Case Studies in Service Tax - Covering various important Issues/ Aspects July 2014
Index 1 Exemption limit of Rs. 10 lakh 2 Reverse Charge Mechanism 3 Place of Provision of Service 4 CENVAT Credit on Input Services
Index 1 Exemption limit of Rs. 10 lakh
Exemption Limit of Rs. 10 Lakh Notification No. 33/ 2012 Service Tax dated 20 June, 2012 Exemption to Small Service Providers Exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year Notification shall not apply in the following cases: Conditions for availing exemption: 1. Aggregate value of taxable services does not exceed ten lakh rupees in preceding financial year; 2. No CENVAT Credit on inputs, input services and capital goods to be availed during the period for which exemption is claimed; 3. On the date of availing exemption, CENVAT Credit of any inputs lying in stock or in process, to be paid by service provider. Balance CENVAT Credit lying unutilized, if any, shall lapse; 4. Exemption limit shall be computed cumulatively for all taxable services provided from all premises and not separately for each premise or each taxable service; 5. Option given to service provider not to avail exemption and pay service tax. However, option once availed shall not be withdrawn for remaining part of the year. 1. Taxable services provided under a brand name or trade name, whether registered or not, of another person; 2. Value of taxable services in respect of which service tax is to be paid under reverse charge mechanism. 3
Exemption Limit of Rs. 10 Lakh Aggregate Value of Taxable Services Includes Does not include 1. Value of taxable services charged in the first consecutive invoices issued during a financial year; 2. Taxable service means any service on which service tax is leviable under Section 66B of the Finance Act, 1994 i.e. services provided in the taxable territory, other than services specified in the negative list. 1. Value of services which are not leviable to service tax under Section 66B of the Finance Act, 1994, including services specified in the negative list; 2. Value of services which are exempt from the whole of service tax under any other notification. 4
Exemption Limit of Rs. 10 Lakh Case Studies: Particulars Value of services for which exemption available Value of services for which service tax to be paid Case 1 ABC Ltd., a Pune based company. is engaged in providing software services to clients in India. Year wise aggregate value of taxable services provided by ABC Ltd. is mentioned below: Year 1 Rs. 700,000; Year 2 Rs. 1,200,000; Year 3 Rs. 500,000 What happens if no service tax was required to be paid in the 1st year, however, ABC Ltd. being ignorant of the exemption limit, pays service tax on Rs. 700,000. Case 2 Mr. A has obtained the franchise of McDonald's in Pune to provide restaurant services. Year wise aggregate value of taxable services provided by Mr. A is mentioned below: Year 1 Rs. 1,200,000; Year 2 Rs. 500,000; Year 3 Rs. 800,000 5
Exemption Limit of Rs. 10 Lakh Case Studies: Particulars Value of services for which exemption available Value of services for which service tax to be paid Case 3 ABC Ltd., a Pune based company is engaged in providing software services. XYZ Inc. situated in USA is a group company of ABC Ltd. Following is the breakup of services provided and received by ABC Ltd. in the 1 st year: Software services provided to clients in India Rs. 200,000; Software services provided to clients outside India Rs. 1,000,000; Management Cross charges for administration support charged by XYZ Inc. Rs. 1,200,000 In the 2 nd year of operation, ABC Ltd. provides software services to the extent of Rs. 500,000 only to clients in India. Case 4 XYZ Ltd., a Pune based company has obtained registration for 2 units in Pune. Unit 1 is engaged in providing construction services; Unit 2 is engaged in providing restaurant services with the facility of air-conditioning; Unit wise value of services provided by ABC Ltd. is mentioned below: Unit 1 Rs. 500,000 (Service tax abatement available on 75% of value of service under a notification); Unit 2 Rs. 700,000. 6
Exemption Limit of Rs. 10 Lakh Case Studies: Particulars Value of services for which exemption available Value of services for which service tax to be paid Case 5 XYZ Ltd., a Pune based company has obtained registration for 3 units in Pune. Unit 1 is engaged in providing restaurant services with the facility of air-conditioning; Unit 2 is engaged in providing restaurant services without the facility of air-conditioning; Unit 3 is engaged in providing lottery services. Unit wise value of services provided by ABC Ltd. is mentioned below: Unit 1 Rs. 500,000; Unit 2 Rs. 1,200,000; Unit 3 Rs. 700,000. 7
Index 2 Reverse Charge Mechanism
