Dear all, know about service tax
1. Background
Service tax is said to be tax of 21st century. This tax made a small beginning in 1994. Its scope is increasing every year. Service tax is presently payable @ 12% w.e.f. 18-4-2006 (plus education cess of 2% i.e. total 12.24%) on ‘taxable services’ i.e. those services which are specified in section 65(105) of Finance Act, 1994.
Rate of Service Tax
Section 66 of Finance Act, 1994 (which is a charging section) states that there shall be levied a tax (hereinafter referred to as the service tax) at the rate of 12% of value of taxable services referred in section 65(105) of Finance Act, 1994 [In addition, education cess @ 2% is payable].
This tax was first time introduced with effect from 1-7-1994 on three services. The rate was 5%. It was subsequently increased to 8% w.e.f. 14-5-2003. It was enhanced to 10% w.e.f. 10-9-2004. An education cess of 2% of service tax has been imposed vide section 95 of Finance (No. 2) Act, 2004, w.e.f. 10-9-2004.
Presently, service tax rate is 12% plus education cess of 2% (total 12.24%) w.e.f. 18-4-2006.
Education cess - Legally, you have to show service tax and education cess separately in invoice. You cannot just charge 12.24% as ‘service tax’. In that case, department can ask you to pay further 0.24% amount. You should also pay it by showing separate account head in TR-6 challan’, indicating appropriate code.
No TDS provisions
2. Service Provider
Section 65(105) of Finance Act, 1994 which defines each ‘taxable service’ states that the term ‘service provider’ shall be construed accordingly. Thus, service provider is one who provides taxable service as defined under section 65(105) of Finance Act, 1994.
In most of the cases, service provider, i.e. person who is providing taxable service is liable to pay service tax. However, in few cases, exceptions have been made and other person is made liable to pay service tax.
The major exceptions are as follows - (a) When service provider is non-resident, service receiver is liable (b) In case of service of Goods Transport Agency (GTA), consignor/consignee who is paying freight is liable (c) In case of insurance agents and mutual fund agents, insurance company and mutual fund are liable (d) In case of sponsorship service provided to a body corporate or firm, the body corporate or firm receiving such sponsorship service will be liable. These are discussed in a later chapter under ‘Procedures’.
As per section 65(105) which specifies various taxable services, in many cases, service is taxable if service is provided by ‘any person’. In some case, service is taxable if provided to ‘client’ or customer’. In some cases, service is taxable if provided to ‘any person’. Hence, tax liability will often depend on who is service provider and service receiver.
Any person - In many cases, service is taxable if provided by ‘any person’. This would include individual, partnership firm, HUF, society, company, body corporate, charitable institutions, cooperative society or Central/State Government.
Section 3(42) of General Clauses Act states that ‘person’ shall include any company or association or body of individuals, whether incorporated or not.
Unincorporated association or body is taxable - An explanation inserted after section 65(121) by Finance Act, 2006, w.e.f. 1-5-2006, states that taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration.
Thus, an unincorporated association providing service to its members can also be ‘a person’ for purpose of service tax.
3. Service Receiver
In many cases, the service is taxable only when it is provided to a ‘client’ or to a ‘customer’. These words are not defined under the Act and hence these words have to be understood as per in common parlance, i.e. by persons in the relevant trade who use them.
Client - As per Oxford Dictionary, ‘client’ means (1) a person using the services of a lawyer, architect, social worker or other professional person. (2) a customer.
Other definitions of the word ‘client’ are as follows - (a) A person using the services of a professional person or organization [Concise Oxford Dictionary] (b) One who engages the services of any professional adviser (Webster’s Concise Dictionary) (c) A person who employs or retains an attorney, or counsellor, to appear for him in courts, advise, assist and defend him in legal proceedings, and to act for him in any legal business; an individual, corporation, trust or estate that employs a professional to advise or to assist it in the professional’s line of work, professionals include but are not limited to attorneys, accountants, architects etc. [Black’s Law Dictionary]
Dictionary meaning of the word ‘client’ suggest that a ‘client’ is a person who hires, engages or employs services of a professional - Pfizer Ltd. v. CCE (2005) 2 STT 77 (CESTAT).
Customer - As per Oxford dictionary, ‘customer’ means a person who buys goods or services from a shop or business. As per Black’s Law Dictionary, ‘customer’ is one who regularly or repeatedly makes purchases of, or has business dealings with a tradesman or business. Ordinarily one who has repeated business dealings with another; a buyer, purchaser, consumer or patron.
4. Value
New section 67, introduced w.e.f. 18th April, 2006 makes elaborate provisions for valuation for purpose of levy of service tax. Provision has been made for valuation rules.
Highlights of provisions of valuation under section 67
The highlights of new provisions of section 67 are as follows -
Service tax is payable on gross amount charged by service provider for service provided or ‘to be provided’. Thus, tax is payable as soon as advance is received.
‘Value of taxable service’ plus service tax payable is equal to ‘gross amount charged’ [section 67(2)].
Where the consideration for providing services is entirely in money, gross amount charged by service provider of taxable service provided or to be provided by him will be relevant for ‘valuation’ [section 67(1)(i)].
Where the consideration for providing services is not wholly or partly in terms of money, service tax is payable on amount of money, which with addition of tax service tax charged, is equivalent to the consideration [section 67(1)(ii)].
Where consideration is not ascertainable, valuation will be on basis of Valuation Rules [section 67(1)(iii)]
If gross amount charged by service provider is inclusive of service tax (i.e. service tax not charged separately in invoice), value of taxable service will be calculated by back calculations such that with addition of service tax payable, the total is equal to the gross amount charged [section 67(2)].
Gross amount charged for taxable services can be before, during or after provision of service [section 67(3)].
Valuation will be as per Valuation Rules, subject to section 67(1), 67(2) and 67(3) [section 67(4)]. Thus, valuation can be only with reference to valuation rules.
Highlights of service tax valuation rules
In exercise of powers under section 67, Service tax (Determination of Value) Rules, 2006 have been issued w.e.f. 19-4-2006. The Service tax Valuation Rules provide as follows -
If consideration is not wholly or partly consisting of money, value will be determined by service provider in terms of rule 3.
As per rule 3(a) of Service Tax Valuation Rules, Valuation shall be on basis of gross amount charged by service provider for similar services.
If value cannot be determined on basis of rule 3(a), valuation shall be on basis of equivalent money value of such consideration, which shall not be less than cost of provision of such services [rule 3(b) of Service Tax Valuation Rules]
Central Excise Officer can reject ‘value’ determined by service provider and determine ‘value’ for purpose of service tax payment [rule 4].
Rules 5 and 6 make provisions for certain specific inclusions and exclusions for valuation
Payments made by service provider as agent of service receiver and recovered from service receiver are excluded for purpose of valuation [rule 5(2)]
In case of services provided from outside India, actual consideration received will be relevant for valuation [rule 7(1)].
Value to be determined by service provider
Rule 3 of Valuation Rules makes it clear that value of taxable service shall be determined by service provider. Thus, responsibility of valuation has been cast on service provider. However, rule 4 authorises Central Excise Officer to reject the value as determined by service provider and determine the ‘value’, after following principles of natural justice.
Value when consideration is partly or fully in money
Service tax chargeable on any taxable service is on basis of gross amount charged by service provider for ‘such’ service provided or to be provided by him, when provision of service is for a consideration in money [section 67(1)(i)].
If consideration is partly in money, valuation will be on basis of ‘amount equivalent to consideration’ as provided in section 67(1)(ii).
If value of consideration cannot be ascertained, ‘value’ will be calculated by applying valuation rules, as provided in section 67(1)(iii).
Charge should be for taxable service
The charge should be for taxable service provided or to be provided. Thus, if any other amount is charged which is not for taxable service provided or to be provided, service tax will not be payable on such charge.
Meaning of ‘gross amount charged’ and ‘money’
These terms are defined as follows -
“Gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment [explanation (c) to section 67]. This is an inclusive definition and hence will include other items (e.g. consideration received other than in cash).
“Money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value [explanation (b) to section 67]
Amount may be charged to any one, not necessarily to service receiver
The words used in section 67(1)(i) of the Act are ‘charged for such service provided or to be provided by him’. Thus, the charge may be to anyone. It is not necessary that ‘charge’ should be only to receiver of service. Even if amount is ‘charged’ to some other person and not to receiver of service, service tax will become payable
Amount need not be ‘charged’ by service provider - money paid to third party may also be includible
It is not necessary that the money should be paid to service provider himself. Amount paid even to third party is includible in ‘value’ of service if it is for provision of service and at the instance of service provider.
It is true that section 67(1)(i) uses the words ‘amounts charged by service provider’. However, that sub-section applies only when the entire consideration for service is given in form of money. If part consideration is not paid in terms of money, the money equivalent of the total consideration will be considered for purpose of ‘value’ of taxable service, as provided in section 67(1)(ii).
For example, if travelling and hotel expenses of service provider (like maintenance engineer or auditor or consulting engineer) are paid by service receiver directly to hotel or travel agency, it will still be part of ‘value’ for taxable service, since those expenses are incurred for availing the service [As discussed later, definition of ‘consideration’ also makes it clear that consideration need not be received by the service provider himself].
Amount may be received before, during or after provision of service
Section 67(3) provides that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after the provision of such service. This provision is identical with Explanation 3 of the pre-amended section 67 which had come into force with effect from 13-5-2005, and was effective upto 18-4-2006.
Part of a service cannot be treated as a ‘taxable service’
A service has to be a predominantly taxable service for levy of service tax. The tax cannot be levied if a composite service consists of some part which is taxable.
In Daelim Industrial Co. v. CCE 2003 STT 438 = 155 ELT 457 = 57 RLT 636 (CEGAT), it was held that a works contract cannot be vivisected and part of it subjected to tax (SLP filed by department dismissed by SC - (2004) 170 ELT A181). This decision was followed in Larsen & Toubro Ltd. v. CCE (2005) 1 STT 183 = 174 ELT 322 = 60 RLT 505 (CESTAT), in respect of design element of works contract (departmental appeal against the decision in L&T’s case admitted by SC on 11-10-2004 - 182 ELT A149) - also followed in Ircon International Ltd. v. CCE (2005) 2 STT 264 = 1 STR 46 (CESTAT).
Tax on payments received in advance from customers
Till 13th May, 2005, section 67 provided that value of taxable service shall be the gross amount charged for services rendered by him. The section 67, as amended w.e.f. 13-5-2005, provided that value of taxable service shall be gross amount charged by service provider for taxable service provided or to be provided by him. Explanation 3 was added to this section w.e.f. 13-5-2005, which specifically declares for removal of doubt, that gross amount charged for taxable service shall include any amount received towards the taxable service before, during or after provision of taxable service.
Section 67(1)(i) (as substituted w.e.f. 18-4-2006), also provides for payment of tax on ‘service provided or to be provided’.
