OVERVIEW OF SERVICE TAX LAW Contributed by CA. Jayesh Gogri

What is Service tax? Service tax was first introduced in 1994 only in respect of 3 services and the revenue collection was just Rs. 400 Crores approximately from 4000 assessees. Since then, year after year the number of services, assessees and collection grew by leaps and bounds. In the year 2012-13, the total number of assessees was more than 17 lacs and the gross service tax collection was as much as Rs. 132500 Crores1 approximately. An increase of more than 300 times!! Presently, Service tax contributes to 16% of the gross tax collections in India. Yearwise tax collection details alongwith number of services and taxpayers are provided in the following table:

1

Financial

Revnue

% Growth

No. of

No. of

% Growth

Year

(Rs. In

over

Services

Assessees

over

Crores)

previous

under tax

previous

year

net

year

1994-95

407

Base Year

3

3943

Base Year

1995-96

862

112

6

4866

23.41

1996-97

1059

23

6

13982

187.34

1997-98

1586

50

18

45991

228.93

1998-99

1957

23

26

107479

133.70

1999-00

2128

9

26

115495

7.45

2000-01

2613

23

26

122326

5.91

2001-02

3302

26

41

187577

53.34

2002-03

4122

25

52

232048

23.71

2003-04

7891

91

62

403856

74.04

2004-05

14200

80

75

774988

91.89

Source: www.servicetax.gov.in

2005-06

23055

62

84

846155

9.18

2006-07

37598

63

99

940641

11.17

2007-08

51301

36

100

1073075

14.08

2008-09

60941

19

106

1204570

8.78

2009-10

58422

-4.13

109

1307286

8.53

2010-11

71016

22

117

1372274

4.97

2011-12

97509

37

119

1535570

11.90

2012-13

132518

36

Negative

1712617

11.53

List regime

Increasingrevenue share of Services in the national gross domestic product (GDP), increase in number of services in the Service tax gamut as well as rate of Service tax has contributed to such a voluminous growth in the revenue collection. In the year 2014-15, Service tax collections are estimated to be around Rs.2.15 Lacs Crores, which is likely to be higher than collections of Central excise or Customs duties2.

Is Service tax constitutionally valid? Service tax is levied under Entry 97 of the List 1 of Seventh Schedule to the Constitution of India. Though, a specific entry no. 92C has been inserted in the List to provide for Levy of taxes on Services, Service tax continues to be collected under residual entry 97. Constitutional validity of the levy of Service tax was challenged by various forums like Tamil Nadu KalyanMandapam Association, All India Federation of Tax Practitioners, Association of Leasing and Financial Service Companies. However, in all the cases, Hon’ble Supreme Court upheld the constitutionality of Service tax on various services3.

What is Service? Even though the term ‘taxable service’ was defined under sub- Section (105) of Section 65, of the Finance Act, 1994 (hereinafter referred to as the Finance Act); the specific term ‘ Service’ remained

2 3

Source:ET Bureau Feb 19, 2014 3 STR 260, 7 STR 625, 19 STR J17

undefined for the longest time. In the case of Magus Construction Private Limited 4 , Hon’bleGauhatiCourt made an attempt to interpret and define this term. In the given case, the Court referred to various sources and laid down as under: “....29. In the light of the various statutory definitions of “service”, one can safely define “service” as an act of helpful activity, an act of doing something useful, rendering assistance or help. Service does not involve supply of goods; “service” rather connotes transformation of use/user of goods as a result of voluntary intervention of “service provider” and is an intangible commodity in the form of human effort. To have “service”, there must be a “service provider” rendering services to some other person(s), who shall be recipient of such “service”....” The above Judgment was given in the year 2008. Almost after a passage of 4 years thereafter, the term “Service” could find place in the Statute in 20125. However, there is a vast difference between the definition given by the Gauhati High Court and the one given by the Parliament. The Court held that service is a result of human effort, an act of doing something useful, etc. Whereas, in the Finance Act, ‘service’ has been defined to include any passive activities like, right to use, renting, agreeing to an obligation, etc. which may not involve any human effort or activity. The term ‘Service’ as defined in the Finance Act has all the limbs any definition can have. It starts with ‘means’, expands it with its ‘inclusive’ limb (declared services) and also restricts the scope by providing an ‘exclusion’ clause (negative list and others). The interesting fact is by its exclusion limb, it excludes transactions of goods and then again trading of goods finds place in the Negative list which also provides exclusion from taxable services. It is surprising to note that when something cannot be called as service at all, what is the need of exclusion under the negative list of services. This may lead to disputes as to the value of ‘services’ to be reported in the statutory returns and could have impact over CENVAT credit workings6.

