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Finanace act 2012 service tax

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By
CA. Dhruv Seth
ds@sethspro.com

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COVERAGE OF THIS PRESENTATION
•Overview of Indian Tax structure
•Importance of Service Tax
•Definition of “Service”
•Defin...

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POWER TO LEVY
•Article 265 – No tax shall be levied or collected
except by the authority of law
•Article 246 – Distributes...

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Finanace act 2012 service tax

  1. 1. By CA. Dhruv Seth ds@sethspro.com
  2. 2. COVERAGE OF THIS PRESENTATION •Overview of Indian Tax structure •Importance of Service Tax •Definition of “Service” •Definition of “Declared Service” •Draft Place of provision of service rules
  3. 3. POWER TO LEVY •Article 265 – No tax shall be levied or collected except by the authority of law •Article 246 – Distributes legislative powers •Schedule VII - List I – Center List (97) List II – State List (66) List III – Concurrent List (47)
  4. 4. POWER TO LEVY Union List State List Concurrent Income Tax Taxes on Land, Building Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty (Entry No. 44) Customs Entry Tax Excise Excise on Liquor etc Corporation Tax Tolls CST VAT Service Tax Luxury Tax Stamp Duty on BOE, Cheques etc. Stamp Duty on documents other than those in List I
  5. 5. DIRECT VIS-À-VIS INDIRECT TAX COLLECTION Budgeted 2012-13 Revised 2011-12 Actual 2010-11 Actual 2009-10 Actual 2008-09
  6. 6. • Regressive • Administrative Cost • Inflationary • Growth Oriented DIRECT VIS-À-VIS INDIRECT
  7. 7. INDIRECT TAX Excise / Customs VAT / CST Service Tax
  8. 8. BREAKUP OF INDIRECT TAX COLLECTION
  9. 9. SERVICE TAX VIS-À-VIS GDP
  10. 10. SERVICE WISE CONTRIBUTION 2011-12
  11. 11. MOST TRENDING SERVICES Service 2010-11 2011-12 % Growth Construction Residential Complex 1,145.63 2,681.67 234.08% Air passenger transport service 693.04 1,273.09 183.70% Transport of goods through pipeline 394.34 718.95 182.32% Broadcasting 1,084.14 1,785.83 164.72% Credit Card, Debit Card 437.01 697.79 159.67% Business Support Service 2,688.86 4,197.33 156.10% Information technology 1,742.53 2,641.24 151.58% Airport Services 608.44 902.12 148.27% Advertising 794.29 1,163.11 146.43% Renting of immovable property 2,829.24 4,119.92 145.62%
  12. 12. • From Positive Approach • To Negative Approach  Define “Service” – 65B (44) Define “Declared Services” – 65B (22) Define “Negative Service” – 66D Notify “Exempt Service” – 12 / 2012 CHANGE
  13. 13. DETERMINATION Service Sec 65B (44) ? Declared Service Sec 66E ? NO NOYES Negative List Sec 66D ? YES Exemption 12/2012 ? NO YES Not Taxable YES TaxableNO
  14. 14. There shall be levied a tax (hereinafter referred to as the Service Tax) at the rate of twelve per cent. On the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed 66B – CHARGING SECTION
  15. 15. 65B(44) – FLOW CHART Basic Provision Includes Exclusions Further exclusions vide Explanation 1 Explanation 2 Explanation 3 - Deeming Explanation 4
  16. 16. any activity carried out by a person for another for consideration and includes a declared service but shall not include…. 65B (44) - SERVICE MEANS
  17. 17. 65B (44) - ESSENTIALS Service activity a person for another consideration declared service
  18. 18. • Busy or vigorous action or movement • The state or quality of being active • Lively action or movement ACTIVITY
  19. 19. Activity could be active or passive and would also include forbearance to act. Agreeing to the obligation to refrain from an act or to tolerate an act or a situation has also been specified as a declared service under section 66E of the Act. GUIDANCE NOTE 2 – WHAT IS ACTIVITY?
  20. 20. • Necessary to have two persons • Has to be carried out for the other person • Caveat - Explanation 2(a) of 65B(44) A PERSON FOR ANOTHER
  21. 21. (i) an individual, (ii) a Hindu undivided family, (iii) a company, (iv) a society, (v) a limited liability partnership, (vi) a firm, (vii) an AOP or BOI, whether incorporated or not, (viii) Government, (ix) a local authority, or (x) every artificial juridical person, not falling within any of the preceding sub-clauses; SEC 65B(37) - PERSON
  22. 22. 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 CONSIDERATION - SEC 2(D)
  23. 23. • Gifts or Donation • Research • Charity SPECIAL CONSIDERATION
  24. 24. 65B(44) – FLOW CHART Basic Provision Includes Exclusions Further exclusions vide Explanation 1 Explanation 2 Explanation 3 - Deeming Explanation 4
  25. 25. ...but shall not include a.) an activity which constitutes merely – (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; OR 65B (44) - SERVICE CONTINUED
  26. 26. ii.) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; OR iii.) a transaction in money or actionable claim 65B (44) - SERVICE CONTINUED
  27. 27. b.) a provision of service by an employee to the employer in the course of or in relation to his employment ; c.) fees taken in any court or tribunal established under any law for the time being in force. 65B (44) - SERVICE CONTINUED
  28. 28. 65B(44) – FLOW CHART Basic Provision Includes Exclusions Further exclusions vide Explanation 1 Explanation 2 Explanation 3 - Deeming Explanation 4
  29. 29. Nothing in this clause shall apply to a.) M.P. / M.L.A. / Local authorities b.) Person holding post pursuance to the provisions of the Constitution c.) Chairperson / Member / Director of a body established by the CG / SG 65B (44) – EXPLANATION 1
