BASICS OF SERVICE TAX AND SCOPE FOR PROFESSION

Transcription

1 BASICS OF SERVICE TAX AND SCOPE FOR PROFESSION Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF&SMP) The Institute of Chartered Accountants of India (Set up by an Act of Parliament) New Delhi

2 Basics of Service Tax and Scope for Profession Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF&SMP) The Institute of Chartered Accountants of India (Set up by an Act of Parliament) New Delhi

3 The Institute of Chartered Accountants of India All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form, or by any means, electronic mechanical, photocopying, recording, or otherwise, without prior permission, in writing, from the publisher. DISCLAIMER: The views expressed in this book are those of author(s). The Institute of Chartered Accountants of India may not necessarily subscribe to the views expressed by the author(s). The information cited in this book drawn from various sources while every efforts have been made to keep the information cited in this book error free, the institute or any office do not take the responsibility for any typographical or clerical error which may have crept in while compiling the information provided in this book. Further, the information provided in this book are subject to the provisions contained under different acts and members are advised to refer to those relevant provision(s) also. Edition : January, 2012 Committee/Department : Committee for Capacity Building of CA Firms and Small & Medium Practitioners (CCBCAF&SMP), ICAI ccbcaf@icai.org Website : Price : ` 80 /- (including CD) ISBN : Published by : The Publication Department on behalf of the Institute of Chartered Accountants of India, ICAI Bhawan, Post Box No. 7100, Indraprastha Marg, New Delhi Printed by : Sahitya Bhawan Publications, Hospital Road, Agra January/2012/500 Copies

4 Foreword Taxation, as we all know, plays an important role in promoting economic growth as well as its equitable distribution. I am happy that the contribution of the Institute and our members in this area has been very significant. Every year, the Institute provides inputs to the Ministry of Finance for widening the tax base, measures for increasing tax collections, simplification and rationalization of tax laws. The Institute has been closely working with the Ministry of Finance in introduction and implementation of Value Added Tax, Fringe Benefit Tax, Service Tax, e-governance, etc. Service Tax was first introduced to the Indian system Union Budget of the year The idea behind imposing Service Tax is to reduce the degree and extent of tax on core business, industry and trade without reducing the revenue stream for the government. Services of non-life insurance brokers, telephones and stock brokers were the only 3 taxable services which were subjected to this tax when it was introduced for first time. The list of taxable services is now comprehensive and includes more than 100 categories. The scope has now been broadened to increase revenue and to encompass almost all services under the net of Service Tax. The government charges service tax in India on the gross amount which the service providers charge from their clients. By bringing more and more services within the scope of service tax, the government intends to enhance its revenue earnings manifold. Members of our Institute play a significant role in enriching the knowledgebase in the domain of Service Tax. I am pleased to know that the Committee for Capacity Building of CA Firms and Small & Medium Practitioners(CCBCAF & SMP) of our Institute has brought out the book on Basics of Service Tax and Scope for Profession. It is heartening to note that the said Committee has brought out the aforesaid publication to enhance the knowledgebase of the Practitioners. I appreciate the efforts put in by the contributors for preparing the Basic Draft of this Book and complement the Committee for publishing the aforesaid book. January 27, 2012 New Delhi CA. G. Ramaswamy President, ICAI

5 iv

6 Preface The service sector is the fastest growing among all the sectors in today's world. The traditional sectors such as agriculture and industry have taken a back seat even in developing countries such as India, Pakistan, China and many Latin American nations. Service Tax as a source of collection for the Central Government is increasing year by year and this year may garner in excess of Rs. 1,00,000 Crores. The CA interested in employment would find the need to know the provisions as they would have an impact on activities of service including works contract. Those in practice would need to know the basics to be able to advise the client whether he/ she is liable or not and assist in the initial registration, payment of service tax after calcuating the set off available and finally filing the returns. The effective rate of service tax was 5% in the beginning, which has undergone several changes and has been increasing every year. Currently effective rate of service tax is 10.30% of the total gross amount charged by the service providers. This rate of tax is inclusive of Education Cess of 2% of service tax and Secondary and Higher Secondary Education Cess of 1% of the service tax, which has been introduced in the year 2004 and subsequently in the year The number of assesses in the year were 3943 increased to in the year It shows increase in number of assesses 332 times over the 16 years period. The service tax revenue has shown a steady rise since its inception in They have grown almost 142 folds since i.e. from Rs.410 cores ( ) to Rs crores ( ). With the objective of enhancement of the knowledge, the Committee has prepared this Book on Basics of Service Tax and Scope for Profession. As part of capacity building measure, this book has been designed to enable the members to widen their knowledge base on Service Tax and I am confident that this publication would surely help the members in discharging their responsibility in rendering the service tax assignments ina very effective manner. I feel great pleasure in acknowledging the efforts and the contribution made by CA. Madukar N. Hiregange, Central Council Member, ICAI, CA. Rajendra Kumar P., Central Council Member, ICAI, CA. Ashok Batra, Senior Member,