What is included? Declared Services: Declared services7 covered in the inclusive limb of the definition of ‘Service’, include 9 activities, which in normal parlance may not be considered to be services. The list covers services which are litigation prone and disputable in nature. A detailed discussion on the following services may find place in the subsequent pages of this Journal by another Author:

4

11 STR 225 Section 65B (44) of the Finance Act, 1994 66 Rule 6(3) and 6(3A) of CENVAT credit Rules, 2004 7 Section 66E of the Finance Act, 1994 5

(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 completion certificate by the competent authority (c) temporary transfer or permitting the use or enjoyment of any intellectual property right (d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software (e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act (f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods (g) activities in relation to delivery of goods on hire purchase or any system of payment by instalments (h) service portion in the execution of a works contract (i) service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity. It may be noted that 6 items of the above list which are considered as ‘Deemed services’ under the Service tax Laws are also considered as ‘Deemed Sales’ under different State VAT laws, though in a different context and value. It is painful to observe that in the absence of clear demarcation of jurisdiction between Central and State Governments, business entities have chosen to pay VAT as well as Service tax on the entire value on activities like Software, right to use intellectual property rights, etc.

What is excluded? Apart from other exclusions, the important exclusions pertain to the’ Negative List’. Negative List: 17 services are covered in the Negative List8. It may be relevant to noted that various terms and phrases used in the Negative List which appear to be simple and plain in language are defined elsewhere and convey a completely different meaning as compared to understanding of a common man.

On what Value is Service tax payable? 8

Section 66D of the Finance Act, 1994

Taxability of Reimbursements has always been a bone of contention. Rule 5 of Service tax (determination of Value) Rules, 2006, provides for 12 conditions to be fulfilled in order to claim deduction in respect of reimbursable expenses charged by the Service providers which are in addition to the consideration charged in respect of Services. Practically, it is very difficult to comply with all the conditions. In the case of Intercontinental Consultants & Technocrats Pvt. Ltd9., Delhi High Court held Rule 5 to be ultra vires. In case of declared services like, works contract or supply of food, the activities involve goods as well as services. It is very difficult to ascertain the precise value portion of both separately. From the plain reading of Valuation Rules, it appears that these Rules do not permit theassessee to determine the value of its services and goods on his own. Rule 2B and 2C prescribing for deeming value, warrant appropriate modification. If the validity of these rules are challenged, it is likely to be held as ultra viresby the judicial authorities, as the same appears to travel beyond the Section10 dealing with the Valuation. This Sectionprovides that the taxable value would be the consideration which is charged towards the taxable services. It may be relevant to note the landmark decision of Supreme Court in the case of Bharat Sanchar Nigam Limited11wherein it was held that in case of a composite contract, it is possible that there could be levy of more than one taxes, however the value on which centre has levied tax, cannot be taxed by States and vice versa. In other words, as per the Apex Court, the base value which gets taxed cannot be more than 100% in any case. Classification of services: In order to determine the correct valuation of taxable services, in cases where 2 or more services have been provided as a composite service, wherein one may be exempt, other may be taxable and one more service could be chargeable at reduced rate of Service tax. In such a case, the question may arise whether such composite transaction should be considered as exempt service, taxable service or service which is to be charged at concessional rate. In this regard, Section 66F of the Finance Act, provides that if such services in a composite transaction are naturally bundled then the entire composite transaction would be classified as a service which is of a dominant character. Conversely, if the services are not naturally bundled in the ordinary course of business, the entire transaction should be taxed in a manner which results in the highest tax liability. What is naturally bundled has to be ascertained keeping in view the prevalent trade practices, consumer perception, nature of service etc. Nonetheless, the concept of bundled service is quiet subjective in nature and can be source of enormous litigation. 9

29 STR 9 Section 67 of the Finance Act, 1994 11 2 STR 161 10

What is the taxable event? The next important question is at what point in time the liability to pay Service tax gets triggered? There could be three different events in relation to service occurring at different points in time. Provision of service, raising of invoice, receipt of payment, etc. At what point in time the service can get taxed is a question. Moreover, say for example, at the time provision of service, there was no tax on such service, however, at the time of raising invoice, tax was imposed, should one pay Service tax? Questions may arise in respect of services like telephone, maintenance which are continuous in nature. At what point in time it can be said that the service has been provided. Another important question is what if at the time of raising invoice there was a different rate of tax and at the time of receiving the payment for such service, the rate was changed. All the above questions find answers in Point of Taxation Rules, 2011. This set of Rules deals with the point of taxation in relation to events like provision of service, invoice date and payment date. It also deals with services which are continuous in nature and the change in rate of Service tax. Rule wise analysis has been done in the subsequent pages of this journal. However, it may be worthwhile to note that if the tax has been paid at the time of one of the three events, a proper system should be developed to track the same so that no tax gets paid twice on the same service at occurrence of different events and also no service remains untaxed.

