“Understanding New Regime of Service Taxation in India” on 31th October,2012

1. Presents
A Knowledge Master Class
On
“Understanding New Regime of Service Taxation in India”
Conducted by
Dr. Sanjiv Agarwal
FCA, FCS
Wednesday,
31th
October,2012
New Delhi © Dr. Sanjiv
Agarwal
1

2. SESSION – II
Overview of Taxation of Services
and Major Changes
2

3. This Presentation Covers
• Economic Overview
• Overview of taxation of services – Past and Present
• Major Changes
• Scope of „Service‟ under new regime
• Declared Services including Works Contract
• Bundled Services
3

4. Indian Economy – An overview
 India‟s economy is the 11th largest economy in the world
and the second fastest growing even in today‟s
recession
 World is presently facing recession-II but Indian
economy is still better than comparable economies.
 Agriculture, services and industry are the major sector of
India an economy. Contribution of different sectors in
March, 2012 was :
 Agriculture 19%
 Services 59%
 Industry 22%
4
to be

5. Service Tax Share of Services in
GDP
Agricult ure
19%
Service
Sect or
Indust ry 59%
22%
GDP C O MPO S ITIO N IN MARC H, 2012
5

6. Growth in Tax GDP Ratio – Slow but
Steady
Years Tax GDP ratio
2003-04 9.2%
2007-08 11.9%
2009-10 9.7%
2010-11 10.3%
2011-12 10.1%
6

7. Taxonomy of Indian Taxation
TAXATION POWERS OF UNION
 Income Tax – on income, except
agricultural income
 Excise Duty – on goods manufactured
 Custom Duty – on imports
 Service Tax – on specified services
 Central Sales Tax – on inter-state sale of goods
 Stamp Duty – on 10 specified instruments
to be contd…..
7

8.  Introduced in India in 1994 as a simple, modest tax with
just three services.
 Service tax – an indirect tax.
 Approach to Service Tax – Selective as against
comprehensive one.
 Desirable from revenue, equity and economic view point.
 Governed by Finance Act, 1994 and a dozen of rules.
 Legislative dependence on other laws.
 Scattered and heterogeneous large mass of service
providers as well as wide spectrum of services.
 Jurisdictional application.
8

9. Selective Approach to Service Tax
 Selective v. Comprehensive approach
 Taxation by choice
 Service not defined but taxable service defined.
 > 120 taxable services [section 65(105)]
 Resulted in distortions / prejudice
 Untapped tax potential
 Economically unjustified
 Issues – Classification, Illogical
definitions, Constitutional challenges, deemed services
etc.
9

10. Shift to Comprehensive approach
 W.e.f. 1st July 2012
 Finance Act, 2012 – A land mark Act to shift from positive
to negative approach.
 It took 18 years to shift from selective approach to
positive approach to tax services
 Section 65 (Definition of Taxable Service), 65A
(Classification of Taxable service), 66 (Charge of Section
Tax) and 66A (Charge of Service Tax on Services
received from outside India) have no application w.e.f.
01.07.2012.
10

11. Taxation of Services by Finance Act, 2012
All Services
(including declared Services
(-)
Specific Exclusions
(-)
Negative List Services
(-)
Exemptions
(=)
Taxable Services 11

12. New system of taxation of services
All services to be taxed other than services
specified in the negative list and exempted
services – Section 66B.
Negative list (17 in number) specified through
statutory provisions – Section 66D.
„Service‟ defined for the first time.
„Negative List‟ and „declared services‟ also
defined.
12

13.  Section 65 Old definitions of Services / Taxable
Services
 Section 65A Classification of Services
 Section 66 Charge of Service Tax
 Section 66A Charge of Service Tax on Services
received from outside India.
 Import of Service Rules, 2006
 Export of Service Rules, 2005
13

14. New Provisions in Service Tax
Section 66 B deals with charge of service tax
on or after Finance Act, 2012
Section 66 C provides for determination of
place of provision of
service.
Section 66 D comprises of negative list of
services
Section 66 E comprises of the services which
constitute declared services
Section 66 F provide principles of interpretation
of specified description of services
or bundled services
14

15. The New Taxability Concept
SERVICE FOR A CONSIDERATION
9 DECLARED SERVICES
E: Employee
M: Money
A: Actionable claim E - MAGIC TEST
G: Goods
I: Immovable property
C: Court Fee
1. Non - 2.
Taxable Negative
territory
(POPS) list (17)
3.
Exemption
s (39)
Taxable
15