7 ICAI, CA. Pradeep Jain, Senior Member, ICAI & CA. Roopa Nayak, Bangalore in preparation of this book on Basics of Service Tax and Scope for Profession. I appreciate the efforts put in by the members of CCBCAF & SMP and officials of CCBCAF & SMP Secretariat, who have provided necessary support for publishing the aforesaid book. January 25, 2012 CA. Vijay Kumar Garg Chairman Committee for Capacity Building of CA Firms and Small & Medium Practitioners, ICAI vi

8 Index 1. Introduction Areas of Opportunity for Chartered Accountants Applicability Levy and Collection Registration Classification of Services CENVAT Credit Rules Valuation of Services Exemptions under Service Tax Import and Export of Services Point of Taxation Documentation & Records Service Tax Payment Interest and Penalty Return Filing Refunds under Service Tax Penal Provisions Assessment Demands under service tax Appeals Service Tax Audit Other Miscellaneous Provisions List of appendices: o Common Errors in Service Tax o Accounting entries o Service tax audit o Common Practitioner s Aids... 63

9

10 Chapter 1 Introduction The flourishing economy opens up a whole new paradigm of opportunities and avenues for professionals to perform prosper and prove their vigor. Chartered Accountants as professionals have time and again proved their acumen, be it in practice or employment. It does not need to be argued that the knowledge of a CA is second to none. But in the ever-changing scenario, constant up-gradation and a thorough understanding of the latest statutory provisions/ mandatory requirements having force of law are an essential to keep the flag of the fraternity flying high. Amongst the many opportunities that stand in the way of members, the field of indirect taxes needs to be particularly mentioned because it is the road less travelled and with it rests the enormous potential that offers the willing a whole new area of opportunities. In the vast field of indirect taxes, many statutes are covered but it is the shift of our economy from manufacturing sector to the rapidly expanding service sector that particularly draws our attention to Service tax which is an exciting phenomenon amongst the indirect taxes. The service-tax net is rapidly expanding and it promises a robust future. This book here provides an insight into the major provisions of the Finance Act 1994, updated with changes up to 15 th Dec 2011 and a wholesome set of functional areas that are available for Chartered Accountants to explore:- Why Chartered Accountants? A chartered accountant is a versatile professional who has an unparalleled practical exposure and vast knowledge thanks to their tough examination and rigorous training. They certainly count among the top 1-2 % of the population in terms of education and knowledge. The area of indirect tax practice is not much different from the practice in direct taxes, which is much more familiar to this community. However it shall be acknowledged that unlike Excise/ Custom/ VAT dealing with goods, services being intangible in nature have a unique place in indirect taxes and their accounting is very important and significant. Leaving many other factors aside and talking only from the accounting perspective there is no other professional who can serve the purpose better then a Chartered Accountant. The remuneration for the practitioner in this area is generally much higher due to the lack of specialists as well as the high stakes involved especially in litigation.

11 Chapter 2 Areas of Opportunity for Chartered Accountants The areas where CA s in practice / employment can provide their services are as under:- 1. Providing Tax planning in government/commercial projects having substantial investment: Indirect tax costs could form up to 25% of value, (Excise/ Service Tax 10% +VAT 13% + Misc taxes 2%) of a project which could substantially be reduced, by structuring the transaction in such a way that the pricing is competitive. The professional accountants with their knowledge could guide the client in structuring the transaction in such a manner as to be able to avail proper credit, obtain registration in order to pass on the credit etc, and deduce other vital ways to reduce the tax burden and make the price of the product more competitive. 2. Registration: Registration is one service that could be of much help to the client and it does not take too many days. Further, professionals could ensure that the right information was disclosed during registration in order to avoid future hassles. CA s can ensure that all the information as required was duly provided in the registration process and ensure a proper follow up so as to avoid the delay in obtaining registration. CA s can guide the clients in seeking registration on centralized/ decentralized basis depending upon the nature of services provided. 3. Disclosures to department: Disclosures made to the department such as books of accounts maintained, procedures followed by the assessee, copies of documents including intimation about important contracts and tax treatment with respect to the same play a significant role which most of the assessees tend to overlook, CA s can ensure proper disclosures of important events that have occurred during the provision of output services which could save an assessee from being assessed to tax for extended period and imposition of penalties. 4. Procedural Aspect: As the assessee would not be aware of the law, Chartered Accountants can explore the opportunity of providing the start up hand holding exercise, wherein for the initial few months of operations, CA s could assist/ guide the assessee in maintaining the accounts, raising the bills, drafting quotation, filing of returns, payment of service tax/ excise duty,

