Session ii dated 31.10.2012

PresentsA Knowledge Master Class

On

“Understanding New Regime of Service Taxation in India”

Conducted byDr. Sanjiv Agarwal

FCA, FCS

Wednesday,31th October,2012New Delhi © Dr. Sanjiv

Agarwal

1

Corporate Knowledge Foundation

SESSION – II

Overview of Taxation of Services

and Major Changes

2


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

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%

to be contd…….

5

GDP CO MPO SITIO N IN MARCH, 2012

Agriculture19%

Industry22%

Service Sector59%

Service Tax Share of Services in GDP

6

Growth in Tax GDP Ratio – Slow but Steady

Years Tax GDP ratio 2003-04 9.2% 2007-08 11.9% 2009-10 9.7% 2010-11 10.3% 2011-12 10.1%

7

Taxonomy of Indian Taxation

TAXATION 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…..

8

Service Tax in India (The Past)

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.

9

Service Tax in India (The Past)

Selective Approach to Service TaxSelective 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.

10

Service Tax - Today

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.

11

All Services(including declared Services

(-)

Specific Exclusions

(-)

Negative List Services

Exemptions

Taxable Services

(-)

Taxation of Services by Finance Act, 2012

(=)

12

Service Tax - Today

New system of taxation of servicesAll 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.

13

Service Tax provisions no longer applicable (w.e.f. 1.7.2012)

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, 2006Export of Service Rules, 2005

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

15

The New Taxability Concept

Taxable

3. Exemptions (39)

1. Non -

Taxable

territory

(POPS)

2. Negative list (17)

SERVICE FOR A CONSIDERATION

E - MAGIC TEST

E: EmployeeM: MoneyA: Actionable claimG: GoodsI: Immovable propertyC: Court Fee

9 DE

CL

AR

ED

SE

RV

ICE

S

16

Taxable Services w.e.f. 1.7.2012

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

17

Goods & Service Tax (The Future)

GST: A Common Tax on

Goods Services

18

Pre-requisites for migrating to a GST regime – An Update

• 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

19

GST – An UpdateBudget 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

20

The GST Journey – beginning of end…….

Past Recent Past Now & Future

National GST Dual GST ???????

…or end of beginning !!

Objective to widen tax baseService 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

MAJOR CHANGES IN SERVICE TAX LAW BY FINANCE ACT, 2012 - AT A

GLANCE

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 or bundled services.

MAJOR CHANGES IN SERVICE TAX LAW BY The FINANCE ACT, 2012 - AT

A GLANCE

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

MAJOR CHANGES IN SERVICE TAX LAW BY The FINANCE ACT, 2012 - AT A

GLANCE

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 monthsRevision Application Authority and Settlement Commission

provisions made applicable to service tax.Special Audit of Service tax assesses by CAs /CWAs .

MAJOR CHANGES IN SERVICE TAX LAW BY The FINANCE ACT, 2012 - AT A

GLANCE

Service Tax Return – Modified ST-3

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 www.aces.gov.in/download.jsp

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

http://www.aces.gov.in/download.jsp

Exports [Rule 6(A)]

Service provider should be in IndiaService receiver should be outside IndiaBoth should not be mere establishmentsService should not be in Negative listService should be provided outside IndiaPayment should be in convertible currency

Exports – W.e.f. 1.07.2012

27

Scope of services under Service Tax

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….

Services on which no Service Tax shall be payable comprise 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

Scope of services under Service Tax

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)

What is Service

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

What is Service

31

ActivityNot defined in the ActIn 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 actAgreeing to an obligation to refrain from an act or to tolerate an

act or a situation - listed as a declared service u/s 66E

What is Service

32

ConsiderationMeans everything received or recoverable in

return for a provision of service which includes -Monetary paymentNon-monetary paymentDeferred 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”

What is Service

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

What is Service

34

Activity for a Consideration Activity should be carried out by a person

for a considerationActivity without consideration like-

DonationGiftsFree charities

outside the ambit of serviceCharity for consideration would be service

and taxable unless otherwise exempted

What is Service

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 value

Actionable 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

What is Service

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 moneyService excludes money transactionsEven fee for remittance is not taxable (POPS) Sender of money outside India bank / company

remitting located outside IndiaFee charged by Indian bank - remitter located

outside India (not taxable as per POPS)

What is Service

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

What is Service

38

Government – Not definedSection 3 (22) of General Clause Act, 1897Includes Central/State Government/ Union

TerritoryActions taken in the name of President/

GovernorMost of services provided by government are

in Negative List

What is Service

39

Local Authority - Section 65B(31)A Panchayat as referred to in clause (d) of article 243 of

the ConstitutionA Municipality as referred to in clause (e) of article 243P

of the ConstitutionA 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.

What is Service

40

Governmental Authority (N. No. 25/2012-ST)board/ Authority / other body established with > 90% participation equity /government controlset up by Act of Parliament or State

Legislatureto carry out any functions entrusted to

municipality u/s 243W of Constitution

What is Service

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

What is Service : Exclusions

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; or

b) duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or

c) 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.

What is Service

43

What is Service

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 his other

establishment in a non-taxable territory shall be treated as establishments of

distinct persons.

