PriceWaterhouseCoopers

Critical Analysis of Amendments in Service Tax in 2006 S. Madhavan Executive Director New Delhi – July 13, 2006 Agenda • New Categories of Services & Expansion of Existing Services • • • Valuation Import of services Export of Services PricewaterhouseCoopers New Categories of Services & Expansion of Existing Services New Categories of Services • Business support services • Credit card, debit card, charge card or other payment card related services • Services in relation to automated teller machine operations, maintenance or management • Sale of space or time for advertisement, excluding sale of space for advertisement in print media and sale of time slots by a broadcasting agency or organization • Services provided by a registrar to an issue • Services provided by a share transfer agent • Services provided by recovery agents • Internet telephony services PricewaterhouseCoopers New Categories of Services • Sponsorship services, excluding sponsorship in relation to sports events • Scheduled or non-scheduled air transport services to any passenger embarking in India for international journey, in any class other than economy class • Public relations services • Auctioneers‟ services • Transport of goods in containers by rail other than by Indian Railways • Ship management services • Transport by cruise ship PricewaterhouseCoopers Expansion of Existing Services • References to „commercial concern‟ in the definitions of seventeen taxable services substituted with „person‟ to expand the scope thereof • Banking and other financial services to include - transfer of money through different modes, such as telegraphic transfer, mail transfer and electronic transfer, by any person, and - services provided as a banker to an issue • Erection, commissioning or installation services to include erection, commissioning or installation of structures, whether or not pre-fabricated PricewaterhouseCoopers Expansion of Existing Services • Management consultancy services extended so as to include consultancy in different areas of management • Consulting engineer services to include such services provided by any firm or body corporate • Technical testing and analysis services to include - clinical testing of drugs and formulations and to exclude - testing or analysis for the purpose of determination of the nature of diseased condition, identification of a disease, prevention of any disease or any disorder in human beings or animals PricewaterhouseCoopers Conclusions • Scope and ambit of service tax significantly expanded • Many services appear to be covered under multiple headings • Many definitions are complexly worded and require legal interpretation • Definition of „business support services‟ seems to be widely worded • Distinction between work and service increasingly blurred • Distinction between goods and services also increasingly blurred - prospect of double taxation PricewaterhouseCoopers Valuation of Services Introduction • Hitherto, value of taxable services was defined in Section 67 as - the gross amount charged for services subject to specified exclusions & inclusions • Finance Act, 2006 has replaced erstwhile Section 67 with new Section 67 to interalia provide for situations - where consideration is wholly or partly not in money or - where consideration is not ascertainable for any reason • Service Tax (Determination of Value) Rules, 2006 („Valuation Rules‟) notified on April 19, 2006 to lay down the principles to determine taxable value of services • Rules 3, 4 & 7 are specifically worded whereas Rules 5 & 6 are generally worded PricewaterhouseCoopers Consideration in Money • Value of service = Gross amount charged • Gross amount charged extends to the following situations:payments by cheque credit card payments deductions from accounts any form of payment by issuance of credit notes or debit notes book adjustments • Consideration includes any amount that is payable for taxable services provided or to be provided PricewaterhouseCoopers Consideration Wholly or Partly not in Money • Value of service is the gross amount charged by the service provider for a similar service rendered to any other person in the ordinary course of trade and where the gross amount charged is the sole consideration • If value cannot be determined as above, the basis is the - equivalent money value of such consideration - which is not less than the cost of provision of such service Example: exchange of services with net payments, barter etc. PricewaterhouseCoopers Consideration Wholly or Partly not in Money • Following terms not defined, leading to ambiguity - similar service - equivalent money value of such consideration - cost of provision of service PricewaterhouseCoopers Consideration not Ascertainable • Section 67 provides that in respect of services rendered for a consideration which is not ascertainable, the value is to be determined as prescribed • Examples - supply of goods & provision of services for a lump sum amount, bundling of services for fixed amount, etc. • Provision of free services will not be covered under the aforesaid provisions and hence is not chargeable to tax • Valuation Rules do not contain provisions for determining value consideration is not ascertainable PricewaterhouseCoopers where Treatment of out of Pocket Expenses / Reimbursements • Conditions for exclusion of out of pocket expenses or reimbursements from value - service provider acts as pure agent - recipient of services    receives & uses goods or services is liable to make payments to third parties is aware of the contractual arrangements - invoice to indicate that payment is on behalf of the service recipient - no mark-up on recoveries from the recipient - goods or services procured from third parties in addition to services provided by service provider on own account PricewaterhouseCoopers Import of Services • Value of taxable services is the actual consideration – Rule 7 - meaning of „Actual Consideration‟ needs elaboration - Rule 3 on manner of determination is inapplicable to such situations • Services partly performed in India - total consideration paid by the recipient is chargeable to tax - including the value of services performed outside India PricewaterhouseCoopers Key Issues • Threat of double taxation - Annual Maintenance Contracts - Construction Services/Erection services - IPR transactions - Lease transactions • Tax treatment of composite contracts PricewaterhouseCoopers Abatements Abatement option available only for 12 taxable services S.No 1. 2. 3. 4. Taxable category Tour Operators Rent a cab scheme operator Mandap Keeper services Pandal and Shamiana services Abatement 90% / 60% 60% 40% 30% 5. 6 7. 8. 9. 10. 