Service Tax Issues

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Service Tax Latest Issues, Updates and important Provision.

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Service Tax Issues

  1. 1. SERVICE TAX, CENVAT CREDIT RULES AND SELECTED ISSUES BY C A S H A I L E S H R A T H I ACA, M.Com B A H E T I & S O M A N I Chartered Accountants www.bandsindia.com
  2. 2. TOPICS COVERED <ul><ul><li>Who is eligible? </li></ul></ul><ul><ul><li>On what is he eligible? </li></ul></ul><ul><ul><li>When is he eligible? </li></ul></ul><ul><ul><li>Any conditions for claiming CENVAT Credit? </li></ul></ul><ul><ul><li>Accounting Treatment </li></ul></ul>
  3. 3. Who is eligible and On what is he eligible ? <ul><li>Manufacturer who manufactures taxable goods </li></ul><ul><li>Service Provider who provides taxable output service </li></ul><ul><li>What is eligible for credit? </li></ul><ul><ul><li>Manufactured Products - Excise Duty, Additional Excise Duty, NCCD, Education Cess, Secondary & Higher Education Cess </li></ul></ul><ul><ul><li>Imported Products - Countervailing Duty, Additional Duty of Customs, Education Cess, Secondary & Higher Education Cess - Services </li></ul></ul><ul><ul><li>Service Tax, Education Cess, Secondary & Higher Education Cess </li></ul></ul>
  4. 4. ISSUES <ul><ul><li>In cases where a person pays service tax as a recipient of service, can he </li></ul></ul><ul><ul><ul><li>Avail the CENVAT Credit? </li></ul></ul></ul><ul><li>Utilise the CENVAT Credit? </li></ul><ul><ul><li>What are the provisions pertaining to internal allocation of duties & cesses? </li></ul></ul>
  5. 5. internal allocation of duties & cesses WHAT AGAINST WHAT     SHE     Education Cess     Service Tax     Excise Duty/CVD/ SHE Education Cess Service Tax Excise Duty Utilisation Availment
  6. 6. INPUTS <ul><ul><li>All Goods used in relation to manufacture of final products within the factory of production </li></ul></ul><ul><ul><li>All Goods used for providing any output service </li></ul></ul><ul><ul><li>Does not include LDO/HSD/Motor Spirit </li></ul></ul><ul><ul><li>Includes inputs used in manufacture of capital goods which are used in the factory for manufacture </li></ul></ul>
  7. 7. ISSUE <ul><ul><li>Can a motor vehicle be considered as inputs </li></ul></ul><ul><ul><ul><li>for other service providers? </li></ul></ul></ul><ul><ul><ul><li>For Manufacturers? </li></ul></ul></ul>
  8. 8. POINT OF AVAILAMENT <ul><ul><li>Inputs - Rule 4(1) – </li></ul></ul><ul><ul><ul><li>immediately </li></ul></ul></ul><ul><ul><li>Capital Goods Rule 4(2) </li></ul></ul><ul><ul><ul><li>50% in the year of receipt </li></ul></ul></ul><ul><ul><ul><li>Balance thereafter </li></ul></ul></ul><ul><ul><li>Input Services - Rule 4(7) </li></ul></ul><ul><ul><ul><li>On payment of the value of the service </li></ul></ul></ul><ul><ul><li>Inputs lying in stock </li></ul></ul><ul><ul><ul><li>at the time of taxability of output - Rules 3(2) & 3(3) </li></ul></ul></ul><ul><ul><ul><li>at the time of exemption of output - Rules 11(2), 11(3) & 11(4) </li></ul></ul></ul>
  9. 9. CENVAT AND NON TAXABLE ACTIVITIES <ul><ul><li>Rule 6(1): Not Available for Exempted Goods or Services </li></ul></ul><ul><ul><li>OPTION I </li></ul></ul><ul><ul><li>Rule 6(2): Specific Identification and claim for taxable goods / services – </li></ul></ul><ul><ul><li>OPTION II </li></ul></ul><ul><ul><li>Rule 6(3)(i): No identification - composite scheme for manufacturers / service providers based on output (ad hoc payment) - OPTION II </li></ul></ul><ul><ul><li>OPTION III </li></ul></ul><ul><ul><li>Rule 6(3)(ii): No identification - composite scheme for manufacturers / service providers based on input (proportionate payment) - OPTION III </li></ul></ul>
