Professional learning workshop organised by FICCI
Topics Emerging trends in service tax
By: S. S. GUPTA CHARTERED ACCOUNTANT
Introduction
The introduction of levy of service tax on service of renting of immovable property has substantially changed the manner of operation for the contractors who are involved in construction of commercial properties like malls, multiplexes.
The definition of renting of immovable property is given in section 65 (90a) as follows and the taxable service is as follows :-
“‟(90a) „renting of immovable property‟ includes renting, letting, leasing, licensing or other similar arrangements of immovable property for use in the course of furtherance of business or commerce but does not include –
1)
2)
renting of immovable property by a religious body or to a religious body; or renting of immovable property to a educational body, imparting skill or knowledge or lessons on any subject or field, other than a commercial training or coaching centre;
Explanation, - For the purposes of this clause, “for use in the course or furtherance of business or commerce” includes use of immovable property as factories, office buildings, warehouses, theatres, exhibition halls and multiple-use buildings;
The taxable service has been defined in clause (zzzz) as follows “(zzzz) to any person, by any other person in relation to renting of immovable property for use in the course of furtherance of business or commerce” Explanation 1 – For the purposes of this sub-clause, “immovable property” includes – (i) building and part of a building, and the land appurtenant thereto; (ii) land incidental to the use of such building or part of a building; (iii) the common or shared areas and facilities relating thereto; and (iv) in case of a building located in a complex or an industrial estate, all common areas and facilities relating thereto, within such complex or estate,
but does not includea) vacant land solely used for agriculture, farming, forestry, animal husbandry, mining purposes; b) vacant land, whether or not having facilities clearly incidental to the use of such vacant land; c) land used for educational, sports, circus, entertainment and parking purposes; and d) building used solely for residential purposes and buildings used for the purposes of accommodation, including hotels, hostels, boarding houses, holiday accommodation, tents, camping facilities.
Explanation 2- For the purposes of this subclause, an immovable property partly for use in the course or furtherance of business or commerce and partly for residential or any other purposes shall be deemed to be immovable property for use in the course of furtherance of business or commerce.
All the owners of commercial property like mall, multiplexes etc. normally give the premises on rent and collect rent every month. Such owners will now have to pay service tax under this category. They will be entitled to the credit of service tax paid by the contractor who have undertaken the work of construction. Many contractors like civil contractors, electrical contractors, plumbing contractors hitherto were normally paying service tax by determining the value on 33% of the gross value of taxable service. However, now they will have to avail the credit of excise duty paid on inputs and pay the service tax on the gross amount billed to the customers. Thus the emerging trend is that all these contractors will purchase the products from the supplier who can issue the excise invoice.
Exemption from service tax
Service tax equivalent to the service tax leviable on the amount of property tax paid is exempted. ( Notification 24/2007.) However amount paid as penalty , interest on account of delayed payment of property tax not eligible for exemption. In cases where property tax is paid for a period which is different from the rental period, property tax proportionate to the rental period will only be allowed for exemption.
Adjustment in case of payment of property tax after payment of service tax.
Rule 4C provides for adjustment of service tax in cases where the property tax is paid after the payment of service tax on the rental and when the deduction of such property tax could not be availed at the time of payment of service tax. Intimation required to be given to the superintendent within 15 days of the adjustment.
Works Contract The service tax has been introduced on works contract which has been defined as follows under sub-clause (zzzza) of Section 65 (105) as any service provided or to be provided “to any person, by any other person in relation to the execution of a works contract, excluding works contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.”