11. 12. Commercial or Industrial construction service Construction of complex Outdoor catering services Convention services Goods transport agency services Erection, commissioning or installation services Transport of goods in containers by rail Business auxiliary services (production / processing of parts/ accessories used in cycles etc.) 67% 67% 50% 40% 75% 67% 70% 30% Notification No.1/2006-ST dt. 1st March, 2006 (as amended upto date) PricewaterhouseCoopers Abatements • Need for abatement option for the following taxable services - Management, maintenance or repair services - Photography services - Authorized service station services • General exemption under Notification No. 12/2003 continues to be available PricewaterhouseCoopers Conclusions • Valuation Rules have created several complications • Service providers need to structure pricing mechanisms / contracts • Consideration needs to be supported with costs as substantiation • Analytical studies may be needed in industries having complex pricing mechanisms such as Telecom, Banking, Construction, Hotel, etc. • Mitigation of tax liability possible under composite contracts - explicit clauses in contracts (determination of intent) - harmonization of options under VAT/ service tax PricewaterhouseCoopers Import of Services Introduction • Finance Act, 2005 introduced explanation to section 65(105) indicating that services provided by a person located outside India to any person in India is a taxable service • Several contentious issues arose - extra-territorial jurisdiction - taxability of services provided & consumed outside India - retrospective effect • Finance Act, 2006 introduced section 66A • Taxation of Services (Provided from Outside India & Received in India) Rules, 2005 notified on April 18, 2006 („Import Rules‟) PricewaterhouseCoopers Scheme of Taxation • Taxable service provider outside India & service receiver in India attracts service tax • Section 66A read with the Import Rules indicates that Services received in India are sought to be taxed • Import Rules lay down criteria for determining whether services received in India. For this purpose, taxable services grouped into three categories - location of immovable property - performance of service whether wholly or partly in India - location of recipient of service in India • Services received by individuals for non-business or non-commercial purposes not taxable PricewaterhouseCoopers Scheme of Taxation • Service provider having business establishment in more than one country - establishment directly connected with service is relevant • Person carrying on business through a branch or agency in a country is considered as having business establishment in that country • Person carrying on business through a permanent establishment in more than one country - each permanent establishment considered as distinct person • Usual place of residence means in case of a body corporate is the place where it is incorporated or otherwise legally constituted PricewaterhouseCoopers Scheme of Taxation • Valuation of services taxable under Section 66A - actual consideration charged for services - in case services in category 2 which are performed partly in India, total consideration including value of service performed outside India would be taxable • Person liable to pay service tax is the service recipient • Provisions relating to registration and payment of service tax apply to such service recipient PricewaterhouseCoopers Key Issues • Permanent Establishment is not defined • For the purpose of Section 66A (2) permanent establishment outside India and permanent establishment in India of the same legal entity deemed to be separate persons - TRU Circular dated April 19, 2006 treats provision of services between such persons as taxable. This could mean cross charge by Head Office to Branch Office in India would attract service tax • Sub-section (2) of section 66A & Explanation 1, implies that services received outside India by branch or agency of Indian Company would not be subject to service tax PricewaterhouseCoopers Key Issues • Rule 3( iii) of the Import Rules states that services qualify as imports when services received by a recipient located in India for use in relation to business or commerce • Typically intangible services are listed in Rule 3(iii) e.g. USA - Banking and financial services - Online information and access services India • Circular dated 19th April 2006 states that “ only services received in India are taxable under these provisions” • Is receipt of such services in India necessary for them to be treated as imports? PricewaterhouseCoopers Export of Services Export of Services Rules • Effective from March 15, 2005 • Export Rules lay down criteria for determining whether services exported from India. For this purpose, taxable services grouped into three categories - location of immovable property outside India - service wholly or partly performed outside India - recipient of service located outside India • Additional conditions for all services - service should be delivered outside India & used outside India - payment is received in convertible foreign exchange PricewaterhouseCoopers Export of Services Rules • Additional conditions for services categorised under recipient of service criteria - if recipient has commercial establishment or any office in India • order for provision of services should received from commercial establishment or office outside India - services not related to business or commerce • recipient to be located outside India at the time of provision of such services PricewaterhouseCoopers Key Issues • Condition: Service to be delivered outside India & used outside India to be considered as „Export‟; based on premise „Service tax is a destination based consumption tax‟ • Service provider to discharge the onus that service provided would be used outside India • Documenting delivery & use outside India would be a challenge where there is no tangible output e.g. Computer network services • Second criteria: Performance of service wholly or partly outside India • Performance is execution/ provision of service. Delivery represents outcome of service PricewaterhouseCoopers Way Forward Way Forward • Cross-border services need to be reviewed for determining fulfillment of criteria for import / export • Documentation of contracts needs to be strengthened to support the position adopted • Consistency with other regulatory filings needs to be maintained • Documentation to be maintained to support claim before authorities Cross border taxation of services poses a real challenge to minimise tax exposure on imports and eliminate tax on exports PricewaterhouseCoopers Thank You