Deciphering Service Tax Finance Act: A Professionals Guide for Traders

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Service Tax Finance Act,1994 (As amended by Finance Act 2009) Act 1994 Act,2009) The things to be considered for interpretation considered…. for Trade Notices Circulars / Court Orders Notification Rules Act Pinnacle Education 2 Introduction Particulars P ti l Finance Act,1994 , Chapter V (Finance Act) Chapter VA (Finance Act) Chapter VI (Finance Act) Implication I li ti Applicable Law for Service Tax pp Act for Service Tax provisions Advance Ruling on Service Tax •Education Cess on Service Tax •S & H Ed. Cess on Service Tax 3

Pinnacle Education Administration of Service Tax Particulars Service Tax Rules Who can make it The Central Government Implication •To carry out the provisions of the Act •They cannot be contradictory, there-fore, cannot over-ride the Act •Providing rules for service tax •Making amendments in them, •Providing or withdrawing exemptions from service tax •Dealing with any other matter that th t would f ilit t ld facilitate smooth th operation of service tax 4 Notifications The Central Government Pinnacle Education Administration of Service Tax

Particulars P ti l Circulars or Letters on service tax/ Orders of Service Tax Trade Notices Who Wh can make it I li ti k Implication The Central Government and Central Board of Excise and Customs (CBEC) C t Central Excise/Service / Tax Commissionrates •Define the scope of taxable services and administration of service tax- It interpretes the law but never defines the law.

•Issue of trade notice on receiving instruction g from Finance Ministry or CBEC for effective implementation and administration of service tax law 5 Pinnacle Education Person liable to Service tax

Who is Liable to pay tax? py Person liable to pay tax Service Provider Specified persons as per Rule 2(1) (d) of Service Tax Rules, 1994 Recipient of p Services Pinnacle Education 7 Person covered in Rule 2(1)(d) Person Who is liable to tax General insurance business Insurer / Re-insurer Insurance auxiliary service provided Person carrying on general by an insurance agent insurance/ life insurance business b i Any taxable service provided by any Recipient of such service p person from a country other than y India and received by any person in India

Pinnacle Education 8 Person covered in Rule 2(1)(d) Person Who is liable to tax Goods transport agency The consignor or consignee of goods Sponsorship service provided to any Recipient of such sponsorship corporate or firm Business auxiliary service of The mutual fund or asset distribution of mutual fund by a management company mutual fund distributor or an agent Telecommunication Services •Director General of posts and Telegrams •MD of MTNL Delhi MTNL, •Licensee (authorised by CG) 9 Pinnacle Education Specific Exemptions

Services provided to United Nations or an International p Organization Services provided to a developer or Units of Special Economic Zone Goods and materials sold by service provider to recipient of service Small service providers below limit of Rs.

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10 Lacs in 2008-09. [If in 2008-09, the gross receipts is not exceeding Rs. 10 Lacs, no service tax i payable i F Y2009 10 till the value of services i is bl in F. Y. 2009-10, ill h l f i exceeds Rs. 10 Lacs, once, it crosses the threshold limit, service tax is leviable on excess above Rs. 10 Lacs].

Services provided by Reserve Bank of India (RBI) Pinnacle Education 10 Specific Exemptions Service provider being Technology Business Incubator (TBI), Science and Technology Entrepreneurship Park (STEP) and incubates i b Services provided by a digital cinema service provider Services provided by Resident Welfare Associations p y Technical Testing and Analysis Services (like clinical research) Service provided by a person for inter-state or intra-state transportation of passengers in a vehicle bearing “Contract Contract Carriage Permit” with specified conditions.

