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Negative List based Taxation of Services. CONCEPTUAL FRAMEWORK. Framework: Dissecting the “Charge”. The Elements. Person Liable to Pay Tax. Definition of Service. Service means…. Service means. Activity. A Person (Service Provider). Another Person (Service Recipient).
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The Elements.. Person Liable to Pay Tax
Service means Activity A Person (Service Provider) Another Person (Service Recipient) Consideration Enforceable Contract
DIVISIBLE VS. INDIVISIBLE CONTRACTS: SIMPLE EXAMPLE • Can it be said that: • A grocery store sells a sandwich ? • A eating house sells bread, butter & tomatoes ?
Composite Contracts: Judicial Thinking • A composite contract should not be vivisected to levy a tax on a specific component of such a contract but should be analysed as a whole • State of Madras vs. Gannon Dunkerley & Co 9 STC 353 (SC) • Even in cases where the agreements provide for progressive payments based on individual milestones • Sentinel Rolling Shutters & Engg. Co. vs. CST 4 SCC 260 (SC) • Even if specific price breakup is given for individual milestones • Daelim Industrial Co. Ltd. vs. CCE 155 ELT 457 (Tri) as approved by SC • Even if there are separate agreements • CIT vs. Sundwiger Empg & Co. 262 ITR 110 (AP)
Service includes declared service • Immoveable Property • renting of immovable property; • Sale of Under Construction Units • Leases & Licenses • 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; • 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; • agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; • 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
Declared Services : Issues • Most of these represent an overlap with “deemed sale” • However, deemed sales are excluded • Except in case of works contracts and catering contracts, dominant intention is important to determine taxability
Service portion in execution of a works contract • 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 • Goods component not a part of taxability, so credit not available
…Works Contract Valuation Total amount charged to include the value of goods or services supplied free of cost.
Bundling of services CORPORATE GURUKUL
Bundled Services • Section 65A not applicable under Negative List • Classification of transaction as either a service or not a service • Transaction as a sale or service as per BSNL vs. Union of India 2006 (2) STR 161 (SC) • Principles under section 66Ffor taxability of bundled services • Nature of the output service will not determine the nature of input service • Most specific description shall be preferred over a more general description • ‘Bundled service’ • naturally bundled • not naturally bundled
Examples on Bundled Services • Food Supplied by Airline • Placement Services by Educational Institution • Loading of Goods by Goods Transport Agencies • Sale of Print and Radio Slots as a Package • Site Formation and Construction of Dam
VALUATION CORPORATE GURUKUL
Important Principles under Section 67 • Value of Taxable Services: • Gross amount charged by the service provider • for such service provided or to be provided by him • No Notional Valuation Rules, however, non monetary consideration taxable • Cum Tax Benefit Available if tax not separately charged • Dominant Intention Test Important in contracts other than works contracts and catering contracts
Valuation Rules • Special Cases for Valuation: • Works Contracts • service component of composite contract (Rule 2A) • Money Changing • Service component of sale of foreign currency (Rule 2B) • Catering Services • Service Component of Supply of Food (Rule 2C) • Reduction through Notification • Section 67A defines the point of taxation for rate, value and exchange rate purposes
Reimbursement of Expenses • Any expenditure or costs incurred by the service provider • In the course of providing taxable service • Shall be treated as a consideration and • Shall be included in the value for the purpose of charging service tax
Reimbursement:Climb of the Everest • Service Provider • Enters into contractual arrangement • Does not hold title to goods / services • Does not use goods / services • Receives actual amount • Invoices separately the amount • Service Recipient • Receives and uses the goods / services • Liable to pay • Authorises the service provider • Knows that the services are provided by third party • Service • In Addition to the basic service
Valuation: Works Contracts : Issues • If value can be determined, can presumptive method be adopted? • If value is not adopted by the State VAT Authorities, can the actual method be adopted? • What is the scope of inclusion of free issue materials and services?