  30. 30. Transaction in money shall not include any activity relating to the use of money for conversion by cash or by any other mode, from one form, currency or denomination, to other form, currency or denomination for which a separate consideration is charged. 65B (44) – EXPLANATION 2
  31. 31. a.) an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons. b.) an establishment of a person in the taxable territory and any of his other establishment in a non taxable territory shall be treated as establishment of distinct persons. 65B (44) – EXPLANATION 3
  32. 32. Sec 65B (22) of the Finance Act, 1994 “Means any activity carried out by a person for another person for consideration and declared as such in Section 66E” DECLARED SERVICE
  33. 33. a. Renting of Immovable Property b. Construction of a complex, building c. Temporary transfer of IPR d. Development, design etc. IT Software e. Agreeing to refrain or tolerate SECTION 66E
  34. 34. f. Transfer of goods without transfer of right of such goods g. Activities in relation to hire purchase h. Service portion in execution of Works Contract i. Service portion of food being served SECTION 66E
  35. 35. Renting of Immovable Property - Sec 66D(M) – Negative List – Renting of residential dwelling for use of residence SECTION 66E (a)
  36. 36. Agreeing to the obligation  to refrain from an act OR  to tolerate an act or a situation OR  to do an act. SECTION 66E (e)
  37. 37. Transfer of goods by way of hiring, leasing, licensing, or in any manner such manner without transfer of right to use such goods. SECTION 66E (f)
  38. 38. BSNL Vs. UOI (2006) 145 STC 91 (SC) a) There must be goods available for delivery b) The identity of the goods must be certain c) All permissions and license required should be available to the transferee d) It must be a transfer of right to use and not merely a license to use the goods e) The owner cannot transfer the right to anyone else till it is with the original transferee TRANSFER OF RIGHT - TESTS
  39. 39. Activities in relation to delivery of goods on hire purchase or any system of payment by installments. SECTION 66E (g)
  40. 40. Service portion in the execution of a works contract - Works contract definition 65B(54) - Notification 24/2012 dated 06-06- 2012 superseding 11/2012 SECTION 66E (h)
  41. 41. a.) Pay on service portion of contract OR SECTION 66E (h) Works Contract Value of Service portion Original Works contract 40% of the total amount Maintenance or repair or servicing of any goods 70% of the total amount All other works contract 60% of the total amount
  42. 42. 66F. (1) Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service. (2) Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description. SEC 66F – BUNDLED SERVICE
  43. 43. Explanation.— For the purposes of sub- section (3), the expression "bundled service" means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.’; SEC 66F – BUNDLED SERVICE
  44. 44. a. if various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character; b. if various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax. SEC 66F – BUNDLED SERVICE
  45. 45. Term “Sale” as in 4(3) of the Sale of Goods Act, 1930 • “where under a contract of sale the property in the goods is transferred from the seller to the buyer, the contract is called a sale.” SERVICE VIS-À-VIS SALE
  46. 46. In 'State of Punjab and Haryana V. Associated Hotels of India Limited' - AIR 1972 SC 1131 the Supreme Court held that a contract for sale is one whose main object is the transfer of property in, and the delivery of the possession of a chattel as a chattel to the buyer. Where the principal object of the work undertaken by the payee of the price is not the transfer of a chattel, the contract is one of work and labor. SERVICE VIS-À-VIS SALE
  47. 47. Important traits 1.) Transfer of property as a chattel 2.) When the property in the transaction passes 3.) Identifiable existence prior to delivery 4.) Proportion of value of material and service 5.) Substance and not the form SERVICE VIS-À-VIS SALE
  48. 48. Sec 66D(f) – Negative List - Any process amounting to manufacture or production of goods Sec 65B(40) of the Finance Act “Process amounting to manufacture or production of goods” means a process on which duties of excise are leviable under Sec 3 of the Central Excise Act, 1944 or any process amounting to manufacture of narcotics on which duties are leviable under the state act” SERVICE VIS-À-VIS MANUFACTURE
  49. 49. • Sec 3 of the Central Excise Act, 1944 (a) a duty of excise to be called the Central Value Added Tax (CENVAT)] on all excisable goods (excluding goods produced or manufactured in special economic zones) which are produced or manufactured in India SERVICE VIS-À-VIS MANUFACTURE
  50. 50. • Manufacture Sec 2f of Central Excise • UOI vs. DCM AIR 1963 SC 791 SC “manufacture implies a change but every change is not manufacture. A new and different article must emerge having a distinctive name, character or use” SERVICE VIS-À-VIS MANUFACTURE
  51. 51. • Deemed manufacture is not covered by the above • Over 35 processes have been specified or (b) Repacking, relabeling, putting or altering MRP in case of articles covered under MRP valuation provisions [clauses (ii) and (iii) of section 2(f) of Central Excise Act] SERVICE VIS-À-VIS MANUFACTURE