  10. 10. OPTION - I <ul><ul><li>Maintain Separate Records and claim FULL credit of inputs and input services attributable to taxable output services / taxable finished goods - Rule 6(2) </li></ul></ul><ul><ul><li>Claim FULL Credit of Capital Goods unless exclusively used for exempted services/ exempted finished goods - Rule 6(4) </li></ul></ul><ul><ul><li>Claim FULL Credit of Specified Input Services unless exclusively used for exempted services/ exempted finished goods - Rule 6(5) </li></ul></ul>
  11. 11. OPTION - II <ul><ul><li>Claim FULL Credit of Inputs and service tax unless exclusively used for exempted services/ exempted finished goods </li></ul></ul><ul><ul><li>Claim FULL Credit of Capital Goods unless exclusively used for exempted services/ exempted finished goods - Rule 6(4) </li></ul></ul><ul><ul><li>Claim FULL Credit of Specified Input Services unless exclusively used for exempted services/ exempted finished goods - Rule 6(5) </li></ul></ul><ul><ul><li>Pay an Amount equal to 10% of value of exempted goods Rule 6(3)(i) </li></ul></ul><ul><ul><li>Pay an Amount equal to 8% of value of exempted services Rule 6(3)(i) </li></ul></ul>
  12. 12. OPTION - III <ul><ul><li>Effectively Claim PROPORTIONATE Credit of Inputs and Input Services unless exclusively used for exempted services/ exempted finished goods </li></ul></ul><ul><ul><ul><li>Manufacturer Input Quantity Based </li></ul></ul></ul><ul><ul><ul><li>Service Provider Output Value Based </li></ul></ul></ul><ul><ul><li>Claim FULL Credit of Capital Goods unless exclusively used for exempted services/ exempted finished goods - Rule 6(4) </li></ul></ul><ul><ul><li>Claim FULL Credit of Specified Input Services unless exclusively used for exempted services/ exempted finished goods - Rule 6(5) </li></ul></ul><ul><ul><li>PROPORTIONATE CREDIT to be worked on Provisional and Final Basis </li></ul></ul>
  13. 13. OPTION - III <ul><ul><li>Provisional Percentage to be based on previous financial year (can be Zero) </li></ul></ul><ul><ul><li>Final Percentage to be based on current financial year </li></ul></ul><ul><ul><li>Pay Difference before 30 June (otherwise pay interest@ 24% p.a.) </li></ul></ul><ul><ul><li>Excess can be re-claimed as &quot;Credit&quot; </li></ul></ul>
  14. 14. COMPOSITE OUTPUT : OPTIONS NA %  % Service Provider not maintaining separate records (input side) NA %  % Manufacturer not maintaining separate records (input side) 8%    Service Provider not maintaining separate records (output side) 10%    Manufacturer not maintaining separate records (output side) NA    Manufacturer/Service Provider maintaining separate records Consequence on Output SERVICES Capital Goods INPUT TAX SITUATION
  15. 15. ISSUES <ul><ul><ul><li>Are services provided to SEZ Unit taxable services or exempted services? </li></ul></ul></ul><ul><ul><ul><li>Are exports taxable or exempted services? </li></ul></ul></ul>
  16. 16. the person making payment towards freight would be liable to pay the service tax <ul><ul><ul><li>IN CASE THE CONSIGNOR OR THE CONSIGNEE OF THE GOODS TRANSPORTED IS ONE OF THE FOLLOWING:- </li></ul></ul></ul><ul><ul><ul><li>Factory registered under or governed by the Factories Act; </li></ul></ul></ul><ul><ul><ul><li>Company established by or under the Companies Act; </li></ul></ul></ul><ul><ul><ul><li>Corporation established by or under any law; </li></ul></ul></ul><ul><ul><ul><li>Society registered under Societies Registration Act or similar law; </li></ul></ul></ul><ul><ul><ul><li>Co-operative society established by or under any law; </li></ul></ul></ul><ul><ul><ul><li>Dealer of excisable goods, registered under the Central Excise Law; or </li></ul></ul></ul><ul><ul><ul><li>Any body corporate established, or a partnership firm registered, by or under any law. </li></ul></ul></ul>