16.  All services Taxable
[section 65B (44)]
 Declared services Taxable
(section 66E)
 Services covered under Not Taxable
negative list of services
(section 66D)
 Services exempt under Mega Exempted
Notification No. 25/2012-ST
dated 20.6.2012
 Other specified Exemptions Exempted
16

17. GST: A Common Tax
on
Goods Services
17

18. • Setting up of empowered committee for GST (like VAT) which can steer the road
map into action - done
• Broaden the tax base for excise duty (presently 40% comes from petroleum
products) – being done
• Finishing area based and product based exemptions – being done
• Rationalization of concessions and exemptions including that on exports –
being done
• Expanding service tax to almost all services – negative list introduced
• Common/unified tax rate for goods and services which may be ideally, revenue
neutral (a suitable GST rate) – dual tax proposed
• Avoiding or minimizing differential tax rates – under discussions
• Abolition of other small taxes - under discussions
• Abolition of CST in a phased manner - being done
• Power to levy service tax on select/agreed services to States - under
discussions
• Issue of inter-State services and goods movement vis-à-vis levy of duty or tax
to be sorted out - under discussions
• Revenue sharing mechanism to be rationalized - under discussions
18

19. Budget 2012
 No announcement on GST rollout date
 GST to be implemented in consultation with the States at the earliest
 GST network (GSTN) likely to be in place from August, 2012 (not yet done)
 GSTN to implement common PAN based registration, return filing and
processing of payments for centre and all states on a shared platform.
 Bringing closer of Service Tax and Central Excise for transition to GST
 Drafting of model legislation for CGST and SGST under progress.
 Common forms for Service Tax and Central Excise registration and return
proposed.
 Place of Supply Rules, 2012 to trigger debate to assess issues that may arise in
taxation of inter state services for eventual launch of GST.
 New FM is meeting the Empowered Committee on GST on 8th November, 2012
to expedite the GST roll-out
19

20. Past Recent Past Now &
Future
National GST Dual GST ???????
…or end of beginning !!
20

21.  Objective to widen tax base
 Service Tax law to be shorter by about 40 percent
 Effective rate of Service Tax shall be 12.36 percent w.e.f.
01.04.2012 including education cess.
 Definition of ‘service’ finds place in statutory provisions
 All services to be taxed including a set of services called
„declared services‟
 Negative list of services containing 17 broad service
categories to be out of Service Tax ambit.
 Withdrawing of many existing exemptions / abetments or
their rationalization
21

22.  Place of provision of service rules will determine the
location of service and become be basis of taxation.
 Withdrawal of export of service rules and import of service
rules in view of place of provision of service rules coming into
operation.
 Concept of taxable territory and non- taxable territory
brought in
 Basis of charge of Service Tax shifted under new section 66B.
 Taxation of Service to be determined by provision of service in
taxable territory and non taxable territory.
 Classification of service criteria replaced by new section 66F
on interpretation principles of specified description of service
22
or bundled services.

23.  Consequent upon change in service tax rates, there is change of service tax
rate in composition scheme and specified rates w.e.f. 1.4.2012 (Composition
scheme for works contract withdrawn w.e.f 1.7.2012)
 Penalty wavier for arrears paid within specified time in respect of renting of
immovable property service.
 Retrospective exemption to road repairs and repairs etc of non commercial
government buildings.
 Under new reverse charge mechanism, onus of paying Service Tax will be
shared by service provider and service receiver in case of specified
services.
 Service Tax on taxable services provided by service provider located in Jammu
& Kashmir state liable under reverse charge.
 New Accounting Codes for payment of tax for the month July and onwards -
Tax Collection 00441089
Other Receipts 00441090
Penalties 00441093
Deduct Refunds 00441094 23

24.  Change in valuation rules in relation to works contracts
and outdoor catering / supply of food.
 Provision introduced for date of determination of value of
service, tax rate and rate of exchange.
 Payment of Service Tax on receipt basis for all service
providers being individuals / firms / LLPs, if aggregate
value of taxable services in previous year does not
exceed Rs. 50 lakh.
 Criteria for Rs 10 lakh threshold exemption changed.
 Time limit for appeal by assessees to Commissioner
(Appeals) reduced from 3 months to 2 months
 Revision Application Authority and Settlement
Commission provisions made applicable to service tax.
 Special Audit of Service tax assesses by CAs /CWAs .24

25.  N. No. 47/2012-ST dated 28.09.2012 – for April to June
2012, quarterly return shall be filed.
 Order No. 3/2012 - last date of return extended upto
25.11.2012
 A format of Modified ST-3 issued and available at
www.aces.gov.in/download.jsp
 More or less, it is same as previous ST-3 return. Only the
year and return period column is pre-filled and constant
 Return format and time for next quarter/ period to be
notified
25