Section 65(105), as amended w.e.f. 16-6-2005 starts with words ‘taxable service means any service provided or to be provided’.
After 13th May 2005, service tax will be payable as soon as advance is received, even if service is provided later - view confirmed in MF(DR) circular No. B1/6/2005-TRU dated 27-7-2005 para 27. Till 13th May 2005, the provision was that service tax was payable only when service is actually provided.
Rule 4A(1) of Service Tax Rules, as amended w.e.f. 1-4-2005 provides that every person providing taxable service shall issue an invoice, bill or challan within 14 days from date of completion of such taxable service or receipt of any payment towards value of the taxable service, whichever is earlier. Rule 6(1) has also been amended w.e.f. 1-4-2005 to provide for payment of service tax to credit of Central Government by 5th of following month in which payments are received towards taxable services.
Thus, service tax will be payable on advance received also w.e.f. 13th May 2005.
Tax payable only on amount actually received
Rule 6(1) of Service Tax Rules makes it clear that service tax is payable on value of taxable services received. Thus, if service provider does not receive any payment from his customer, there is no liability of service tax. Service tax is payable only on ‘value of taxable service’ actually ‘received’, and not on amount ‘billed’.
If the service receiver does not pay full amount of Bill and pays less amount, reasonable interpretation is that proportionately less tax is payable.
Gross amount to be inclusive of service tax
Section 67(2) provides that where gross amount charged by a service provider is inclusive of service tax payable, the ‘value’ of taxable service will be such amount as, with addition of service tax payable, is equal to the gross amount charged [same provision in explanation 2 to earlier section 67].
The service provider is required to show service tax separately in his invoice/bill, since provisions of section 12A of Central Excise have been made applicable to service tax. This is also required as per Rule 5(1) of Service Tax Credit Rules. This is also required to enable the service recipient to claim credit of service tax paid by the service provider.
Calculation of service tax by back calculations
The gross amount charged can be taken as inclusive of service tax and the ‘value’ and ‘service’ tax is to be calculated by back calculations.
For example, if Bill amount is Rs. 1,000 and service tax is not shown separately in Invoice, the tax payable is not Rs. 122.40, but Rs. 109.05 and Assessable Value is Rs. 890.95 (Check that 12.24% of Rs. 890.95 is Rs. 109.05 and total of Rs. 890.95 plus Rs. 109.05 is Rs. 1,000. In invoice, Rs. 106.91 will be service tax and Rs. 2.14 as education cess.).
The simple mathematical formula is as follows -
Assessable Value = (Cum tax price)/(1 + rate of tax)
Exclusion of value of material
Notification No. 12/2003-ST dated 20-6-2003 provides that if the amount charged includes value of goods and materials sold, service tax will not be payable on value of goods and materials sold. There should be documentary evidence showing value of goods and materials sold. This exemption is available only if Cenvat credit of such material is not taken. If such credit was taken, assessee should pay amount equal to the credit. Such payment should be before sale of such goods and materials.
Though the words used are ‘pay the amount’, it should be sufficient if the Cenvat taken is reversed in Cenvat credit records.
Abatement in certain cases from gross value of contract
In some cases, abatement has been provided from gross value of contract by way of an exemption notification, e.g. in case of construction services, service tax is payable on 33% of value of gross amount including of material, in case of outdoor catering contracts, service tax is payable on 50% of amount etc. Thus, exemption notifications have been used as ‘valuation provisions’.
The so called ‘exemption notification’ is on the assumption that in absence of such ‘exemption’, service tax would be payable on value of such goods also. This is incorrect as tax is payable only on ‘value of service’ and not on ‘gross value of contract’.
Abatement is provided of certain percentage, probably on the presumption that the abated amount represents value of material. ‘Exemption’ is granted in respect of certain value which is not taxable at all in the first place. You cannot ‘exempt’ something which is not taxable at all.
Valuation when value of consideration cannot be ascertained
Section 67(1)(ii) can apply only when value of consideration, though not in terms of money, is ascertainable. If value of such consideration is not ascertainable, valuation will be by application of Valuation Rules.
Provision when consideration is not even partly in money
Rule 3 has application only when consideration is not wholly or partly consisting of money. Thus, strictly legally, rule 3 has no application when at least part consideration is in money. However, even when consideration is partly in other than money, valuation has to be done by applying valuation rules, if value of such consideration is not ascertainable.
Hence, the principles of rule 3 can apply to determine ‘value’ even in cases where consideration is partly in terms of money.
Valuation on basis of Equivalent money value of consideration
Rule 3(b) provides that where the value cannot be determined in accordance with clause (a) [i.e. rule 3(a) on basis of value of similar service], the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.
Thus, if value of similar services cannot be ascertained, the ‘value’ will be ‘equivalent value of consideration’. Such ‘equivalent value’, to be determined by service provider himself, shall not be less than cost of provision of such service.
Rules make no provision for method of calculation of ‘cost’ of the taxable services. There is presently no specific guideline from the Institute of Cost and Works Accountants of India (ICWAI) for the purpose of computing the cost of provision of services. Hence, such ‘cost’ should be determined on the basis of normal principles of costing.
‘Cost’ will have to be worked out on basis of usual costing principles of normal costs and allocation of normal overheads. Certificate of Cost/Chartered Accountant may be obtained for this purpose.
All expenditure and costs relating to provision of service incurred by service provider are includible
Rule 5(1) provides that where certain expenditure or costs are incurred by the service provider in the course of providing any taxable service, all such expenditure or costs shall be treated as consideration for the taxable services provided or to be provided and shall be included in the ‘value’ for purpose of charging of service tax on the said service.
This is a general rule which makes it clear that, even when such expenditure or costs are recovered separately by service provider from service receiver, such expenditure or costs must be included in the value of taxable service.
However, expenditure incurred by service provider as ‘pure agent’ of service receiver is not includible, as per rule 5(2). This aspect is discussed later.
‘Out of pocket’ expenses incurred are includible
The service provider often claims reimbursement of certain expenses incurred by him (like travelling, boarding and lodging, etc.) while providing a taxable service. These are often termed as ‘out of pocket’ expenses.
Department had clarified that out of pocket expenses like travelling, boarding and lodging on reimbursable basis are not subject to service tax. Assessee will have to provide documentary evidence substantiating his claim from the gross amount. It is clarified that this is applicable in respect of all the services - Pune-I Commissionerate TN 8/98-ST dated 13-10-1998 - parallel Indore TN 5/98-ST dated 14-10-1998.
This position will now not apply under the new Valuation Rules and all such expenses will be includible in ‘value’ of taxable service. All earlier departmental circulars regarding valuation have been withdrawn as per para 4.1.13 of MF(DR) circular No. B1/4/2006-TRU dated 19-4-2006.
Para 4.1-7 of MF(DR) circular No. B1/4/2006-TRU, dated 19-4-2006, reads as follows ‘Value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenditures or costs incurred by the service provider in the course of providing a taxable service forms integral part of the taxable value and are includible in the value. It is not relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client’.
Reimbursement of expenses incurred on behalf of service receiver not includible
Often, a service provider incurs some expenditure on behalf of service receiver and then recovers the amount from him. Such expenditure is not part of service provided by him to service receiver, but is incurred by him as per business practice or convenience. Following illustrations may clarify the provisions -
Octroi/entry tax amount paid by Clearing & Forwarding Agent, CHA or Transporter on behalf of owner of goods/Principal
Customs duty, dock dues, demurrage, transport charges etc. paid by Customs House Agent on behalf of client.
Advertisement charges paid by Advertising Agency to newspaper on behalf of clients.
Ticket charges paid by Travel Agent and recovered from his customer.
These are not part of service provided and hence are not includible. Rule 5(2) provides that the expenditure or costs that a service provider incurs, as a pure agent of the client, shall be excluded from the value if such service provider fulfils prescribed conditions.
The principle is also discernible from various exclusions as contained in rule 6(2).
Conditions to be satisfied for exclusion from ‘value’
Expenditure or costs incurred by service provider are not includible only if following conditions are satisfied :
the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
the recipient of service is liable to make payment to the third party;
the recipient of service authorises the service provider to make payment on his behalf;
the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.
Meaning of ‘Pure agent’
Explanation 1 to the rule 5 provides that for the purpose of rule 5(2), ‘pure agent’ means a person who—
enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;
does not use such goods or services so procured; and
receives only the actual amount incurred to procure such goods or services.
If he charges something extra, only that extra amount should be taxable and not entire amount, since that extra amount is for his services.
Value of material supplied is not includible
Clauses (vi) and (vii) of explanation 1 to earlier section 67 (existing upto 18-4-2006) provided that cost of part and materials supplied during provision of services of maintenance, repair, erection, commissioning or installation services will not be includible. Clause (ii) of explanation to earlier section 67 provided that cost of unexposed photography film, unrecorded magnetic tapes or such storage devices sold to client during course of providing service is not includible.
New section 67 does not have these provisions. These clauses have not been incorporated in rule 6(2). However, it does not mean that service tax can be imposed on value of goods or services. Even under new section 67, service tax is payable only on gross amount charged for ‘such service provided’.
5. Exemption from service tax
Central Government can grant partial or total exemption, by issuing an ‘exemption notification’ u/s 93 of Finance Act, 1994. Such exemption may be partial or total. Exemption may be conditional or unconditional. The only limitation is that exemption cannot be granted by Central Government with retrospective effect. There are following general exemptions -
Small service providers - Small units whose turnover less than Rs. four lakhs per annum are exempt from service tax.
Export of Services - There is no service tax on export of services, if service is exported as per ‘Export of Service Rules’.
Services to UN Agencies/SEZ - Services provided to UN and International Agencies and supplies to SEZ or developer are exempt [Notification No. 16/2002-ST dated 2-8-2002 in respect of UN and International Agencies and Notification No. 4/2004-ST dated 31-3-2004 in respect of SEZ - earlier No. 17/2002-ST dated 21-11-2002].
Services provided by RBI exempt - Exemption form service tax has been provided to all taxable services provided by Reserve Bank of India. (Notification No. 7/2006-ST dated 1.3.2006).
Goods and materials supplied while providing service - Service tax is not payable on value of goods and material supplied to the service recipient while providing service. There should be evidence about its value. Such exclusion is permissible only if Cenvat credit on such goods and material is not taken [This has been discussed in earlier chapter].
General Exemption to small service providers
The small service providers whose turnover of taxable services from one or more premises did not exceed Rs. four lakhs in previous year will be exempt from service tax in next financial year upto the turnover of Rs. 4 lakhs. The provisions are prescribed in Notification No. 6/2005-ST dated 1-3-2005.
Specific Exemptions
In case of some services, service tax is payable at lower rates, i.e. partial abatement is available from gross value. The lower rate is applicable if the service provider does not avail Cenvat credit of duty/tax on inputs, input services and capital goods.
