service tax and vat

What is Service Tax?

• It is a type of indirect duty levied on particular services that are categorized as taxable services. The responsibility of paying this kind of levy lies on the service provider. This duty can't be levied on services that are not included in the specified list. Over last one or two years, the domain of service tax been broadened to include new services.

• The goal behind imposing service tax in India is to lower the extent of concentration of taxation on business and industry without compelling the government to find the middle ground on the revenue requirements

Why service tax?

• Services constitute a very good spectrum of economic activities.

• The share of the services sector in the real GDP s higher than agriculture and industrial sector.

Why service tax needed?

• With the increasing role of service sector and its contribution to GDP, the government felt that this sector should not be untaxed

• This decision also make tremendous revenue potential to the government

• It is expected that in due course, service tax would be reduce the tax burden on international trade and domestic manufacturing sector

• So a planned growth of service tax would be commensurate with the goals of economic utilization and globalization

Beginning

• Service tax in India made a humble beginning from 1st July, 1994 with only three services being covered in the organized sector like telephone, general insurance and stock broking.

Different approaches to Service tax

• There are two approaches to service tax Comprehensive approach: All services are taxable

and a negative list is specified for services, which are not taxable

Selective approach: Only selective services are subjected to service tax. India follows the selective approach of taxing selected service only.

• Service tax is levied on the specified service and is paid by the service provider except in a few cases when the service receiver pays it

• The liability to pay service tax is there even if it is not collected from customer

• Central board of excise & Customs (CBEC) regulates service tax matter

What is nature of Service Tax?

• Service tax is a tax on service.• Service means value addition to a product that is

intangible• If there is no service, there is no tax.• There is no service tax act; service tax is imposed by

amending chapter V of finance act 1994 from time to time.

• There is also no provision of deduction of tax at source from service tax

• For charge of service tax, one has to know– What is taxable service and,– Value of service.

• Service tax is payable only and only on taxable service.

Different features of service tax

• Indirect tax• No separate act

– Central govt. has power to make rules to carry out ST act• Administrated by CBEC• Uniform rate

– 12% Service tax + 2% EC + 1% SHEC = 12.36% actually• No double taxation

– Service falling under two or more sub clauses can’t taxed twice• Not applicable in Jammu & Kashmir• Chargeable on taxable service• Small service provider excluded

– A threshold limit of ` 10 lakh has been provided• Taxable service/value

– Taxable service and value have been specially defined• Tax is generally payable by service provider• Self assessment• Exemption by notification

– Power have been given to government to exempt from service tax in appropriate cases by special notification

• Voluntary compliance– There is reliance on collection of tax primarily through voluntary

How to define extent & application

(Sec. 64)• Service tax introduced by virtue of chapter V of the finance act

1994, extends to the whole of India except to the state of Jammu and Kashmir

• Service provided in the state of Jammu and Kashmir from any other state are not subject to service tax. However service provided from Jammu and Kashmir to other state are subject to service tax

• Service provided beyond the territorial waters of India were not liable to service tax provision but under a notification issued in 2002, the service tax provisions have been extended to designated areas in the continental shelf and exclusive economic zones of India. The exclusive economic zone extends up to 200 nautical miles inside the sea from base line.

• Service provided within the territorial water of India are subject to service tax in the same way as services provided in India are taxable.

• India includes territorial waters extended up to 12 nautical miles from the Indian land and mass

What is basis of charge of service tax?

• The rate of service tax is applied on the value of taxable services provided or to be provided

• There is a uniform rate of service tax on all services currently it is 12.36% (12 + 3% of 12)

• The cess paid on input services is allowed as credit for payment of cess on output services.

How to find out valuation of taxable service?

• The consideration for a taxable service shall be the gross amount charged by service provider for the service provided or to be provided.

• Consideration in terms of money: gross amt. charged by service provider

• Consideration is not in terms of money: the value of taxable service shall be the amount of money as with addition of service tax charged, is equivalent to consideration

How to find out valuation of taxable service?