26. Exports [Rule 6(A)]
 Service provider should be in India
 Service receiver should be outside India
 Both should not be mere establishments
 Service should not be in Negative list
 Service should be provided outside India
 Payment should be in convertible currency

27. Services on which Service Tax shall be attracted comprise
of :
 Those services which satisfy the definition of service u/s
65B (44)
 Nine specified declared services u/s 66E
 Those services which do not find place in negative list of
services u/s 66D
 Those services which are not exempt from levy of Service
Tax under Notification No. 25/2012-ST dated 20.06.2012
to be contd….
27

28. Scope of services under Service
Tax
Services on which no Service Tax shall be payable
comprise of :
• Service which are specifically excluded from the scope
of definition of service itself u/s 65B(44).
• 17 broad services specified in the negative list of
services u/s 66D.
• Services which are exempt from levy of Service Tax
under N. No. 25/2012-ST dated 20.06.2012.
• Specified services otherwise exempt under specific
notifications.
• Activities where service provider and service receiver
are in non –taxable territory
28

29. „Service' has been defined in clause (44) of the new section
65B and means –
 any activity
 for consideration
 carried out by a person for another
 and includes a declared service (66E)
29

30.  Activity must be for a consideration (nexus / reciprocity)
 Activity – includes both activity as well as non-activity
 Consideration – includes both monetary and non
monetary consideration.
 Two persons are involved –
Service provider
Service receiver
 Only services provided by one person to another are
taxable
 Person – natural as well as artificial
30

31. Activity
 Not defined in the Act
 In common understanding, activity includes –
 An act done
 A work done
 A deed done
 An operation carried out
 Execution of an act
 Provision of a facility etc.
 Activity could be active or passive and forbearance to act
 Agreeing to an obligation to refrain from an act or to tolerate
an act or a situation - listed as a declared service u/s 66E
31

32. Consideration
 Means everything received or recoverable in return for a
provision of service which includes -
 Monetary payment
 Non-monetary payment
 Deferred consideration
 Under Indian Contract Act, 1872, Consideration means -
“When, at the desire of the promisor, the promisee or any
other person has done or abstained from doing, or does or
abstains from doing, or promises to do or to abstain from
doing, something, such act or abstinence or promise is called a
consideration for the promise”
32

33. Consideration
 Monetary consideration means any consideration in
form of Money.
 Includes not only cash but also cheques, promissory
note, bill of exchange, letter of credit, draft, pay order,
traveler‟s cheques, money order, postal or electronic
remittance or any such similar instrument
 Non- monetary consideration- money equivalent
33

34. Activity for a Consideration
Activity should be carried out by a person for a
consideration
Activity without consideration like-
Donation
Gifts
Free charities
outside the ambit of service
Charity for consideration would be service and
taxable unless otherwise exempted
34

35. Money- 65B(33)
"money" means legal tender, cheques, promissory note, bill of
exchange, letter of credit, draft, pay order, traveller cheques, money
order, postal or electronic remittance or any similar instrument but
shall not include any currency that is held for its numismatic value
Actionable Claim –Section 3 of Transfer of Property Act, 1882
• Claim to unsecured debts
• Claim to beneficial interest in movable property not in possession of
claimant
• Right to insurance claim
• Arrears of rent
35

36. Tax on Money Remittance (Circular No. 163 dated 10.7.2012)
 No service tax on foreign currency remitted to India from
overseas
 Amount of remittance comprises money
 Service excludes money transactions
 Even fee for remittance is not taxable (POPS)
 Sender of money outside India bank / company remitting
located outside India
 Fee charged by Indian bank - remitter located outside
India (not taxable as per POPS)
36

37. Person-65B(37)
"person" includes,––
• an individual,
• a Hindu undivided family,
• a company,
• a society,
• a limited liability partnership,
• a firm,
• an association of persons or body of individuals, whether incorporated
or not,
• Government,
• a local authority, or
• every artificial juridical person, not falling within any of the above
37

38. Government – Not defined
Section 3 (22) of General Clause Act, 1897
Includes Central/State Government/ Union Territory
Actions taken in the name of President/ Governor
Most of services provided by government are in
Negative List
38

39. Local Authority - Section 65B(31)
 A Panchayat as referred to in clause (d) of article 243 of the
Constitution
 A Municipality as referred to in clause (e) of article 243P of the
Constitution
 A Municipal Committee and a District Board, legally entitled
to, or entrusted by the Government with, the control or
management of a municipal or local fund
 A Cantonment Board as defined in section 3 of the
Cantonments Act, 2006
 A regional council or a district council constituted under the
Sixth Schedule to the Constitution
 A development board constituted under article 371 of the
Constitution, or
 A regional council constituted under article 371A of the
Constitution.
39