Till 28-2-2006, he was entitled to avail Cenvat credit on input services. W.e.f. 1-3-2006, he cannot avail any Cenvat credit, if he avails the partial abatement.
Some important exemptions are as follows –
Some important exemptions are as follows –
Taxable Service
Partial abatement available
Relevant Notification w.e.f. 1.3-2006
Accommodation booking service by tour operator
10% of gross amount charged
1/2006-ST dated 1-3-2006.
Air Travel Agent
Option to pay service tax at flat rate on ‘basic fare’ @ 0.6% in case of domestic booking and 1.2% in case of international booking
rule 6(7)
Business Auxiliary Service in relation to processing of parts and accessories used in manufacture of cycle, cycle rickshaws and hand operated sewing machines
Tax on 70% of gross amount if gross amount is inclusive of cost of inputs and input services, whether or not supplied by the client (Is it exemption or punishment?)
1/2006-ST dated 1-3-2006.
Commissioning and installation services
Tax on 33% of gross amount if gross amount includes value of material
1/2006-ST dated 1-3-2006.
Construction Service
Tax on 33% of gross amount if gross amount includes value of material
1/2006-ST dated 1-3-2006.
Goods Transport Agency (GTA)
Tax only on 25% amount in his invoice [Payment will be made by consignor/consignee who is actually paying freight]
1/2006-ST dated 1-3-2006.
Mandap keeper, hotels and convention services, providing full catering services
Tax on 60% gross amount charged
1/2006-ST dated 1-3-2006.
Outdoor caterer
Tax on 50% amount if he provides full and substantial meal
1/2006-ST dated 1-3-2006.
Package tours and other than package tour
Tax is payable only on 40% of gross amount charged
1/2006-ST dated 1-3-2006.
Pandal and shamiana Service
70% of gross amount charged if full catering service provided
1/2006-ST dated 1-3-2006.
Rent-a-cab operator
Tax payable on 40% of gross amount charged
1/2006-ST dated 1-3-2006.
Transport of goods in container by rail
Tax payable on 30% of gross amount charged
1/2006-ST dated 1-3-2006.
These exemptions appear to be on the assumption that service tax is otherwise payable on the value of goods used in providing taxable service. This assumption seems to be of doubtful validity, as section 67 (which is a valuation section) makes it clear that tax is payable on gross amount charged for the taxable service. Service tax is not payable on total value of contract.
6. Classification
There are various types of services on which service tax is payable. These are specified in various sub-clauses of section 65(105). It is possible that a service may appear to be classifiable under more than one headings.
It is necessary to specify the heading under which the service being provided is falling. This is termed as ‘classification’. Presently, this does not have much revenue significance, as service tax rate is uniform for all types of services. However, the classification will become important if different tax rates are specified for different services or provisions in respect of ‘Export of Service’ or ‘Cenvat Credit’ differ.
The classification of services will be determined according to terms specified in various sub-clauses of section 65(105). [section 65A(1)]. If prima facie, a taxable service is classifiable under two or more sub-clauses of section 65(105), classification shall be effected as per following rules.
u Specific description to be preferred over a general description
u Classification should be as per essential character in case of composite services.
u Service which appears earlier in list, if service cannot be classified on above basis
Specific description to be preferred
The sub-clause which provides most specific description should be preferred over sub-clauses providing a more general description. [section 65A(2)(a)].
Classification as per Essential character in case of composite services
Composite services are those consisting of combination of different services. In case of such services, if the service cannot be classified on the basis of specific description as per section 65A(2)(a) above, it shall be classified as if they consisted of a service which gives them their essential character [section 65A(2)(b)].
In brief, composite services should be classified on basis of ‘essential character’, if no specific description can be found for such specific services.
Service which appears earlier in list, if service cannot be classified on above basis
If a service cannot be classified on basis of above provisions, the service should be classified under sub-clause which occurs first among the sub-clauses which equally merit consideration [section 65A(2)(c)].
In other words, in case of more than one descriptions where services can be classified, it should be classified under sub-clause which appears first in section 65(105)], if it cannot be classified on basis of specific description or essential character. [In case of CETA and Customs Tariff, in such cases, product is required to be classified under heading which appears last in Tariff, i.e. latter the better].
Tax payable only once
Even if a service can fall under more than one headings, service tax is payable only once. If one service provider is providing more than one taxable service, he need to take only one registration. However, the certificate shall be endorsed for all taxable services and tax liability will have to be discharged separately for each of the taxable services separately. - CBE&C circular No. 51/13/2002-ST dated 7-1-2003.
7. Cenvat and Service tax
The system of VAT was introduced in Central Excise in 1986. The concept was also introduced in case of Service Tax in 2002. However, these two were independent of each other.
Since both excise (goods tax) and service tax are under Central Government, the Government intends to integrate these two taxes. Full integration of goods and service tax will take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning has been made by making credit of service tax and excise duty inter-chargeable w.e.f. 10-9-2004.
Overview of Cenvat System
General highlights of the scheme are as follows :
Credit of duty paid on input and input services and capital goods - The Cenvat scheme is principally based on system of granting credit of duty paid on inputs, input services and capital goods. A provider of taxable output services has to charge service tax in his invoice as per normal procedure. However, he gets credit of (a) duty paid on inputs and capital goods and (b) service tax paid on input services. This is termed as Cenvat Credit. This Cenvat Credit can be used for payment of service tax on his output services.
Input services eligible for credit - An output service provider will be entitled to credit of service tax paid by him on input services, which are used by him directly or indirectly in or in relation to provision of output services. Even input services relating to setting up a office premises will be eligible. In addition to this, services like advertising, activities relating to business like accounting, auditing, storage, transport etc., which are only indirectly related to provision of output services would also be permitted for credit. In fact, all input services relating to all activities relating to business are eligible for Cenvat credit.
Inputs goods eligible for Cenvat to service provider - Credit will be available of excise paid on inputs used for providing output services, except high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol).
Cenvat on Capital Goods - Capital goods used for providing output taxable service will be available. Credit of duty paid on machinery, plant, spare parts of machinery, tools, dies, etc., is available. However, upto 50% credit is available in current year and balance in subsequent financial year or years. A service provider can take out capital goods from his premises, provided that he brings them back within 180 days. This period can be extended by Assistant/Deputy Commissioner.
Credit on motor vehicles used to provide output service - Motor vehicles are not ‘capital goods’ for purpose of ‘manufacture’, but credit on motor vehicles would be allowed as ‘capital goods’ only to the service providers of courier, tour operator, rent-a-cab scheme operator, cargo handling agency, outdoor caterer, pandal and shamiana operator and goods transport agency. Motor vehicle will not be treated as ‘capital goods’ for manufacturers or other service providers.
No Cenvat credit if output service exempt from service tax - No credit is available if output service is exempt from service tax.
Service provider providing exempted as well as unexempted services - If the service provider uses common inputs both for exempted as well as un-exempted services, he should maintain separate records for input services used for exempted output services and should not avail Cenvat on such inputs/input services. However, if he does not maintain separate records and inventories of inputs/input services used in exempted output services, he can utilise Cenvat credit only upto 20% of service tax payable on output service.
For example, assume that service tax payable on output service is Rs. 100. Service tax paid on input service is Rs. 15. These input services are used both for taxable output services and exempt/non-taxable output services. In such case, assessee can avail and utilise credit of entire Rs. 15. However, if tax paid on input services is Rs. 75, and these are used both for exempted and taxable services, then assessee can actually utilise credit of only Rs. 20. He will have to pay balance in cash, even if credit of Rs. 55 is still available in his books.
He can carry forward balance credit and can utilise it in subsequent month/s, if opportunity arises.
Credit on basis of specified documents - Cenvat Credit is to be availed only on the basis of specified documents as proof of payment of duty on inputs or tax on input services.
Input material Credit available instantly - Credit of excise duty on inputs can be taken up instantly, i.e. as soon as inputs reach the premises of service provider. In case of capital goods, upto 50% credit is available in current year and balance in subsequent financial year.
Credit of input service only after payment made to service provider - In case of input services, credit is available only after the amount of Bill is paid to person who had provided the service.
No cash Refund, except in case of exports - In some cases, it may happen that duty paid on inputs and service tax paid on input services may be more than tax payable on output services. In such cases, though the Cenvat credit will be available to the service provider, he cannot use the same and the same will lapse. There is no provision for refund of the excess Cenvat credit. The exception is that if output service is exported, rebate of input service tax and duty paid on inputs can be obtained.
One-to-one correlation not required - Cenvat rules do not require input-output co-relation to be established.
Input Service Distributor
In some cases, the bill/invoice is raised in the name of head office/regional office etc., but services are actually received in the premises of service provider. In addition, the Head Office/Regional Offices receive services which are not specific for any premises or service provider, such as advertising, market research, management consultancy etc. Bills in respect of such services would be received only in these offices.
To enable the service provider to avail credit of such input services, a concept of “input service distributor” has been introduced. The HO/Regional Office will have to register as ‘Input Service Distributor’ with Excise department. The HO/Regional Office will have to issue Invoice to the office providing service. The service provider can avail credit on basis of such invoice. It would be left to the assessee to decide as to how he distributes the credit among various service providing units. He has to ensure that the total credit allowed does not exceed the eligible credit amount.
As per rule 2(m), “input service distributor” means an office managing the business of manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.
Registration of Input Service Distributors - Existing Input Service Distributors were required to register before 16-7-2005. In case of new input Service Distributors, they should register within 30 days from commencement of business [Rule 3(1) of Service tax (Registration of Special Category of Persons) Rules, 2005]. He will have to file half yearly return within one month from close of half year in form ST-3 [Rule 9(10) of Cenvat Credit Rules amended w.e.f. 16-6-2005].
Inputs eligible for Cenvat
All goods, except (a) light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and (b) motor vehicles are eligible. These should be used for providing taxable output service.
Input service for purpose of Cenvat Credit
“Input service” means any service used by a provider of taxable service for providing an output service. - - It includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal [rule 2(l)].
Words ‘in relation to’ widen scope of input services - The words used in the definition are ‘in relation to’. ‘In relation’ expands the scope of coverage. It is not restrictive.
Wide coverage of ‘input service’
The services that will be covered are services in relation to -
Setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises
Advertisement or sales promotion
Market research
Storage upto the place of removal
Procurement of inputs
Activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.
Wide scope due to use of word ‘includes’ - The word used in Explanation is ‘includes’. The word ‘includes’ denotes that scope is expanded.
Credit only after payment to service provider
Credit of input services can be availed only after the output service provider makes payment of value of input services and the service tax payable on it, as shown in invoice of input service provider.
In case of input goods, credit is available as soon as goods are received in premises, but not so in case of credit of service tax.
Mere payment of service tax to service provider is not sufficient - Suppose the invoice is for Rs. 100 and service tax is Rs. 12.24, can you avail Cenvat credit if you pay only Rs.12.24 to the input service provider? The answer is no, as the words used are ‘value of input services and the service tax payable on it’.
