Session ii dated 31.10.2012


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“Understanding New Regime of Service Taxation in India”
on 31th October,2012

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  • Great article. Thanks for the info, very helpful. BTW, if anyone needs to fill out a “1991 CA CP10.5, [Jan 1991]”, I found a blank form here: "" and also here "prejudgment"
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Session ii dated 31.10.2012

  1. 1. Presents A Knowledge Master Class On “Understanding New Regime of Service Taxation in India” Conducted by Dr. Sanjiv Agarwal FCA, FCSWednesday,31th October,2012New Delhi © Dr. Sanjiv Agarwal 1
  2. 2. SESSION – IIOverview of Taxation of Services and Major Changes 2
  3. 3. This Presentation Covers • Economic Overview • Overview of taxation of services – Past and Present • Major Changes • Scope of „Service‟ under new regime • Declared Services including Works Contract • Bundled Services 3
  4. 4. Indian Economy – An overview India‟s economy is the 11th largest economy in the world and the second fastest growing even in today‟s recession World is presently facing recession-II but Indian economy is still better than comparable economies. Agriculture, services and industry are the major sector of India an economy. Contribution of different sectors in March, 2012 was :  Agriculture 19%  Services 59%  Industry 22% 4 to be
  5. 5. Service Tax Share of Services in GDP Agricult ure 19% Service Sect orIndust ry 59% 22%GDP C O MPO S ITIO N IN MARC H, 2012 5
  6. 6. Growth in Tax GDP Ratio – Slow but Steady Years Tax GDP ratio2003-04 9.2%2007-08 11.9%2009-10 9.7%2010-11 10.3%2011-12 10.1% 6
  7. 7. Taxonomy of Indian TaxationTAXATION POWERS OF UNION Income Tax – on income, except agricultural income Excise Duty – on goods manufactured Custom Duty – on imports Service Tax – on specified services Central Sales Tax – on inter-state sale of goods Stamp Duty – on 10 specified instruments to be contd….. 7
  8. 8.  Introduced in India in 1994 as a simple, modest tax with just three services. Service tax – an indirect tax. Approach to Service Tax – Selective as against comprehensive one. Desirable from revenue, equity and economic view point. Governed by Finance Act, 1994 and a dozen of rules. Legislative dependence on other laws. Scattered and heterogeneous large mass of service providers as well as wide spectrum of services. Jurisdictional application. 8
  9. 9. Selective Approach to Service Tax  Selective v. Comprehensive approach  Taxation by choice  Service not defined but taxable service defined.  > 120 taxable services [section 65(105)]  Resulted in distortions / prejudice  Untapped tax potential  Economically unjustified  Issues – Classification, Illogical definitions, Constitutional challenges, deemed services etc. 9
  10. 10. Shift to Comprehensive approach  W.e.f. 1st July 2012  Finance Act, 2012 – A land mark Act to shift from positive to negative approach.  It took 18 years to shift from selective approach to positive approach to tax services  Section 65 (Definition of Taxable Service), 65A (Classification of Taxable service), 66 (Charge of Section Tax) and 66A (Charge of Service Tax on Services received from outside India) have no application w.e.f. 01.07.2012. 10
  11. 11. Taxation of Services by Finance Act, 2012 All Services (including declared Services (-) Specific Exclusions (-) Negative List Services (-) Exemptions (=) Taxable Services 11
  12. 12. New system of taxation of servicesAll services to be taxed other than services specified in the negative list and exempted services – Section 66B.Negative list (17 in number) specified through statutory provisions – Section 66D.„Service‟ defined for the first time.„Negative List‟ and „declared services‟ also defined. 12
  13. 13.  Section 65 Old definitions of Services / Taxable Services Section 65A Classification of Services Section 66 Charge of Service Tax Section 66A Charge of Service Tax on Services received from outside India. Import of Service Rules, 2006 Export of Service Rules, 2005 13