Reverse Charge Mechanism 1. Scheme of Reverse Charge: Section 68 (2) Payment of Service Tax under Reverse Charge Mechanism Specified taxable services notified by Central Government Person responsible for payment of service tax Point of Taxation Notification No. 30/ 2012 dated 20 June 2012 Prescribed under Rule 2 (1) (d) (i) of Service Tax Rules, 1994 Prescribed under Rule 7 of Point of Taxation Rules, 2011 9
Reverse Charge Mechanism 2. Specified taxable services covered under reverse charge mechanism: S.No. Specified Taxable Service Service Provider Service Recipient % of Service tax payable by Service Provider % of Service tax payable by Service Recipient 1. Insurance services Insurance Agent * 2. Recovery Agent services Recovery Agent Person carrying on insurance business Banking company, financial institution or a non banking financial company Nil 100% Nil 100% 3. Goods Transport Agency services (Transportation of goods by road) Goods Transport Agency Person liable to pay freight Nil 100% 4. Sponsorship services Any person 5. Services provided by an arbitral tribunal Arbitral Tribunal Body Corporate or Partnership Firm Nil 100% Nil 100% 6. Legal Services Individual Advocate or Firm of Advocates Any Business Entity Nil 100% 7. Support Services * Government or local authority Nil 100% 8. Rent a cab services Abated Nil Abated 100% Individual, HUF or Non Abated 50% Non Abated 50% Partnership Firm, whether Business Entity registered as 9. Manpower Supply or security services registered or not, including a body corporate 25% 75% 10. Works Contract services association of persons 50% 50% 11. Import of Services 12. * Services provided by Director of a Company or a body corporate to the said Company or body corporate Any person located in nontaxable territory Director of a Company or body corporate Any person located in taxable territory Nil 100% Company or body corporate Nil 100% * - Budget changes in Union Budget of 2014-15 effective from 11 July 2014. 10
Reverse Charge Mechanism 3. Point of Taxation under reverse charge mechanism: * Rule 7 of Point of Taxation Rules, 2011 Point of Taxation in case of taxable services covered under Reverse Charge Mechanism Service tax under reverse charge to be paid in cash only (Explanation to Rule 3 (4) of CENVAT Credit Rules, 2004) Where payment for services made within 6 months from date of invoice Where payment for services not made within 6 months from date of invoice Point of Taxation = Date of Payment Point of Taxation = Point of taxation for any other taxable service as per normal provisions Special Provision in case of Associated Enterprises: In case of associated enterprises, where person providing service is located outside India, point of taxation shall be date of debit in the books of accounts of the person receiving the service or date of making payment, whichever is earlier. * - Budget Changes in Union Budget of 2014-15 effective from 1 October 2014 Point of Taxation = Date of Payment or Expiry of 3 months from Invoice Date, whichever is earlier. 11
Reverse Charge Mechanism 4. Other important provisions under reverse charge mechanism: Taxable Services under Reverse Charge Mechanism * Availment of CENVAT Credit Registration Requirements Prescribed under first and second proviso to Rule 4 (7) of CENVAT Credit Rules, 2004 Section 69 of Finance Act, 1994 states that every person liable to pay service tax shall make an application for registration Full Reverse Charge Date on which service tax is paid Partial Reverse Charge Date on which service tax and value of input service is paid i. Service recipient is considered as a person liable for paying service tax under Rule 2 (1) (d) (i) of Service Tax Rules, 1994; ii. Hence, registration would be required to be obtained in respect of services covered under reverse charge mechanism * - Budget changes in Union Budget of 2014-15 effective from 11 July 2014. 12
Reverse Charge Mechanism 5. Goods Transport Agency ( GTA ) services under reverse charge mechanism: GTA Services Service Provider Service Receiver Abatement Exemption Goods Transport Agency: As per Section 65B (26) of Finance Act, 1994 goods transport agency means any person who provides service in relation to transport of goods by road and issues a consignment note, by whatever name called Person liable to pay freight: i. Any factory registered under or governed by the Factories Act, 1948; ii. Any society registered under the Societies Registration Act, 1860 or under any other law; iii. Any co-operative society established by or under any law; iv. Any dealer of excisable goods registered under Central Excise Act, 1944; v. Any body corporate established, by or under any law; vi. Any partnership firm whether registered or not under any law, including association of persons Notification No. 26/ 2012 Service Tax dated 20 June, 2012: i. Abatement of 75% available on GTA services; ii. CENVAT Credit on inputs, capital goods and input services used for providing taxable service, shall not be taken Notification No. 25/ 2012 Service Tax dated 20 June 2012: Entry No. 21 Services provided by a goods transport agency, by way of transport in a goods carriage of: a. b. goods, where gross amount charged for the transportation of goods on a consignment transported in a single carriage does not exceed one thousand five hundred rupees; c. goods, where gross amount charged for transportation of all such goods for a single consignee does not exceed rupees seven hundred fifty 13