40. Governmental Authority (N. No. 25/2012-ST)
 board/ Authority / other body
 established with > 90% participation
 equity /government control
 set up by Act of Parliament or State Legislature
 to carry out any functions entrusted to municipality u/s
243W of Constitution
40

41. 'Service' does not include -
 any activity that constitutes only a transfer in title of goods or
immovable property by way of sale, gift or in any other manner
 a transfer, delivery or supply of goods which is deemed to be a
sale of goods within the meaning of clause (29A) of article 366 of
the Constitution
 a transaction only in money or actionable claim
 a service provided by an employee to an employer in the course
of the employment.
 fees payable to a court or a tribunal set up under a law for the time
being in force
41

42. This scope shall not apply to –
a) functions performed by M.P., M.L.A., Members of
Panchayats / Municipalities who receive any
consideration in performing the functions of that office
as such member; or
b) duties performed by any person who holds any post in
pursuance of the provisions of the Constitution in that
capacity; or
c) duties performed by any person as a Chairperson or a
Member or a Director in a body established by the
Central Government or State Government or local
authority and who is not deemed as an employee
before the commencement of this section.
42

43. For the purpose of scope of service -
(a) an unincorporated association or a AOP and a member
thereof shall be treated as distinct persons;
(b) an establishment of a person in the taxable territory and any of his
other establishment in a non-taxable territory shall be treated as
establishments of distinct persons.
(c) A person carrying on a business through a branch or agency or
representational office in any territory shall be treated as having an
establishment in that territory
43
43

44.  Draft Circular (F.No. 354 /127/2012-TRU dated 27.7.2012) issued for
clarification on certain activities / facilities / reimbursements to employees by
the employers
(a) Treatment of supplies made by the employer to employees
 Amount deducted from salary / paid for service provided by the employer to
employee is for consideration and taxable
 Employer who provides some services free of cost (e.g.
crèche, gymnasium or a health club) are not liable to tax
(b) Treatment of reimbursements made by the employer to the employee
 Reimbursements of expenditure incurred on behalf of the employer in
course of employment would not amount to a service, hence non-taxable 44

45. (c )Treatment of supplies and reimbursements made by the
employer to ex-employees/ pensioners
Same tax treatment with ex- employees of the company –
 Reimbursement of expenses on behalf of
company – non-taxable
 Facilities for consideration – taxable
 Facilities free of cost - non taxable
45

46.  Director‟s services to the company are taxable w.e.f
1.7.2012
 Sitting fees, commission, bonus, etc. are subject to
service tax
 W.e.f. 1.7.2012 upto 6.8.2012, service tax will be
deposited by the directors while from 7.8.2012 vide
Notification No. 45/2012, Service Tax on such services
will be deposited by the company under reverse charge
 WTDs /MDs /EDs who are under contractual employment
with the company and receive salary or remuneration
from the company will not be covered - considered as
employees of the company
46

47.  Interest on loan by director to company, dividend on shares, other
professional charges on account of services not rendered as a
director (in professional capacity) are not liable to Service Tax
 In case of nominee director, the nominating company who receives
fees will be liable to pay service tax
 The invoice / receipt to be issued by the directors within 30 days
 In case of nominee directors, the invoice will be issued by the
nominating company
 In the case of Government nominees, the services shall be deemed
to be provided by the Government but liable to be taxed under
reverse charge basis
47

48.  Partnership firm is not a distinct legal entity apart from the
partners under the Partnership Act, 1932
 Partner is not an employee of the firm -contract of
employment requires two distinct firms, viz., employer and
employee
 Partners are the real owners of the assets of Firm to the
extent of their share
 Salary paid to partner is only profit known by a different
name
 It is only a transaction in money
 Incomes received from firm treated as income from Profits
and Gains of Business or Profession under I T Act, 1961
 Partnership Act, 1932 can not be overlooked
48

49. Taxability of Services – Then & Now
Period Taxable Non Taxable
Prior to Finance Act,
2012 Taxable services Exempt services
(upto 30.6.2012) specified in section 65 Service not covered
(105) under section 65 (105)
Import of services Export of services
under reverse charge
Post Finance Act, 2012
(w.e.f. 1.7.2012) All services provided Services in Negative
in taxable territory List
Declared services Exempt services
Services provided in
non- taxable territory
(as per POPS Rules)
49