  14. 14. New Provisions in Service TaxSection 66 B deals with charge of service tax on or after Finance Act, 2012Section 66 C provides for determination of place of provision of service.Section 66 D comprises of negative list of servicesSection 66 E comprises of the services which constitute declared servicesSection 66 F provide principles of interpretation of specified description of services or bundled services 14
  15. 15. The New Taxability Concept SERVICE FOR A CONSIDERATION 9 DECLARED SERVICESE: EmployeeM: MoneyA: Actionable claim E - MAGIC TESTG: GoodsI: Immovable propertyC: Court Fee 1. Non - 2. Taxable Negative territory (POPS) list (17) 3. Exemption s (39) Taxable 15
  16. 16.  All services Taxable [section 65B (44)] Declared services Taxable (section 66E) Services covered under Not Taxable negative list of services (section 66D) Services exempt under Mega Exempted Notification No. 25/2012-ST dated 20.6.2012 Other specified Exemptions Exempted 16
  17. 17. GST: A Common Tax onGoods Services 17
  18. 18. • Setting up of empowered committee for GST (like VAT) which can steer the road map into action - done• Broaden the tax base for excise duty (presently 40% comes from petroleum products) – being done• Finishing area based and product based exemptions – being done• Rationalization of concessions and exemptions including that on exports – being done• Expanding service tax to almost all services – negative list introduced• Common/unified tax rate for goods and services which may be ideally, revenue neutral (a suitable GST rate) – dual tax proposed• Avoiding or minimizing differential tax rates – under discussions• Abolition of other small taxes - under discussions• Abolition of CST in a phased manner - being done• Power to levy service tax on select/agreed services to States - under discussions• Issue of inter-State services and goods movement vis-à-vis levy of duty or tax to be sorted out - under discussions• Revenue sharing mechanism to be rationalized - under discussions 18
  19. 19. Budget 2012 No announcement on GST rollout date GST to be implemented in consultation with the States at the earliest GST network (GSTN) likely to be in place from August, 2012 (not yet done) GSTN to implement common PAN based registration, return filing and processing of payments for centre and all states on a shared platform. Bringing closer of Service Tax and Central Excise for transition to GST Drafting of model legislation for CGST and SGST under progress. Common forms for Service Tax and Central Excise registration and return proposed. Place of Supply Rules, 2012 to trigger debate to assess issues that may arise in taxation of inter state services for eventual launch of GST. New FM is meeting the Empowered Committee on GST on 8th November, 2012 to expedite the GST roll-out 19
  20. 20. Past Recent Past Now & FutureNational GST Dual GST ??????? …or end of beginning !! 20
  21. 21.  Objective to widen tax base Service Tax law to be shorter by about 40 percent Effective rate of Service Tax shall be 12.36 percent w.e.f. 01.04.2012 including education cess. Definition of ‘service’ finds place in statutory provisions All services to be taxed including a set of services called „declared services‟ Negative list of services containing 17 broad service categories to be out of Service Tax ambit. Withdrawing of many existing exemptions / abetments or their rationalization 21
  22. 22.  Place of provision of service rules will determine the location of service and become be basis of taxation. Withdrawal of export of service rules and import of service rules in view of place of provision of service rules coming into operation. Concept of taxable territory and non- taxable territory brought in Basis of charge of Service Tax shifted under new section 66B. Taxation of Service to be determined by provision of service in taxable territory and non taxable territory. Classification of service criteria replaced by new section 66F on interpretation principles of specified description of service 22 or bundled services.