Reverse Charge Mechanism Case Studies: Description Whether service tax is required to be paid under reverse charge Proportion of service tax payable by service recipient Amount of service tax payable by service recipient Point of Taxation Case 1: ABC Ltd., a Company registered under Companies Act, 1956 is engaged in providing security services to XY Associates, a Partnership Firm; Value of services rendered for the month of May, 2014 is Rs. 100,000; Invoice for such services is dated 1 June 2014 and the payment in respect of such services is made on 30 June 2014. Case 2: ABC Ltd., a Company registered in India is the subsidiary company of XYZ Inc., USA; ABC Ltd. receives software services from XYZ Inc.; Value of Services rendered for the month of May, 2014 is Rs. 100,000; Invoice for such services is dated 1 June 2014; Expenses in relation to such services are booked by ABC Ltd. on 30 May 2014 as a provision for expenses; Payment in respect of such services is made on 30 June 2014. 14
Reverse Charge Mechanism Case Studies: Description Whether service tax is required to be paid under reverse charge Proportion of service tax payable by service recipient Amount of service tax payable by service recipient Point of Taxation Case 3: AB Associates, a Partnership Firm is engaged in providing works contract services to ABC Ltd., a Company registered under the Companies Act, 1956; AB Associates has raised an invoice dated 1 June 2014, in relation to the works contract services for Rs. 100,000; For the purpose of discharging service tax in relation to the works contract services, AB Associates has adopted the Actual Value Method as prescribed under Rule 2A (i) of Service Tax (Determination of Value) Rules, 2006; Payment in respect of such services is made on 30 June 2014. 15
Reverse Charge Mechanism Case Studies: Description Whether service tax is required to be paid under reverse charge Proportion of service tax payable by service recipient Amount of service tax payable by service recipient Point of Taxation Case 4: ABC Ltd. is a Pune based company registered under the Companies Act, 1956; During the month of April, 2014, ABC Ltd. has availed GTA services for transport of raw materials from various vendors across India; The goods transport agency from whom the GTA services are availed does not provide GTA services to any other consignee; Following is the summary of GTA services availed during the month of April, 2014: S.No. Particulars Freight paid by ABC Ltd. 1. 200 Trucks @ Rs. 1,400 per truck Rs. 280,000 2. 300 Trucks @ Rs. 1,600 per truck Rs. 480,000 A single invoice dated 1 May 2014 is raised in respect of the above GTA services; Payment in respect of such services is made on 31 May 2014. 16
Index 3 Place of Provision of Service
Place of Provision of Service 1. Concept of Place of Provision of Service: Place of Provision of Service Section 66B Charge of Service Tax Section 66C Determination of Place of Provision Place of Provision of Services Rules, 2012 ( PPSR, 2012 ) Service Tax to be levied on all services, other than services in negative list, which are provided or agreed to be provided in the taxable territory Central Government may frame rules in order to determine the place of provision of service Determination of Place of Provision of Service having regard to the nature and description of various services Note: Taxable Territory = Whole of India except the State of Jammu and Kashmir 18