50.  Non commercial construction for non-government
purpose
 Private roads
 Residential construction of more than one unit
 Commercial artists/performers
 Actors, directors
 Reality show judges
 Tourism boats
 Board director‟s sitting fee
 Non-compete fee
 Arbitrators to business entities
to be contd.. 50

51. Discourses and lectures
Banking services to government
Unrecognized IPRs
Services to RBI
Hotel Telephone Calls
Video library facilities by hotels
Matrimonial sites
Astrologers
Works contracts for movable properties
On board catering and other facilities
51

52.  Clause 44 of section 65B defines service – it includes a declared service.
 There are 9 categories of services or activities as declared services
implying that on all such nine declared services, Service Tax shall be
payable
 Does not include any such transfer, delivery or supply of any goods which
is deemed to be a sale within the meaning of Article 366(29A) of the
Constitution of India.
 What is declared services is defined in section 65B(22) to mean any
activity carried out by a person for another person for a consideration and
declared as such under section 66E of the Act.
 They are amply covered by the definition of service but have been
declared with a view to remove any ambiguity for the purpose of uniform
application of law all over the country
52

53. Following constitute Declared Services (Section 66E)
 Renting of immovable property;
 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 certificate of
completion by a competent authority;
 Temporary transfer or permitting the use or enjoyment of any intellectual
property right;
 Development, design, programming, customization, adaptation, up
gradation, enhancement, implementation of information technology software;
53

54.  Agreeing to the obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act;
 Transfer of goods by way of hiring, leasing, licensing or any such manner
without transfer of right to use such goods;
 Activities in relation to delivery of goods on hire purchase or any system of
payment by installments ;
 Service portion in execution of a works contract;
 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 part of the activity.
54

55. Renting of Immovable Property
Renting (Section 65B (41)) -
allowing, permitting or granting access, entry, occupation, usage or any such
facility, wholly or partly, in an immovable property, with or without the transfer
of possession or control of the said immovable property and includes letting,
leasing, licensing or other similar arrangements in respect of immovable
property
Renting of certain kinds of immovable properties is specified in the negative list
• Renting of vacant land, with or without a structure incidental to its use,
relating to agriculture.
• Renting of residential dwelling for use as residence
• Renting out of any property by Reserve Bank of India
• Renting out of any property by a Government or a local authority to a
non-business entity
55

56. Exemptions to Renting of Immovable property
 Threshold level exemption up to Rs. 10 lakh.
 Renting of precincts of a religious place meant for general public is
exempt.
 Renting of a hotel, inn, guest house, club, campsite or other
commercial places meant for residential or lodging purposes, having
declared tariff of a room below rupees one thousand per day or
equivalent is exempt.
 Renting of immovable property to / by educational institution in
respect of exempted education
56

57. The immovable property could be –
 factories
 office buildings
 warehouses
 theatres
 exhibition halls
 multiple use buildings
 commercial markets
 shops / shopping centre
 hotel, guest houses
 community centre
 Vacant land for commercial use etc.
 Allowing or permitting the usage of immovable property without
transferring possession of such property is also renting of
immovable property.
57

58. Nature of Activity Taxability
Renting of property to educational body Not chargeable to service tax; exemption
Renting of vacant land for animal Not chargeable to service tax as it is covered in
husbandry or floriculture the negative list entry relating to agriculture
Permitting use of immoveable property for Chargeable to service tax as permitting usage of
placing vending/dispensing machines space is covered in the definition of renting
Allowing erection of communication tower Chargeable to service tax as permitting usage of
on a building for consideration. space is covered in the definition of renting
Renting of land or building for Chargeable to service tax as there is no specific
entertainment or sports exemption.
Renting of theatres by owners to film Chargeable to service tax as the arrangement
distributors amounts to renting of immovable property.
Renting of immovable property outside India not taxable in India even if owners are
in India

59. Construction Activities [Section 66E (b)]
Construction activities means 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.
It includes construction of -
 Complex
 Building
 Civil structure or part thereof
 Complex or building intended for sale to a buyer except where
entire consideration is received after issuance of completion
certificate by the competent authority.
Actual sale after construction-if any consideration received before
such completion certificate, it will also be taxed.
59

60. Construction is not defined
Construction Includes
 additions,
 alteration,
 replacement, or
 remodeling
of any existing civil structure
60

61. Who is Competent Authority to Issue Completion Certificate
 Government
 Any authority authorized to Issue CC under any law
 In absence of any requirement to issue CC,
• Architect under Architect Act, 1972
• Chartered Engineer registered with Institution of Engineers
• Licensed surveyor (of local body / development or planning
authority)
61