12 Basics of Service Tax and Scope for Profession calculation of interest standard operating procedures to be implemented and controls to be instituted 5. Monthly/ Quarterly payment of Tax/ duties: An Assessee having multi dimensional activity, having to comply with different laws, would welcome outsourcing of their tax computation and tax remittance activity to a CA, so that they are not burdened with tax compliance work, without effecting their routine work. 6. Return Verification/ Filing of returns: The assessee is often not abreast with latest amendments, notifications etc, CA s could explore an opportunity of filing/ reviewing the returns, ensuring that the returns depicting true and correct information, are filed so as to avoid future litigation hassles. 7. Service Tax Review and Quarterly Audit: Chartered Accountants could provide a value addition review audit, wherein the CA could examine if the eligible tax credits are duly availed, documentation for availing credits, classification of services, scrutiny of returns, availing the benefits of exemptions, disclosures made to department, making payments under protest when the Service tax is not leviable, have been taken care of. A nutshell review of ST transaction along with internal audit or as a separate service would create value addition to the clients. CA s can manage Compliance with least difficulty by considering the various exemptions, date of applicability, availment of credits, and voluntary payment of dues so as to avoid penalties. 8. Review before Departmental Audit: The CA can take up reviews to ascertain the grey areas and possible risk associated with them. It also provides the assessee an opportunity to take immediate action to rectify these grey areas and mitigate the risk of hefty demand notices along with interest and penalty. Such audit provides a feeling of comfort that major issues/ possible errors have been examined. For example: In case ST is payable but not paid the CA shall guide the assessee to discharge his ST liability along with interest so as to avoid penalty. 9. Assistance during Departmental IAP or CAG Audit: These audits are dreaded by the tax-payer who normally has a very limited knowledge of the provisions and rules. Therefore a knowledgeable professional CA is needed who can interact with the department. Such assistance could provide a great value addition to the client. CA s would be abreast with all the latest amendments, notifications circulars etc. This would restrict departmental officers from confronting the clients with unwarranted issues, which could create problems to the assessee at the higher forums during litigation. 10. Opinions/ Clarifications: Margins in today s competitive environment are very thin and hence it is vital for the assessee to have a clear 3

13 understanding regarding applicability of tax as over/under charging of the same shall both land him into trouble. Now, where the ST consultancy is given by a CA, the client would be able to structure optimally his availment of credits, payment towards liability of service tax/ Excise duty etc, thus ensuring smooth cash flow for other aspects of his business. 11. Transaction structuring: Chartered Accountants would play a vital role in area of transaction structuring, as transaction structuring plays a significant role in tax planning, credit availing and utilization, input service distributor, centralized registration etc. the impact of which would result in litigation-free business, due compliance with the law and also overcoming of uncertain tax laws. 12. Effect of budget/recent changes on activity: Updating and keeping abreast of the budget changes, its implications on the existing business practice and alteration of business practice in case of negative impact due to such amendment would also play an important role as a CA can guide the client on the change in law, important judicial pronouncements and amendments brought down by the recent Finance Act. 13. Refunds of Service Tax: A CA can assist the client in complying with information, documentation and collating of data for the purpose of applying for refund of service tax. 14. Departmental letter reply: Almost every departmental audit brings forth certain objections. A reasoned reply provided to the audits by professional with extracts of the law/ circulars or Tribunal Judgments may eliminate 90% of the points, which in turn would result in low probability of litigation. 15. Show Cause Notice Reply: This area offers immense learning potential as well as apposite remuneration to the professional. However it shall be noted that at the very beginning the professional should let the client know about the possible implications in writing / mail so that there is no scope for disappointment and the esteem of the profession is maintained. 16. Representation before adjudicating authority: This normally follows the SCN reply. All the important evidences and defenses and factual issues should be put forward at this point as it is possible to get all the details necessary. Here, the CA s can play a vital role. 17. Reply / Representation at appellate forums: In the course of the proceedings the need for the right professional becomes apparent. CA s can represent the interests of the client up to the tribunal stage and can be of enormous help to the client who is generally a layman. 4