Place of Provision of Service 2. Determination of Place of Provision of Service (PPSR, 2012): Rule No. Description Place of Provision 3. 4. General Rule - Where location of service receiver available in ordinary course of business - Where location of service receiver not available in ordinary course of business Performance based services: i. In respect of goods to be made physically available; ii. In respect of services provided from a remote location by electronic means; iii.in respect of services provided to an individual requiring physical presence Location of Service Recipient; Location of Service Provider Where services are performed; Location of goods at the time of provision of service; Where services are performed 5. Services directly relating to immovable property Location of immovable property 6. Services relating to events Place where event is actually held 7. Services referred to in Rule 4, 5 and 6 are provided at more than one location, including a location in the taxable territory Location in taxable territory where greatest proportion of service is provided 8. Provider and Recipient of service located in the taxable territory Location of Service Recipient 9. 10. Specified Services: i. Services provided by Banking Company, non banking financial company or financial institution to account holders; ii. Online information and database access or retrieval services; iii.intermediary services; iv.services in relation to hiring of means of transport, upto one month Services of transportation of goods, other than by way of courier or mail Goods Transportation Agency Services Location of Service Provider Place of destination of goods Location of person liable to pay tax 11. Passenger Transportation Services Place where passenger embarks for continuous journey 12. Services provided on board a conveyance First scheduled point of departure 19
Place of Provision of Service 3. Location of Service Provider/ Service Recipient: Registration Single Registration, whether centralized or otherwise Multiple Registrations Services provided/ used from/ at one location Services provided/ used from/ at more than one location In the absence of any establishments, whether business or fixed Location of Business Establishment Location of other Fixed Establishment, where services provided/ used from/ at a place other than Business Establishment Location of Establishment most directly concerned with the provision/ use of service Usual Place of Residence of the provider/ recipient of service 20
Place of Provision of Service Case Studies: Description Which Rule is applicable to determine Place of Provision Place of Provision Whether Place of Provision within taxable territory Case 1: ABC Ltd. is a Pune based Company registered in India under the Companies Act, 1956. ABC Ltd. has opened a branch office in Dubai; For the new office in Dubai, XY Associates, a Bangalore based partnership firm in India, has provided interior decoration services. Case 2: ABC Ltd. is a Pune based tax and management consulting company; ABC Ltd. has entered into a contract with its group company US Inc. situated in USA to provide a report on company law updates in India; Such report on company law updates in India is intended to be used by XYZ Inc, USA which has entered into a contract with US Inc. to provide such report. Case 3: In the above case, assuming all other facts remaining the same, what would be the place of provision of service, where the managing director of XYZ Inc. has visited India to attend a training on company law updates conducted by ABC Ltd. Please note that there is no contract of service between ABC Ltd. and XYZ Inc. 21
Index 4 CENVAT Credit on Input Services
CENVAT Credit on input services Rule 2 (l) of CENVAT Credit Rules, 2004 Input service Means Includes Excludes Any service: i. used by a provider of output service for providing an output service; or ii. used by a manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products upto the place of removal i. modernization, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises; ii. advertisement or sales promotion, market research, business exhibition; iii. accounting auditing, financing; iv. recruitment and quality control, coaching and training; v. computer networking; vi. credit rating; vii. share registry; viii.security; ix. legal services; x. procurement of inputs, storage upto the place of removal, inward transportation of inputs and capital goods and outward transportation upto the place of removal i. service portion in the execution of a works contract and construction services (declared services); used in relation to building or civil structure or part thereof or laying of foundation or making of structures for support of capital goods; except for the provision of one or more of the above mentioned declared services; ii. renting of motor vehicle which is not capital goods; iii. general insurance, servicing, repair and maintenance of motor vehicle which is not capital goods except when used by: a manufacturer of motor vehicle in respect of motor vehicle manufactured by such person; or an insurance company in respect of motor vehicle insured or reinsured by such person iv. services primarily meant for personal use or consumption of an employee such as outdoor catering, health services, life insurance, health insurance etc. 23
Thank You