  23. 23.  Consequent upon change in service tax rates, there is change of service tax rate in composition scheme and specified rates w.e.f. 1.4.2012 (Composition scheme for works contract withdrawn w.e.f 1.7.2012) Penalty wavier for arrears paid within specified time in respect of renting of immovable property service. Retrospective exemption to road repairs and repairs etc of non commercial government buildings. Under new reverse charge mechanism, onus of paying Service Tax will be shared by service provider and service receiver in case of specified services. Service Tax on taxable services provided by service provider located in Jammu & Kashmir state liable under reverse charge. New Accounting Codes for payment of tax for the month July and onwards - Tax Collection 00441089 Other Receipts 00441090 Penalties 00441093 Deduct Refunds 00441094 23
  24. 24.  Change in valuation rules in relation to works contracts and outdoor catering / supply of food. Provision introduced for date of determination of value of service, tax rate and rate of exchange. Payment of Service Tax on receipt basis for all service providers being individuals / firms / LLPs, if aggregate value of taxable services in previous year does not exceed Rs. 50 lakh. Criteria for Rs 10 lakh threshold exemption changed. Time limit for appeal by assessees to Commissioner (Appeals) reduced from 3 months to 2 months Revision Application Authority and Settlement Commission provisions made applicable to service tax. Special Audit of Service tax assesses by CAs /CWAs .24
  25. 25.  N. No. 47/2012-ST dated 28.09.2012 – for April to June 2012, quarterly return shall be filed. Order No. 3/2012 - last date of return extended upto 25.11.2012 A format of Modified ST-3 issued and available at More or less, it is same as previous ST-3 return. Only the year and return period column is pre-filled and constant Return format and time for next quarter/ period to be notified 25
  26. 26. Exports [Rule 6(A)]  Service provider should be in India  Service receiver should be outside India  Both should not be mere establishments  Service should not be in Negative list  Service should be provided outside India  Payment should be in convertible currency
  27. 27. Services on which Service Tax shall be attracted comprise of :  Those services which satisfy the definition of service u/s 65B (44)  Nine specified declared services u/s 66E  Those services which do not find place in negative list of services u/s 66D  Those services which are not exempt from levy of Service Tax under Notification No. 25/2012-ST dated 20.06.2012 to be contd…. 27
  28. 28. Scope of services under Service TaxServices on which no Service Tax shall be payablecomprise of : • Service which are specifically excluded from the scope of definition of service itself u/s 65B(44). • 17 broad services specified in the negative list of services u/s 66D. • Services which are exempt from levy of Service Tax under N. No. 25/2012-ST dated 20.06.2012. • Specified services otherwise exempt under specific notifications. • Activities where service provider and service receiver are in non –taxable territory 28
  29. 29. „Service has been defined in clause (44) of the new section 65B and means – any activity for consideration carried out by a person for another and includes a declared service (66E) 29
  30. 30.  Activity must be for a consideration (nexus / reciprocity) Activity – includes both activity as well as non-activity Consideration – includes both monetary and non monetary consideration. Two persons are involved – Service provider Service receiver Only services provided by one person to another are taxable Person – natural as well as artificial 30
  31. 31. Activity Not defined in the Act In common understanding, activity includes –  An act done  A work done  A deed done  An operation carried out  Execution of an act  Provision of a facility etc. Activity could be active or passive and forbearance to act Agreeing to an obligation to refrain from an act or to tolerate an act or a situation - listed as a declared service u/s 66E 31
  32. 32. Consideration Means everything received or recoverable in return for a provision of service which includes -  Monetary payment  Non-monetary payment  Deferred consideration Under Indian Contract Act, 1872, Consideration means - “When, at the desire of the promisor, the promisee or any other person has done or abstained from doing, or does or abstains from doing, or promises to do or to abstain from doing, something, such act or abstinence or promise is called a consideration for the promise” 32
  33. 33. Consideration Monetary consideration means any consideration in form of Money. Includes not only cash but also cheques, promissory note, bill of exchange, letter of credit, draft, pay order, traveler‟s cheques, money order, postal or electronic remittance or any such similar instrument Non- monetary consideration- money equivalent 33
  34. 34. Activity for a ConsiderationActivity should be carried out by a person for a considerationActivity without consideration like- Donation Gifts Free charities outside the ambit of serviceCharity for consideration would be service and taxable unless otherwise exempted 34
  35. 35. Money- 65B(33) "money" means legal tender, cheques, promissory note, bill of exchange, letter of credit, draft, pay order, traveller cheques, money order, postal or electronic remittance or any similar instrument but shall not include any currency that is held for its numismatic valueActionable Claim –Section 3 of Transfer of Property Act, 1882 • Claim to unsecured debts • Claim to beneficial interest in movable property not in possession of claimant • Right to insurance claim • Arrears of rent 35