14 Basics of Service Tax and Scope for Profession 18. Assistance to advocate at High Court/ Supreme Court: Though Chartered accountants cannot appear in person at the High/ Supreme Court level, they can assist the advocates on accounting and other related matters. 19. Outsourcing of the Function: Many MNCs would be keen to outsource this uncertain law to professionals who would account, file returns & litigate etc if necessary. That is, it is the professional who will take responsibility and own this function for the client. 20. Other Areas: These could be in training/ teaching, writing articles, assisting in drafting the notification or authoring. Training could involve weekly training sessions to the clients, altering the transaction structuring due to change in the law, seminars etc. However, before making his/her selection, the professional should remember that the subject of service tax is quite complex, as compared to central excise which is a well settled law; he/she should first of all have exposure to this area plus proper training for desired results. The knowledge of central excise can be useful. The formula of success for the practitioner is that he should provide quality, at the appropriate price with grace and dedication. Note: There are a few common errors taking place in relation to service tax matters. The list of such common errors is given in Appendix-1. This would ensure such mistakes could be avoided to the extent possible. Some of the common practitioner s aids for practice in this area are given in Appendix 4. 5

15 Chapter 3 Applicability Services are one of the major contributors to the development of economy, as per the Economic Survey The contribution of the services sector to the Indian Economy has been manifold: a 63.8% share in Gross Domestic Product (GDP), growing 10% annually, contributing about 25% in generation of employment. Tax on services was first introduced in the year 1994, through the insertion of Chapter V in the Finance Act, 1994, and levy was confined to three services (viz Telephones, Stock Brokers & General Insurance), Since then, the Act has been amended every year to bring in more services into the tax net and as on date 117 services are taxable. The Central Board of Excise & Customs (CBEC), Department of Revenue, Ministry of Finance, deals with the task of formulation of policy concerning levy and collection of Service Tax. The CBEC is assisted by the Directorate of Service Tax located at Mumbai. There are six Commissionerates located at metropolitan cities of Delhi, Mumbai, Kolkata, Chennai, Ahmedabad and Bangalore which deal exclusively with work related to Service Tax. Governing provisions The provisions pertaining to service tax are given in Chapter V and VA of Finance Act 1994 as amended from time to time. Sec 94 empowers the Central Government to make rules to carry out the provisions of this chapter. Sec 98 grants the power to give exemptions. The Government has consequently notified various sets of rules, the provisions of which have been explained as we proceed further with this book. What is Service? The term "service" has not been defined in the Finance Act, 1994, by way of any statutory provision or otherwise or by the rules framed hereunder. Service has been defined differently under various laws. Under the Incometax Act, 1961, service means service of any description, which is made available to potential users and includes the provision of services in connection with business of any industrial or commercial nature, such as, accounting, banking, communication, conveying of news, information, advertising, entertainment, amusement, education, financing, insurance, chit funds, real estate, construction, transport, storage, processing, supply of electrical or other energy, boarding and lodging.

16 Basics of Service Tax and Scope for Profession Under the Monopolies and Restrictive Trade Practices Act, 1969 the term "service" has been defined as under:- "'Service means service of any description which is made available to potential users and includes the provisions of facilities in connection with banking, financing, insurance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information but does not include the rendering of any service free of charge or under a contract of personal service." The term "service", as defined under the Consumer Protection Act, 1986, reads as under: "'service' means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, transport, processing, supply of electrical or other energy, board or lodging or both, entertainment, amusement or the purveying of news or other information but does not include the rendering of any service free of charge or under a contract or personal service." Foreign Exchange Management Act, 1999, has also defined the term "service" as under:- "Service means service of any description which is made available to potential users and includes the provision of facilities in connection with banking, financing, insurance, medical assistance, legal assistance, chit fund, real estate, transport, processing, supply of electrical or other energy, boarding or lodging or both, entertainment, amusement or the purveying of news or other information, but does not include the rendering of any service free of charge or under a contract of personal service." Conclusion:- In the light of the various statutory definitions of the term "service", one can safely define "service" as an act of helpful activity, an act of doing something useful, and 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". Under the Finance Act, 1994, "service tax" is levied on "taxable service" and not on "service provider". A "service provider" is only a means for deposit of the "service tax" to the credit of the Central Government. Although the term "service receiver" has not been defined in the Finance Act, 1994, the "service receiver" is a person, who receives or avails the services provided by a "service provider". 7

17 Chapter 4 Levy and Collection The levy of service tax extends to whole of India except that it does not extend to the state of Jammu and Kashmir by virtue of section 64 of Chapter V of Finance Act. Service Provider and Service Receiver Concept The question of taxing a service would arise where the service that is provided by the service provider happens to be covered under any of the relevant sub-clauses of section 65(105). Once the relevant clause is identified, the concept of service provider and service receiver would also have to be satisfied in order to tax the concerned service. In most of the categories, the service provider and the service receiver can be any person. Further, as far as rate of Service Tax is concerned, it is specified that the general rate is 10% of the value of taxable services. In addition, Education Cess (E.C.) of 2% and Secondary and Higher Education Cess (SHEC) of 1% on the amount of service tax are also required to be paid. In sum, the present effective rate of service tax is 10.30% of the value of taxable services. Where the criteria discussed above are satisfied, the tax would be levied on the service provider who would be liable to collect the service tax amount from the service receiver and remit it to the government in the manner prescribed. However in certain cases, the statute requires the service receiver to pay the service tax to the government which is popularly known as Reverse Charge Mechanism or Tax Shift Mechanism. In Service Tax Law, where the concept of Service Provider and Service receiver are there, tax is generally to be paid by service provider. However, in respect of taxable services notified under sec 68(2) read with Rule 2(1)(d) of STR,1994, tax is payable by the prescribed person. The services notified are :- Goods transport agency service specified person paying freight. Sponsorship service provided to any body corporate/firm located in India - the body corporate or firm receiving such service. Business auxiliary service of distribution of mutual fund distributor or agent mutual fund or asset management company receiving such service.