(Cont…)

Computation of service tax

• Find out value of taxable service• 12.36% value of taxable service is

the quantum of service tax• Again the tax liability calculated &

step no. 2, one can claim credit for service tax paid on input service subject to a few condition.

Partial abatement of service tax

Service Who can take benefit

Rate Is it optional

Air travel agent Person liable for paying service tax in relation to service provided by an air travel agent

0.6% - domestic booking1.25% - international booking

If ones this potion select than, It charged for a whole FY and for all bookings.

Life insurance Policy holder 1% of gross amount of premium

Only for risk cover premium

Purchase or sale of foreign currency, money changer

Authorized money changer or foreign exchange broker

0.25 % of gross amount of currency exchanged

Works contract Person liable to pay service tax

4 % gross amount charged for work contract

If one exercise it shall be applied for entire contract.

Partial abatement available vides notification no. 1/2006:- 1st march, 2006 service tax abatement is available in some cases. However service tax provider cannot take CENVET credit of such duty/tax on inputs. Input service & Capital goods used for providing such taxable service

IllustrationIn Particular service 70% gross amount is chargeable for service tax

Particular A Ltd. B Ltd.Gross amount charged (a) 18,00,00

025,00,000

Value of Capital goods used (b) 15,00,000

4,00,000

Balance (a) - (b) = (c) 3,00,000 21,00,000Normal Service tax (c) x 12.36% 37,080 2,59,560Service available on abetment (a) x 70% x 12.36%

1,55,736 2,16,300

Service tax available whichever Is lower 37,080 2,16,300

How service tax is paid• Service tax is payable on receipt basis. As is an

indirect tax, it s payable by the service provider but it is recovered from recipient of service

• Credit for Input Service– Output and input service fall within the same

category• Registration

– Person liable to pay service tax is required to register.– In case of non-resident, who do not have office in

India but liable to pay service tax in India, this burden of shifted to recipient of service

• Payment Schedules of service tax– Every person providing taxable service is liable to pay

service tax to the central government

ExceptionsNotified service Person liable to payingTelecommunication Director general of post &

TelegraphMTNL chairmenAny person who granted license by Govt. for service

General Insurance business Insurer or reinsurance providing such service

Insurance auxiliary service provider by an insurance agent

Person who carrying general insurance business or life insurance business

Service provided by any person from a country other than india

Recipient of such service

Service I relation to transport of goods by road in a goods carriage

Any person who pays or liable to pay freight either himself or through his agent.

Sponsorship Service Who receive such sponsorship service

Registration Requirements

• The following person must– Person liable to pay service tax– Input service distributor :- head office– Every provider of taxable service whose

aggregate value of taxable service in a FY exceeds ` 9.00 Lakh

Form of ApplicationThe application for registration is required to be made in duplicate form ST-1 with•A copy of PAN•Proof of address•Constitution of applicant (Partnership Deed, AOA, MOA)Time limit for making application

Particular TimePerson who liable to pay service tax

Within 30 days from the date on which charge of service tax is bought into force

Input Service distributor Within a period of 30 days of the commencement of business or 16th June 2005 whichever is later

Small Service Provider Within a period of 30 days of the date in FY on which the aggregate value of service exceeds Rs. 9 Lakh

Time limit for granting registration

• The department is required to issue the registration certificate in form ST-2, within 7 days of the receipt of the application

• In case failure to issue certificate assessee can carry his activities with a “deemed” registration.

Centralized registration Process

Central office or premises registered if accounting is centralized.

Particular SituationWhen more than one service is provided

Single application is sufficient

When information is to be change or added

Writing an application to assistant of CBSE within 30 days of such change

When assessee stop to provide taxable service

Surrender the registration certificate immediatelyTax to be pain on amounts

actually received

• Service provider charges service tax on the amount of bill raised on his client, service tax is payable to the government on the amount actually received towards value of taxable service.