  36. 36. Tax on Money Remittance (Circular No. 163 dated 10.7.2012) No service tax on foreign currency remitted to India from overseas Amount of remittance comprises money Service excludes money transactions Even fee for remittance is not taxable (POPS) Sender of money outside India bank / company remitting located outside India Fee charged by Indian bank - remitter located outside India (not taxable as per POPS) 36
  37. 37. Person-65B(37) "person" includes,–– • an individual, • a Hindu undivided family, • a company, • a society, • a limited liability partnership, • a firm, • an association of persons or body of individuals, whether incorporated or not, • Government, • a local authority, or • every artificial juridical person, not falling within any of the above 37
  38. 38. Government – Not definedSection 3 (22) of General Clause Act, 1897Includes Central/State Government/ Union TerritoryActions taken in the name of President/ GovernorMost of services provided by government are in Negative List 38
  39. 39. Local Authority - Section 65B(31) A Panchayat as referred to in clause (d) of article 243 of the Constitution A Municipality as referred to in clause (e) of article 243P of the Constitution A Municipal Committee and a District Board, legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund A Cantonment Board as defined in section 3 of the Cantonments Act, 2006 A regional council or a district council constituted under the Sixth Schedule to the Constitution A development board constituted under article 371 of the Constitution, or A regional council constituted under article 371A of the Constitution. 39
  40. 40. Governmental Authority (N. No. 25/2012-ST)  board/ Authority / other body  established with > 90% participation  equity /government control  set up by Act of Parliament or State Legislature  to carry out any functions entrusted to municipality u/s 243W of Constitution 40
  41. 41. Service does not include - any activity that constitutes only a transfer in title of goods or immovable property by way of sale, gift or in any other manner a transfer, delivery or supply of goods which is deemed to be a sale of goods within the meaning of clause (29A) of article 366 of the Constitution a transaction only in money or actionable claim a service provided by an employee to an employer in the course of the employment. fees payable to a court or a tribunal set up under a law for the time being in force 41
  42. 42. This scope shall not apply to –a) functions performed by M.P., M.L.A., Members of Panchayats / Municipalities who receive any consideration in performing the functions of that office as such member; orb) duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; orc) duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State Government or local authority and who is not deemed as an employee before the commencement of this section. 42
  43. 43. For the purpose of scope of service -(a) an unincorporated association or a AOP and a member thereof shall be treated as distinct persons;(b) an establishment of a person in the taxable territory and any of hisother establishment in a non-taxable territory shall be treated asestablishments of distinct persons.(c) A person carrying on a business through a branch or agency orrepresentational office in any territory shall be treated as having anestablishment in that territory 43 43
  44. 44.  Draft Circular (F.No. 354 /127/2012-TRU dated 27.7.2012) issued for clarification on certain activities / facilities / reimbursements to employees by the employers (a) Treatment of supplies made by the employer to employees  Amount deducted from salary / paid for service provided by the employer to employee is for consideration and taxable  Employer who provides some services free of cost (e.g. crèche, gymnasium or a health club) are not liable to tax (b) Treatment of reimbursements made by the employer to the employee  Reimbursements of expenditure incurred on behalf of the employer in course of employment would not amount to a service, hence non-taxable 44
  45. 45. (c )Treatment of supplies and reimbursements made by theemployer to ex-employees/ pensionersSame tax treatment with ex- employees of the company –  Reimbursement of expenses on behalf of company – non-taxable  Facilities for consideration – taxable  Facilities free of cost - non taxable 45
  46. 46.  Director‟s services to the company are taxable w.e.f 1.7.2012 Sitting fees, commission, bonus, etc. are subject to service tax W.e.f. 1.7.2012 upto 6.8.2012, service tax will be deposited by the directors while from 7.8.2012 vide Notification No. 45/2012, Service Tax on such services will be deposited by the company under reverse charge WTDs /MDs /EDs who are under contractual employment with the company and receive salary or remuneration from the company will not be covered - considered as employees of the company 46
  47. 47.  Interest on loan by director to company, dividend on shares, other professional charges on account of services not rendered as a director (in professional capacity) are not liable to Service Tax In case of nominee director, the nominating company who receives fees will be liable to pay service tax The invoice / receipt to be issued by the directors within 30 days In case of nominee directors, the invoice will be issued by the nominating company In the case of Government nominees, the services shall be deemed to be provided by the Government but liable to be taxed under reverse charge basis 47
  48. 48.  Partnership firm is not a distinct legal entity apart from the partners under the Partnership Act, 1932 Partner is not an employee of the firm -contract of employment requires two distinct firms, viz., employer and employee Partners are the real owners of the assets of Firm to the extent of their share Salary paid to partner is only profit known by a different name It is only a transaction in money Incomes received from firm treated as income from Profits and Gains of Business or Profession under I T Act, 1961 Partnership Act, 1932 can not be overlooked 48