62. Residential Complex
 Complex comprising of one or more buildings having more than one
residential unit
 Even two units would be called „complex‟
 Single residential unit – self contained residential unit designed for
use, wholly / principally, for residence of one family
 Original work – new construction and all type of addition / alteration
to abandoned / damaged structures on land as are required to make
them workable / erection , commissioning, installation.
62

63. Temporary transfer or permitting the use or enjoyment of any
intellectual property right [Section 66 E (c)]
Intellectual property right‟ has not been defined but Intellectual property
right includes :
 Copyright
 Patents
 Trademarks
 Designs
 Any other similar right to an intangible property
63

64. Examples of IPRs
 Patents - New technical, concepts,
inventions
 Copyright - Text, graphics, software, data
compilations, art, music
 Trademarks - Brands (Services/ Products)
image and reputation
 Confidential Information - Ideas, information, know-how,
processes etc.
 Design Rights -Form and appearance,
decoration, apparels
64

65. What is taxed in IPR
all IPRs (whether recognized in law or not) excluding
copy rights
temporary transfer of IPRs
permitting the use of IPRs
enjoyment of IPRs
65

66. Copyrights as IPRs are exempted which include :
literary work
dramatic work
musical work
artistic works
cinematograph films
66

67. Information Technology software related services [section 66E(d)]
 It includes following in relation to Information Technology Software (ITS)
–
 Development
 Design
 Programming
 Customization
 Adaptation
 Upgradation
 Enhancement
 Implementation
67

68. ITS is defined in Section 65B(28)
 Representation in ITS should be of any of the following –
• Instruction
• Data
• Sound
• Image
• Source code
• Object code
 Such items represented should be recorded in a machine readable
form,
 Such items represented and recorded should be capable of being
manipulated.
 They should provide interactivity by way of a –
• computer, or
• automatic data processing machine, or
• any other device or equipment
68

69. Scope of ITS Service
Design - plan, scheme
Programming - process of writing a computer programme
Customization - modifying to meet a specific requirement
Adaptation - change to suit, adopt
Up gradation - raising standard, improving quality / version /
features
Enhancement - in value, content, quality
Implementation - execution
69

70. Agreeing to obligation to refrain from on Act / to tolerate Act or situation /
to do an Act [section 66E(e)]
Following activities if carried out by a person for another for
consideration would be treated as provision of service -
 Agreeing to the obligation to refrain from an act.
 Agreeing to the obligation to tolerate an act or a situation.
 Agreeing to the obligation to do an act.
70

71. Examples of Obligations / Actions
 non compete fees for agreeing not to compete
 compensation on termination of business agreements
 advance forfeited for cancellation of agreement to provide a
service.
 forfeiture of security deposit for damages done by service
receiver in course of receiving of services.
 cancellation charges being charged by airlines, hotels etc.
 consideration for non-appearance in a court of law or
withdrawal of suit.
 demurrage charges or detention charges
71

72. Transfer of goods by hiring, leasing, licensing [66E(f)]
There should be transfer of goods involved
 Such transfer of goods should be by way of –
 hiring
 leasing
 licensing, or
 any such manner
 Such transfer should be without transfer of right to use
such goods.
 Excludes intangible goods
 Only goods [section 65B(25)] covered
72

73. Transfer of right to use
 Taxable only when transfer of right to use goods is not there
 Constitutional / legal concept
 Can be determined when agreement in read in whole, not
just one clause
 Transfer of right to use is deemed sale u/s 366(29A) of
Constitution
 If owner retains effective control, no transfer of right can
take place
 Service excludes deemed sale u/s 366(29A)
73

74. Tests laid down by Supreme Court in BSNL v UOI [(2006)2 STR 161
(SC)]
 There must be goods available for delivery ;
 There must be consensus ad idem as to the identity of the goods;
 The transferee should have legal right to use the goods –
consequently all legal consequences of such use including any
permissions or licenses required therefore should be available to the
transferee;
 For the period during which the transferee has such legal right, it has
to be the exclusion to the transferor – this is the necessary
concomitant of the plain language of the statute, viz., a „transfer of the
right to use‟ and not merely a license to use the goods;
 Having transferred, the owner cannot again transfer the same right to
others
74