  52. 52. • Levy tax based on jurisdiction of consumption • Do not charge tax on Export of services • Levy tax on Import of services • Avoid taxation in multiple jurisdictions • Avoid non-taxation in all jurisdictions • Tax B2B - based on location of customers • Tax B2C - based on location of service providers BASIC TAXING PHILOSOPHY – POP 2012
  53. 53. Location of Service Receiver and Provider - Registered - its location is the registered premises - Not registered - its location could be: a) Business establishment; OR b) Fixed establishment; OR c) Business / Fixed Establishment most directly concerned with use / provision of service; OR d) Usual place of residence / place of incorporation BASIC TAXING PHILOSOPHY – POP 2012
  54. 54. LOCATION – POP 2012 Registered in India Location is India Yes Business Establishment ? No No Fixed Establishment ? No Usual Place of Residence - India ? No Location not India Fixed Establishment abroad ? Yes Establishment more directly concernedYes Location would be business establishmentNo Another Fixed Establishment ? Yes Establishment more directly concerned Yes Fixed Establishment No Location is India Yes
  55. 55. Rule 3 - Place of provision generally The place of provision of a service shall be the location of the service receiver; Provided that in case the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the service provider. BASIC RULES – POP 2012
  56. 56. Rule 8 - Place of provision of services where provider and receiver are located in taxable territory Place of provision of a service, where the location of the service provider as well as that of the service receiver is in the taxable territory, shall be the location of the service receiver. BASIC RULES– POP 2012
  57. 57. Rule 14 - Order of application of rules Notwithstanding anything stated in any rule, where the provision of a service is, prima facie, determinable in terms of more than one rule, it shall be determined in accordance with the rule that occurs later among the rules that merit equal consideration. BASIC RULES – POP 2012
  58. 58. STRUCTURE – POP 2012 Particulars Description Rule Location of Service Receiver General Rules 3, 8 & 14 Location of Service Provider Where location not available Specific Rule for five specified Proviso – 3 9 Various Other Specific Rules for seven specified services 4 to 6, 7, 10 to 12
  59. 59. The place of provision of following services shall be the location where the services are actually performed, namely - 1.) Goods Physically made available by receiver EXCEPT – E-SERVICES where goods located 2.) Supply of goods along with service 3.) Service in physical presence of individual RULE 4 – POP 2012
  60. 60. The place of provision of services provided directly in relation to an immovable property, including services – • Experts and estate agents • Provision of hotel accommodation • grant of rights to use immovable property, • services for carrying out or coordination of construction work, including architects / int. decorators shall be the place where the immovable property is located or intended to be located. RULE 5 – POP 2012
  61. 61. The place of provision of services provided by way of admission to, or organization of – • a cultural, artistic, sporting, scientific, educational, or entertainment event, • or a celebration, conference, fair, exhibition, • or similar events, and of services ancillary to such admission, shall be the place where the event is actually held. RULE 6 – POP 2012
  62. 62. Where any service referred to in rules 4, 5, or 6 is provided at more than one location, including a location in the taxable territory, its place of provision shall be the location in the taxable territory where the greatest proportion of the service is provided. RULE 7– POP 2012
  63. 63. The place of provision of following services shall be the location of the service provider:- • Services provided by a banking company to account holders; • Telecommunication services provided to subscribers; • Online information and database access or retrieval services; • Intermediary services; • Service consisting of hiring of means of transport, upto a period of one month. RULE 9 (SPECIFIED SERVICES) – POP 2012
  64. 64. Rule 10. The place of provision of services of transportation of goods, other than by way of mail or courier, shall be the place of destination of the goods: Provided that the place of provision of services of goods transportation agency shall be the location of the person liable to pay tax. Rule 11. The place of provision in respect of a passenger transportation service shall be the place where the passenger embarks on the conveyance for a continuous journey. RULE 10 & 11– POP 2012
  65. 65. Place of provision of services provided on board a conveyance Place of provision of services provided on board a conveyance during the course of a passenger transport operation, including services intended to be wholly or substantially consumed while on board, shall be the first scheduled point of departure of that conveyance for the journey. RULE 12– POP 2012
  66. 66. Powers to notify description of services or circumstances for certain purposes. In order to prevent double taxation or non-taxation of the provision of a service, or for the uniform application of rules, the Central Government shall have the power to notify any description of service or circumstances in which the place of provision shall be the place of effective use and enjoyment of a service. RULE 13– POP 2012
  67. 67. THANK YOU

