Service Tax Negative List & Reverse Charge Concepts

TOPICS COVERED Jurisdiction Negative list Declared service Mega Exemption Reverse Charge

Introduction Services constitute more than 50% of GDP The growth in service sector is an indicator of economic development However, till 1994 the burden of taxation was on goods only Further there was no sound reasoning for not taxing the service sector

Jurisdiction The Concept of Taxable Territory The levy extends to whole of India except the state of Jammu and Kashmir It extended to designated area in the continental shelf and Exclusive Economic Zone of India Under Negative list regime the jurisdiction is well defined – Section 65B (27)

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

6 Taxation of Services Post Finance Act, 2012

Taxability of Services ( ) 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 Other specified ExemptionsExempted

Negative list Various committees constituted by Government suggested for comprehensive coverage Govinda Rao committee Kelkar Committee The suggestion were not implemented immediately for various reasons Finally in the year 2012 comprehensive approach was opted for levy of service tax

Negative list ( contd ) Finally in the year 2012 comprehensive approach was opted for levy of service tax All Services other than the services specified in the negative list are taxable. 3 Steps to ascertain the taxability Activity covered within the ambit of “Service” It is not specified in the negative list –Section 66D It is not exempted under Notfn.No.25/2012-ST

Charging section – 66B There shall be levied a tax (hereinafter referred to as the service tax) at the rate of fourteen per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.

Definition of Service Any activity ( Sec 65B(44) ) By a person for another person For consideration Includes declared service Excludes certain activity

By a person for another person person Self service not taxable- Service by one branch office to another branch office or Head office Exception  A branch office located in taxable territory and another office located in non taxable territory - treated as distinct person.  Association and members thereof are also treated as distinct person.

What is an activity  Not defined in the Act  Activity includes – - An act done, A work done, A deed done - An operation carried out - Execution of an act - Provision of a facility Activity could be active or passive  It includes refraining from an act (Non compete fee) Situation as described under declared service

By a person for another person person Self service not taxable- Service by one branch office to another branch office or Head office Exception  A branch office located in taxable territory and another office located in non taxable territory - treated as distinct person.  Association and members thereof are also treated as distinct person.

Meaning of person ‘Person’ defined under Section 65 B of the Act. An individual A Hindu undivided family A company A society A limited liability partnership firm A firm An association or body of individuals Government – Central, State, Local authority Every artificial juridical person

Consideration No definition in the Finance Act, 1994 Definition as per Indian Contract Act, 1872 Anything received in return for provision of service is consideration Monetary Consideration Illustrations (p.no.9) Guidance Paper) Guidance Paper Consideration given by third parties

Non Monetary Considerations Supply of Goods and Services in return for the Service Refraining or forbearing an Act Doing or agreeing to an Act Illustrations (p.no 7) Guidance Paper Guidance Paper If money value not ascertainable  Comparable value of similar Service  If not available, cost of provision of service

Activity without consideration Grants, Donations, gift, free charities – outside ambit of Service Grants given for research work without any obligations Donations to charitable organizations without any obligations

THE NEGATIVE LISTTHE NEGATIVE LIST Services Services by Govt. or local authority subject to certain exclusions. (*)Govtlocal authority Services by RBI Services by Foreign Diplomatic Mission located in India Services relating to AgricultureAgriculture Trading of Goods Any process amounting to manufacture (*) Sale of Space for advertisement other than by radio or T.V. Toll charges Betting, Gambling, lottery (*)

Admission to entertainment event or amusement facilities (*) Transmission or distribution of electricity Education Renting of residential dwelling for use as a residence Interest or discount Transportation of passengers with certain exceptions Transportation of goods with certain exceptions Funeral, burial, crematorium or mortuary services THE NEGATIVE LISTTHE NEGATIVE LIST Services

Declared Services Renting of Immovable Property Construction of Complex, Building, Civil Structure Temporary transfer of IPR Information Technology Software Refraining from an act Hiring, leasing of goods without transfer of right to use such goods Activities in relation to hire purchase Service portion in Works ContractWorks Contract Service portion in supply of food or drinks.supply of food