Services provided by Federation of Indian Export Organisations (FIEO) and specified Export Promotions councils councils. By Inter-bank purchase and sale of foreign currency between scheduled banks. Specific service provided to Goods transport Agencies Pinnacle Education 11 Valuation of Services Value of Taxable Service u/s 67 u/s. 67 • “For the purpose of this chapter, the value of any taxable p p p , y service shall be the gross amount charged by the service provider for such service rendered by him. • The use of the expression ‘gross amount’ implies that, prima facie, no deductions ill be ll d The d d ti will b allowed. Th use of th word ‘ h d’ makes it f the d ‘charged’ k apparent that service provider must raise a bill on the service receiver, and that such a bill (by whatever name called) must indicate the gross ( y ) g amount clearly. Currently, appx. Currently appx more than 100 services are defined as taxable service under the service tax net u/s. 65(105) of finance Act,1994. Pinnacle Education 13 Value of taxable services : Factors consideration • • • • • • • Identification of services to be considered, involvingg Service to be excluded Service to be included Statutorily i l dibl / excludible i S il includible l dibl items (lik PAN S i (like PAN, Service T Tax Assessee code) Items includible / excludible according to departmental clarifications g p Excluding reimbursement of out-of-pocket if expenses, if permissible Inclusion of service tax element separately in the bills General exemptions G l i Specific exemptions The gross amount is required to be computed only in respect of ‘taxable service taxable service’ covered under section 65 (105) of the Act Pinnacle Education 4 Format of Service Tax Invoice TAX INVOICE Ref: _________ To, M/s. XYZ Ltd. Address Particulars Being Professional Fees rendered as Statutory Audit for F. Y. 2008-2009 Out of Pocket Expenses in discharge of services Add: Add Service T Tax Add: Educational Cess Add: Secondary and Higher Education Cess PAN : Service Tax Code: Total 10% 2% 1% AABPS 1234 Z AABPS 1234 Z ST001 23,60,500 Amount 20,00,000 1,54,500 2,00,000 4,000 2,000 Date : ________ Pinnacle Education 15 Salient Features

Rate of Service Tax = 10% The service tax collected must be shown separately in Invoice/ Bill raised by the person providing services [Sec. 83- similar to Sec. 12A of Central Excise Act,1944] If service tax not shown separately, the amount charged by service provider to his customer / clients will be treated as cum tax price and back ward (Reverse) calculations will be made. Value of taxable service = [Gross amount charged/(100+ rate of tax)] x 100 Service tax = [Gross amount charged/(100 + rate of tax)]x rate of tax Pinnacle Education 16 Salient Features

Irrespective of method of accounting the service tax is payable to accounting, the Government only when the value of taxable services is received. Service S i tax not payable on f bl free services as f l i for levy of service tax, f i consideration is necessary [Sec. 67 (1)(iii) and Service Tax (Determination of value) Rules,2006] Service tax liable on taxable services – to be paid even if not collected from the client [Sec. 68] by applying backward / reverse calculation. No service Tax on out of pocket expenses, if incurred on behalf of customer / client.

Pinnacle Education 17 Salient Features Service Tax cannot be made applicable retrospectively [Prospective Impact] Services performed prior to the date of levy not liable for payment of service tax Service tax is payable as soon as any advance is received as: a. a The taxable service includes “service to be provided”, and service provided b. The payments received before, during, or after the provision of taxable service An assessee may adjust excess payment of service tax against his liability of service tax for subsequent periods in equal instalments.

Pinnacle Education 18 Administrative Rules & Procedures Service tax collected from the recipient of service must be paid to the central Government [Section 73A] in Form GAR-7. A multiple service provider (a service provider rendering more than one taxable service) can use single GAR-7 challan for payment of service tax on different services Interest for short payment / non payment short-payment non-payment : 13% p a p. a. Payment of Service Tax: For Company : For period April-February : 5th of next onth For March F M h : 31st M h March For Others : For Quarter 1,2 and 3: 5th of next month after end of quarter For 4th Quarter : 31st March Return in Form : ST – 3 : Self Assessment Provisional Assessment : ST 3A Due Dates of submission of return: Pinnacle Education 25th October : April-September 25th April : October -March 19 Calculation of Exemption Limit – Illustration 1 Financial Year 2008-2009 2009-2010 2010-2011 Amount of Is Service Services (Rs. ) Taxable? 8,50,000 15,00,000 18,00,000 Yes Yes Yes Is Service Tax payable?

