NEW SERVICE TAX REGIME

w.e.f July 01, 2012

Making Tax Compliance simplified

NEW SERVICE TAX REGIME EFFECTIVE JULY 1, 2012

NEGATIVE LIST BASED APPROACH

Complete overhaul of taxation of services From Positive list to Negative list approach No classification of services required Replacement of abatement/ exemptions with new abatement and exemptions Only services rendered in taxable territory are taxable Place of Provision of Service Rules, 2012 (PPSR) notified to determine the place of performance of service Import of services and export of services rules rescinded A detailed Education Guide issued to explain the concept of negative list based approach of service taxation

CHARGING SECTION
Section 66B There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed As per Section 65B(52) - Taxable territory means the territory to which provisions of Chapter V of Finance Act, 1994 apply i.e. whole of India excluding the State of Jammu & Kashmir As per Section 66C The Central Government may by rules determine the place where services are provided or deemed to be provided

DEFINITION OF SERVICE
"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include: (a) an activity which constitutes merely, (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ia) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or (ii) a transaction in money or actionable claim ; a provision of service by an employee to the employer in the course of or in relation to his employment; fees taken in any Court or tribunal established under any law for the time being in force.

DEFINITION OF SERVICE
Explanation 2 For the purposes of this Chapter,

an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;
an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. Explanation 3 A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory;

Negative list of services

Sr. No. 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17 Clause 66D(a) 66D(b) 66D(c) 66D(d) 66D(e) 66D(f) 66D(g) 66D(h) 66D(i) 66D(j) 66D(k) 66D(l) 66D(m) 66D(n) 66D(o) 66D(p) 66D(q) Negative Service Services by Government or a local authority Services by the Reserve Bank of India Services by a foreign diplomatic mission located in India Services relating to agriculture Trading of goods Any process amounting to manufacture or production of goods goods Selling of space or time slots for advertisements Service by way of access to a road or a bridge on payment of toll of toll charges Betting, gambling or lottery Admission to entertainment events or access to amusement facilities Transmission or distribution of electricity Services by way of education Services by way of renting of residential dwelling for use as residence Financial Sector Service of transportation of passengers Services by way of transportation of goods Funeral, burial, crematorium or mortuary services Date 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012 01-07-2012

Mega Exempted Notification

Ch. No. Ch. No. 01 Ch. No. 02 Ch. No. 03 Ch. No. 04 Ch. No. 05 Ch. No. 06 Ch. No. 07 Ch. No. 08 Ch. No. 09 Ch. No. 10 Ch. No. 11 Ch. No. 12 Ch. No. 13 Ch. No. 14 Ch. No. 15 Exempted Services Topic
Services provided to the United Nations or a specified international organization Health care services Veterinary clinic services Charitable activities Renting of precincts of a religious place or conduct of any religious ceremony Advocate or Arbitral Tribunals' Services Technical testing or analysis of newly developed drugs
Training or coaching in recreational activities Educational services Services provided to a recognized sports body Sponsorship of tournaments or championships Construction Services - Services provided to the Government or local authority Specified Construction services Construction Services - Original works - Others Copyright

Ch. No. 18 Ch. No. 19 Ch. No. 20 Ch. No. 21 Ch. No. 22 Ch. No. 23 Ch. No. 24 Ch. No. 25 Ch. No. 26 Ch. No. 27 Ch. No. 28 Ch. No. 29 Ch. No. 30 Ch. No. 31 Ch. No. 32 Ch. No. 33 Ch. No. 34 Ch. No. 35 Ch. No. 36 Ch. No. 37 Ch. No. 38 Ch. No. 39

Renting of a hotel, inn, guest house, club, campsite or other commercial places Serving of food or beverages by a restaurant, eating joint or a mess Transportation of goods by rail or a vessel Goods transport agency Renting of Motor Vehicle for transportation of passengers and goods Transport of passengers Motor vehicle parking to general public Services provided in relation to pubic services General insurance business Services provided by an incubate Service by an club/association/society to own members Services by the intermediaries Job Work Services by an organizer in respect of a business exhibition outside India Public telephone services Slaughtering of bovine animals Services provided by person located in a non- taxable territory Public Libraries Services by Employees' State Insurance Corporation Services by way of Transfer of a going concern Services by way of public conveniences Municipal services

WHAT IS ACTIVITY?
What is the scope of the term activity in the definition of service Para 2.1.1 of Education Guide - the word activity would include an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility etc. It is a term with very wide connotation...Activity could be active or passive and would also include forbearance to act. Agreeing to the obligation to refrain from an act or to tolerate an act or a situation has also been specified as a declared service under section 66E of the Act.

FOR CONSIDERATION

Section 67, Explanation (a) remains unchanged and defines consideration

Consideration includes any amount that is payable for the taxable services provided or to be provided - inclusive definition dealing with money consideration Clarified to consideration include monetary consideration and non-monetary

>

Education Guide - Examples for non-monetary consideration can be:

Supply of goods or services in return Refraining or forbearing to do an act Tolerating an act or a situation Doing or agreeing to do an act.