75. Article 366 (29A) of Constitution of India, as amended by Constitution (46th
Amendment) Act, 1982, w.e.f 2.2.1983
"Tax on the sale or purchase of goods" includes-
 a tax on the transfer, otherwise than in pursuance of a contract, of
property in any goods for cash, deferred payment or other valuable
consideration;
 a tax on the transfer of property in goods (whether as goods or in some
other form) involved in the execution of a works contract;
 a tax on the delivery of goods on hire-purchase or any system of
payment by installments;
 a tax on the transfer of the right to use any goods for any purpose
(whether or not for a specified period) for cash, deferred payment or
other valuable consideration;
to be contd……
75

76.  a tax on the supply of goods by any unincorporated association or body
of persons to a member thereof for cash, deferred payment or other
valuable consideration;
 a tax on the supply, by way of or as part of any service or in any other
manner whatsoever, of goods, being food or any other article for human
consumption or any drink (whether or not intoxicating) , where such
supply or service is for cash, deferred payment or other valuable
consideration,
and such transfer, delivery or supply of any goods shall be deemed to
be a sale of those goods by the person making the transfer, delivery or
supply and a purchase of those goods by the person to whom such
transfer, delivery or supply is made.
76

77. Examples of transfer without right to use
 Car on hire with driver – right to use not transferred
 Conditional supply of equipment – not free to use goods
 Bank lockers – possession not transferred to hirer
 Scaffolding structure for temporary purpose – no transfer of right /
effective control and possession
 Hiring of Pandal / Shamiyana – No effective control
 Hiring of audio visual equipment with attendant – no transfer of right /
possession

78.  Includes delivery of goods on -
 hire purchase
 any system of payment by installment
 Payment in parts / installments
 Lease payment is calculated so as to cover full cost of asset together
with interest charges
 Transfer of substantially all risks and rewards in relation to goods so
transferred
 Not taxable as covered under deemed sale of goods
 But services in relation to such sale taxable
78

79.  Delivery of goods on hire purchase
 Transfer of possession (and not just of custody)
 The hirer has the option or obligation to purchase the goods in
accordance with the terms of the agreement.
 In hiring, hirer has no such option and risks remain with owner /
not transferred to hirer
 In hire purchase, hirer has option / obligation to purchase goods
 Operating lease not covered
 Involves two transactions – financial transaction and hire
purchase. Financial transaction is chargeable to Service Tax
[Association of Leasing & Financial Services v. Union of India
(2010) 20 STR 417 (SC)].
 Service Tax levied only on 10 percent value representing interest
in financial lease and not full value (Notification No. 26/2012-ST)
79

80. Works Contract [65B(54)]
 “Works Contract” means a 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 movable or
immovable property or for carrying out any other similar
activity or a part thereof in relation to such property.
80

81. Works Contract covers
Construction
Erection
Commissioning
Completion
Fitting out
Repair
Maintenance
Renovation
Alteration, or
Any other similar activity or part there of
81

82. Such activities could be in relation to any –
Movable property (plant, machinery, equipments
etc)
Immovable property (land, building, structures etc)
This definition is very vast and covers almost
everything
82

83. Some issues in works contracts
Labour contracts Excluded
Repair & Maintenance of motor vehicles yes if property in goods
transferred in execution of WC
Construction of pipeline / conduit yes, structures on land
Painting/repair/renovation of building yes if involves provision of
material also
Erection/commissioning installation of yes if transfer of property in
plant/ machine etc goods is involved and machinery
etc are embedded / attached to
earth after the job
83

84. Value of service portion in execution of work contract = gross amount charged for works
contact less value of transfer of property in goods involved in execution of works contract
Gross amount includes Gross amount does not include
Labour charges for execution of Value of transfer of property in goods involved in the
the works execution of the said works contract.
Amount paid to a sub-contractor Note:
for labour and services As per Explanation (c) to sub-rule (i), where value added tax
Charges for planning, designing or sales tax has been paid or payable on the actual value of
and architect’s fees property in goods transferred in the execution of the works
contract, then such value adopted for the purposes of
payment of value added tax or sales tax, shall be taken as
the value of property in goods transferred in the execution of
the said works contract.
Cost of establishment of the Value Added Tax (VAT) or sales tax, as the case may be, paid,
contractor relatable to supply of if any, on transfer of property in goods involved in the
labour and services and other execution of the said works contract
similar expenses relatable to
supply of labour and services
Profit earned by the service
provider relatable to supply of
labour and services 84

85. Alternative valuation model (Rule 2A of Valuation Rules)
Where works contract is for… Value of the service portion shall be…
(A) execution of original works forty percent of the total amount charged
for the works contract
(B) maintenance or repair or seventy per cent of the total amount
reconditioning or restoration or servicing charged including such gross amount
of any goods
(C) in case of other works contracts, not sixty percent of the total amount charged
included in serial nos. (A) and (B) above, for the works contract
including contracts for maintenance,
repair, completion and finishing services
such as glazing, plastering, floor and wall
tiling, installation of electrical fittings.
85