Where can Service tax be levied? The next important question is can Service tax be levied if the services are provided out of India or if the services are provided from India to a person located out of India. It is a well-known fact that Service tax is not levied on the transactions occurring in Jammu and Kashmir. In respect of service transactions occurring between persons based in India and persons located abroad, it is important to understand the applicability of the service tax provisions. In this regard, detailed place of supply of services provisions are prescribed known as Place of Provision of Services Rules, 2012. This set of Rules deals with various variety of services like performance based, property based, event based, transportation related, specific categories of services. A detailed discussion on the same has been made in the following pages.

Who has to pay Service tax? Normally, it is the Service provider who has been held responsible for payment of Service tax irrespective of the fact whether he has been able to recover the same from Service recipients. However, by virtue of Section 68 (2) of the Finance Act, the Central Government has been

empowered to specify a person other than Service Provider to pay Service tax on part or whole portion of the taxable value. In other words, even recipients of Service may be liable to pay Service tax to the Government in respect of services received by them. This is also called as ‘Reverse charge mechanism’. Reverse charge can be full or partial. Notifications 12 have been issued by the Government in respect of certain services and certain types of service providers/recipients. In case of partial reverse charge, there are various challenges in front of Service recipients like identifying the form of organisation of the Service Provider, value on which Service tax to be paid, what if Service provider has charged Service tax at the full rate on the entire value of service, etc. Similarly, for Service providers, proper presentation of tax liability in the Invoice is an important point to be taken care about.

What are the provisions in relation to set off under Service tax Law? Set off which is termed as CENVAT Credit, in the Service tax and Central Excise Laws, is of paramount importance for any service provider. The primary intention of granting CENVAT Credit is to avoid cascading effect and provide the mechanism which works on the principle of “Value Added Tax”. In other words, tax must be levied at every value addition and only on value addition. However, this concept has been diluted to a large extent. Presently, set off, in respect of Central Excise Duty paid on inputs as well as capital goods and Service tax paid on input services, is allowed. Large numbers of restrictions have been provided by limiting the scope of inputs and input services. This is one of the largest source of litigation.

What are Compliances under Service tax Law? Like most of tax statutes, Service tax has also fair amount of procedures and compliances to be taken care of. Mainly, any person liable to pay tax has to comply with the following: Nature of Compliance

Relevant Section

Relevant Rule of

Form

Servie tax Rules, 1994 Registration

Section 69

Rule 4

ST-1 and ST-2

Payment of tax

Section 68

Rule 6

GAR 7

Submission of Return

Section 70

Rule 7, 7A, 7B, 7C

ST 3

Is refund of Service tax possible? In case of excess payment or export of goods/services, refund can be claimed within 12 months from the relevant date subject to certain terms and conditions prescribed in various rules and 12

30/2012 ST dated 20.06.2012 and 45/2012 ST dated 7.8.2012

notifications. The important condition in case of refund is unjust enrichment. Unjust enrichment means the burden of Service tax should not have been passed on in respect of amount claimed as refund.

What are the penal Consequences in case of non-compliance? Like any other tax statute, adequate amount of powers have been given to Service tax officers to penalise defaulters. These powers include not only levying financial penalties13 but also arresting or prosecuting14 the large and regular defaulters. However, if adequate reasons have been explained to the adjudicating authority, the penalties can be waived15.

Conclusion: Service tax law is fairly interesting to professionals but equally taxing for Assessees. Requisite amount of knowledge and understanding is missing not only on the side of the Assessees but also at the level of Tax collectors. Sincere efforts by the Government to simplify the law and honest efforts by the Assessees to comply with the law can certain help the nation to grow better and faster.

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Section 75, 76, 77 and 78 of the Finance Act, 1994 Section 89 and 91 of the Finance Act, 1994 15 Section 80 of the Finance Act, 1994 14