Remark No No Yes On balance above Rs. 10 Lacs by L – b reverse calculation l l ti Yes Ideally, on entire amount from the first receipt onwards. But, onwards But if assessee wants to avail benefit of exemption, he has to communicate his intention to Commissioner of Service Tax (in Writing) about availment of exemption till s. 0 acs ( ov ded e s Rs. 10 Lacs (Provided he is not collecting Service Tax) 20 Pinnacle Education Calculation of Exemption Limit – Illustration 2 Financial Year 2008-2009 2009-2010 Amount of Is Service Services (Rs. ) Taxable? 8,00,000 25,00,000 25 00 000 5,00,000 2010-2011 58,00,000 No No No Yes Is Service Tax payable? Remark No No No Till 28 02 2010 28. 02. 2010 No No, as exemption limit of Rs. 10 Lacs is not yet crossed Yes On balance above Rs. 10 Lacs – by reverse calcualtion (if service tax is not charged by Service provider Pinnacle Education 21 Calculation of Exemption Limit – Illustration 3 Financial Year Amount of Services (Rs. ) 8,50,000 15,00,000 (Receipt – 14,00,000) 8,00,000 Is Service Taxable? Yes Yes Is Service Tax payable? Remark 2008-2009 2009-2010 No No Yes On balance above Rs. 0 Lacs – by reverse calculation No If assessee wants to avail benefit of exemption, he has p , to communicate his intention to Commissioner of Service Tax (in Writing) about availment of exemption till il t f ti Rs. 10 Lacs (Provided he is not collecting Service Tax) Yes Pertains to last year which year, got realised in this year, on which service tax was levied. 22 2010-2011 Yes 1,00,000 1 00 000 (of PY2009-10) Pinnacle Education Yes Examples on applicability of Service Tax Situations Solution If an Interior Decorator raises a bill for services say, on The liability to pay service tax to the 15th December, 2009 for Rs. ,10,300/- (including Government would arise only in service tax (incl. of Ed. Cess and S & H Ed. Cess) of February 2010 on cash basis. Rs. 10,300/-) and the client pays his bill only in February 2010 Mr. Mr King provided consultancy to Ms Queen on 25th No service tax to be paid as service is Ms. November,2009 but did not raise a bill out of love and “Free Service” affection If bill amount is Rs 50 000 and ser i e t is not Ser i e t payable sh ll be computed mo nt Rs. 50,000 nd service tax Service tax p ble shall omp ted shown separately in invoice, as follows: 50,000/110. 0 x 10. 30 = Rs. 4,669. 08 and not Rs. 5,150/- Pinnacle Education 23 Examples on applicability of Service Tax Situations If bill i raised b M Th is i d by Mr. Thomas on 25 09 2009 25. 09. 2009 amounting to Rs. 1,00,000 + Service Tax @10. 30% = 1,10,300/-, but, out of this, client paid only Rs. 50,000/- on 14. 03. 2010 and balance on 15. 04. 2010. Solution Service S i tax payable shall b computed bl h ll be d as follows: On 31. 03. 2010 : 50,000/110. 30 x 10. 30 = Rs. 4,669. 08 On 31. 03. 2010 : 60,300/110. 30 x 10. 30 = 5,630. 92 Service provided on 25. 03. 2009 worth Rs. ,00,000/-, No Service Tax leviable as the service out of which Rs. 3,00,000/- received on 05. 04. 2009. was not taxable at the time of From 01. 05. 2009, this service was made taxable, rendering the same. balance Rs. 2,00,000 received after 01. 05. 2009 Advance received on 01 04 2009 R 9 00 000/ f Ad i d 01. 04. 2009 Rs. 9,00,000/- for P Proportionate service t on services ti t i tax i work to be carried out from April-June,09. On 1st rendered from June: On 05. 07. 2010 : 3,00,000/110. 30 x June,2009, this service is made taxable. 10. 30 = Rs. 28,014. 51 Pinnacle Education 24 Examples on applicability of Service Tax

Situations If bill i raised b M F is i d by Ms. Forum on 16 09 2009 amounting 16. 09. 2009 i to Rs. 1,00,000 + Service Tax @10. 30% = 1,10,300/-, but, out of this, client paid only Rs. 50,000/- on 14. 03. 2010 and balance was w/off by her. y Advance of Rs. 15,00,000/- received on July,2009 by M/s. Era Legal Firm for rendering Legal consultancy services to M/s. Globus Insurance Ltd. From 25. 08. 2009, this service was made taxable, the firm performed this service on 31st August,2009 (M/s. Era Legal Firm has never taken Service Tax Registration in past, as it was rendering tax free services till 25. 08. 009) Solution Service S i tax payable shall b computed bl h ll be d as follows: On 31. 03. 2010 : 50,000/110. 30 x 10. 30 = Rs. 4,669. 08 Service Tax is payable shall be computed as follows: Total Service Value = 15,00,000 Less: Exemption = 10,00,000 Net Amount = 5,00,000 On 05. 10. 2009 : 5,00,000/110. 30 x 10. 30 = Rs. 46,690. 84 Pinnacle Education 25 • • • • • • Service Tax is payable on gross amount charged by services provider for services provided or to be provided Thus, Tax is payable as soon as advance is received. i d Value of taxable services plus Services Tax payable is equal to Gross amount charged.