(c) A person carrying on a business through a branch or agency or

representational office in any territory shall be treated as having an

establishment in that territory

43

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

Employer facilities to Employees

(c )Treatment of supplies and reimbursements made by the employer 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

Employer facilities to Employees

Directors Services to Company - Taxable

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

Directors Services to company- Taxable

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

Remuneration to Partner – Not a Service

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 moneyIncomes 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

Taxability of Services – Then & Now

Period Taxable Non Taxable

Prior to Finance Act, 2012(upto 30.6.2012) Taxable services

specified in section 65 (105)

Import of services under reverse charge

Exempt services Service not covered

under section 65 (105) Export of services

Post Finance Act, 2012(w.e.f. 1.7.2012) All services provided in

taxable territory Declared services

Services in Negative List Exempt services Services provided in non-

taxable territory (as per POPS Rules)

Examples of new activities which may be taxed

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

Discourses and lecturesBanking services to governmentUnrecognized IPRsServices to RBIHotel Telephone CallsVideo library facilities by hotelsMatrimonial sitesAstrologersWorks contracts for movable propertiesOn board catering and other facilities

Examples of new activities which may be taxed

51

52

Declared Services 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

53

List of declared services

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;

54

List of declared services

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.

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 property

Renting 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


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


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



Nature of Activity Taxability

Renting of property to educational body Not chargeable to service tax; exemption

Renting of vacant land for animal husbandry or floriculture

Not chargeable to service tax as it is covered in the negative list entry relating to agriculture

Permitting use of immoveable property for placing vending/dispensing machines

Chargeable to service tax as permitting usage of space is covered in the definition of renting

Allowing erection of communication tower on a building for consideration.

Chargeable to service tax as permitting usage of space is covered in the definition of renting

Renting of land or building for entertainment or sports

Chargeable to service tax as there is no specific exemption.

Renting of theatres by owners to film distributors

Chargeable to service tax as the arrangement amounts to renting of immovable property.

Renting of immovable property outside India not taxable in India even if owners are in India

Construction Activities [Section 66E (b)] Construction activities means 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 completion certificate by the competent 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 any consideration received before such completion certificate, it will also be taxed.

59

Construction Activities

Construction is not defined

Construction Includes additions,

alteration,

replacement, or

remodeling

of any existing civil structure

60


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


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

Temporary transfer or permitting the use or enjoyment of any intellectual property right [Section 66 E (c)]Intellectual property right’ has not been defined but Intellectual property right includes : Copyright

Patents

Trademarks

Designs

Any other similar right to an intangible property

Intellectual Property Right

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


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


Copyrights as IPRs are exempted which

include :

literary work

dramatic work

musical work

artistic works

cinematograph films

66


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

Information Technology Software

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


Scope of ITS Service

Design - plan, scheme

Programming - process of writing a computer programme

Customization - modifying to meet a specific requirement

Adaptation - change to suit, adopt

Up gradation - raising standard, improving quality / version /

features

Enhancement - in value, content, quality

Implementation - execution 69


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

Obligations / Actions

Examples of Obligations / Actionsnon compete fees for agreeing not to compete compensation on termination of business agreementsadvance 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

Obligations / Actions

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

Transfer of Goods

Transfer of right to useTaxable 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

Transfer of Goods

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

Transfer of Goods

Article 366 (29A) of Constitution of India, as amended by Constitution (46th

Amendment) 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

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 to

be a sale of those goods by the person making the transfer, delivery or

supply and a purchase of those goods by the person to whom such

transfer, delivery or supply is made.

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Transfer of Goods

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

Transfer of Goods

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Delivery of goods on hire purchase / installments [section 66E(g)]

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

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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)

80

Works Contract [66E(h)]

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.

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Works Contract

Works Contract covers ConstructionErection Commissioning CompletionFitting out Repair Maintenance RenovationAlteration, or Any other similar activity or part there of

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Works contract

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

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Works Contract

Some issues in works contracts

Labour contracts Excluded

Repair & Maintenance of motor vehicles

yes if property in goods transferred in execution of WC

Construction of pipeline / conduit yes, structures on land

Painting/repair/renovation of building

yes if involves provision of material also

Erection/commissioning installation of plant/ machine etc

yes if transfer of property in goods is involved and machinery etc are embedded / attached to earth after the job

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Valuation of service portion in Works Contract

Value of service portion in execution of work contract = gross amount charged for works

contact less value of transfer of property in goods involved in execution of works contract Gross amount includes Gross amount does not include

Labour charges for execution of the works Amount paid to a sub-contractor for labour and servicesCharges for planning, designing and architect’s fees

Value of transfer of property in goods involved in the execution of the said works contract.Note:As per Explanation (c) to sub-rule (i), where value added tax or sales tax has been paid or payable on the actual 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 in the execution of the said works contract.

Cost of establishment of the contractor relatable to supply of labour and services and other similar expenses relatable to supply of labour and services

Value Added Tax (VAT) or sales tax, as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said works contract

Profit earned by the service provider relatable to supply of labour and services

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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 reconditioning or restoration or servicing of any goods

seventy per cent of the total amount charged including such gross amount

(C) in case of other works contracts, not included in serial nos. (A) and (B) above, including contracts for maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings.

sixty percent of the total amount charged for the works contract

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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

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Service portion in supply of foods and drinks [section 66E(i)]

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

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.

Service portion in supply of foods and drinks [section 66E(i)]

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Valuation of Service portion (Rule 2C of valuation Rules)

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

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Bundled Services

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’.

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Bundled Services

Rule 1 Reference to main service can not be used for services used for

providing the 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

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Bundled Services

Rule 2Most specific description to be preferred over more

general description for services capable of differential treatment

for any 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

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Bundled Services

Taxability of naturally bundled services in ordinary course of 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

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

Bundled Services

Rule 4 Taxability of services not naturally bundled in ordinary course of

business

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.

Bundled Services

THANK YOU

FOR

YOUR

PRECIOUS TIME

AND

ATTENTION

Dr. Sanjiv Agarwal

FCA, FCS, Jaipur

[email protected]

[email protected]

Session ii dated 31.10.2012

Education

Transcript of Session ii dated 31.10.2012