18 Basics of Service Tax and Scope for Profession General Insurance Business Insurer or Reinsurer as the case may be Insurance auxiliary service by an insurance agent person carrying the general insurance business or life insurance business as the case may be. Taxable services received by any person in India from a country other than India the recipient of such service in India. Telecommunication service, service tax payable only by telegraph authority. However, it may be noted that Circular No. 332/35/2006-TRU, dated has stated that if there is no service provider and service recipient relationship, the question of providing taxable service to any person by any other person does not arise. Service tax shall be payable only if the aggregate value of service (including the service which is taxable but for which exemption is provided) provided during the previous financial year exceeds Rs.10 Lakhs (Notification no. 06/2005 dated 1/3/2005 as amended by 08/2008 dated 1/3/2008). However, the above exemption shall not be available to the person providing specified services under sec (68)(2) as above, and to the person providing service under the brand name or trade name of others. Exemption of Rs.10 Lakh is available towards aggregate value not exceeding Rs.10 Lakhs. It means the sum total of first consecutive payments received during a financial years towards the gross amount charged by the service provider towards taxable service (Amount received from exempt service is not to be counted). Thus once the value exceeds Rs.10 Lakh, service tax is to be paid over and above such amount. However "aggregate value referred to above does not include payments received towards such gross amount which are exempt from whole of service tax leviable thereon under section 66 of the said Finance Act or under any other notification. Every person providing a taxable service and liable to pay service tax is required to get himself registered with the Central Excise / Service Tax department. Application for registration is required to be made in Form ST-1 to the 9

19 Basics of Service Tax and Scope for Profession jurisdictional superintendent of Central Excise/Service tax within 30 days of levy of service tax on such service or, in case of an existing taxable service, within 30 days of the commencement of provision of such service. A person providing more than one taxable service is required to take only one single registration. He should indicate all taxable services provided by him in Form ST-1. 10

20 Chapter 5 Registration The Superintendent of Central Excise shall grant a certificate of registration in form ST-2 within seven days from the date of receipt of the application. If the registration certificate is not granted within seven days, the registration applied for shall be deemed to have been granted. It also specifies that 7 days shall be reckoned from the date, the application for registration is complete in all respects. Further, Order no. 2/2011 dated 13 th December 2011 specifies the documents required to be submitted by the person applying for registration within 15 days of filing of application i.e. copy of PAN, residence Proof, Constitution of Applicant, Power of Attorney. Following two categories of persons have also been identified as Special Category of Persons for seeking registration (i) Input Service Distributor (ii) Any provider of taxable service whose aggregate value of taxable service in a financial year exceeds nine lakh rupees. Procedure for registration Application for registration is to be made online (website in Form ST -1 to the Superintendent of Central Excise. The form shall be filed online with all the required details and submitted online itself. A printout of the form submitted online shall be taken and alongwith the documents as specified, shall be submitted to the department at the concerned commissionerate. The registration certificate will be granted by the department, in Form ST-2, within seven days of filing of an application (complete and properly filled up). In case registration certificate is not issued within seven days, the registration is deemed to have been granted. A single registration is sufficient even when an assessee is providing more than one taxable services. However, he has to mention all the services being provided by him in the application. In case a registered assessee starts providing any new service from

21 Basics of Service Tax and Scope for Profession the same premises, he need not apply for a fresh registration. He can simply fill in the Form S.T.1 for necessary amendments he desires to make in his existing information. The new form may be submitted to the jurisdictional Superintendent for necessary endorsement of the new service category in his Registration certificate. Documents required for registration Self certified copy of PAN, (where allotment is pending, copy of the application for PAN may be given) Copy of MOA/AOA in case of Companies Copy of Board Resolution in case of Companies Copy of Lease deed/rental agreement of the premises A brief technical write up on the services provided Partnership deed in case of Partnership firm Self attested copy of address proof of partner/ proprietor/ director or authorised signatory 12

22 Chapter 6 Classification of Services Since classification of services is to be done properly, it is necessary that services are classified under appropriate heads and service tax is paid under that head only. However, the rate of service tax for all the services is the same. Classification of service is to be done as follows 1. When Services are prima facie classified under two or more heads, it is to be classified under the head which provides the most specific description 2. When composite services are provided, such services are to be classified on the basis of service which gives them their essential character. 3. When a service can t be classified under any of the two above, it is to be classified under the sub clause which occurs first amongst the sub clauses which equally merit consideration. In addition to this, the non statutory principles shall have also to be given proper accord especially where any meaning to a term has not been provided for in the statutory provisions.

