such transfer, delivery or supply of any goods shall be deemed tobe a sale of those goods by the person making the transfer, delivery orsupply and a purchase of those goods by the person to whom suchtransfer, delivery or supply is made. 27
  • Transfer of GoodsExamples of transfer without right to use Car on hire with driver – right to use not transferred Conditional supply of equipment – not free to use goods Bank lockers – possession not transferred to hirer Hiring of audio visual equipment with attendant – no transfer of right / possession
  • Includes delivery of goods on -  hire purchase  any system of payment by installmentPayment in parts / installmentsLease payment is calculated so as to cover full cost of asset togetherwith interest chargesTransfer of substantially all risks and rewards in relation to goods sotransferredNot taxable as covered under deemed sale of goodsBut services in relation to such sale taxable 29
  • Delivery of goods on hire purchaseTransfer of possession (and not just of custody)The hirer has the option or obligation to purchase the goods inaccordance with the terms of the agreement.In hiring, hirer has no such option and risks remain with owner /not transferred to hirerIn hire purchase, hirer has option / obligation to purchase goodsOperating lease not coveredInvolves two transactions – financial transaction and hirepurchase. Financial transaction is chargeable to Service Tax[Association of Leasing & Financial Services v. Union of India(2010) 20 STR 417 (SC)].Service Tax levied only on 10 percent value representing interestin financial lease and not full value (Notification No. 26/2012-ST) 30
  • Works contract [65B(54)] “Works Contract” means a 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 the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property. 31
  • Works contract covers Construction Erection Commissioning Completion Fitting out Repair Maintenance Renovation Alteration, or Any other similar activity or part there of 32
  • Such activities could be in relation to any – Movable property (plant, machinery, equipments etc) Immovable property (land, building, structures etc) This definition is very vast and covers almost everything 33
  • Some issues in works contractsLabour contracts ExcludedRepair & Maintenance of motor yes if property in goodsvehicles transferred in execution of WCConstruction of pipeline / conduit yes, structures on landPainting/repair/renovation of building yes if involves provision of material alsoErection/commissioning installation of yes if transfer of property inplant/ machine etc goods is involved and machinery etc are embedded / attached to earth after the job. 34
  • Value of service portion in execution of work contract = gross amount charged for workscontact less value of transfer of property in goods involved in execution of works contractGross amount includes Gross amount does not includeLabour charges for execution of Value of transfer of property in goods involved in thethe works execution of the said works contract.Amount paid to a sub-contractor Note:for labour and services As per Explanation (c) to sub-rule (i), where value addedCharges for planning, designing tax or sales tax has been paid or payable on the actualand architect’s fees value of property in goods transferred in the execution of the works contract, then such value adopted for the purposes of payment of value added tax or sales tax, shall be taken as the value of property in goods transferred inCost of establishment of the the execution Tax (VAT) or sales tax, as the case may be, Value Added of the said works contract.contractor relatable to supply of paid, if any, on transfer of property in goods involved inlabour and services and other the execution of the said works contractsimilar expenses relatable tosupply of labour and servicesProfit earned by the serviceprovider relatable to supply oflabour and services 35
  • Alternative valuation model (Rule 2A of Valuation Rules)Where works contract is for… Value of the service portion shall be…(A) execution of original works forty percent of the total amount charged for the works contract(B) maintenance or repair or seventy per cent of the total amountreconditioning or restoration or servicing charged including such gross amountof any goods(C) in case of other works contracts, not sixty percent of the total amount chargedincluded in serial nos. (A) and (B) above, for the works contractincluding contracts for maintenance,repair, completion and finishing servicessuch as glazing, plastering, floor and walltiling, installation of electrical fittings. 36
  • Total Value = Sum total of + gross amount charged + value of goods and services supplied free of cost for use in or in relation to execution of WC Same Contract Any other Contract + value of land charged as part of total consideration - amount charged for such goods / services, if any - VAT levied, if anyIf value of FOC goods / services is not ascertainable, it will bedetermined on basis of fair market value having close resemblanceFMV based on generally accepted accounting principlesNo Cenvat available on goods / inputs used in works contract 37
  • Supply of foods and drinks is deemed sale and hence not taxableHowever, only service portion in deemed sale is sought to be taxedService portion in activity wherein goods, being food or any other articleof human consumption or any drink (whether or not intoxicating) issupplied in any manner as a part of the activity is a declared service.Levy of Service Tax on services provided by only such restaurants whereservice portion in total supply is substantial and discernible 38
  • Restaurants provided conditional exemption  Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other then those having the facility of air-conditioning or central air-heating in any part of the establishment, at any time during the year, and which has a license to serve alcoholic beverage.  Threshold exemptionWhat activities are covered – • Supply of food or drinks in a restaurant; • Supply of food and drinks by an outdoor caterer.
