CA Sunil Gabhawalla S B Gabhawalla & Co Chartered Accountants

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1 CA Sunil Gabhawalla S B Gabhawalla & Co Chartered Accountants

2 Tax on all services provided in the taxable territory Attaches itself to the service rather than to a person Multiple Point Taxation based on the concept of value addition Therefore effectively a consumption tax 2

3 Tax attaches to the place of consumption therefore destination based Export of Services exempted from tax and eligible for rebates/refunds of input taxes Import of Services liable for payment of tax under reverse charge mechanism Is the place of consumption same as the place of consumer? 3

4 OUTSIDE INDIA C -FCo Delivery of Materials Actual Performance of Work A FCo Territorial Frontiers. INDIA Construction Sub Contract US$ 75 (Material US$ 50 Labour US$ 25) B - ICo Construction Contract US$ 100 (Material US$ 60 Labour US$40)

5 For the material component, Is B importing goods worth $50 from C? Is B exporting goods worth $60 to A? Is B liable for import duties? Is B eligible for export incentives? For the services component, Is B importing services worth $25 from C? Is B exporting services worth $40 to A? Is B liable for payment of service tax as an importer of services? Is B eligible for export incentives as an exporter of services? Can there be different set of answers? 5

6 INDIA C -ICo Delivery of Materials Actual Performance of Work A ICo Territorial Frontiers. OUTSIDE INDIA Construction Sub Contract US$ 75 (Material US$ 50 Labour US$ 25) B - FCo Construction Contract US$ 100 (Material US$ 60 Labour US$40)

7 For the material component, Is A importing goods worth $60 from B? Is C exporting goods worth $50 to B? Is A liable for import duties? Is C eligible for export incentives? For the services component, Is A importing services worth $40 from B? Is C exporting services worth $25 to B? Is A liable for payment of service tax as an importer of services? Is C eligible for export incentives as an exporter of services? Is there double taxation? Can there be different set of answers? 7

8 Applies to whole of India (excl. J&K) Applies to taxable services provided Applies to taxable services provided in whole of India (excl. J&K) 8

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10 Transaction either covered or not covered Based on Place of Provision of Services Rules Concepts of Import / Export of Service deleted Export of Service concept still relevant for CENVAT Credit/Rebates Reverse Charge Mechanism applicable, if Service Provider located outside India No Major Impact more confusing due to use of word provision instead of receipt

11 Basis of Determination Services rendered to foreign clients Impact of receipt in Indian Currency Old Provisions Separate Rules for Import and Export based on category of service Not Liable for Payment of service tax Taxable New Provisions Common Rules based on substance of transaction Not Liable for Payment of Service Tax since territory outside India Still Not Taxable but, reversal of CENVAT Credit required Services from foreign vendors Liable for Payment under Liable for Payment under RCM RCM Transactions with J&K Not Applicable Applicable Transactions between Branches Impacted Imports only Impacts Imports as well as Exports Also impacts transfers inter se

12 Description General Rule Services provided in respect of goods that are required to be made physically available by the service receiver to the service provider, in order to provide the service When such services are provided from a remote location by way of electronic means. Services provided entirely or predominantly, in the ordinary course of business, in the physical presence of an individual, represented either as the service receiver or a person acting on behalf of the receiver Rule Location of Service Receiver. In case the location of the service receiver is not available, then Location of service provider Place of Performance Location of goods at the time of provision of service Place of Performance

13 Place of Provision of Services Rules Description Services in relation to immovable property Services in relation to Events When Service Provider and Service Receiver are located in taxable territory Specified services: a) Banking & Financial Services b) Online Information and Database access or retrieval services c) Intermediary services d) Hiring of means of transport Service of Transport of Goods Goods Transport Agency Passenger Transportation On Board a conveyance Rule Location of Immovable property where the event is actually held Location of service receiver Location of Service Provider Destination of Goods Location of Service Recipient Place of Origin Place of Origin

14 Generic Issues Service Provider and Service Recipient in same location India Specific Definitions (like telecommunication services) Category Specific Issues Old Provisions Debatable if the service is rendered abroad Earlier not taxable New Provisions Taxable even if service rendered abroad Now Taxable in view of negative list Technical Testing and Recipient Based Performance Based Analysis Service Intermediaries Recipient Based Provider Based Online Information and Database Access Recipient Based Provider Based

15 In case of multiple establishments, place of establishment more closely connected with theactivitytobeconsidered How to determine the place of establishment more closely connected? Invoice Contract Payment Debit to Accounts (Bearing of Cost) Actual Performance/Consumption of the Service

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17 General Principle (Forward Charge Mechanism) Service Provider to collect from Service Recipient and pay tax to the Government Service Recipient is not accountable to the Government directly Reverse Charge Mechanism Service Recipient called upon to directly pay tax to the Government

18 Need for Reverse Charge Mechanism Legal Provisions Section 68 Independent Liability of Service Provider and Service Recipient Not Similar to Tax Deduction at Source Variations Full / Partial Reverse Charge Mechanism Comprehensive / Selective Reverse Charge Mechanism Too Onerous a Responsibility?