FOR CONSIDERATION
A agrees to dry clean Bs clothes >B agrees to click As photograph - a service transaction as per Education Guide Would any set of reciprocal promises qualify as a service transaction and be liable for service tax? EU VAT jurisprudence provides the following key test: Is there an intent relationship? to create a legally enforceable

DECLARED SERVICES SECTION 66E

A. renting of immovable property;

B. construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completioncertificate by the competent authority C. temporary transfer or permitting the use or enjoyment of any intellectual property right;

D.

development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software;
agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

E.

PLACE OF PROVISION OF SERVICE RULES

Determine the place where services are provided or deemed to be provided
Section 66C - The Central Government may by rules PPS Rules shall replace Export Rules and Import Rules under service tax PPS Rules also define location of service provider / service receiver PPS Rules may also be relevant for determining services wholly consumed within an SEZ and services provided to/ received from J&K

Place of Provision of Services

PPS Rules appear to be modeled around the EU VAT Place of Supply Rules

Sl. No
Rule 3 General Rule

Rule

Place of Provision of Service

Location of service receiver Location of service provider

If recipient location is not ascertainable in the ordinary course of business Specific Rules Rule 4 Service provided in respect of goods that are required to be made physically available by the service receiver to the service provider to provide the service

Location where the service is performed

Provided when such services are provided from a Location where the goods are situated at remote location by way of electronic means the time of provision of service

This Rule shall not apply in case of service provided in respect of goods temporarily imported into India for repairs for re-export

Service provided entirely or predominantly in the physical presence of an individual

Location where the service is performed

S No
Rule 5

Rule
Immoveable property based services provided directly in relation to an immoveable property (includes grants of right to use immoveable property, services for carrying out or coordination of construction work)

Place of Provision of Service

Location or proposed location of immoveable property

Rule 6 Rule 7

Services in relation to an event If services referred to in Rule 4,5 or 6 provided in many locations including location in taxable territory Where service provider and service receiver are located in the taxable territory (for e.g. A India appoints B India to design a hotel in US taxable)

Location of event Taxable territory

Rule 8

Location of service receiver

Rule 9

Services such as specified Banking, Online database, Intermediary services , hiring of means of transport up to one month

Location of service provider

Rule 10

Transport services in relation to goods Goods transportation agency services

Destination of goods Location of service provider

RULE 2 (f) OF PPSR - INTERMEDIARY

intermediary means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the main service) between two or more persons; but does not include a person who provides the main service on his account

PLACE OF PROVISION OF SERVICE SUMMARY

S No
Rule 11

Rule
Passenger transport services

Place of Provision of Service

Where the passenger embarks

Rule 12

Services provided on board a conveyance

First schedule point of departure

Rule 14

Order of Application of rules

Later Rule to supersede

EXPORT OF SERVICES
Provision of any service shall be treated as export of service when
the provider of service is located in the taxable territory, the recipient of service is located outside India, the service is not a service specified in the negative list, the place of provision of the service as per PPS rules is outside India, the payment for such service has been received in convertible foreign exchange, and the provider of service and recipient of service are not merely establishments of the same legal entity

Place of provision of service outside India Versus Export of services

RULES OF INTERPRETATION
Other Points

Rules of Interpretation - Section 66F Unless otherwise specified, reference to a service (i.e. main service) does not include reference to service used to provide the main service Possibility of differential treatment - most specific description preferred over general description Bundled services New concept of bundled services introduced Defined as services containing elements of two or more services Taxability Services which are naturally bundled - Single service based on its essential character Services which are not naturally bundled - Service which attracts the highest amount of service tax Manner of determining if the services are bundled naturally or not also provided

AMENDMENTS IN THE REVERSE CHARGE

MECHANISM
Type of Input Service Insurance Agent Goods Transporter Service Provider Type Type Insurance Business All % S T payable by service recipient 100% 100%

Sponsorship
Services by arbitration Tribunal Services by arbitration Tribunal Support services by Govt / Local Authority (except renting and transport of goods) Services by advocate / law firm (except

All
All

100%
100%

All Individual / Law firm

100% 100%

Vehicle Hiring
Supply of Manpower Works Contract From a service provider located in J&K/outside India and and received by a person in India

Individual/HUF/Firm/A OP
Individual/HUF/Firm/A OP Individual/HUF/Firm/A OP All

100%
75% 50% 100%

VALUATION RULES
Important inclusions amount realized as demurrage

Important exclusions interest on delayed payment of any consideration for the services or sale of property

provision

of

accidental damages due to unforeseen actions not relatable to the provision service subsidies and grants disbursed by the Government, not directly value of service affecting

of

the

Definition of works contract

Section 65B(54) of the Finance Act,2012):

"works contract" means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property The Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 stands withdrawn AMC contracts for goods also as works contract - entitled for abatement

New valuation rules for works contract prescribed under the Service Tax Valuation Rules

Old Scheme

New Scheme

Composition scheme - Option to pay tax at 4.80% on contract value

No composition scheme w.e.f July 1, 2012 Identified value for services Else, value of service is deemed to be: 40% of gross amount in case of original work 70% of gross amount in case of works contract for maintenance, repair or reconditioning or restoration or servicing of goods 60% of gross amount in all other cases

Credit restriction of 60% under Composition Scheme for specified services

Full credit now available on all input services

Notification No. 26/2012- Service Tax ABATEMENT

Sl. No. 1 2 3 Description of Taxable service Services in relation to financial leasing including hire purchase Transport of goods by rail Transport of passengers, with or without accompanied belongings by rail PercentAge of Taxable 10 30 30 Conditions Nil. Nil. Nil.

Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises ( including hotel, convention center, club, pendal, shamiana or any other place, specially arranged for organizing a function) together with renting of such premises
Transport of passengers by air, with or without accompanied belongings

70

(i) CENVAT credit on any goods classifiable under Chapters 1 to 22 of the Central Excise Tariff Act, 1985 (5 of 1986) used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

40

CENVAT credit on inputs and capital goods, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

6 Renting of hotels, inns, guest 60 Same as above. houses, clubs, campsites or other commercial places meant for residential or lodging purposes.

Services of goods transport agency in relation to transportation of goods.

25

CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004.

8 9

Services provided in relation to Same as above. chit 70 Renting of any motor vehicle 40 designed to carry passengers 50 Same as above.

10 Transport of goods in a vessel

Same as above.

11 Services by a tour operator in (i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been relation to,25 taken under the provisions of the CENVAT Credit Rules, 2004. (ii) The bill issued for this purpose indicates that it is (i) a package tour inclusive of charges for such a tour.

(ii) a tour, if the tour operator 10 (i) CENVAT credit on inputs, capital goods and input services, is providing services solely of arranging or booking used for providing the taxable service, has not been taken under accommodation for any the provisions of the CENVAT Credit Rules, 2004. person in relation to a tour (ii) The invoice, bill or Chelan issued indicates that it is towards the charges for such accommodation. (iii) This exemption shall not apply in such cases where the invoice, bill or Chelan issued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.

40 (iii) any services other than specified at (i) and (ii) above.

(i) CENVAT credit on inputs, capital goods and input services, used for providing the taxable service, has not been taken under the provisions of the CENVAT Credit Rules, 2004. (ii) The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.

12. Construction of a complex, 25 (i) CENVAT credit on inputs used for providing the taxable building, civil structure or a service has not been taken under the provisions of the CENVAT part thereof, intended for a Credit Rules, 2004. sale to a buyer, wholly or (ii) The value of land is included in the amount charged from the partly except where entire service receiver. consideration is received after issuance of completion certificate by the competent authority

PAY SERVICE TAX ON CASH BASIS FROM 1ST APRIL, 2012.

Service Provider
Individual or firm including partnership firm Individual or firm including partnership firm Other than the above

Turnover in Previous Yr.

Not exceeding Rs.50 lakh

Payment of Service Tax

On receipt of consideration ( cash basis) On point of taxation (accrual basis ) On point of taxation (accrual Basis)

Exceeding Rs.50 lakh

Without any limit

SERVICE TAX RETURNS to be Notified

Monthly Returns
All assessees who paid service tax of Rs. 25 lacks or more during the previous year. Existing all assessees who paid service tax less than Rs.25 lacks during the previous year Yes No

Qrtrly. Returns
No Yes

New assessees other than individual and firms even if service tax liability for the financial year is less than Rs.25 lacks

Yes

No

Individual or firms who paid service tax of Rs.25 lacks or more in the previous year.

Yes

No

Accounting Code for Service Tax Effect from 1-7-2012

Accounting Codes

Name of

Tax Collection

Primary Secondary Other Education Education Receipts CESS CESS

Penalties

All Taxable Services

004410 004402 004404 004410 00441 9 8 6 0 93

Note : Other Receipt for payment of interest, etc.

Employee to employer:
Casual employees covered; contractual outside Services provided outside the terms of employment will be taxable e.g. Private coaching beyond school hours when under no obligation under the contract taxable Bonus, overtime and termination amount not taxable Non-compete taxable

Employer to employee..
Not excluded and thus taxable
Expenses recovered from employees for private use of company facilities: taxable unless otherwise exempt; can take Cenvat credit if employee registered
Canteen charges (usually exempt unless AC and alcoholic liquor being served) To and fro transportation will be taxable; Stay in guest house Rs 1000 per day or more taxable Charges for private use of official car: taxable unless right to use Training: taxable Recovery of pay for breach of contract: taxable

Payments to Directors...
Not excluded and thus taxable:
Applicable to all kinds of directors except of government regulatory bodies
Any monetary or no-monetary consideration Directors fee

Commission/bonus
Company car/ travel reimbursements

Mr. K.S. Kamalakara, Cost Accountant in practice, has the expertise in the field of Indirect Taxation, Exim Policy and Costing System implementation. His experience span for more than one and half decade.