  • in a restaurant -40% of total value chargedby outdoor catering - 60% of total value chargedExemption under Notification No. 25/2012-ST to mid day meal schemeand restaurants without bar license / air conditioning / central heatingfacilityAbatement @ 30% Notification No. 26/2012-ST provided Cenvat credit isnot taken on goods 40
  • Total Value = Sum total of + gross amount charged + Value of goods and services supplied free of cost for use in or in relation to supply of food under Same contact Any other contract + value of land charged as part of total consideration - amount charged for such goods / services, if any - VAT levied, if anyIf value of FOC goods / services is not ascertainable, it will be determined on basis offair market value of having close resemblanceFMV based on generally accepted accounting principlesNo Cenvat available on goods used in supply of food
  • Amendment in Rule 6Inclusion - a) Any amount realized as demurrage, or by any other name, for the provision of a service beyond the period originally contracted or in any other manner relatable to the provision of service will be included in taxable valueExclusions - a) Accidental damages due to unforeseen actions not relatable to the provision of service will be excluded from the value of service b) Interest on loan has been substituted with I. Interest on Deposits and II. Interest on delayed payments. (Interest on loans will now be exempt) c) subsidies and grants disbursed by the Government, not directly affecting the value of service. 42
  • Principles of Interpretation of specific description of services [section 66F] Section 65A dealing with classification of taxable services omitted w.e.f. 1.7.2012 useful in deciding whether a service falls in negative list / exemptions / declared services composite v. bundled service bundled service –  collection of services / tied up services  more than one service  element of one service combined with element of provision of other service (s). Examples - Mailing done by RTI, Air traveling and catering therein Earlier issue – which taxable service Now – whether any activity is a ‘service’ or not a ‘service’. 43
  • Rule 1Reference to main service can not be used for services used for providingthe main service If some service is provided with reference to provision of main service,it does not be come main service, Related services do not take the colour of main service. Examples • Provision of access to any road or bridge on payment of toll  Security services  IT related same  Contract commission Transportation of passengers by rail Air travel agency Tour operators 44
  • Rule 2Most specific description to be preferred over more generaldescription for services capable of differential treatment forany purpose based on its description Examples  Real estate agent for immovable property • If taxed as intermediary, his location is important • If taxed as immovable property, location of property is important Outdoor catering by pandal & shamiana / convention to be taxed as specific combined entry exist for abatement and not as individual services 45
  • Taxability of naturally bundled services in ordinary courseof business (Rule 3) If various elements of a bundled service are naturally bundled in the ordinary course of business, it shall be treated as provision of a single service which gives such bundle its essential character Perception of service provider / service receiver Trade practice Example • Packaged hotel accommodation for convention delegates may include Hotel room accommodation Breakfast Tea / coffee during conference 46
  •  Access to gym / health club / pool  Internet  Business centre  Sight seeingCould be considered as naturally bundled convention services as eachactivity is taxable but does not provide essential character and taxedaccordinglyIndicators of naturally bundled services There is a single price or the customer pays the same amount, no matter how much of the package they actually receive or use The elements are normally advertised as a package. The different elements are not available separately. The different elements are integral to one overall supply – if one or more is removed, the nature of the supply would be affected.Each case to be individually examined
  • Bundled ServicesRule 4 Taxability of services not naturally bundled ink ordinary course ofbusiness If various elements of a bundled service are not naturally bundled in the ordinary course of business, it shall be treated as provision of a service which attracts the highest amount of service tax. Examples  Renting of two floors or two portions of building by a common agreement (treated as commercial use)  Management of event covering advertisement, promotion, space booking, photography, videography, public relation etc.