19 Service Tax to be paid as a service recipient Service Recipient may account for the service either as Expenses Capital Asset/ CWIP Asset/Liability (specially reimbursement of expenses) Invoicing Issues: What should the service provider s invoice contain? How to account in books? What are the Income Tax TDS obligations CENVAT Credit Related Issues Whether CENVAT can be utilised for paying this tax? Having paid this tax, whether CENVAT can be claimed?

20 Description of Service Liability of Service Provider Compone Effective nt Rate Liability of Service Recipient Componen Effective t Rate Only Non Corporate Service Providers and Corporate Service Recipients Rent-a-Cab on abated value NIL NIL 100% 4.944% Rent a-cab on non abated 60% 7.416% 40% 4.944% value

21 Net Impact on Service Recipient is the same 4.944% What is covered? Taxis Radio Cabs Employee Leased Cars Long Term Car Leases General Tourist Cars taken on lease Buses for Staff Transportation Reimbursement claimed by employees No CENVAT Credit is available

22 Description of Service Liability of Service Provider Compone Effective nt Rate Liability of Service Recipient Componen Effective t Rate Only Non Corporate Service Providers and Corporate Service Recipients Supply of Manpower 25% 3.09% 75% 9.27% Security Services (only w.e.f. 25% 3.09% 75% 9.27% )

23 Definition supply of manpower means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control Effective from also includes security services Security Services means services relating to the security of any property, whether movable or immovable, or of any person, in any manner and includes the services of investigation, detection or verification, of any fact or activity Controversy between a manpower supply service and the basic service (matter in Supreme Court) Labour Contractor Labour Supplier Housekeeping Agency Data Entry Operators Accounts Outsourcing Industrial Labourers Impact of Valuation where salaries/esic/pf paid by the company

24 Description of Service Works Contract Services Liability of Service Provider Liability of Service Recipient Componen Effective Rate Component Effective Rate t Only Non Corporate Service Providers and Corporate Service Recipients Nature of Works Presumptive Effective Contract Value of Tax Rate Service Original Works 40% 4.944% 50% 2.472% 50% 2.472% (Construction of new immoveable property) Works Contracts 70% 8.652% 50% 4.326% 50% 4.326% relating to moveable assets Other Works 60% 7.416% 50% 3.708% 50% 3.708% Contracts

25 Issues Concept Works Contract is complex concept Interpretation of works contract vs. labour contracts Whether all works contracts are liable for RCM? Issues Valuation Valuation of Works Contracts can result in difficulties Choice of Valuation Option independent of each other Debates will increase on account of free issue materials and services

26 Definition: Contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any moveable or immoveable property or for carrying out any other similar activity or a part thereof in relation to such property Vivisection Value of goods liable for VAT Service Component can be taxed under Service Tax

27 Contract for Sale Contract for Work Contract for Other Services Labour Contracts Indirect Transfer of Property in Goods Accretion Accession Blending Also WC under Service Tax Law Also WC under Service Tax Law Not Works Contract under Service Tax Law Original Works Others 70% 40% 60%

28 Example Income Tax 94C VAT 29A Treated as Works Contracts under all laws Service Tax 65B(44) Erection of Power Plant (on turnkey basis) Yes Yes Yes Annual Maintenance Contracts Yes Yes Yes (Comprehensive) Repairs of Motor Cars (with materials) Yes Yes Yes Treated as Works Contracts under IT & VAT Law but not under Service Tax Law Printing Contracts Yes Yes No Photography Contracts Yes Yes No

29 Example Income Tax 94C VAT 29A Service Tax 65B(44) Treated as Works Contracts under IT Law but not under Service Tax or VAT Law Construction Work undertaken on labour job Yes No No basis without any transfer of material Annual Maintenance Contracts (Non Comprehensive) Yes No No Not treated as Works Contracts under any of the laws Sale of Computer with free installation No No No Catering Contracts No No No Software Licenses No No No

30 Valuation Options Value adopted for State VAT purposes to be reduced Actual Value of materials to be reduced If not possible, adopt presumptive Value

31 Issues Concept Works Contract is complex concept Interpretation of works contract vs. labour contracts Whether all works contracts are liable for RCM? Issues Valuation Valuation of Works Contracts can result in difficulties Choice of Valuation Option independent of each other Debates will increase on account of free issue materials and services

32 General (Liability of the Service Recipient Only) Description of Service Liability of Service Liability of Service Recipient Provider Component Effective Rate Sponsorships NIL 100% 12.36% Arbitral Tribunal NIL 100% 12.36% Individual or Firm of Advocates NIL 100% 12.36% Support Service (Other than renting) NIL 100% 12.36% by Government or Local Authority Foreign Service Providers NIL 100% 12.36% Goods Transport Agency Services NIL 100% 3.09% Directors (w.e.f ) NIL 100% 12.36%

33 Onerous Obligation How to handle implementation Manual ERP/System Driven Possibility of Mistakes very common Will the Department provide an HUG in case of such mistakes?

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