Explanation – For the purposes of this sub clause, “works contract” means a 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 purposes of carrying out, -
(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether pre-fabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or other installations for transport of fluids, heating, ventilation or airconditioning including related pipe work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water proofing, lift and escalator, fire escape staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit, primarily for the purposes of commerce or industry; or
(c) construction of a new complex or a part thereof; or
residential
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar services, in relation to (b) and (c); or (e) turnkey projects including engineering, procurement and construction or commissioning (EPC) projects;
The department‟s letter bearing no. 334/1/2007-TRU dated 28th February 2007 with respect of levy of service tax in works contract in para 6.4-2 clarified as follows: “Taxable value under this service is that part of the value of
the works contract which is relatable to services provided in the execution of a works contract. Such value is to be determined on actual basis based on the records maintained by the assessee. However, it is proposed to give an option to an assessee to opt for a composition scheme. Under the composition scheme, the assessee is required to pay 2% of the total value of the works contract as service tax. Assessee opting for the composition scheme is not entitled to avail cenvat credit of capital goods, inputs or input services required for use in the works contract. Valuation of works contract and details of the composition scheme will be notified separately.”
Valuation in case of works contract
Value of taxable services to be determined under Rule 2A of service tax valuation rules. Value of works contract service to be equal to gross amount charged for works contract less the value of transfer of property in goods involved in the execution of the said works contract. Gross amount charged for the works contract does not include Value Added Tax (VAT) or sales tax paid, if any, on transfer of property in goods involved in the execution of the said works contract;
Value of works contract service to include,(i) labour charges for execution of the works; (ii) amount paid to a sub-contractor for labour and services; (iii) charges for planning, designing and architect‟s fees; (iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract; (v) cost of consumables such as water, electricity, fuel, used in the execution of the works contract; (vi) cost of establishment of the contractor relatable to supply of labour and services; (vii) other similar expenses relatable to supply of labour and services; and (viii) profit earned by the service provider relatable to supply of labour and services;
In cases where VAT or sales tax has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then the value adopted for payment of VAT or sales tax to be treated as value of transfer of property in goods involved in the execution of the said works contract and to be deducted from the gross amount charged for the works contract.
Optional Composition scheme for works contract.
Service provider has been given an option to adopt the composition scheme for payment of service tax on works contract service. For this purposes The Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 has been notified. Option to service provider to pay an amount equivalent to two per cent. of the gross amount charged for the works contract instead of paying service tax at the rate specified in section 66. Gross amount charged for the works contract shall not include VAT or sales tax paid on transfer of property in goods involved in the execution of the said works contract.
Cenvat credit of duties on inputs is not allowed in cases where the service provider has opted for the said composition. However Cenvat credit of service tax paid on input services and excise duty on capital goods is eligible. Option for composition is to be exercise prior to payment of service tax in respect of the said works contract and the option once exercised shall be applicable for the entire works contract and cannot be withdrawn until the completion of the said works contract.
Emerging trend with introduction of levy on Works Contract is that construction contractors where the builders are not able to take credit of service tax paid by the contractors will opt for payment of service tax under works contract category. It must be noted that the composition rate can be changed by the government any time by issuing the notification. Therefore, at the time of quoting for the products which are likely to last for years, one needs to clarify that the increase in rate if any in future, the service tax component will increase. There will be no choice with the contractor to switch over to the other category once, the option to pay the service tax under works contract is exercised.
LEVY ON NEW SERVICES
The other emerging trend is in very budget, new and new categories of services are being added every year. This trend is likely to continue and more new services will be added after every budget.
Foreign Payment
The expenditure in foreign currency also needs to be reviewed to ascertain whether any of the services availed by the company attracts service tax under the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.
Investigation It is observed that the officers of Director General of Central Exercise, Intelligence issues notice for investigation and call in for records. Since, these officers have all India jurisdiction, the summons are issued to the assessee situated in any city causing tremendous inconvenience to the service provider or manufacturer. Always the records for last five years are asked.
Audits The government it seems is relying heavily on the audits being conducted for service tax. As regards cenvat credit, it is seen that the same old issues which were earlier settled under the Modvat scheme are now being raised. The credit is proposed to be denied if the document is described as debit notes. The credit is also proposed to be denied on the indirect services which are used for manufacture of goods or providing the output services.
THANK YOU Balanced view presented by:
S.S.Gupta Chartered Accountant
A/102-106, Zaitoon Apt, 182, Station Road, Goregaon (West), Mumbai-400062 Tel. No. 28754127 / 28760161 / 28761424 Fax No. 28778458 Email: guptass@mtnl.net.in