23 Chapter 7 CENVAT Credit Rules 2004 The CENVAT Credit Rules, 2004 specify the duties and the taxes which can be used for setting off the Service Tax liability to be discharged on output services. Further, these rules specify the conditions to be fulfilled by the service providers in order to claim these set offs. The CENVAT Credits would not be available in respect of the Central Excise duties paid on inputs and service tax paid on input services used exclusively for providing an exempted service or for manufacture of exempted goods. Further, no CENVAT Credit shall be allowed in respect of capital goods, which are used exclusively in manufacture of exempted goods or in providing exempted services. CENVAT credit in respect of input services shall be allowed on or after the day when payment is made to input service provider. Further, w.e.f , with the mandatory insertion of Point of Taxation Rules, 2011, CENVAT credits is allowed on or after the day on which invoice, bill etc. in respect of input service is received, However, if payment of the value of input service and service tax thereon is not made within 3 months of the date of invoice, the manufacturer or output service provider is liable to pay an amount equal to the CENVAT credit availed which can again be taken on the payment. Further, CENVAT Credit in respect of inputs and capital goods shall be admissible once such inputs or capital goods reach the factory of the manufacturer. Before we proceed with the discussion on CENVAT Credits, it is important to consider some of the critical definitions as relevant to a service provider. In this regard, the definitions of input, input service and capital goods assume significance. The reader is advised to refer the CENVAT Credit Rules 2004 for the exact text though the definitions have been discussed below with reference to a service provider Concepts The definition of input contained in rule 2(k) has been revised. For better understanding of the definition of input, inclusions and exclusions which has been tabled below Inclusions All goods used in the factory by the manufacturer of the final product Exclusions Light diesel oil, high speed diesel oil, Motor spirit commonly known as petrol

24 Basics of Service Tax and Scope for Profession Any goods including accessories cleared along with the final product and goods used for providing free warranty for final products. Goods used for generation of electricity or steam for captive use also constitute inputs. All goods used for providing an output service Any goods used for the construction of a building or a civil structure or laying of foundation or making of structure for support of capital goods. Capital goods except when used as parts or components in manufacture of final products Goods used primarily for personal use or consumption of any employee including food articles etc. Goods having no relationship whatsoever with the manufacture of final product. Motor Vehicles Definition of capital goods Capital goods as per Rule 2(a) of CENVAT Credit Rules 2004, means: (A) The following goods, namely 1. All goods falling under chapters 82, 84, 85, 90, heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of the First Schedule to Central Excise Tariff Act 2. Pollution control equipment 3. Components, spares and accessories of the goods specified at clauses (1) and (2) above 4. Moulds and dies, jigs and fixtures 5. Refractories and refractory materials 6. Tubes and pipes and fittings thereof; and 7. Storage tank used- in the factory of manufacturer of final products, but does not include any equipment or appliance used in an office or outside the factory of the manufacturer of the final products for generation of electricity for captive use within the factory; or, 15

25 Basics of Service Tax and Scope for Profession for providing output service. (B) Motor vehicles would also be regarded as capital goods where they are registered in the name of the service provider for providing the following taxable services 1. Courier Services 2. Tour operator Services 3. Rent-a-cab scheme operator services 4. Cargo handling Services 5. Transport of Goods by road service 6. Outdoor catering Service 7. Pandal or shamiana Service (C) Dumpers or tippers falling under chapter 87 of first Schedule to the Central Excise Tariff Act, 1985 are eligible as Capital Goods when used for providing site formation and clearance services and mining services, provided that such dumpers or tippers are registered in the name of the service provider. (D) Components, spares and accessories of motor vehicles, dumpers or tippers, as the case may be, used to provide taxable services as specified in (B) and (C) above. Restriction in case of capital goods As per Rule 4(2)(a) of CCR 2004, the CENVAT credit in respect of capital goods Received in the premises of the service provider who provides taxable services, shall be taken for an amount not exceeding 50% of the duty paid on such capital goods in the same financial year. The balance credit can be taken in any subsequent financial year if the capital goods are in possession of such service provider. The criterion as to possession would not apply to components, spares, accessories, refractories and refractory materials, moulds, dies and goods falling under heading 6805, grinding wheels and the like, and parts thereof falling under heading 6804 of First Schedule of Central Excise Tariff Act. However, full CENVAT credit will be allowed in the same financial year in respect of capital goods which are cleared as such in the same financial year. 16