Capital goods eligible for Cenvat credit
Following are the ‘capital goods’, vide Rule 2(a)(i) of Cenvat Credit Rules -
Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84 * Electrical machinery under chapter 85 * Measuring, checking and testing machines etc. falling under chapter 90 * Grinding wheels and the like goods falling under sub-heading No 6801.10 * Abrasive powder or grain on a base of textile material, falling under 68.02
Pollution control equipment
Components, spares and accessories of the goods specified above.
Moulds and dies
Refractories and refractory material
Tubes, pipes and fittings thereof, used in the factory
Storage Tank.
Use of capital goods for output service - The capital goods should be used for providing output service. If these are exclusively used to provide exempted services, credit of duty paid will not be available.
Sending capital goods outside for providing service
Service provider can send out capital goods for providing output service, but these should be brought back within 180 days [second proviso to Rule 3(5)]. Extension can be obtained from Assistant/Deputy Commissioner.
In fact, in case of large projects, it will be highly uneconomical to bring back the capital goods to the premises of service provider.
Hopefully, obtaining permission from AC/DC should not be a problem. If permission is rejected, reasoned order will have to be given. Order rejecting extension is an appealable order and appeal can be filed with Commissioner (Appeals).
Depreciation cannot be availed on Cenvat portion
Rule 4(4) of Cenvat Credit Rules clarifies that manufacture cannot avail depreciation in respect of excise portion e.g. if cost of ‘capital goods’ is Rs. 1.15 lakhs, out of which Rs. 0.15 lakh is duty paid, assessee can claim depreciation under Income Tax only on Rs. one lakh, if he has availed Cenvat credit of Rs. 0.15 lakh.
Credit to be availed in two stages of 50% each
Cenvat credit on capital goods is required to be availed in more than one year, viz. upto 50% credit can be availed when these are received and balance in any subsequent financial year. The condition for taking balance credit is that the capital goods should be in possession and use of final products in subsequent years.
The exception is that in case of consumables like spare parts, components, moulds and dies, refractories, refractory materials and grinding wheels, the balance credit can be availed in subsequent year, even if they are not in possession and use.
Duties and documents eligible for credit
All taxes and duties defined as ‘Cenvat Credit’ will be eligible.
Rule 3(1) states that following duties/taxes will be available as credit (hereinafter referred as Cenvat Credit). Thus, the term ‘Cenvat Credit’ used in various rules means aggregate of following duties and taxes:
Basic excise duty on indigenous inputs [Paid on goods specified in First Schedule to CETA]. Corresponding CVD on imported goods is allowable.
Education cess on manufactured excisable goods and CVD equal to education cess on imported goods. This credit can be utilised only for payment of education cess on final product or output services
National Calamity Contingent Duty (NCCD) leviable under section 136 of Finance Act, 2001 and corresponding CVD paid on imported goods. This credit can be used for payment of NCD on outputs only and not for any other duty.
Service tax on input services
Education cess paid on service tax. This credit can be utilised only for payment of education cess on final product or output services.
Additional Customs Duty paid under section 3(5) of Customs Tariff Act. This duty is imposed w.e.f. 1-3-2005. This credit will not be available to service providers. Proviso to rule 4(2)(a) of Cenvat Credit Rules makes it clear that even if the goods are ‘capital goods’, full 100% credit will be available in first year itself
Additional Excise duty paid under section 85 of Finance Act, 2005.
Basic duty and service tax on input services are inter-changeable, i.e. Credit of duty paid under one head can be utilised for payment of duty under other head.
Restrictions on taking Cenvat credit - Credit of any duty can be utilised for payment of any duty on final product. However, some exceptions are provided in rule 3(7). Thus, excluding these exceptions as explained below, input credit of any type of duty can be utilised for payment of any type of duty on final product.
In respect of service providers, Cenvat credit is restricted/denied in certain cases, as follows-
In respect of inputs/capital goods procured from EOU unit, Cenvat credit is available only partially as per formula - Rule 3(7)(a) of Cenvat Credit Rules
Cenvat credit of Education Cess can be utilised for payment of education cess only.
Education cess paid on input or input service can be utilised either for payment of education cess on output services or education cess on final product, but cannot be used for payment of other taxes.
Credit only upto input services, inputs and capital goods received upto end of month/quarter
Service tax is presently payable by 5th of following quarter in case of individual, proprietary firm or partnership firm, and by 5th of following month in case of other service providers except in month of March. However, first proviso to Cenvat Credit rule 3(4) states that only Cenvat credit available as on last day of the month can be utilised for payment of duty even if tax is payable by 5th of following month/quarter. Cenvat credit in respect of input services/inputs/capital goods received after end of month cannot be utilised while paying service tax on 5th of following month. The credit can be utilised in subsequent month only.
Eligible duty/tax paying documents
Credit can be taken on the basis of following documents -
Invoice of Manufacturer from factory
Invoice of manufacturer from his depot or premises of consignment agent
Invoice issued by registered importer
Invoice issued by importer from his premises or consignment registered with Central Excise
Invoice issued by registered first stage or second stage dealer
Supplementary Invoice
Bill of Entry
Certificate issued by an appraiser of customs in respect of goods imported through foreign post office
TR-6 Challan of payment of tax where service tax is payable by other than input service provider
Invoice, bill or challan issued by provider of input service on or after 10-9-2004
Invoice, Bill or Challan issued by input service provider under rule 4A of Service tax Rules.
Essential requirement of invoice - As per rule 9(2) of Cenvat Credit Rules, Cenvat credit cannot be denied as long as the document contains essential aspects of duty/tax payment i.e. -
payment of duty or service tax
description of goods or taxable service
assessable value
name and address of the factory or warehouse or provider of input service.
Thus, Cenvat cannot be denied if the documents contain these details and no permission/condonation is required if the invoice/bill/challan contains these basic details. Note that Serial Number is not a essential detail specified in rule 9(2).
The Cenvat Credit can be utilised for payment of any of following -
Payment of service tax on output services
Payment of ‘amount’ if inputs are removed as such or after partial processing [Rule 3(4)(b)]
Payment of ‘amount’ on capital goods if they are removed as such [Rule 3(4)(c)]
Payment of ‘amount’ if goods sent for job work are not returned within 180 days - Rule 4(5)(a).
Exempted output services
As per basic principle of VAT, credit of duty or tax can be availed only for payment of service tax on output services. As a natural corollary, if no duty is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed.
As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input service which is used in manufacture of exempted goods or exempted services.
Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit of that portion of input/input service will not be available.
Meaning of ‘exempted services’
As per rule 2(e), “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act.
Services on which no tax is payable are also ‘exempt services’ - For purpose of the definition of ‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted service’ for purpose of rule 6.
Returns to be submitted
A return has to be submitted to Range Superintendent of Central Excise in the prescribed form, as follows -
Half yearly return within one month from close of half year, by provider of output services [rule 9(9)]. The return should be in form ST-3.
Half yearly return within one month from close of half year, by Input Service Distributor [rule 9(10)] The return should be in form ST-3.
Revised return – There is no provision for submission of revised return. If assessee finds that he has made some mistake, he should pay the amount by TR-6 challan and inform department suitably. If he has paid excess amount by mistake, he is required to file refund claim. He cannot adjust excess payment on his own, except in few cases where it has been specifically permitted. If he has not taken Cenvat credit of certain inputs, input services or capital goods, he can avail it in subsequent period, since there is no time limit for availing Cenvat credit. This will be reflected in his return for that subsequent period, as in normal course.
Regards
arun k mishra
From India, Bahadurgarh
471. Background
Service tax is said to be tax of 21st century. This tax made a small beginning in 1994. Its scope is increasing every year. Service tax is presently payable @ 12% w.e.f. 18-4-2006 (plus education cess of 2% i.e. total 12.24%) on ‘taxable services’ i.e. those services which are specified in section 65(105) of Finance Act, 1994.
Rate of Service Tax
Section 66 of Finance Act, 1994 (which is a charging section) states that there shall be levied a tax (hereinafter referred to as the service tax) at the rate of 12% of value of taxable services referred in section 65(105) of Finance Act, 1994 [In addition, education cess @ 2% is payable].
This tax was first time introduced with effect from 1-7-1994 on three services. The rate was 5%. It was subsequently increased to 8% w.e.f. 14-5-2003. It was enhanced to 10% w.e.f. 10-9-2004. An education cess of 2% of service tax has been imposed vide section 95 of Finance (No. 2) Act, 2004, w.e.f. 10-9-2004.
Presently, service tax rate is 12% plus education cess of 2% (total 12.24%) w.e.f. 18-4-2006.
Education cess - Legally, you have to show service tax and education cess separately in invoice. You cannot just charge 12.24% as ‘service tax’. In that case, department can ask you to pay further 0.24% amount. You should also pay it by showing separate account head in TR-6 challan’, indicating appropriate code.
No TDS provisions
2. Service Provider
Section 65(105) of Finance Act, 1994 which defines each ‘taxable service’ states that the term ‘service provider’ shall be construed accordingly. Thus, service provider is one who provides taxable service as defined under section 65(105) of Finance Act, 1994.
In most of the cases, service provider, i.e. person who is providing taxable service is liable to pay service tax. However, in few cases, exceptions have been made and other person is made liable to pay service tax.
The major exceptions are as follows - (a) When service provider is non-resident, service receiver is liable (b) In case of service of Goods Transport Agency (GTA), consignor/consignee who is paying freight is liable (c) In case of insurance agents and mutual fund agents, insurance company and mutual fund are liable (d) In case of sponsorship service provided to a body corporate or firm, the body corporate or firm receiving such sponsorship service will be liable. These are discussed in a later chapter under ‘Procedures’.
As per section 65(105) which specifies various taxable services, in many cases, service is taxable if service is provided by ‘any person’. In some case, service is taxable if provided to ‘client’ or customer’. In some cases, service is taxable if provided to ‘any person’. Hence, tax liability will often depend on who is service provider and service receiver.
Any person - In many cases, service is taxable if provided by ‘any person’. This would include individual, partnership firm, HUF, society, company, body corporate, charitable institutions, cooperative society or Central/State Government.
Section 3(42) of General Clauses Act states that ‘person’ shall include any company or association or body of individuals, whether incorporated or not.
Unincorporated association or body is taxable - An explanation inserted after section 65(121) by Finance Act, 2006, w.e.f. 1-5-2006, states that taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration.
Thus, an unincorporated association providing service to its members can also be ‘a person’ for purpose of service tax.
3. Service Receiver
In many cases, the service is taxable only when it is provided to a ‘client’ or to a ‘customer’. These words are not defined under the Act and hence these words have to be understood as per in common parlance, i.e. by persons in the relevant trade who use them.
Client - As per Oxford Dictionary, ‘client’ means (1) a person using the services of a lawyer, architect, social worker or other professional person. (2) a customer.
