CA Sunil GabhawallaS 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

2

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

Territorial Frontiers….

INDIA

OUTSIDE INDIA

C -FCo A – FCo

B - ICo

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

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

Delivery of MaterialsActual Performance of Work

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

Territorial Frontiers….

OUTSIDE INDIA

INDIAC -ICo A – ICo

B - FCo

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

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

Delivery of MaterialsActual Performance of Work

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)

8

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 ServiceProvider located outside India

No Major Impact – more confusing due to use ofword “provision” instead of “receipt”

Old Provisions New Provisions

Basis of Determination Separate Rules for Import and Export based on category of service

Common Rules based on substance of transaction

Services rendered to foreign clients

Not Liable for Payment of service tax

Not Liable for Payment of Service Tax since territory outside India

Impact of receipt in IndianCurrency

Taxable Still Not Taxable but,reversal of CENVAT Credit required

Services from foreign vendors Liable for Payment under RCM

Liable for Payment under RCM

Transactions with J&K Not Applicable Applicable

Transactions betweenBranches

Impacted Imports only Impacts Imports as well as ExportsAlso impacts transfers inter se

Description Rule

General Rule Location of Service Receiver. In casethe location of the service receiver isnot available, then Location of serviceprovider

Services provided in respect of goods that are required tobe made physically available by the service receiver tothe service provider, in order to provide the service

Place of Performance

When such services are provided from a remote locationby way of electronic means.

Location of goods at the time ofprovision of service

Services provided entirely or predominantly, in theordinary course of business, in the physical presence ofan individual, represented either as the service receiveror a person acting on behalf of the receiver

Place of Performance

Description Rule

Services in relation to immovable property Location of Immovable property

Services in relation to Events where the event is actually held

When Service Provider and Service Receiver are located intaxable territory

Location of service receiver

Specified services:

a) Banking & Financial Servicesb) Online Information and Database access or retrieval

servicesc) Intermediary servicesd) Hiring of means of transport

Location of Service Provider

Service of Transport of Goods Destination of Goods

Goods Transport Agency Location of Service Recipient

Passenger Transportation Place of Origin

On Board a conveyance Place of Origin

…Place of Provision of Services Rules

Old Provisions New Provisions

Generic Issues

Service Provider and Service Recipient in same location

Debatable if the service is rendered abroad

Taxable even if service rendered abroad

India Specific Definitions (like telecommunication services)

Earlier not taxable Now Taxable in view of negative list

Category Specific Issues

Technical Testing and Analysis

Recipient Based Performance Based

Service Intermediaries Recipient Based Provider Based

Online Information and Database Access

Recipient Based Provider Based

In case of multiple establishments, place ofestablishment more closely connected withthe activity to be considered

How to determine the place of establishmentmore 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)

Invoicing Issues: What should the service provider’s invoice contain? How to account in books? What are the Income Tax TDS obligations

CENVAT Credit Related Issues Whether CENVAT can be utilised for paying this tax? Having paid this tax, whether CENVAT can be claimed?

Description of Service Liability of Service Provider

Liability of Service Recipient

Component

Effective Rate

Component

Effective Rate

Only Non Corporate Service Providers and Corporate Service Recipients

Rent-a-Cab on abated value NIL NIL 100% 4.944%Rent –a-Cab on non abated value

60% 7.416% 40% 4.944%

Net Impact on Service Recipient is the same 4.944%

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

No CENVAT Credit is available

Description of Service Liability of Service Provider

Liability of Service Recipient

Component

Effective Rate

Component

Effective Rate

Only Non Corporate Service Providers and Corporate Service Recipients

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

25% 3.09% 75% 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 Liability of Service Provider

Liability of Service Recipient

Works Contract Services Component

Effective Rate Component Effective Rate

Only Non Corporate Service Providers and Corporate Service RecipientsNature of WorksContract

PresumptiveValue ofService

EffectiveTax Rate

Original Works(Construction ofnew immoveableproperty)

40% 4.944% 50% 2.472% 50% 2.472%

Works Contractsrelating tomoveable assets

70% 8.652% 50% 4.326% 50% 4.326%

Other WorksContracts

60% 7.416% 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

involved in the execution of such contract is leviableto tax as sale of goods and such contract is for thepurpose of carrying out construction, erection,commissioning, installation, completion, fitting out,repair, maintenance, renovation, alteration of anymoveable or immoveable property or for carrying outany other similar activity or a part thereof in relationto such property

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

Contract for Sale Contract for Work

Labour Contracts Indirect Transfer of Property in Goods

Accretion

Also WC under Service Tax Law

Original Works

40%

Others

60%

Accession

Also WC under Service Tax Law

70%

Blending

Not Works Contract under Service Tax

Law

Contract for Other Services

Example Income Tax 94C

VAT –29A

Service Tax – 65B(44)

Treated as Works Contracts under all laws

Erection of Power Plant (on turnkey basis) Yes Yes Yes

Annual Maintenance Contracts (Comprehensive)

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 Yes Yes No

Photography Contracts Yes Yes 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 (NonComprehensive)

Yes No No

Not treated as Works Contracts under any of the laws

Sale of Computer with free installation No No No

Catering Contracts No No No

Software Licenses 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

Service Provider

Liability of Service Recipient

Component Effective RateSponsorships 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

NIL 100% 12.36%

Foreign Service Providers NIL 100% 12.36%

Goods Transport Agency Services NIL 100% 3.09%

Directors (w.e.f. 07.08.2012) NIL 100% 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?