• It is thus, not payable on amount charged in the Bills/Invoice but on the amount actually received

No Service tax on free service

– If service is given free of charge than service tax is not payable.

Payment of service tax if not collected from the client

Service tax on payments received in advance Service tax is payable as soon as advance is

received even if service I provided later If when service is not taxable at the time of

receipt of advance but become taxable at the time of providing service than advance received is apportioned between two periods (When Service was not taxable and become taxable) and tax is paid on the part of service which is provided on or after the service becomes taxable

If advance is received but no service provided than Service tax paid in advance shall be refunded.

Payment of service tax collected in excess to be paid to the central government.

Due date for payment of Service taxIndividual Proprietary,

Partnership FirmAny Other (Corporate

Assessee)Quarter E-payment

Due Due Date Month E-payment

dueDue date

1st Apr. to 30th Jun

6th July 5th July April 6th May 5th May

1st July to 30th Sep

6th Oct 5th oct May 6th Jun 5th Jun

1st Oct to 31st Dec

6th Jan 5th Jan

Service Tax = Gross Amount Charged x 12.36100 + 12.36

Valuation of Service Tax = Gross Amount Charged x 100

100 + 12.36

Manner of Payment fo Service tax

• Assesses has to pay service tax in the bank designated by CBEC in form TR-6, or any other manner is prescribed by CBEC.

• Form TR-6 is yellow in colour.• Multiple service providers can use a single TR Challan.• E – Payment of Service Tax

– GR – 7 challan used instead of TR-6 Challan– From 1st January 2006. In case of assesses who paid service tax

of Rs. 50 Lakh or more in the preceding FY have already paid during current year must make payment through E-payment

• Payment By Cheque– The cheque should be deposited with the designated bank on

or before the due date• Rounding off

– Includes 50 paisa or more rounded off to Rs.1– Less than 50 paisa ignored

Adjustment of Service Tax• When no service is provided

– Service provider can adjust the excess service tax paid by hm against his service tax liability for the subsequent period if the following two condition are satisfied\• Assesses has no rendered service wholly or partly• Value of taxable service along with service tax has been refunded by the service provider

• When excess amount of service tax is paid for other reason– A assesses is allowed to adjust the excess service tax paid by him for the

subsequent period. Wit effect from 1st march 2007.– Self adjustment facility has been extended to all assesses subject to following

condition• If adjustment are other than interpretation of law, taxability, classification, valuation on

applicability of any exemption notifications• Adjusted amount should be made only in succeeding month/Quarter.• Adjustment amount should not exceed Rs. 1,00,000 for the relevant month/Quarter• The detail of self-adjustment should be intimated to officer within a 15 days from the date

of adjustment.

– Centralized registration can adjust the excess service tax paid without any monetary limit

Provisional Payment of Service tax

• If assesses is unable to correctly estimate the amount of tax payable by him, he can request in writing to the commissioner of CBSE for payment of service tax on provisional basis

• In such cases, the assesses has to submit a memorandum in form ST-3A giving detail of difference between service taxes deposited and service tax to be paid for each month/Quarter.

Interest on Late payment of service tax

(Sec.75)

• If the service tax is paid after the due date, simple interest is paid at 13% for late payment

• Interest is paid for the period of delay not for the whole month.

• Period of delay is counted from the first day after the due date till the actual payment of service tax is made.

• If delay s for 10 days than interest is paid for 1 days only.

General exemption from service tax (Sec. 93)

• The central government can grant total or partial exemptions to taxable services following are general exemptions……..• Services provided by united nation or an in international organizations• Service provided to developer or units of special economic zone

– The central government has granted full exemption to the service provider who provided taxable service to a developer of SEZ– He exemption is granted subject to the following condition

The developer has been approved by the board The unit of SEZ has been approved by the development commission of SEZ The developer or unit of SEZ shall maintain proper account of receipt & utilization of the said taxable services

• Goods & materials sold by service provider to recipient of service– If provider sold goods than that amount is not included in the taxable service amount– The sale value of goods and material sold as a part of service must be shown separately in the bills raised on the recipients.