26 Basics of Service Tax and Scope for Profession Definition of input service For better understanding of the definition of input services under Rule 2(l), inclusions and exclusions which has been tabled below:- Inclusions Any service used by the provider of taxable service for providing output service or, Used by a manufacturer whether directly or indirectly in or in relation to manufacture of final product and clearance of final product up to the place of removal Services used in relation to Modernization or renovation or repairs of the premises of provider of output service or an office relating to such premises Advertisement or sales promotion Market research Storage up to the place of removal Procurement of inputs Accounting, auditing, financing, recruitment and quality control, coaching and training, computer networking, credit rating, share registry and security, business exhibition, legal service) Inward transportation of inputs or capital goods and Outward transportation up to the place of removal Exclusions Architect service, port service, air port service, other port services, commercial or industrial construction service, works contract service and construction of residential complex when they are used in construction of building or civil structure or even when used for laying foundation or making structure for support of capital goods. Services such as rent-a-cab service, general insurance service, authorised service station service and supply of tangible goods services in so far as they relate to a motor vehicle except when used for the provision of taxable services for which the credit on motor vehicle is available as capital goods; 17

27 Basics of Service Tax and Scope for Profession Services such as those provided in relation to outdoor catering, beauty treatment, health service, cosmetic and plastic surgery, membership of a club, health and fitness centre, life insurance, health insurance and travel benefit extended to employees on vacation such as leave or home travel concession, when such services are used primarily for personal use or consumption of any employee. Note: The line such as activities in relation to business have been deleted in this budget. Prior to , the credits could be availed making payment of invoice. W.e.f the CENVAT Credit on input services can be availed on receipt of invoice. However, the payment of such invoice has to be made within three months of DATE of invoice. If payment of input service is not made within 3 months of DATE of invoice then an amount equal to the credit availed in respect of such service needs to be paid back to the credit of the government. However, the same (i.e. credit) will be allowed when the payment is made for the input service and service tax thereon. If subsequent to payment made or invoice received, an amount is received back or credit note is received, or the value of service is renegotiated or altered for any reason the credit availed to that extent requires to be reversed/paid. Credit on the invoices of input services issued prior to would continue to be eligible on payment basis and not on the basis of receipt of invoice. Duties/taxes which can be considered for set off or availing credits The duties and taxes which can be considered as per Rule 3(1) of CENVAT Credit rules 2004 for set off or availment are as follows Basic Excise Duty (First Schedule to CETA) Special Excise Duty (Second Schedule to CETA) Education cess on excisable goods and on taxable services 18

28 Basics of Service Tax and Scope for Profession Secondary Higher Education Cess of excisable goods and on taxable services Service tax u/s 66 of Chapter V of Finance Act Service tax u/s 66A of chapter V of Finance Act (w.e.f ) Service tax paid under reverse charge mechanism Counter veiling Duty u/s 3 (3) of Customs Tariff Act on imported goods The aforesaid duties should have been incurred on input or capital goods received in the premises of the provider of output service on or after and the taxes should have been paid on any input service received by the provider of output services on or after The service provider cannot claim credit of additional duty (SAD 4%) leviable under section 3(5) of the Customs Tariff Act, by virtue of proviso to Rule 3(1) of CENVAT credit Rules Utilisation of CENVAT credits: - The CENVAT Credit on inputs, capital goods or input services can be utilized either for Payment of excise duty on any final product, or Payment of service tax on output service, or Reversal of CENVAT credit availed on inputs when the inputs are removed as such or after partial processing, or Reversal of CENVAT credit on capital goods where the capital goods have been removed as such, or Payment of amount as required u/r 16(2) of Central Excise Rules 2002 (reversal of CENVAT or payment on transaction value in case of clearance of goods, which had been brought back to the factory for repairs, etc.) The credit of Education Cess and Secondary and Higher Education Cess (whether on input services or excisable goods) is to be used only for payment of Education Cess and Secondary and Higher Education Cess on output services. When inputs/capital goods are removed outside the premises-rule 3(5) As per Rule 3(5), when inputs or capital goods on which CENVAT credit has been taken, are removed as such from the premises of the service provider, the CENVAT credit availed in respect of such inputs or capital goods has to be reversed. However, such reversal is not required if removal of such inputs 19