Where consideration for providing services is entirely in money terms, gross amount charged by Services Provider of taxable services provided or to be provided by him, will be relevant for valuation. Where consideration is not wholly in term of money, Service tax is payable on the amount of money + money’s worth and along with Service Tax charged is equivalent to the consideration Where consideration is not ascertainable, valuation will be based on valuation rules. If gross amount is charged by Services Provider is inclusive of Service Tax then, by working out back-ward (Reverse) calculation amount of tax will be ascertained.

Pinnacle Education Summary of Provision for valuation of Service [Sec. 67] [S 67] 26 CENVAT Rules applicable to Service T t S i Tax CENVAT on Service Tax • Credit of duty paid on input and input Service 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 input and capital goods b] Service Tax paid on input Services.

This is termed as CENVAT credit. In case of Tour Operator Service Tax ll t d S i T collected Less: Duty on Capital Goods (Bus) Less: Service Tax paid to Contract fees Net Payable Pinnacle Education 1,00,000 1 00 000 85,000 5,000 10,000 28 Input goods /Service , on which credit is availed shall be related to service being provided CENVAT on Service Tax • Input Services eligible for credit: An output Services 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.

All input Services relating to all activities relating to business are eligible to CENVAT credit For e. g. : In case of Clearing House Agent (CHA) providing service for clearing the import consignment, he can take credit of service tax paid on payment made to Container Freight Station (CFS) for storage of Import Cargo till clearance on payment of d C ill l f duty. Input goods eligible for CENVAT to service provider: Credit will be available of excise paid on inputs used for providing output Services, except High speed di l Oil [HSD] Li h Di l Oil [LDO] and motor spirit d diesel Light Diesel d ii [Petrol].

One – to – one correlation not required: CENVAT rule do not require input output co-relation to b establish. l i be bli h Pinnacle Education • • 29 CENVAT on Service Tax • C NV T on capital CENVAT o c p goods: – Credit of duty paid on plant, machinery, spare parts of machinery, tools, dies etc. however up to 50% credit is available in current year and balance in subsequent financial year. Suppose, on 15. 05. 2009, a CA purchases Computer worth Rs. 50,000/- for pp p p rendering professional services, on which he pays Excise Duty of Rs. 5,000/- , he can avail set off to the extent of Rs. ,500/- (i. e. 50% of total duty amount) in F. Y. 2009-10 and balance in F. Y. 2010-11 – A service provider can take out capital goods f i id k i l d from premises, provided h b i i id d he brings backs within 180 days. Period can be extended by Asst. / Dy. Commissioner of Excise. • Sale of old capital Goods: If old capital goods on which CENVAT was availed are sold as scrap, an amount equal to CENVAT credit availed should be paid (i. e. Reversal of earlier credit). In above illustration, on p , py , / sale of the computer in F. Y. 2012-13, he has to pay Rs. 5,000/- to Service Tax department.

Pinnacle Education 30 CENVAT on Service Tax • No Credit on motor vehicles used to provide output Services: Motor vehicles C ed o o o ve c es sed o p ov de o p Se v ces: o o ve c es are not capital goods under Service Tax act for the purpose. Hence, credit cannot be allowed to service provider – (Except some specific businesses like Tour Operator, Rent-a-cab scheme operator, Cargo handling agency, etc. ) Procedural Requirement: Credit on the basis of specified documents: CENVAT credit will be only allowed on the basis on documents such as (a) A proof of payment of tax or input Services (i. payment to supplier of goods / Services) and (b) production of Tax invoice showing separate disclosure of Service Tax charged. • Pinnacle Education 31 CENVAT on Service Tax • Credit of input Services only after payment made to service provider: In case of p y py p input Services, credit is available only after the amount of bill is paid to a person who had provided Services. No CENVAT credit if output service is exempt from Service Tax: No credit under this scheme is available if output service is exempted exempted.

Service provider providing exempted as well as non exempted (taxable) Services: – If the service provider uses common input for taxable as well exempted output Services, he should maintain separate records for input Services Se v ces, shou d a ta sep e eco ds o pu Se v ces used for exempted output services and should not avail CENVAT on such input. – A provider of both taxable and exempt services, who is not maintaining separate b k of accounts of i books f f inputs shall pay an amount equal to 6% of the h ll l f h value of exempted services. However, he can utilize CENVAT credit only up to 20% of Service Tax • • p y payable on output Services. p Pinnacle Education 32 CENVAT on Service Tax • No cash refund except the case of export: In some case it may happen, that c s e d e cep e c se o e po : so e c se y ppe , duty paid on input and Service Tax paid on input Services may be more than tax payable on output Services. There is no provision for refund of excess CENVAT credit. The exception is if output Services is exported, the efund can be claimed on input tax paid and utilized for such output Services. • 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 which is availed as CENVAT credit. Writing off credit taken: In case credit taken on inputs/capital goods on fully written off, the service provider shall pay back the amount of such credit taken (w. e. f. 01. 04. 09). • Pinnacle Education 33 Export of Services Export of Services – Features • T b e Se v ces e po ed e e e p : T b e Se v ces Taxable Services exported are exempt: Taxable Services may be exported y e po ed without payment of Service Tax. What is export of Services? Services are categories as follows Immovable Property Category: In case of 10 selected Services provided in relation to immovable property, the Services shall be considered as exported if the immovable property is situated outside India. Performance based category: In case of 50 selected Services shall be considered as exported if the Services are wholly or partly performed outside India.