• Exemption for small service provider– The service provider whose turnover is less than 10 lakh in the previous year will be exempt from service tax up to ` 10 lakh in

next FY• Service provided by reserve bank of India• Exemption to technology business Incubator, Science and Technology Entrepreneurship park (STEP) and Incubates

– STEP – Software developer Company– Incubates - Who help for development of IT– Exemption is granted to incubates subject to following condition

Incubates should be located within the premises of the incubator Total business turnover of incubates entrepreneurship does not exceed ` 50 Lakh during the preceding financial year. The exemption is avail to incubate for a period of 3 year.

• Services provided by a digital cinema service provider. If service rendered by satellite, microwave or global communication line that’s only exempt but physical means including

CD/DVD that’s not exempt.• Service provided by Residential welfare association

– Monthly contribution does not exceed Rs. 3000/Month• Drug & Medicine Produces

What is Provisions Pertaining to returns

Furnishing of returns: Who paid tax are must file the returnForm of Return: ST-3Periodicity for filing return: Half year basis – April to September October to MarchDue dated for filing return•1st April to 30th Sep. – 25th Oct is Due Date•1st Oct. to 31st Mar. – 25th April is Due Date•If the 25th April or 25th Oct. is a public holiday, than filled on the immediately succeeding working day.Contents of Return•Half Year Period detail•Name of the Assesses, Registration No.•Category of Taxable ServiceDocuments submitted along with return•Copies of TR-6 challan indicate payment of service tax for Month/Quarter•Memorandum in form ST-3A (in case of Provisional Assessment)First Return: At first time furnish all the accounts which maintained by assesses are inform to the officerReturn when no service provided: Must file a NIL returnReturn in case of multiple service: Service wise detail should be given in the return instead of Single figureRevised Return: According to Rule 7B of Service tax rules it allows to assesses to rectify mistakes and file a revised return in form ST-3, in triplicate within 90 days from the date of filing the original returnE-Filing of return: Assesses should have a 15 digit STP code for e-filingPenalty for late filing of return: Overall maximum limit is Rs. 2000

Delay Penalty

Up to 15 Days `. 500

15 to 30 Days ` 1000

31 Days and On ` 1000 to ` 100/day from 31st day onwards but the total penalty can not exceed ` 2000

When Person is liable for penalty under Service Tax

Particular PenaltyFor non-Payment or Late Payment ` 200/Day during which failure

contains Interest s charge 2%/Month which

the failure containsWhichever is higher is selected but the

penalty cannot exceed the amount of service tax which was payable. penalty can be waived or reduced if proper cause is shown

Penalty for non-Obtain RegistrationFor not furnishing required information

` 5000 or ` 200/Day whichever is higher

For non maintenance of books of account and documents. For Failure to pay tax electronically when required. Penalty for issuing incorrect invoice.

Liable to penalty which may extent to ` 5000

Other Points:•Interest and penalty paid within 30 days from the date of communication of order of the central excise officer. The amount of above penalty shall be 25%•If this penalty is payable, penalty for non-payment or late payment service tax can not be imposed.

What is a role of Chartered Accountant?

• Advising Clients• Procedural Requirements• Personal representation– Appear before the assessment authority

for appeal

• Certification and Audit• Constant updating of Law and

Provisions

Challenges before the Service tax administration in India

• Service tax is said to be the tax of 21st century because of its potential to raise revenue for the government it is open for a number of challenges.

• A few of them are related to the nature and growth while others to procedural aspects of the service tax collection.