Classification Section 66F- Section 66F- Need for classification even under negative list Applicable in the following areas Negative list Exemption Place of provision of service Rules 2012 Cenvat Credit Rules, 2004

Reverse charge

Reverse Charge  Generally service provider is liable to pay service tax – Section 68(1)  For specified Services, Service Receiver is liable to pay service tax – Section 68(2)  Reasons for reverse charge method –  Administrative convenience,  service provider in non taxable territory,  Service provider in unorganized sector

Partial Reverse Charge  Major changes introduced in 2012 at the time of introduction of negative list based levy  Both the service provider and service receiver liable to pay service tax  More number of services added to reverse charge method of levy

Sl. No Service providerService receiverDescription of service service provider service receiver 1Insurance AgentInsurance companiesAll serviceNil100% 1 ARecovery AgentBanks, FI, NBFC All servicesNil100% 2GTA7 specified persons Transport of goods by road Nil100% 3Any person Body corporate or partnership firm SponsorshipNil100% 4Arbitrary TribunalBusiness entity All services more than Rs. 10 Lakhs Nil100% 5AdvocateBusiness entity Legal service more than Rs. 10 Lakhs Nil 100% 6767 Government Director of a Company Business entity Company Support service ( except RIS, courier) All services Nil NIL 100%

Sl.NoService providerService receiverDescription of serviceService provider Service receiver 8 Individual, Any company registered under Companies Act,1956 Rent a Cab service with abatement Nil100% HUF Proprietary firm A business entity registered as body corporate Rent a Cab service without abatement 50% 9Partnership firm Supply of Man power, Security Service 25% (0%)75% (100%) 10 Association of person Works Contract Service50% 11 Any person in non taxable territory Any person in Taxable territory All taxable serviceNil100%

Reverse charge (conditions)  No cenvat credit can be utilized  No SSI benefit available for reverse charge  For WCS, the service recipient has the option to valuation method as per his choice

“Business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession [Sec 65B(17)] “Body Corporate” – Company incorporated in India, Company incorporated outside India, LLP, Trust. Cooperative Society, Firm, HUF, Certain Notified Companies are NOT ‘Body Corporate’. ST Rule 2 (bc) “body corporate” has the meaning assigned to it in clause (7) of section 2 of the Companies Act, 1956 (1 of 1956); CA 1956 Section 2 (7) "body corporate" or "corporation" includes a company incorporated outside India but does not include - (a) a corporation sole ; (b) a co-operative society registered under any law relating to co-operative societies ; and (c) any other body corporate (not being a company as defined in this Act), which the Central Government may, by notification in the Official Gazette, specify in this behalf ; Reverse charge (concepts)

In some services (e.g. GTA, renting of motor vehicle designed to carry passengers), the abatement is subject to condition of non-availment of Cenvat credit by service provider (not by service receiver) A certificate should be obtained from the service provider about non-availment of Cenvat credit Reverse charge (concepts)

Important case law on Constitutional aspects ServiceDecision Mandap keeper service -Tamilnadu Kalyana Mandapam Assn -2004(167)ELT3(SC) Rejected the contention that the tax is on immovable property. It was held that tax is on the granting of the temporary exclusive possession of immovable property. GTA service Gujarat Ambuja Cements Ltd 2006 (3) STR 608(SC) Levy on GTA upheld Reverse charge mechanism also upheld

Important case law on Constitutional aspects ServiceDecision SIM card of cellular telephone- BSNL Ltd 2006(2) STR 161 (SC) Levy on composite transaction Dominant theory Aspect theory Levy of Service Tax on WCS and supply of food – Article 366 (29A). Chartered /Cost Accountant service All India federation of Tax practitioners 2007 (7) STR 625 (SC) Levy is on services provided by Chartered Accountant and Cost Accountant. The tax is not on profession but on the services provided by professionals. A CA has to pay professional tax till he remains in the profession whereas ST is on the income out of service

Important case law on Constitutional aspects ServiceCitation Temporary transfer of Copy Right in films 2013(32) STR 129 (Mad) Works Contract Service - Kone Elevators 2014 (304) ELT 161 (SC) Legal services P.C. Joshi TIOL – HC ( Mum)

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