CA Sunil Gabhawalla S B Gabhawalla & Co Chartered Accountants

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

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

C -FCo

A FCo
Delivery of Materials Actual Performance of Work Territorial Frontiers.

OUTSIDE INDIA INDIA

Construction Sub Contract US$ 75 (Material US$ 50 Labour US$ 25)

B - ICo

Construction Contract US$ 100 (Material US$ 60 Labour US$40)

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

C -ICo

A ICo
Delivery of Materials Actual Performance of Work Territorial Frontiers.

INDIA

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)

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

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)

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

Old Provisions Basis of Determination Separate Rules for Import and Export based on category of service Not Liable for Payment of service tax

New Provisions Common Rules based on substance of transaction Not Liable for Payment of Service Tax since territory outside India

Services rendered to foreign clients

Impact of receipt in Indian Currency

Services from foreign vendors

Taxable

Still Not Taxable but, reversal of CENVAT Credit required

Liable for Payment under RCM

Liable for Payment under RCM

Transactions with J&K

Transactions between Branches

Not Applicable
Impacted Imports only

Applicable
Impacts Imports as well as Exports Also impacts transfers inter se

Description General Rule

Rule

Location of Service Receiver. In case the location of the service receiver is not available, then Location of service provider Services provided in respect of goods that are required to Place of Performance 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 Location of goods at the time of by way of electronic means. provision of service Services provided entirely or predominantly, in the Place of Performance 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

Place of Provision of Services Rules

Description Services in relation to immovable property Services in relation to Events Rule Location of Immovable property where the event is actually held

When Service Provider and Service Receiver are located in Location of service receiver taxable territory Specified services: Location of Service Provider 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 Destination of Goods Goods Transport Agency Passenger Transportation On Board a conveyance Location of Service Recipient Place of Origin Place of Origin

Old Provisions Generic Issues Service Provider and Service Debatable if the service Recipient in same location is rendered abroad

New Provisions Taxable even if service rendered abroad

India Specific Definitions (like telecommunication services)

Category Specific Issues Technical Testing and Analysis

Earlier not taxable

Now Taxable in view of negative list

Recipient Based

Performance Based

Service Intermediaries
Online Information and Database Access

Recipient Based
Recipient Based

Provider Based
Provider Based

In case of multiple establishments, place of establishment more closely connected with the activity to be considered 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

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

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?

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) What should the service providers invoice contain? How to account in books? What are the Income Tax TDS obligations Whether CENVAT can be utilised for paying this tax? Having paid this tax, whether CENVAT can be claimed?

Invoicing Issues:

CENVAT Credit Related Issues

Description of Service

Liability of Service Provider

Compone nt

Liability of Service Recipient

Effective Componen Effective Rate t Rate

Only Non Corporate Service Providers and Corporate Service Recipients

Rent-a-Cab on abated value Rent a-Cab on non abated value NIL 60% NIL 7.416% 100% 40% 4.944% 4.944%

Net Impact on Service Recipient is the same 4.944% What is covered?

No CENVAT Credit is available

Taxis Radio Cabs Employee Leased Cars Long Term Car Leases General Tourist Cars taken on lease Buses for Staff Transportation Reimbursement claimed by employees

Description of Service

Liability of Service Provider

Compone nt

Liability of Service Recipient

Effective Componen Effective Rate t Rate

Only Non Corporate Service Providers and Corporate Service Recipients

Supply of Manpower Security Services (only w.e.f. 07.08.2012) 25% 25% 3.09% 3.09% 75% 75% 9.27% 9.27%

Definition supply of manpower means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control Effective from 07.08.2012 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

Description of Service

Works Contract Services

Nature of Works Presumptive Effective Contract Value of Tax Rate Service 40% 4.944% Original Works (Construction of new immoveable property) 70% 8.652% Works Contracts relating to moveable assets 60% 7.416% Other Works Contracts

Liability of Service Liability of Service Provider Recipient Componen Effective Rate Component Effective Rate t

Only Non Corporate Service Providers and Corporate Service Recipients

50%

2.472%

50%

2.472%

50%

4.326%

50%

4.326%

50%

3.708%

50%

3.708%

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

Definition:
Contract wherein transfer of property in goods

Vivisection

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

Value of goods liable for VAT Service Component can be taxed under Service Tax

Contract for Sale

Contract for Work

Contract for Other Services

Labour Contracts

Indirect Transfer of Property in Goods Accession Also WC under Service Tax Law Blending Not Works Contract under Service Tax Law

Accretion Also WC under Service Tax Law Original Works Others

70%

40%

60%

Example

Income Tax 94C

VAT 29A

Service Tax 65B(44)

Treated as Works Contracts under all laws Erection of Power Plant (on turnkey basis) Annual Maintenance Contracts (Comprehensive) Yes Yes Yes Yes Yes Yes

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 Photography Contracts Yes Yes Yes Yes No No

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 basis without any transfer of material Yes No No

Annual Maintenance Contracts (Non Comprehensive)

Yes

No

No

Not treated as Works Contracts under any of the laws Sale of Computer with free installation Catering Contracts Software Licenses No No No No No No No No No

Valuation Options

Value adopted for State VAT purposes to be reduced

Actual Value of materials to be reduced

If not possible, adopt presumptive Value

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

General (Liability of the Service Recipient Only) Description of Service Liability of Liability of Service 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) by Government or Local Authority Foreign Service Providers Goods Transport Agency Services Directors (w.e.f. 07.08.2012) NIL NIL NIL NIL 100% 100% 100% 100% 12.36% 12.36% 3.09% 12.36%

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?