• In order to speed up and smoothen the service tax administration in India, it is required that exists a separate legislation along with distinct mechanism that exclusively looks after collection of Service tax

• A separate legislation would bring greater clarity in service tax procedure and promote govt. revenue from tax collection along with tax environment

• The twin goal of revenue maximization introduction of the culture of voluntary tax compliance also throw up major challenge before the service tax administration in the country.

• Services are by nature, intangible & Spread across the nation in both organized and unorganized sector.

• Service provides in all sectors cannot easily identified & Brought under the Tax Net

• Some services are provided by people with low education level who can not easily follow the tax administration provision.

Taxable Services

Taxable Services

Commercial training and coaching services

• Shall mean any service provided or to be provided

• To any person,• By any institute or

establishment providing commercial training or coaching

• For imparting skill or knowledge or lessons

• On any subject or field,• Whether with or without

issuance of a certificate, and• But it includes

1. Coaching or tutorial classes

2. Computer training institute

1. Commercial training and coaching services

2. Practicing CA’s services3. Information Technology

services4. Consulting Engineer

services5. Scientific and Technical

consultancy services6. Technical testing and

analysis services7. Business exhibition

services8. Mandap keeper’s

services

Commercial training and coaching

ServicesTaxable:

Not Taxable: ×

Sports coaching ×Preschool coaching (Nursery or Play group) ×Certificate course by recognised institute ×Degree course by recognised institute ×Coaching at residence of service recipient ×Training to employee ×

Vocational training

Provided by central affiliated to NCVT

×

Other than above Not for profit organisation Postal coaching

Taxable Services

Practicing Chartered Accountancy Services

Any service provided (or to be provided) to person, by a practicing chartered accountant in his professional capacity in any manner, is taxable service. Individual/ Proprietor/ Firms providing this service shall continue to pay tax on receipt basis.


2. Practicing CA’s services

3. Information Technology services

4. Consulting Engineer services

5. Scientific and Technical consultancy services

6. Technical testing and analysis services

7. Business exhibition services

8. Mandap keeper’s services

Practicing Chartered Accountancy

Value of Taxable Services:

Service tax is payable on the amount received for the aforesaid services (excluding exempt services). However, service tax is not payable on charges which represent cost of goods sold by service provider. Moreover, expenses (which are a liability of the service receiver) incurred by the practicing chartered accountant and later on recovered from the service receiver, are not subject to service tax.

Taxable Services

Information Technology Services

Information technology software means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment.









Information Technology Services

Important points:• Only customized software is covered. Packaged software sold off the shelf

is leviable to excise duty. However in some cases here is an exemption granted from excise / customs duty for part of the value of the packaged software. Such value which is exempt from excise would be liable for service tax.

• Packaged or Canned software intended for single use and packed accordingly is not liable to service tax if following conditions are satisfied Document providing the right to use is packed along with software Importer has paid appropriate customs duties The manufacturer/ duplicator/ the person holding the copyright to

software has paid the excise duty on the entire amount received from the buyer.

• Services provided in relation to Information Technology (IT) software, such as development, designing, programming, up-gradation, providing advice, consultancy and assistance on the mattes of IT software and providing right to use IT software, whether supplied on a media or electronically, were brought in the ambit of Service tax. However, taxable only when the receiver of service exploits them for commercial or business purposes.

Taxable Services

Consulting Engineering Services

Any service provided (or to be provided) to any person, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner (in one or more discipline of engineering including the discipline of computer hardware engineering) is a taxable service. Services provided by a consulting engineer in relation to advice, consultancy or technical assistance in the disciplines of both computer hardware engineering and computer software engineering shall also be classifiable under “consulting engineer’s services”.