  17. 17. the person making payment towards freight would be liable to pay the service tax <ul><ul><ul><li>Exemption from tax in the following two situations- </li></ul></ul></ul><ul><ul><ul><ul><ul><li>Where the gross amount charged on all consignments transport in a goods carriage does not exceed Rs. 1500 </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Where the gross amount charged individual consignment transported in a goods carriage does not exceed Rs. 750. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>There is no SSP exemption available in case of GTA. </li></ul></ul></ul></ul></ul>
  18. 18. Taxability of Services to Be Provided <ul><li>Facts : </li></ul><ul><li>Date of Agreement 1/5/2009 </li></ul><ul><li>Agreement to become operational from 1/6/2009 & executed over 2 years; value of services Rs. 20 million </li></ul><ul><li>Advance received on 5/5/2009 Rs. 5 million </li></ul>
  19. 19. Taxability of Services to Be Provided <ul><li>Agreement aborted on 31/5/2009 due to </li></ul><ul><li>death of service receiver </li></ul><ul><li>XYZ reasons </li></ul><ul><ul><li>Services to be provided Nil </li></ul></ul><ul><ul><li>Advance forfeited </li></ul></ul><ul><li>Now Question is - </li></ul><ul><li>Is there Service Tax liability on advance received? </li></ul><ul><li>Yes, Services provided or to be provided. </li></ul>
  20. 20. ISSUE <ul><li>Revision in the tax rate subsequent to receiving advance: </li></ul><ul><ul><ul><ul><ul><li>Will it affect the tax liability? </li></ul></ul></ul></ul></ul><ul><ul><ul><li>What happens if service is made exempt when actually provided? </li></ul></ul></ul><ul><li>When both “provided” and “to be provided” are taxable a future exemption will apply only to the “outstanding payments” </li></ul>
  21. 21. ACCOUNTING ISSUE <ul><ul><ul><li>The Service Tax law recognised only cash system of accountancy. However, the Companies Act provides that every company will have to keep its account on accrual basis and while maintaining the account on accrual basis, the accounting standards as promulgated by the ICAI needs to be followed. </li></ul></ul></ul>
  22. 22. ACCOUNTING OF SERVICE TAX INPUT CREDIT <ul><ul><ul><ul><li>On Receipt of Invoice – </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Expenses Account … Dr 100 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Service Tax Credit Suspense… Dr 10 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>To Party Account 110 </li></ul></ul></ul></ul><ul><ul><ul><ul><li>On Payment to Party </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Service Tax Credit … Dr 10 </li></ul></ul></ul></ul><ul><ul><ul><ul><li> To Service Tax Credit Suspense 10 </li></ul></ul></ul></ul>
  23. 23. ACCOUNTING OF SERVICE TAX OUTPUT <ul><li>At the end of a year : </li></ul><ul><li>Service Tax Credit a/c will show a Debit balance which would be equal to CENVAT Credit on account of Service Tax at the year end. </li></ul><ul><li>The Service Tax Credit Suspense a/c will represents CENVAT Credit not availed of the Service Tax which has not become due since the payment for rendering services is not made. </li></ul>
  24. 24. ACCOUNTING OF SERVICE TAX OUTPUT <ul><li>On Billing– </li></ul><ul><li>Party Account … Dr 110 </li></ul><ul><li>To Sales 100 </li></ul><ul><li>To Service Tax Payable Suspense 10 </li></ul><ul><li>On Receipt of the Bill amount </li></ul><ul><li>Service Tax Payable Suspense … Dr 10 </li></ul><ul><li>To Service Tax Payable 10 </li></ul>
  25. 25. ACCOUNTING OF SERVICE TAX OUTPUT <ul><li>At the end of a year : </li></ul><ul><li>Service Tax payable a/c will show a credit balance which would be equal to Service Tax payable at the year end. </li></ul><ul><li>The Service Tax Payable Suspense a/c will represents liability of the Service Tax which has not become due since the payment for rendering services is not received. </li></ul>
  26. 26. issue <ul><ul><ul><ul><li>Is Service Tax Liability not due also liable for disallowance under section 43B? </li></ul></ul></ul></ul>
  27. 27. THANK YOU

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