Editor's Notes

  • Works contract defined in 65B(54)
  • Earlier it read “immovable property for use in the course of furtherance of business or commerce”. General meaning of the word residential dwelling means “A house, apartment, or other place of residence” or “A place to live in”. Hence a commercial property used for residence becomes a residential dwelling thereby rendering it non taxable and residential dwelling used for commercial purpose such as a bank branch would be taxable.

    Further exemptions
    1.)renting of precincts of a religious place meant for general public is also exempt vide exemption notification.
    2.) renting of vacant land, with or without a structure incidental to its use, relating to agriculture. Eg would be animal shelters.
  • Actually there is no activity in this but still would be taxable since it is a declared service. Copied from Australian legislature.

    Agreeing – Needs to be consent of both the parties. A contract which has been thrust on one would not necessarily fit into the definition of the word “Agreeing”

    Obligation - The condition of being morally or legally bound to do something.
  • Some e.g.
    1.) car given in hire by a person with driver on a per month basis. Not right to use since license and permissions not transferred to hirer. Delhi High Court
    2.) Hiring of Bank lockers. Not right to use since possession of the locker is not transferred only the contents belong to the hirer. AP High Court
    3.) Pandal and Shamiana ? For me it is not transfer of right to use which has been transferred since owner has the effective control over the same
  • Only the activities which are in relation to delivery of goods are the ones sought to be taxed and not the delivery of goods itself.

    Hire purchase has been defined in Sec 2 of the hire purchase act, 1972 as
    1.) possession is transferred to the hirer on the condition that such person pays periodical installments. AND
    2.) property of such goods passes to the hirer upon the payment of the last installment. AND
    3.) such person has the right to terminate the agreement any time before the property so passes.

    Financial, operating leases would be only covered if they suffice the above conditions.
  • It has been defined in 65B(44) as a contract wherein transfer of property in goods involved in the execution is leviable to tax as sale of goods. In case on a transaction sales tax is not levaible hence the same should not be within the ambit of the above definition.

    The definition of works contract as proposed in the bill and the act has undergone a substantial change wherein even movable goods have been brought into the ambit of taxation. Earlier it was only limited to “to any building or structure on land”. Now the same reads as “of any movable or immovable property”
  • New notification 24/2012 dated 06-06-2012

    “original works” mean all new constructions OR all types of additions and alterations to damaged and abandoned structures on land that required to make them workable OR erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise.
  • Directly in relation to means there should be a direct nexus and not a mere relation.

    Immovable property has not been defined and hence according to General Clauses Act the same shall mean – Land, benefits to arise out of land, and things attached to earth, or permanently fastened to anything attached to the earth. Thus can include movable fastened machinery within its ambit.
  • An Indian firm provides a ‘technical inspection and certification service’ for a newly developed product of an overseas firm (say, for a newly launched motorbike which has to meet emission standards in different states or countries). Say, the testing is carried out in Maharashtra (20%), Kerala (25%), and an international location (say, Colombo 55%).

    Notwithstanding the fact that the greatest proportion of service is outside the taxable territory, the place of provision will be the place in the taxable territory where the greatest proportion of service is provided, in this case Kerala.
  • “account” means an account bearing interest to the depositor, and includes a non-resident external account and a non-resident ordinary account; for other banking services would get covered under the main rule 3

    (f) “intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of service between two or more persons;
  • Is the place of destination of goods, except in the case of services provided by GTA for transportation of goods by road, in which case place of provision is location of the person liable to pay tax (as determined in terms of rule 2(1)(d) of Service tax Rules, 1994.

    Continuous Journey means –
    1.) Either a Single ticket
    2.) One ticket or invoice with no scheduled stop over in the journey
    London Delhi London – Not taxable since the London is place of provision of service is in London.

    Place where the passenger embarks on the conveyance for a continuous journey. Continuous journey means – journey for which single ticket issued or more than one ticket or invoice has been issued for the journey, by one service provider, or by an agent on behalf, at the same time, and there is no scheduled stopover in the journey
  • Moscow – Delhi – Chennai – Video on demand consumed then not taxable since first scheduled departure was from Moscow
    Delhi – Moscow – Paris – above taxable since first departure point from Delhi even though consumed on Moscow Paris route.

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