Consulting Engineer Services

Discipline of Engineering• Industrial engineering• Mechanical engineering• Aerospace engineering• Computer engineering• Electrical engineering• Metallurgical engineering• Chemical engineering• Civil/environmental engineering• Agricultural engineering• Aquaculture engineering• Architecture engineering

• Automobile engineering• Aviation engineering• Electronics engineering• Environmental engineering• Fabrication engineering• Geotechnical engineering• Hydraulic engineering• Marine engineering• Mining engineering• Telecommunication engineering• Biotechnology engineering

Value of ServicesService tax is payable on the amount received for the aforesaid service. However, service tax is not payable on charges which represent cost of goods sold by service provider. Moreover, expenses (which are the liability of the service receiver) incurred by the service provider and later on recovered from service receiver, are not subject to service tax.

Important Points• Service provided by unqualified engineers cannot be taxed under “consulting engineer’s services.• Service provided by a person who is holder of certificate from an industrial training institute run by

Ministry of Labour and Rehabilitation, cannot be taken as service provided by consulting engineer. • It is not necessary that the concern rendering service should be a commercial concern.• Research & Development Cess (Cess payable on import of technology) is allowed as deduction from

value of taxable Service provided.

Taxable Services









Scientific or Technical Consultancy

Clarification/Explanation

• Consultation may be in nature of an expert opinion/advice.• Service tax will be payable by public funded research

institutions like CSIR, ICAR, DRDO, IIT, IISc, Regional Engineering Colleges, etc.

• Service tax will be payable even if consultancy is provided to Government Department for which consultation fee is received.

• In case of Scientific or Technical Consultancy Services, Point of Taxation Rules, 2011 provides that services shall be deemed to be provided on the date of receipt of amount (i.e. service tax shall be deposited on receipt basis and not on accrual basis).

Exemptions

By doctors, medical colleges, nursing homes, hospitals, diagnostic and pathological labs, etc. as in common parlance they are not known as scientists, technocrats, etc.

Taxable Services









Technical testing and analysis

Clarification/Explanation

Includes testing and analysis undertaken for the purpose of clinical testing of drugs and formulations; but does not include testing or analysis for the purpose of determination of the nature of diseased condition, identification of a disease, prevention of any disease or disorder in human beings or animals. (i.e. medical testing & diagnosis has been excluded from service tax)

Exemptions• Clinical testing of newly developed drugs• Testing & analysis services provided in relation to water quality

testing by Government owned State & District level laboratories• Testing & analysis of seed done by Central or State Laboratory and

Central or State Certifying Agency.• Any testing or analysis services provided in relation to human

beings or animals

Taxable Services









Business exhibition servicesClarification/ExplanationBusiness exhibition service is a service rendered to an exhibitor by an organizer of a business exhibition that intends to market, promote, advertise or show case products or services for growth services. Thus, organizers of events such as trade fairs, road shows, fashion shows, display showcases kept in airports, railway stations, hotels etc. would be covered under this new levy. A display of consumer goods in shops or shopping centres for customers to select and purchase would normally not attract any Service Tax, as normally no separate charges are collected by the shop-keepers for displaying such goods. However, in case an amount is collectzed for merely displaying an item, the same would be chargeable to Service Tax.

Exhibition Service vs Event Management ServiceOrganizers of Trade Fairs and Exhibitions solicit participation from the trade and industry and provide space and other facilities, including furniture, cabins, security, electricity, etc., to display products and provision of services. Whether services provided by the organizers of trade fairs/exhibitions are covered within the scope of event management service? Trade fairs and exhibitions are organised by persons. Such organisers of trade fairs and exhibitions provide services to exhibitors in relation to business exhibition. Services provided by an organizer of trade fairs and exhibitions to an exhibitor in relation to business exhibition is liable to Service Tax under “Business Exhibition Service” In addition, an organiser of the trade fair or business exhibition may engage an event manager to provide service to the organizer in relation to organising trade fairs and exhibitions. In such cases, the event manager renders the service of “Event Management” to the organisers and is liable to pay Service Tax under “Event Management Service”. The two services, namely “Business Exhibition Service” and “Event Management Service”, and the two service providers of the respective services are distinct.

Exemptions

Services provided by an organiser of business exhibition for holding a business exhibition outside India.