86.  Total Value = Sum total of
+ gross amount charged
+ value of goods and services supplied free of
cost for use in or in relation to execution of
WC
whether us same contract /any other contract
+ value of land charged as part of total
consideration
- amount charged for such goods / services, if
any
- VAT levied, if any
 If value of FOC goods / services is not ascertainable, it will be
determined on basis of fair market value having close resemblance
 FMV based on generally accepted accounting principles
 No Cenvat available on goods / inputs used in works contract 86

87.  Supply of foods and drinks is deemed sale and hence not taxable
 However, only service portion in deemed sale is sought to be taxed
 Service portion in 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 is a declared service.
 Levy of Service Tax on services provided by only such restaurants where
service portion in total supply is substantial and discernible
87

88. Service portion in supply of foods and
drinks [section 66E(i)]
 Restaurants provided conditional exemption
 Services provided in relation to serving of food or beverages by a
restaurant, eating joint or a mess, other then those having the
facility of air-conditioning or central air-heating in any part of the
establishment, at any time during the year, and which has a
license to serve alcoholic beverage.
 Threshold exemption
 What activities are covered –
• Supply of food or drinks in a restaurant;
• Supply of food and drinks by an outdoor caterer.

89.  in a restaurant -40% of total value charged
 by outdoor catering - 60% of total value charged
 Exemption under Notification No. 25/2012-ST to mid day meal scheme and
restaurants without bar license / air conditioning / central heating facility
 Abatement @ 30% Notification No. 26/2012-ST provided Cenvat credit is
not taken on goods
89

90. Principles of Interpretation of specific description of services [section 66F]
 Section 65A dealing with classification of taxable services omitted w.e.f.
1.7.2012
 useful in deciding whether a service falls in negative list / exemptions /
declared services
 composite v bundled service
 bundled service –
 collection of services / tied up services
 more than one service
 element of one service combined with element of provision of other
service (s).
 Examples - Mailing done by RTI, Air traveling and catering therein
 Earlier issue – which taxable service
 Now – whether any activity is a „service‟ or not a „service‟.
90

91. Rule 1
Reference to main service can not be used for services used for providing
the main service
 If some service is provided with reference to provision of main service,
it does not be come main service,
 Related services do not take the colour of main service.
 Examples
 Provision of access to any road or bridge on payment of toll
 Security services
 IT related services
 Contract commission
 Transportation of passengers by rail
 Air travel agency
 Tour operators
91

92. Rule 2
Most specific description to be preferred over more general
description for services capable of differential treatment for
any purpose based on its description
 Examples
 Real estate agent for immovable property
• If taxed as intermediary, his location is important
• If taxed as immovable property, location of property is important
 Outdoor catering by pandal & shamiana / convention to be taxed as
specific combined entry exist for abatement and not as individual
services
92

93. Taxability of naturally bundled services in ordinary course
of business (Rule 3)
If various elements of a bundled service are naturally
bundled in the ordinary course of business, it shall be treated
as provision of a single service which gives such bundle its
essential character
 Perception of service provider / service receiver
 Trade practice
 Example
• Packaged hotel accommodation for convention delegates
may include
 Hotel room accommodation
 Breakfast
 Tea / coffee during conference
93

94. Bundled Services
 Access to gym / health club / pool
 Internet
 Business centre
 Sight seeing
 Could be considered as naturally bundled convention services as each
activity is taxable but does not provide essential character and taxed
accordingly
 Indicators of naturally bundled services
 There is a single price or the customer pays the same amount, no matter how
much of the package they actually receive or use
 The elements are normally advertised as a package.
 The different elements are not available separately.
 The different elements are integral to one overall supply – if one or more is
removed, the nature of the supply would be affected.
 Each case to be individually examined

95. Rule 4 Taxability of services not naturally bundled in ordinary course of
business
 If various elements of a bundled service are not naturally
bundled in the ordinary course of business, it shall be
treated as provision of a service which attracts the
highest amount of service tax.
 Examples
 Renting of two floors or two portions of building by a common
agreement (treated as commercial use)
 Management of event covering advertisement, promotion, space
booking, photography, videography, public relation etc.

96. THANK YOU
FOR
YOUR
PRECIOUS TIME
AND
ATTENTION
Dr. Sanjiv Agarwal
FCA, FCS, Jaipur
asandco@gmail.com
sanjivservicetax@gmail.com