29 Basics of Service Tax and Scope for Profession or capital goods is made for providing output service. Further w.e.f vide notification no. 3/2011 CE(NT) dated Rule 3 (5) has also been amended to further include that the reversal of credit/ payment of duty would not be required on inputs when they are removed outside the factory for providing free warranty for final products. For this purpose, free warranty means warranty provided by the manufacturer, the value of which is included in the price of the final product and is not charged separately from the customer. However, if the capital goods, on which CENVAT Credit has been taken, are removed after being used, the manufacturer or provider of output services shall pay an amount equal to the CENVAT Credit taken on the said capital goods reduced by the percentage points calculated by straight line method as specified below for each quarter of a year or part thereof from the date of taking the CENVAT Credit, namely:- (a) for computers and computer peripherals: for each quarter in the first 10% for each quarter in the second 8% for each quarter in the third 5% for each quarter in the fourth and fifth (b) for capital goods, other than computers and computer 2.5% for each quarter. When inputs/capital goods are written off fully/partially Rule 3(5B) When inputs or capital goods before being put to use on which CENVAT Credit has been taken are written off fully or partially or where any provision for such write off is made in the books of accounts then the manufacturer or service provider shall pay an amount equivalent to the CENVAT credit taken on such input or capital goods. Subsequently where such inputs or capital goods are put to use for manufacture or for providing taxable service, the manufacturer or service provider would be entitled to take credit of the amount paid earlier subject to the other provisions in the Rules. Can the inputs or capital goods on which CENVAT credit is claimed, be sent out to a sub contractor for processing? The inputs or capital goods on which credit has been claimed, can be sent out under Rule 4(5)(a) of CENVAT Credit Rules 2004 to a job worker for processing, testing, reconditioning etc. The goods after processing, testing etc are to be received back in the premises of the manufacturer within

30 Basics of Service Tax and Scope for Profession days from the date of sending the same. Where goods are not received back within the prescribed period, the CENVAT credit availed earlier in respect of such inputs or capital goods needs to be reversed or to be paid back. The CENVAT credit can again be claimed on receipt of such inputs or capital goods in the factory. Obligation of the service provider where he provides both taxable as well as exempted services (Rule 6 of CCR 2004): - w.e.f The CENVAT credit on inputs and input services can be availed of by service provider to the extent attributable to taxable services. Where provider of output service avails of CENVAT credit in respect of any inputs or input services and provides such output services which are chargeable to tax as well as exempted services, in that case the provider of output service can avail proportionate credit. The assessee can opt for either of the following options in this regard:- Option I As per Rule 6(2) of CENVAT credit Rule, 2004, where a provider of output service avails the CENVAT credit in respect of any inputs or input services and provides such output service which are chargeable to tax as well as exempted services, then provider of output service has to maintain separate accounts for receipt, consumption and inventory of input and input service meant for use in the exempted services. CENVAT credit can only be taken on that quantity of inputs or input services which are intended for use in providing output service on which service tax is payable. Option II As per Rule 6(3) of CENVAT credit Rules, the provider of output service opting not to maintain separate accounts shall follow either of the following options as applicable to him, 1. The service provider has to pay 5% of value of the exempted services for the year 2011 onwards. 2. The provider of output service shall pay amount equivalent to the CENVAT credit attributable to inputs and input services used in or in relation to manufacture of exempted goods or for provision of output services subject to conditions and procedures specified in sub rule (3A). Note: Here it should be noted that a specific explanation is inserted to Rule 21

31 Basics of Service Tax and Scope for Profession 6(3) by which the credits on inputs or input services that are solely used in or in relation to manufacture of exempted goods or provision of exempted services cannot be availed. With effect from , under CENVAT credit Rules, 2004, CENVAT Credit across goods and services has been allowed. It means that if any excise duty is paid on input or service tax is paid on input services CENVAT Credit of the same can be availed provided they have been used for providing any output service which is taxable. Illustration - if the service tax liability of an output service provider is Rs /- and he has CENVAT credit of Rs /-(paid on input or input services such as Chartered Accountancy, Telephone etc) he can utilize the same to discharge his liability and pay Rs from CENVAT Credit and the balance Rs /- in cash. The credit of service tax on input services (e.g. Telephone service, management Consultancy, professional services, security service etc) would be available on receipt of Invoice. However, payment has to be made within three months. However, before availing any CENVAT Credit a service provider has to carefully go through the definition of Input & Input services as given in CENVAT Credit Rules, 2004 to see whether it qualifies as input or input services or not since many services such as Motor Vehicle, Beauty Parlour and other services which are primarily for personal consumption have been specifically disallowed. To align with GST, the concept of accrual basis like VAT & Excise in service tax has also been introduced in the budget 2011 with introduction of Point of-taxation Rules vide Notification no.18/2011 ST, whereby services provided will be taxed on accrual basis instead of receipt basis. 22