Taxable Services









Mandap Keeper’s servicesClarification/Explanation Dance, drama or music programme or competitions are social functions

and allowing temporary occupation of a hall for a consideration for organizing such functions are liable to service tax under Mandap Keeper Service.

Halls, rooms etc. let out by hotels/restaurants for a consideration for organising social, official or business functions are covered within the scope of “mandap”, and such hotels and restaurants are covered within the scope of “mandap keeper”.

Accordingly, service tax is leviable on services provided by hotels and restaurants in relation to letting out of halls, rooms, etc. for organizing any official, social or business function under mandap keeper service.

Political meetings, film shooting are not social function and hence not taxable.

Renting of art gallery will get covered under Business Exhibition Service. It also includes the following:

• Kalyana mandap or marriage halls• Banquet halls, Barat Ghar• Conference halls etc• Hotels and restaurants providing any such service for organising any

social, official or business function (mere reservation of seats not taxable)

Mandap Keeper’s servicesClarification/Explanation (Cont…) Services of letting out of boats for organizing boat parties or events would

not be liable to service tax being boat is not an immovable property. Any sports stadium or Gymkhana let out their premises for a consideration

for holding official, social or business functions would fall within the purview of Mandap.

The renting of Banquet halls for conducting the Seminars/conferences would fall within the ambit of the definition of the taxable service provided by a Mandap Keeper as such seminars/conferences are considered as official/business function.

Mandap let out for stay of “Barratis” for a consideration would attract Service Tax, as “Barratis” is a part of marriage, which is a social function.

Letting out of school/college building or open land for marriage function, which is also a social function, would attract Service Tax.

Open land /ground is to be treated as an “immovable property” as per the definition given in section 3 of Transfer of Property Act, 1882 and hence the above premises let out for consideration will fall under the category “Mandap” for the levy of Service Tax.

Screening of feature films in cinema theatres is not an official, social or business function and, therefore, no service tax would be leviable under the category of "Mandap Keeper” for giving the theatre on rent for showing premier shows of movies which is a part of the entire process of making and relating the feature films in cinema theatres.

Mandap Keeper’s servicesClarification/Explanation (Cont…)

• Meeting of Board of directors of a company is an example of business function, opening ceremony of a shop is also a type of business function and birthday, marriage function, etc. are instances of social function, when a company holds a seminar for their staff/officers, it would be an official function of the company.

• Services rendered by mandap keepers is taxable service only when he has let out some room, halls, etc. and essentially hand over the temporary possession to the person to whom it is let out. In other words, there is a certain exclusivity, which has been afforded to the person to whom it has been let out. The activity of mere reservation of seats in a restaurant, hence, shall not attract service tax.

• Letting out furniture or any other items will not be called as 'mandap keeper' services because no immovable property is involved.

• Mandap keeper may not be owner of the premises.• If it is temporary structure, service will be taxed under Pandal or

Shamiana Contractor’s Service.• No tax on general donations received.

Mandap Keeper’s servicesClarification/Explanation (Cont…)

• Service charge (even if later on distributed as tips to employees) and amenities charge shall be included in value of taxable service being charge is on gross amount charged.

• Sales Tax, Expenditure Tax are statutory levies, they cannot be included in the value of the taxable services. Any calculation of the Service Tax has to be on the value of service excluding the statutory taxes.

• Car parking charges collected from client who availed mandap keeper service also includible in the taxable value and liable to be taxed.

• The charges of vessels, furniture, decoration etc, provided by the third party other than the mandap keepers are not includible in the taxable value if the mandap keeper is not associated with such supply in any way since the said facility is not provided by the mandap keeper.

• If the mandap keeper raise separate bill for the charges for other facilities like furniture, fixtures, lighting, vessels, crockery, cutlery, etc. all these charges are includible in the value of taxable service for levy of service tax.