Other definitions of the word ‘client’ are as follows - (a) A person using the services of a professional person or organization [Concise Oxford Dictionary] (b) One who engages the services of any professional adviser (Webster’s Concise Dictionary) (c) A person who employs or retains an attorney, or counsellor, to appear for him in courts, advise, assist and defend him in legal proceedings, and to act for him in any legal business; an individual, corporation, trust or estate that employs a professional to advise or to assist it in the professional’s line of work, professionals include but are not limited to attorneys, accountants, architects etc. [Black’s Law Dictionary]
Dictionary meaning of the word ‘client’ suggest that a ‘client’ is a person who hires, engages or employs services of a professional - Pfizer Ltd. v. CCE (2005) 2 STT 77 (CESTAT).
Customer - As per Oxford dictionary, ‘customer’ means a person who buys goods or services from a shop or business. As per Black’s Law Dictionary, ‘customer’ is one who regularly or repeatedly makes purchases of, or has business dealings with a tradesman or business. Ordinarily one who has repeated business dealings with another; a buyer, purchaser, consumer or patron.
4. Value
New section 67, introduced w.e.f. 18th April, 2006 makes elaborate provisions for valuation for purpose of levy of service tax. Provision has been made for valuation rules.
Highlights of provisions of valuation under section 67
The highlights of new provisions of section 67 are as follows -
Service tax is payable on gross amount charged by service provider for service provided or ‘to be provided’. Thus, tax is payable as soon as advance is received.
‘Value of taxable service’ plus service tax payable is equal to ‘gross amount charged’ [section 67(2)].
Where the consideration for providing services is entirely in money, gross amount charged by service provider of taxable service provided or to be provided by him will be relevant for ‘valuation’ [section 67(1)(i)].
Where the consideration for providing services is not wholly or partly in terms of money, service tax is payable on amount of money, which with addition of tax service tax charged, is equivalent to the consideration [section 67(1)(ii)].
Where consideration is not ascertainable, valuation will be on basis of Valuation Rules [section 67(1)(iii)]
If gross amount charged by service provider is inclusive of service tax (i.e. service tax not charged separately in invoice), value of taxable service will be calculated by back calculations such that with addition of service tax payable, the total is equal to the gross amount charged [section 67(2)].
Gross amount charged for taxable services can be before, during or after provision of service [section 67(3)].
Valuation will be as per Valuation Rules, subject to section 67(1), 67(2) and 67(3) [section 67(4)]. Thus, valuation can be only with reference to valuation rules.
Highlights of service tax valuation rules
In exercise of powers under section 67, Service tax (Determination of Value) Rules, 2006 have been issued w.e.f. 19-4-2006. The Service tax Valuation Rules provide as follows -
If consideration is not wholly or partly consisting of money, value will be determined by service provider in terms of rule 3.
As per rule 3(a) of Service Tax Valuation Rules, Valuation shall be on basis of gross amount charged by service provider for similar services.
If value cannot be determined on basis of rule 3(a), valuation shall be on basis of equivalent money value of such consideration, which shall not be less than cost of provision of such services [rule 3(b) of Service Tax Valuation Rules]
Central Excise Officer can reject ‘value’ determined by service provider and determine ‘value’ for purpose of service tax payment [rule 4].
Rules 5 and 6 make provisions for certain specific inclusions and exclusions for valuation
Payments made by service provider as agent of service receiver and recovered from service receiver are excluded for purpose of valuation [rule 5(2)]
In case of services provided from outside India, actual consideration received will be relevant for valuation [rule 7(1)].
Value to be determined by service provider
Rule 3 of Valuation Rules makes it clear that value of taxable service shall be determined by service provider. Thus, responsibility of valuation has been cast on service provider. However, rule 4 authorises Central Excise Officer to reject the value as determined by service provider and determine the ‘value’, after following principles of natural justice.
Value when consideration is partly or fully in money
Service tax chargeable on any taxable service is on basis of gross amount charged by service provider for ‘such’ service provided or to be provided by him, when provision of service is for a consideration in money [section 67(1)(i)].
If consideration is partly in money, valuation will be on basis of ‘amount equivalent to consideration’ as provided in section 67(1)(ii).
If value of consideration cannot be ascertained, ‘value’ will be calculated by applying valuation rules, as provided in section 67(1)(iii).
Charge should be for taxable service
The charge should be for taxable service provided or to be provided. Thus, if any other amount is charged which is not for taxable service provided or to be provided, service tax will not be payable on such charge.
Meaning of ‘gross amount charged’ and ‘money’
These terms are defined as follows -
“Gross amount charged” includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment [explanation (c) to section 67]. This is an inclusive definition and hence will include other items (e.g. consideration received other than in cash).
“Money” includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers cheque, money order, postal remittance and other similar instruments but does not include currency that is held for its numismatic value [explanation (b) to section 67]
Amount may be charged to any one, not necessarily to service receiver
The words used in section 67(1)(i) of the Act are ‘charged for such service provided or to be provided by him’. Thus, the charge may be to anyone. It is not necessary that ‘charge’ should be only to receiver of service. Even if amount is ‘charged’ to some other person and not to receiver of service, service tax will become payable
Amount need not be ‘charged’ by service provider - money paid to third party may also be includible
It is not necessary that the money should be paid to service provider himself. Amount paid even to third party is includible in ‘value’ of service if it is for provision of service and at the instance of service provider.
It is true that section 67(1)(i) uses the words ‘amounts charged by service provider’. However, that sub-section applies only when the entire consideration for service is given in form of money. If part consideration is not paid in terms of money, the money equivalent of the total consideration will be considered for purpose of ‘value’ of taxable service, as provided in section 67(1)(ii).
For example, if travelling and hotel expenses of service provider (like maintenance engineer or auditor or consulting engineer) are paid by service receiver directly to hotel or travel agency, it will still be part of ‘value’ for taxable service, since those expenses are incurred for availing the service [As discussed later, definition of ‘consideration’ also makes it clear that consideration need not be received by the service provider himself].
Amount may be received before, during or after provision of service
Section 67(3) provides that the gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after the provision of such service. This provision is identical with Explanation 3 of the pre-amended section 67 which had come into force with effect from 13-5-2005, and was effective upto 18-4-2006.
Part of a service cannot be treated as a ‘taxable service’
A service has to be a predominantly taxable service for levy of service tax. The tax cannot be levied if a composite service consists of some part which is taxable.
In Daelim Industrial Co. v. CCE 2003 STT 438 = 155 ELT 457 = 57 RLT 636 (CEGAT), it was held that a works contract cannot be vivisected and part of it subjected to tax (SLP filed by department dismissed by SC - (2004) 170 ELT A181). This decision was followed in Larsen & Toubro Ltd. v. CCE (2005) 1 STT 183 = 174 ELT 322 = 60 RLT 505 (CESTAT), in respect of design element of works contract (departmental appeal against the decision in L&T’s case admitted by SC on 11-10-2004 - 182 ELT A149) - also followed in Ircon International Ltd. v. CCE (2005) 2 STT 264 = 1 STR 46 (CESTAT).
Tax on payments received in advance from customers
Till 13th May, 2005, section 67 provided that value of taxable service shall be the gross amount charged for services rendered by him. The section 67, as amended w.e.f. 13-5-2005, provided that value of taxable service shall be gross amount charged by service provider for taxable service provided or to be provided by him. Explanation 3 was added to this section w.e.f. 13-5-2005, which specifically declares for removal of doubt, that gross amount charged for taxable service shall include any amount received towards the taxable service before, during or after provision of taxable service.
Section 67(1)(i) (as substituted w.e.f. 18-4-2006), also provides for payment of tax on ‘service provided or to be provided’.
Section 65(105), as amended w.e.f. 16-6-2005 starts with words ‘taxable service means any service provided or to be provided’.
After 13th May 2005, service tax will be payable as soon as advance is received, even if service is provided later - view confirmed in MF(DR) circular No. B1/6/2005-TRU dated 27-7-2005 para 27. Till 13th May 2005, the provision was that service tax was payable only when service is actually provided.
Rule 4A(1) of Service Tax Rules, as amended w.e.f. 1-4-2005 provides that every person providing taxable service shall issue an invoice, bill or challan within 14 days from date of completion of such taxable service or receipt of any payment towards value of the taxable service, whichever is earlier. Rule 6(1) has also been amended w.e.f. 1-4-2005 to provide for payment of service tax to credit of Central Government by 5th of following month in which payments are received towards taxable services.
Thus, service tax will be payable on advance received also w.e.f. 13th May 2005.
Tax payable only on amount actually received
Rule 6(1) of Service Tax Rules makes it clear that service tax is payable on value of taxable services received. Thus, if service provider does not receive any payment from his customer, there is no liability of service tax. Service tax is payable only on ‘value of taxable service’ actually ‘received’, and not on amount ‘billed’.
If the service receiver does not pay full amount of Bill and pays less amount, reasonable interpretation is that proportionately less tax is payable.
Gross amount to be inclusive of service tax
Section 67(2) provides that where gross amount charged by a service provider is inclusive of service tax payable, the ‘value’ of taxable service will be such amount as, with addition of service tax payable, is equal to the gross amount charged [same provision in explanation 2 to earlier section 67].
The service provider is required to show service tax separately in his invoice/bill, since provisions of section 12A of Central Excise have been made applicable to service tax. This is also required as per Rule 5(1) of Service Tax Credit Rules. This is also required to enable the service recipient to claim credit of service tax paid by the service provider.
Calculation of service tax by back calculations
The gross amount charged can be taken as inclusive of service tax and the ‘value’ and ‘service’ tax is to be calculated by back calculations.
For example, if Bill amount is Rs. 1,000 and service tax is not shown separately in Invoice, the tax payable is not Rs. 122.40, but Rs. 109.05 and Assessable Value is Rs. 890.95 (Check that 12.24% of Rs. 890.95 is Rs. 109.05 and total of Rs. 890.95 plus Rs. 109.05 is Rs. 1,000. In invoice, Rs. 106.91 will be service tax and Rs. 2.14 as education cess.).
The simple mathematical formula is as follows -
Assessable Value = (Cum tax price)/(1 + rate of tax)
Exclusion of value of material
Notification No. 12/2003-ST dated 20-6-2003 provides that if the amount charged includes value of goods and materials sold, service tax will not be payable on value of goods and materials sold. There should be documentary evidence showing value of goods and materials sold. This exemption is available only if Cenvat credit of such material is not taken. If such credit was taken, assessee should pay amount equal to the credit. Such payment should be before sale of such goods and materials.
Though the words used are ‘pay the amount’, it should be sufficient if the Cenvat taken is reversed in Cenvat credit records.
Abatement in certain cases from gross value of contract
In some cases, abatement has been provided from gross value of contract by way of an exemption notification, e.g. in case of construction services, service tax is payable on 33% of value of gross amount including of material, in case of outdoor catering contracts, service tax is payable on 50% of amount etc. Thus, exemption notifications have been used as ‘valuation provisions’.