  49. 49. Taxability of Services – Then & Now Period Taxable Non TaxablePrior to Finance Act, 2012 Taxable services Exempt services(upto 30.6.2012) specified in section 65 Service not covered (105) under section 65 (105) Import of services Export of services under reverse chargePost Finance Act, 2012(w.e.f. 1.7.2012) All services provided Services in Negative in taxable territory List Declared services Exempt services Services provided in non- taxable territory (as per POPS Rules) 49
  50. 50.  Non commercial construction for non-government purpose Private roads Residential construction of more than one unit Commercial artists/performers Actors, directors Reality show judges Tourism boats Board director‟s sitting fee Non-compete fee Arbitrators to business entities to be contd.. 50
  51. 51. Discourses and lecturesBanking services to governmentUnrecognized IPRsServices to RBIHotel Telephone CallsVideo library facilities by hotelsMatrimonial sitesAstrologersWorks contracts for movable propertiesOn board catering and other facilities 51
  52. 52.  Clause 44 of section 65B defines service – it includes a declared service. There are 9 categories of services or activities as declared services implying that on all such nine declared services, Service Tax shall be payable Does not include any such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of Article 366(29A) of the Constitution of India. What is declared services is defined in section 65B(22) to mean any activity carried out by a person for another person for a consideration and declared as such under section 66E of the Act. They are amply covered by the definition of service but have been declared with a view to remove any ambiguity for the purpose of uniform application of law all over the country 52
  53. 53. 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; 53
  54. 54.  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. 54
  55. 55. Renting 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 55
  56. 56. Exemptions 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 of immovable property to / by educational institution in respect of exempted education 56
  57. 57. The immovable property could be –  factories  office buildings  warehouses  theatres  exhibition halls  multiple use buildings  commercial markets  shops / shopping centre  hotel, guest houses  community centre  Vacant land for commercial use etc. Allowing or permitting the usage of immovable property without transferring possession of such property is also renting of immovable property. 57
  58. 58. Nature of Activity Taxability Renting of property to educational body Not chargeable to service tax; exemption Renting of vacant land for animal Not chargeable to service tax as it is covered in husbandry or floriculture the negative list entry relating to agriculture Permitting use of immoveable property for Chargeable to service tax as permitting usage of placing vending/dispensing machines space is covered in the definition of renting Allowing erection of communication tower Chargeable to service tax as permitting usage of on a building for consideration. space is covered in the definition of renting Renting of land or building for Chargeable to service tax as there is no specific entertainment or sports exemption. Renting of theatres by owners to film Chargeable to service tax as the arrangement distributors amounts to renting of immovable property.Renting of immovable property outside India not taxable in India even if owners arein India
  59. 59. Construction Activities [Section 66E (b)]Construction activities means construction of a complex, building, civilstructure or a part thereof, including a complex or building intended forsale to a buyer, wholly or partly, except where the entire considerationis received after issuance of completion certificate by the competentauthority.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 any consideration received beforesuch completion certificate, it will also be taxed. 59
  60. 60. Construction is not definedConstruction Includes  additions,  alteration,  replacement, or  remodelingof any existing civil structure 60
  61. 61. Who 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 registered with Institution of Engineers • Licensed surveyor (of local body / development or planning authority) 61
  62. 62. Residential 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 family 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. 62
  63. 63. Temporary 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 63
  64. 64. Examples 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, processes etc. Design Rights -Form and appearance, decoration, apparels 64
  65. 65. What 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 65
  66. 66. Copyrights as IPRs are exempted which include :literary workdramatic workmusical workartistic workscinematograph films 66
  67. 67. Information Technology software related services [section 66E(d)] It includes following in relation to Information Technology Software (ITS) –  Development  Design  Programming  Customization  Adaptation  Upgradation  Enhancement  Implementation 67
  68. 68. ITS is defined in Section 65B(28) 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 • any other device or equipment 68
  69. 69. Scope of ITS ServiceDesign - plan, schemeProgramming - process of writing a computer programmeCustomization - modifying to meet a specific requirementAdaptation - change to suit, adoptUp gradation - raising standard, improving quality / version / featuresEnhancement - in value, content, qualityImplementation - execution 69