Location of Services recipient criterion: In case of 40 Services the Services shall be considered as exported where the Services are provided and used in or in relation to business or commerce, the Services shall be considered as exported if recipient of Services is located outside India. Pinnacle Education 35 Export of Services – Rules • CONDITIONS APPLICABLE TO ALL CATEGORIES N N SERVICES TO BE CONSIDERED AS EXPORTED: FOR – The Services is delivered outside India and used outside India and – Payment for such Services provided outside India received by service provider in convertible foreign exchange. SERVICES NOT SUBJECTED TO EXPORT RULE: – Air transport of passengers embarking (commencing) in India for international journey. – Transport of persons by a cruise ship embarking (commencing) in any port in India. Pinnacle Education 36 Exemption or Rebate of service tax in case of export – Export without payment of Services tax and utilize CENVAT Credit for payment p py py of Service Tax on other Services. – Export without payment of Service Tax and claim refund of Service tax paid on input Services and excise duty paid on input – Pay service Tax on exported Services and claim refund refund.

Amendment by finance Act,2009: • Two taxable services, namely, ‘Transport of goods through road’ and ‘Commission paid to foreign agents’ to be exempted from the levy of service tax, if the exporter is liable to pay service tax on reverse charge basis. Thus there would be no need for the exporter to first pay the tax and later claim refund in respect of these services. • For other services received by exporters, service tax exemption to be operated through the existing refund mechanism based on self-certification of the documents where such refund is below 0. 5 per cent of FOB value, and certification of documents by a Chartered Accountant for value of refund exceeding the above limit 37 Pinnacle Education Import of Services Import of Services – Features SECTION 66 A – REVERSE CHARGE: Section 66 A provides for reverse charges mechanism as follows: Where any services specified in section 65 (105) is • Provided or to be provided by a person who has established a business permanent address in a country other than India. • Received by a person who has his place of business in India.

Such services shall for the purpose of this section be taxable services and such taxable services shall be treated as if the recipient had himself provided the services in India and accordingly the section will apply If recipient has apply. received the above services otherwise than for the purpose of use in any business or commerce than this section will not apply i. e. if the services are used for self purposes it will not attract service tax purposes, tax. Pinnacle Education 39 Specific rules for Import of Services The recipient in India is treated as a provider of services and accordingly all the provisions of the Act as they apply in relation to a provider of taxable services would apply to him. • When a recipient is an indi id al and s ch ser ices is recei ed individual such services received by him otherwise than for the purpose of use in any business or commerce this provision will not apply. • It is important to know from which country services are being provided. If a company has H. O. in U. S. A. and branch in India providing services from U.

S. A. to an Indian Company without intervention of the branch in India, the provider shall be treated as providing services from U. S. A. , although it has establishment in India, and so reverse charges will be applicable. Pinnacle Education 40 Import of Services in case of Permanent Establishment off foreign Enterprise in I d E bl h f E India • Where a person is carrying on a business through a permanent establishment in India and having another P. E. outside India, say in Germany, now if taxable services provided by Germany.

P. E. to Indian P. E. PE than it is considered as separate person and section is applicable applicable. • A branch or ‘agency’ is treated as business establishment. Pinnacle Education 41 Applicability of Sec 66A Sec. 66A H. O. (Outside India) Service rendered Branch (Within India) Correspondence Customer (Within India) Pinnacle Education 42 Non applicability Sec. 66A Non-applicability of Sec 66A H. O. (Outside India) Correspondence Branch (Within India) Service rendered Pinnacle Education Customer C (Within India) 43

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Deciphering Service Tax Finance Act: A Professionals Guide for Traders. (2020, Jun 02). Retrieved from

Deciphering Service Tax Finance Act: A Professionals Guide for Traders
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