The so called ‘exemption notification’ is on the assumption that in absence of such ‘exemption’, service tax would be payable on value of such goods also. This is incorrect as tax is payable only on ‘value of service’ and not on ‘gross value of contract’.
Abatement is provided of certain percentage, probably on the presumption that the abated amount represents value of material. ‘Exemption’ is granted in respect of certain value which is not taxable at all in the first place. You cannot ‘exempt’ something which is not taxable at all.
Valuation when value of consideration cannot be ascertained
Section 67(1)(ii) can apply only when value of consideration, though not in terms of money, is ascertainable. If value of such consideration is not ascertainable, valuation will be by application of Valuation Rules.
Provision when consideration is not even partly in money
Rule 3 has application only when consideration is not wholly or partly consisting of money. Thus, strictly legally, rule 3 has no application when at least part consideration is in money. However, even when consideration is partly in other than money, valuation has to be done by applying valuation rules, if value of such consideration is not ascertainable.
Hence, the principles of rule 3 can apply to determine ‘value’ even in cases where consideration is partly in terms of money.
Valuation on basis of Equivalent money value of consideration
Rule 3(b) provides that where the value cannot be determined in accordance with clause (a) [i.e. rule 3(a) on basis of value of similar service], the service provider shall determine the equivalent money value of such consideration which shall, in no case be less than the cost of provision of such taxable service.
Thus, if value of similar services cannot be ascertained, the ‘value’ will be ‘equivalent value of consideration’. Such ‘equivalent value’, to be determined by service provider himself, shall not be less than cost of provision of such service.
Rules make no provision for method of calculation of ‘cost’ of the taxable services. There is presently no specific guideline from the Institute of Cost and Works Accountants of India (ICWAI) for the purpose of computing the cost of provision of services. Hence, such ‘cost’ should be determined on the basis of normal principles of costing.
‘Cost’ will have to be worked out on basis of usual costing principles of normal costs and allocation of normal overheads. Certificate of Cost/Chartered Accountant may be obtained for this purpose.
All expenditure and costs relating to provision of service incurred by service provider are includible
Rule 5(1) provides that where certain expenditure or costs are incurred by the service provider in the course of providing any taxable service, all such expenditure or costs shall be treated as consideration for the taxable services provided or to be provided and shall be included in the ‘value’ for purpose of charging of service tax on the said service.
This is a general rule which makes it clear that, even when such expenditure or costs are recovered separately by service provider from service receiver, such expenditure or costs must be included in the value of taxable service.
However, expenditure incurred by service provider as ‘pure agent’ of service receiver is not includible, as per rule 5(2). This aspect is discussed later.
‘Out of pocket’ expenses incurred are includible
The service provider often claims reimbursement of certain expenses incurred by him (like travelling, boarding and lodging, etc.) while providing a taxable service. These are often termed as ‘out of pocket’ expenses.
Department had clarified that out of pocket expenses like travelling, boarding and lodging on reimbursable basis are not subject to service tax. Assessee will have to provide documentary evidence substantiating his claim from the gross amount. It is clarified that this is applicable in respect of all the services - Pune-I Commissionerate TN 8/98-ST dated 13-10-1998 - parallel Indore TN 5/98-ST dated 14-10-1998.
This position will now not apply under the new Valuation Rules and all such expenses will be includible in ‘value’ of taxable service. All earlier departmental circulars regarding valuation have been withdrawn as per para 4.1.13 of MF(DR) circular No. B1/4/2006-TRU dated 19-4-2006.
Para 4.1-7 of MF(DR) circular No. B1/4/2006-TRU, dated 19-4-2006, reads as follows ‘Value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenditures or costs incurred by the service provider in the course of providing a taxable service forms integral part of the taxable value and are includible in the value. It is not relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client’.
Reimbursement of expenses incurred on behalf of service receiver not includible
Often, a service provider incurs some expenditure on behalf of service receiver and then recovers the amount from him. Such expenditure is not part of service provided by him to service receiver, but is incurred by him as per business practice or convenience. Following illustrations may clarify the provisions -
Octroi/entry tax amount paid by Clearing & Forwarding Agent, CHA or Transporter on behalf of owner of goods/Principal
Customs duty, dock dues, demurrage, transport charges etc. paid by Customs House Agent on behalf of client.
Advertisement charges paid by Advertising Agency to newspaper on behalf of clients.
Ticket charges paid by Travel Agent and recovered from his customer.
These are not part of service provided and hence are not includible. Rule 5(2) provides that the expenditure or costs that a service provider incurs, as a pure agent of the client, shall be excluded from the value if such service provider fulfils prescribed conditions.
The principle is also discernible from various exclusions as contained in rule 6(2).
Conditions to be satisfied for exclusion from ‘value’
Expenditure or costs incurred by service provider are not includible only if following conditions are satisfied :
the service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or services procured;
the recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;
the recipient of service is liable to make payment to the third party;
the recipient of service authorises the service provider to make payment on his behalf;
the recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;
the payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;
the service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and the goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.
Meaning of ‘Pure agent’
Explanation 1 to the rule 5 provides that for the purpose of rule 5(2), ‘pure agent’ means a person who—
enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;
neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;
does not use such goods or services so procured; and
receives only the actual amount incurred to procure such goods or services.
If he charges something extra, only that extra amount should be taxable and not entire amount, since that extra amount is for his services.
Value of material supplied is not includible
Clauses (vi) and (vii) of explanation 1 to earlier section 67 (existing upto 18-4-2006) provided that cost of part and materials supplied during provision of services of maintenance, repair, erection, commissioning or installation services will not be includible. Clause (ii) of explanation to earlier section 67 provided that cost of unexposed photography film, unrecorded magnetic tapes or such storage devices sold to client during course of providing service is not includible.
New section 67 does not have these provisions. These clauses have not been incorporated in rule 6(2). However, it does not mean that service tax can be imposed on value of goods or services. Even under new section 67, service tax is payable only on gross amount charged for ‘such service provided’.
5. Exemption from service tax
Central Government can grant partial or total exemption, by issuing an ‘exemption notification’ u/s 93 of Finance Act, 1994. Such exemption may be partial or total. Exemption may be conditional or unconditional. The only limitation is that exemption cannot be granted by Central Government with retrospective effect. There are following general exemptions -
Small service providers - Small units whose turnover less than Rs. four lakhs per annum are exempt from service tax.
Export of Services - There is no service tax on export of services, if service is exported as per ‘Export of Service Rules’.
Services to UN Agencies/SEZ - Services provided to UN and International Agencies and supplies to SEZ or developer are exempt [Notification No. 16/2002-ST dated 2-8-2002 in respect of UN and International Agencies and Notification No. 4/2004-ST dated 31-3-2004 in respect of SEZ - earlier No. 17/2002-ST dated 21-11-2002].
Services provided by RBI exempt - Exemption form service tax has been provided to all taxable services provided by Reserve Bank of India. (Notification No. 7/2006-ST dated 1.3.2006).
Goods and materials supplied while providing service - Service tax is not payable on value of goods and material supplied to the service recipient while providing service. There should be evidence about its value. Such exclusion is permissible only if Cenvat credit on such goods and material is not taken [This has been discussed in earlier chapter].
General Exemption to small service providers
The small service providers whose turnover of taxable services from one or more premises did not exceed Rs. four lakhs in previous year will be exempt from service tax in next financial year upto the turnover of Rs. 4 lakhs. The provisions are prescribed in Notification No. 6/2005-ST dated 1-3-2005.
Specific Exemptions
In case of some services, service tax is payable at lower rates, i.e. partial abatement is available from gross value. The lower rate is applicable if the service provider does not avail Cenvat credit of duty/tax on inputs, input services and capital goods.
Till 28-2-2006, he was entitled to avail Cenvat credit on input services. W.e.f. 1-3-2006, he cannot avail any Cenvat credit, if he avails the partial abatement.
Some important exemptions are as follows –
Some important exemptions are as follows –
Taxable Service
Partial abatement available
Relevant Notification w.e.f. 1.3-2006
Accommodation booking service by tour operator
10% of gross amount charged
1/2006-ST dated 1-3-2006.
Air Travel Agent
Option to pay service tax at flat rate on ‘basic fare’ @ 0.6% in case of domestic booking and 1.2% in case of international booking
rule 6(7)
Business Auxiliary Service in relation to processing of parts and accessories used in manufacture of cycle, cycle rickshaws and hand operated sewing machines
Tax on 70% of gross amount if gross amount is inclusive of cost of inputs and input services, whether or not supplied by the client (Is it exemption or punishment?)
1/2006-ST dated 1-3-2006.
Commissioning and installation services
Tax on 33% of gross amount if gross amount includes value of material
1/2006-ST dated 1-3-2006.
Construction Service
Tax on 33% of gross amount if gross amount includes value of material
1/2006-ST dated 1-3-2006.
Goods Transport Agency (GTA)
Tax only on 25% amount in his invoice [Payment will be made by consignor/consignee who is actually paying freight]
1/2006-ST dated 1-3-2006.
Mandap keeper, hotels and convention services, providing full catering services
Tax on 60% gross amount charged
1/2006-ST dated 1-3-2006.
Outdoor caterer
Tax on 50% amount if he provides full and substantial meal
1/2006-ST dated 1-3-2006.
Package tours and other than package tour
Tax is payable only on 40% of gross amount charged
1/2006-ST dated 1-3-2006.
Pandal and shamiana Service
70% of gross amount charged if full catering service provided
1/2006-ST dated 1-3-2006.
Rent-a-cab operator
Tax payable on 40% of gross amount charged
1/2006-ST dated 1-3-2006.
Transport of goods in container by rail
Tax payable on 30% of gross amount charged
1/2006-ST dated 1-3-2006.
These exemptions appear to be on the assumption that service tax is otherwise payable on the value of goods used in providing taxable service. This assumption seems to be of doubtful validity, as section 67 (which is a valuation section) makes it clear that tax is payable on gross amount charged for the taxable service. Service tax is not payable on total value of contract.
6. Classification
There are various types of services on which service tax is payable. These are specified in various sub-clauses of section 65(105). It is possible that a service may appear to be classifiable under more than one headings.
It is necessary to specify the heading under which the service being provided is falling. This is termed as ‘classification’. Presently, this does not have much revenue significance, as service tax rate is uniform for all types of services. However, the classification will become important if different tax rates are specified for different services or provisions in respect of ‘Export of Service’ or ‘Cenvat Credit’ differ.
The classification of services will be determined according to terms specified in various sub-clauses of section 65(105). [section 65A(1)]. If prima facie, a taxable service is classifiable under two or more sub-clauses of section 65(105), classification shall be effected as per following rules.
u Specific description to be preferred over a general description
u Classification should be as per essential character in case of composite services.
u Service which appears earlier in list, if service cannot be classified on above basis
Specific description to be preferred
The sub-clause which provides most specific description should be preferred over sub-clauses providing a more general description. [section 65A(2)(a)].