  70. 70. Agreeing to obligation to refrain from on Act / to tolerate Act or situation / to do an Act [section 66E(e)]Following activities if carried out by a person for another for consideration would be treated as provision 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. 70
  71. 71. Examples 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 71
  72. 72. Transfer 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 72
  73. 73. Transfer of right to use Taxable only when transfer of right to use goods is not 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/s 366(29A) of Constitution If owner retains effective control, no transfer of right can take place Service excludes deemed sale u/s 366(29A) 73
  74. 74. Tests 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 74
  75. 75. Article 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…… 75
  76. 76.  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. 76
  77. 77. Examples 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 Scaffolding structure for temporary purpose – no transfer of right / effective control and possession Hiring of Pandal / Shamiyana – No effective control Hiring of audio visual equipment with attendant – no transfer of right / possession
  78. 78.  Includes delivery of goods on -  hire purchase  any system of payment by installment Payment in parts / installments Lease payment is calculated so as to cover full cost of asset together with interest charges Transfer of substantially all risks and rewards in relation to goods so transferred Not taxable as covered under deemed sale of goods But services in relation to such sale taxable 78
  79. 79.  Delivery of goods on hire purchase Transfer of possession (and not just of custody) The hirer has the option or obligation to purchase the goods in accordance with the terms of the agreement. In hiring, hirer has no such option and risks remain with owner / not transferred to hirer In hire purchase, hirer has option / obligation to purchase goods Operating lease not covered Involves two transactions – financial transaction and hire purchase. 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 interest in financial lease and not full value (Notification No. 26/2012-ST) 79
  80. 80. 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. 80
  81. 81. Works Contract coversConstructionErectionCommissioningCompletionFitting outRepairMaintenanceRenovationAlteration, orAny other similar activity or part there of 81
  82. 82. 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 82
  83. 83. Some issues in works contractsLabour contracts ExcludedRepair & Maintenance of motor vehicles yes if property in goods 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 83
  84. 84. 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 added taxCharges for planning, designing or sales tax has been paid or payable on the actual value ofand architect’s fees 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 in the execution of the said works contract.Cost of establishment of the Value Added Tax (VAT) or sales tax, as the case may be, paid,contractor relatable to supply of if any, on transfer of property in goods involved in thelabour and services and other execution of the said works contractsimilar expenses relatable tosupply of labour and servicesProfit earned by the serviceprovider relatable to supply oflabour and services 84
  85. 85. 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. 85
  86. 86.  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 whether us 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 any If value of FOC goods / services is not ascertainable, it will be determined on basis of fair market value having close resemblance FMV based on generally accepted accounting principles No Cenvat available on goods / inputs used in works contract 86
  87. 87.  Supply of foods and drinks is deemed sale and hence not taxable However, only service portion in deemed sale is sought to be taxed Service portion in 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 a part of the activity is a declared service. Levy of Service Tax on services provided by only such restaurants where service portion in total supply is substantial and discernible 87
  88. 88. Service portion in supply of foods and drinks [section 66E(i)] 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 exemption What activities are covered – • Supply of food or drinks in a restaurant; • Supply of food and drinks by an outdoor caterer.
  89. 89.  in a restaurant -40% of total value charged by outdoor catering - 60% of total value charged Exemption under Notification No. 25/2012-ST to mid day meal scheme and restaurants without bar license / air conditioning / central heating facility Abatement @ 30% Notification No. 26/2012-ST provided Cenvat credit is not taken on goods 89
  90. 90. 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‟. 90
  91. 91. 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 services  Contract commission  Transportation of passengers by rail  Air travel agency  Tour operators 91
  92. 92. 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 92
  93. 93. 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 93
  94. 94. Bundled Services  Access to gym / health club / pool  Internet  Business centre  Sight seeing Could be considered as naturally bundled convention services as each activity is taxable but does not provide essential character and taxed accordingly Indicators 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
  95. 95. Rule 4 Taxability of services not naturally bundled in 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.