Classification as per Essential character in case of composite services
Composite services are those consisting of combination of different services. In case of such services, if the service cannot be classified on the basis of specific description as per section 65A(2)(a) above, it shall be classified as if they consisted of a service which gives them their essential character [section 65A(2)(b)].
In brief, composite services should be classified on basis of ‘essential character’, if no specific description can be found for such specific services.
Service which appears earlier in list, if service cannot be classified on above basis
If a service cannot be classified on basis of above provisions, the service should be classified under sub-clause which occurs first among the sub-clauses which equally merit consideration [section 65A(2)(c)].
In other words, in case of more than one descriptions where services can be classified, it should be classified under sub-clause which appears first in section 65(105)], if it cannot be classified on basis of specific description or essential character. [In case of CETA and Customs Tariff, in such cases, product is required to be classified under heading which appears last in Tariff, i.e. latter the better].
Tax payable only once
Even if a service can fall under more than one headings, service tax is payable only once. If one service provider is providing more than one taxable service, he need to take only one registration. However, the certificate shall be endorsed for all taxable services and tax liability will have to be discharged separately for each of the taxable services separately. - CBE&C circular No. 51/13/2002-ST dated 7-1-2003.
7. Cenvat and Service tax
The system of VAT was introduced in Central Excise in 1986. The concept was also introduced in case of Service Tax in 2002. However, these two were independent of each other.
Since both excise (goods tax) and service tax are under Central Government, the Government intends to integrate these two taxes. Full integration of goods and service tax will take considerable time, as it can be achieved only after political consensus is achieved. However, a beginning has been made by making credit of service tax and excise duty inter-chargeable w.e.f. 10-9-2004.
Overview of Cenvat System
General highlights of the scheme are as follows :
Credit of duty paid on input and input services and capital goods - The Cenvat scheme is principally based on system of granting credit of duty paid on inputs, input services and capital goods. A provider of taxable output services has to charge service tax in his invoice as per normal procedure. However, he gets credit of (a) duty paid on inputs and capital goods and (b) service tax paid on input services. This is termed as Cenvat Credit. This Cenvat Credit can be used for payment of service tax on his output services.
Input services eligible for credit - An output service provider will be entitled to credit of service tax paid by him on input services, which are used by him directly or indirectly in or in relation to provision of output services. Even input services relating to setting up a office premises will be eligible. In addition to this, services like advertising, activities relating to business like accounting, auditing, storage, transport etc., which are only indirectly related to provision of output services would also be permitted for credit. In fact, all input services relating to all activities relating to business are eligible for Cenvat credit.
Inputs goods eligible for Cenvat to service provider - Credit will be available of excise paid on inputs used for providing output services, except high speed diesel oil (HSD), Light Diesel Oil (LDO) and motor spirit (petrol).
Cenvat on Capital Goods - Capital goods used for providing output taxable service will be available. Credit of duty paid on machinery, plant, spare parts of machinery, tools, dies, etc., is available. However, upto 50% credit is available in current year and balance in subsequent financial year or years. A service provider can take out capital goods from his premises, provided that he brings them back within 180 days. This period can be extended by Assistant/Deputy Commissioner.
Credit on motor vehicles used to provide output service - Motor vehicles are not ‘capital goods’ for purpose of ‘manufacture’, but credit on motor vehicles would be allowed as ‘capital goods’ only to the service providers of courier, tour operator, rent-a-cab scheme operator, cargo handling agency, outdoor caterer, pandal and shamiana operator and goods transport agency. Motor vehicle will not be treated as ‘capital goods’ for manufacturers or other service providers.
No Cenvat credit if output service exempt from service tax - No credit is available if output service is exempt from service tax.
Service provider providing exempted as well as unexempted services - If the service provider uses common inputs both for exempted as well as un-exempted services, he should maintain separate records for input services used for exempted output services and should not avail Cenvat on such inputs/input services. However, if he does not maintain separate records and inventories of inputs/input services used in exempted output services, he can utilise Cenvat credit only upto 20% of service tax payable on output service.
For example, assume that service tax payable on output service is Rs. 100. Service tax paid on input service is Rs. 15. These input services are used both for taxable output services and exempt/non-taxable output services. In such case, assessee can avail and utilise credit of entire Rs. 15. However, if tax paid on input services is Rs. 75, and these are used both for exempted and taxable services, then assessee can actually utilise credit of only Rs. 20. He will have to pay balance in cash, even if credit of Rs. 55 is still available in his books.
He can carry forward balance credit and can utilise it in subsequent month/s, if opportunity arises.
Credit on basis of specified documents - Cenvat Credit is to be availed only on the basis of specified documents as proof of payment of duty on inputs or tax on input services.
Input material Credit available instantly - Credit of excise duty on inputs can be taken up instantly, i.e. as soon as inputs reach the premises of service provider. In case of capital goods, upto 50% credit is available in current year and balance in subsequent financial year.
Credit of input service only after payment made to service provider - In case of input services, credit is available only after the amount of Bill is paid to person who had provided the service.
No cash Refund, except in case of exports - In some cases, it may happen that duty paid on inputs and service tax paid on input services may be more than tax payable on output services. In such cases, though the Cenvat credit will be available to the service provider, he cannot use the same and the same will lapse. There is no provision for refund of the excess Cenvat credit. The exception is that if output service is exported, rebate of input service tax and duty paid on inputs can be obtained.
One-to-one correlation not required - Cenvat rules do not require input-output co-relation to be established.
Input Service Distributor
In some cases, the bill/invoice is raised in the name of head office/regional office etc., but services are actually received in the premises of service provider. In addition, the Head Office/Regional Offices receive services which are not specific for any premises or service provider, such as advertising, market research, management consultancy etc. Bills in respect of such services would be received only in these offices.
To enable the service provider to avail credit of such input services, a concept of “input service distributor” has been introduced. The HO/Regional Office will have to register as ‘Input Service Distributor’ with Excise department. The HO/Regional Office will have to issue Invoice to the office providing service. The service provider can avail credit on basis of such invoice. It would be left to the assessee to decide as to how he distributes the credit among various service providing units. He has to ensure that the total credit allowed does not exceed the eligible credit amount.
As per rule 2(m), “input service distributor” means an office managing the business of manufacturer or producer of final products or provider of output service, which receives invoices issued under rule 4A of the Service Tax Rules, 1994 towards purchases of input services and issues invoice, bill or, as the case may be, challan for the purposes of distributing the credit of service tax paid on the said services to such manufacturer or producer or provider, as the case may be.
Registration of Input Service Distributors - Existing Input Service Distributors were required to register before 16-7-2005. In case of new input Service Distributors, they should register within 30 days from commencement of business [Rule 3(1) of Service tax (Registration of Special Category of Persons) Rules, 2005]. He will have to file half yearly return within one month from close of half year in form ST-3 [Rule 9(10) of Cenvat Credit Rules amended w.e.f. 16-6-2005].
Inputs eligible for Cenvat
All goods, except (a) light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and (b) motor vehicles are eligible. These should be used for providing taxable output service.
Input service for purpose of Cenvat Credit
“Input service” means any service used by a provider of taxable service for providing an output service. - - It includes services used in relation to setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, advertisement or sales promotion, market research, storage upto the place of removal, procurement of inputs, activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal [rule 2(l)].
Words ‘in relation to’ widen scope of input services - The words used in the definition are ‘in relation to’. ‘In relation’ expands the scope of coverage. It is not restrictive.
Wide coverage of ‘input service’
The services that will be covered are services in relation to -
Setting up, modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises
Advertisement or sales promotion
Market research
Storage upto the place of removal
Procurement of inputs
Activities relating to business, such as accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, inward transportation of inputs or capital goods and outward transportation upto the place of removal.
Wide scope due to use of word ‘includes’ - The word used in Explanation is ‘includes’. The word ‘includes’ denotes that scope is expanded.
Credit only after payment to service provider
Credit of input services can be availed only after the output service provider makes payment of value of input services and the service tax payable on it, as shown in invoice of input service provider.
In case of input goods, credit is available as soon as goods are received in premises, but not so in case of credit of service tax.
Mere payment of service tax to service provider is not sufficient - Suppose the invoice is for Rs. 100 and service tax is Rs. 12.24, can you avail Cenvat credit if you pay only Rs.12.24 to the input service provider? The answer is no, as the words used are ‘value of input services and the service tax payable on it’.
Capital goods eligible for Cenvat credit
Following are the ‘capital goods’, vide Rule 2(a)(i) of Cenvat Credit Rules -
Tools, hand tools, knives etc. falling under chapter 82 * Machinery covered under chapter 84 * Electrical machinery under chapter 85 * Measuring, checking and testing machines etc. falling under chapter 90 * Grinding wheels and the like goods falling under sub-heading No 6801.10 * Abrasive powder or grain on a base of textile material, falling under 68.02
Pollution control equipment
Components, spares and accessories of the goods specified above.
Moulds and dies
Refractories and refractory material
Tubes, pipes and fittings thereof, used in the factory
Storage Tank.
Use of capital goods for output service - The capital goods should be used for providing output service. If these are exclusively used to provide exempted services, credit of duty paid will not be available.
Sending capital goods outside for providing service
Service provider can send out capital goods for providing output service, but these should be brought back within 180 days [second proviso to Rule 3(5)]. Extension can be obtained from Assistant/Deputy Commissioner.
In fact, in case of large projects, it will be highly uneconomical to bring back the capital goods to the premises of service provider.
Hopefully, obtaining permission from AC/DC should not be a problem. If permission is rejected, reasoned order will have to be given. Order rejecting extension is an appealable order and appeal can be filed with Commissioner (Appeals).
Depreciation cannot be availed on Cenvat portion
Rule 4(4) of Cenvat Credit Rules clarifies that manufacture cannot avail depreciation in respect of excise portion e.g. if cost of ‘capital goods’ is Rs. 1.15 lakhs, out of which Rs. 0.15 lakh is duty paid, assessee can claim depreciation under Income Tax only on Rs. one lakh, if he has availed Cenvat credit of Rs. 0.15 lakh.
Credit to be availed in two stages of 50% each
Cenvat credit on capital goods is required to be availed in more than one year, viz. upto 50% credit can be availed when these are received and balance in any subsequent financial year. The condition for taking balance credit is that the capital goods should be in possession and use of final products in subsequent years.
The exception is that in case of consumables like spare parts, components, moulds and dies, refractories, refractory materials and grinding wheels, the balance credit can be availed in subsequent year, even if they are not in possession and use.
Duties and documents eligible for credit
All taxes and duties defined as ‘Cenvat Credit’ will be eligible.
Rule 3(1) states that following duties/taxes will be available as credit (hereinafter referred as Cenvat Credit). Thus, the term ‘Cenvat Credit’ used in various rules means aggregate of following duties and taxes:
Basic excise duty on indigenous inputs [Paid on goods specified in First Schedule to CETA]. Corresponding CVD on imported goods is allowable.
Education cess on manufactured excisable goods and CVD equal to education cess on imported goods. This credit can be utilised only for payment of education cess on final product or output services
National Calamity Contingent Duty (NCCD) leviable under section 136 of Finance Act, 2001 and corresponding CVD paid on imported goods. This credit can be used for payment of NCD on outputs only and not for any other duty.
Service tax on input services
Education cess paid on service tax. This credit can be utilised only for payment of education cess on final product or output services.
Additional Customs Duty paid under section 3(5) of Customs Tariff Act. This duty is imposed w.e.f. 1-3-2005. This credit will not be available to service providers. Proviso to rule 4(2)(a) of Cenvat Credit Rules makes it clear that even if the goods are ‘capital goods’, full 100% credit will be available in first year itself
Additional Excise duty paid under section 85 of Finance Act, 2005.
Basic duty and service tax on input services are inter-changeable, i.e. Credit of duty paid under one head can be utilised for payment of duty under other head.
Restrictions on taking Cenvat credit - Credit of any duty can be utilised for payment of any duty on final product. However, some exceptions are provided in rule 3(7). Thus, excluding these exceptions as explained below, input credit of any type of duty can be utilised for payment of any type of duty on final product.
In respect of service providers, Cenvat credit is restricted/denied in certain cases, as follows-
In respect of inputs/capital goods procured from EOU unit, Cenvat credit is available only partially as per formula - Rule 3(7)(a) of Cenvat Credit Rules
Cenvat credit of Education Cess can be utilised for payment of education cess only.
Education cess paid on input or input service can be utilised either for payment of education cess on output services or education cess on final product, but cannot be used for payment of other taxes.
Credit only upto input services, inputs and capital goods received upto end of month/quarter
Service tax is presently payable by 5th of following quarter in case of individual, proprietary firm or partnership firm, and by 5th of following month in case of other service providers except in month of March. However, first proviso to Cenvat Credit rule 3(4) states that only Cenvat credit available as on last day of the month can be utilised for payment of duty even if tax is payable by 5th of following month/quarter. Cenvat credit in respect of input services/inputs/capital goods received after end of month cannot be utilised while paying service tax on 5th of following month. The credit can be utilised in subsequent month only.
Eligible duty/tax paying documents
Credit can be taken on the basis of following documents -
Invoice of Manufacturer from factory
Invoice of manufacturer from his depot or premises of consignment agent
Invoice issued by registered importer
Invoice issued by importer from his premises or consignment registered with Central Excise
Invoice issued by registered first stage or second stage dealer
Supplementary Invoice
Bill of Entry
Certificate issued by an appraiser of customs in respect of goods imported through foreign post office
TR-6 Challan of payment of tax where service tax is payable by other than input service provider
Invoice, bill or challan issued by provider of input service on or after 10-9-2004
Invoice, Bill or Challan issued by input service provider under rule 4A of Service tax Rules.
Essential requirement of invoice - As per rule 9(2) of Cenvat Credit Rules, Cenvat credit cannot be denied as long as the document contains essential aspects of duty/tax payment i.e. -
payment of duty or service tax
description of goods or taxable service
assessable value
name and address of the factory or warehouse or provider of input service.
Thus, Cenvat cannot be denied if the documents contain these details and no permission/condonation is required if the invoice/bill/challan contains these basic details. Note that Serial Number is not a essential detail specified in rule 9(2).
The Cenvat Credit can be utilised for payment of any of following -
Payment of service tax on output services
Payment of ‘amount’ if inputs are removed as such or after partial processing [Rule 3(4)(b)]
Payment of ‘amount’ on capital goods if they are removed as such [Rule 3(4)(c)]
Payment of ‘amount’ if goods sent for job work are not returned within 180 days - Rule 4(5)(a).
Exempted output services
As per basic principle of VAT, credit of duty or tax can be availed only for payment of service tax on output services. As a natural corollary, if no duty is payable on final product or output services, credit of duty/tax paid on inputs or input services cannot be availed.
As per Rule 6(1) of Cenvat Credit Rules, Cenvat credit is not admissible on such quantity of input or input service which is used in manufacture of exempted goods or exempted services.
Thus, if inputs and input services are partly used in exempted final product/output service, Cenvat credit of that portion of input/input service will not be available.
Meaning of ‘exempted services’
As per rule 2(e), “exempted services” means taxable services which are exempt from the whole of the service tax leviable thereon, and includes services on which no service tax is leviable under section 66 of Finance Act.
Services on which no tax is payable are also ‘exempt services’ - For purpose of the definition of ‘exempted services’, services on which no service tax is leviable are also ‘exempted services’. Thus, if a particular service is not taxable under present provisions of Finance Act, 1994, it will be ‘exempted service’ for purpose of rule 6.
Returns to be submitted
A return has to be submitted to Range Superintendent of Central Excise in the prescribed form, as follows -
Half yearly return within one month from close of half year, by provider of output services [rule 9(9)]. The return should be in form ST-3.
Half yearly return within one month from close of half year, by Input Service Distributor [rule 9(10)] The return should be in form ST-3.
Revised return – There is no provision for submission of revised return. If assessee finds that he has made some mistake, he should pay the amount by TR-6 challan and inform department suitably. If he has paid excess amount by mistake, he is required to file refund claim. He cannot adjust excess payment on his own, except in few cases where it has been specifically permitted. If he has not taken Cenvat credit of certain inputs, input services or capital goods, he can avail it in subsequent period, since there is no time limit for availing Cenvat credit. This will be reflected in his return for that subsequent period, as in normal course.
Regards
arun k mishra
From India, Bahadurgarh
Thank you Mr Arun
I am a Trainer and I collect ST from the cliients - since novemebr 2006
While paying thorugh DD or Chque , in the covering letter they ,(my cliemts ) don't mention any details - is this necessary to get it from clients
Secondly after collection of this 12.24 % in how many days i should pay it in the bank - can i pay all at the time of half yearly return
Thirdly my total tunover is arround 4 Lakhs - do i need to wait untill I reach 4L ?
How do i utilise this 4 Lk exemption.
Thankful if you pl give some clarification
Wish you a happy new year 2007
V S Sudhaker
From India, Bangalore
I am a Trainer and I collect ST from the cliients - since novemebr 2006
While paying thorugh DD or Chque , in the covering letter they ,(my cliemts ) don't mention any details - is this necessary to get it from clients
Secondly after collection of this 12.24 % in how many days i should pay it in the bank - can i pay all at the time of half yearly return
Thirdly my total tunover is arround 4 Lakhs - do i need to wait untill I reach 4L ?
How do i utilise this 4 Lk exemption.
Thankful if you pl give some clarification
Wish you a happy new year 2007
V S Sudhaker
From India, Bangalore
Dear V S Sudhaker
Thanks and same to you.
Since you collect ST from the clients since November 2006 and receive payment through DD or Cheque, in the covering letter your clients don't mention any details ask them to mention, it is mandatory. As you Service tax is presently payable @ 12% w.e.f. 18-4-2006 (plus education cess of 2% i.e. total 12.24%) on ‘taxable services’ i.e. those services which are specified in section 65(105) of Finance Act, 1994.
Education cess - Legally, you have to show service tax and education cess separately in invoice. You cannot just charge 12.24% as ‘service tax’. In that case, department can ask you to pay further 0.24% amount. You should also pay it by showing separate account head in TR-6 challan’, indicates appropriate code.
Secondly after collection of this 12.24 % in how many days i should pay it in the bank - can i pay all at the time of half yearly return
Rule 4A(1) of Service Tax Rules, as amended w.e.f. 1-4-2005 provides that every person providing taxable service shall issue an invoice, bill or challan within 14 days from date of completion of such taxable service or receipt of any payment towards value of the taxable service, whichever is earlier. Rule 6(1) has also been amended w.e.f. 1-4-2005 to provide for payment of service tax to credit of Central Government by 5th of following month in which payments are received towards taxable services.
Thus, service tax will be payable on advance received also w.e.f. 13th May 2005.
Thirdly you total turnover is around 4 Lakhs – since your turn over is less than Rs. 4 lakh you are exempted till you reach 4 Lakhs.
Small service providers - Small units whose turnover less than Rs. four Lakhs per annum are exempt from service tax.
Services provided by RBI exempt - Exemption firm service tax has been provided to all taxable services provided by Reserve Bank of India. (Notification No. 7/2006-ST dated 1.3.2006).
General Exemption to small service providers
The small service providers whose turnover of taxable services from one or more premises did not exceed Rs. four lakhs in previous year will be exempt from service tax in next financial year upto the turnover of Rs. 4 lakhs. The provisions are prescribed in Notification No. 6/2005-ST dated 1-3-2005.
I hope you got your reply.
Regards
Arun k mishra
From India, Bahadurgarh
Thanks and same to you.
Since you collect ST from the clients since November 2006 and receive payment through DD or Cheque, in the covering letter your clients don't mention any details ask them to mention, it is mandatory. As you Service tax is presently payable @ 12% w.e.f. 18-4-2006 (plus education cess of 2% i.e. total 12.24%) on ‘taxable services’ i.e. those services which are specified in section 65(105) of Finance Act, 1994.
Education cess - Legally, you have to show service tax and education cess separately in invoice. You cannot just charge 12.24% as ‘service tax’. In that case, department can ask you to pay further 0.24% amount. You should also pay it by showing separate account head in TR-6 challan’, indicates appropriate code.
Secondly after collection of this 12.24 % in how many days i should pay it in the bank - can i pay all at the time of half yearly return
Rule 4A(1) of Service Tax Rules, as amended w.e.f. 1-4-2005 provides that every person providing taxable service shall issue an invoice, bill or challan within 14 days from date of completion of such taxable service or receipt of any payment towards value of the taxable service, whichever is earlier. Rule 6(1) has also been amended w.e.f. 1-4-2005 to provide for payment of service tax to credit of Central Government by 5th of following month in which payments are received towards taxable services.
Thus, service tax will be payable on advance received also w.e.f. 13th May 2005.
Thirdly you total turnover is around 4 Lakhs – since your turn over is less than Rs. 4 lakh you are exempted till you reach 4 Lakhs.
Small service providers - Small units whose turnover less than Rs. four Lakhs per annum are exempt from service tax.
Services provided by RBI exempt - Exemption firm service tax has been provided to all taxable services provided by Reserve Bank of India. (Notification No. 7/2006-ST dated 1.3.2006).
General Exemption to small service providers
The small service providers whose turnover of taxable services from one or more premises did not exceed Rs. four lakhs in previous year will be exempt from service tax in next financial year upto the turnover of Rs. 4 lakhs. The provisions are prescribed in Notification No. 6/2005-ST dated 1-3-2005.
I hope you got your reply.
Regards
Arun k mishra
From India, Bahadurgarh
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