Mandap Keeper’s servicesExemptions/Abatements• The taxable services provided to any person by a mandap keeper for the use of the

precincts of a religious place as a mandap are exempt from service tax leviable thereon. Religious place means a place which is meant for conduct of prayers or worship pertaining to a religion

• 40% abatement is available if, value of taxable service includes use of mandap, facilities provided to the client in relation to such use and also for the catering charges where the mandap keeper also provides catering services, that is, supply of food and the invoice, bill or challan issued indicates that it is inclusive of the charges for catering service. Effective rate of duty would be 60% of normal rate in such cases.

• 40% abatement is available if, taxable service provided by a hotel as Mandap keeper in such cases where services provided include catering services, that is, supply of food alongwith any service in relation to use of a Mandap. The invoice, bill or challan issued indicates that it is inclusive of charges for catering services. Effective rate of duty would be 60% of normal rate in such cases. Here, the expression “hotel” means a place that provides boarding and lodging facilities to public on commercial basis. The expression "food” means a substantial and satisfying meal. High tea or unlimited breakfast is a substantial meal.

• Notification 12/2003 shall not apply in case of Mandap Keeper Services if catering services are also being provided. Notification 12/2003 applies only in case contract is divisible and further sale of goods is not covered by definition of service. In case of mandap keeper services, supply of food & drinks has been made integral part of services and even practically supply of food & drinks is indivisible part of mandap keeper services. (controversial matter)

Justification of VAT• The VAT not only provides full set-off for input tax as well as

tax on previous purchases, but it also abolishes the burden of several other taxes, such as turnover tax, surcharge on sales tax, additional surcharge, special addition tax etc.

• In addition central sales tax is also going to be phased out.

VAT is tax on value addition• The Method consists of levying a tax on value added to product at

each satge of ts production & distribution. For this purpose value added is taken as the difference between the sales and purchase of intermediate product or goods for resale of a business.

• On the face of if the simplest way to levy a VAT is to tax the value assed in a business process embodied in the difference between q business’s sales and purchase

What is the need for introducing VAT

• VAT is more equitable way of taxing as well as all dealers share the tax burden

• VAT is more transparent as easy procedures exist under it and only two rates are there

• Simpler – easy communication and easy compliance

• Credit for input taxation leading to cost efficiency

• Better compliance through self policing

• Prevents cascading effect by providing inpur rebate

• Avoids distortions in trade and economy due to uniform tax rates.

What are the benefits of VAT in brief?

• Set-off will be given for input tax as well as tax paid on previous purchase

• Other taxes, such as turnover tax, surcharge, additional surcharge etc. will be abolished

• Overall tax burden will be rationalized

• Prices will in general fall• There will be self-

assessment by dealers• Transparency will increase• There will be higher revenue

growth.

Merits of VAT• Eliminates multiple Tax: Set off will be given for the input tax as well as tax paid on previous purchase• Simple

It is based on simply on transaction and not on a base that required complicated definition like income or wealth VAT has the merit of certainty and is required ease to understand In most countries, the pre-VAT commodity tax systems are found to be very complicated, in fact all those countries that have gone in for VAT had a

genuine need for simplifying their tax systems.

• Lowering of TAX burden: VAT reduces tax burden and helps in reduce price• Fairness

VAT is a move towards more efficiency, equal competition and fairness in the tax system VAT helps common people, trade, industry & also the government.

• Tax Evasion will be reduced There is a self assessment and therefore better tax compliance being less chances of tax eveson It has the merit of ‘self-policing’ in that it induces business to demand invoice from the supplier to enable them to obtain credit for the tax paid on

their purchase against their total tax liability.

• Tax transparency The buyer knows, out of the total consideration paid for purchase of material, what is tax component. Thus, the system ensures transparent also. This transparency enables the state govt. to know as to what is the exact amount of tax coming at each stage. Thus, it is a great aid to the govt.

which taking decisions regard to rate of tax etc.

• Higher Tax revenue: Higher revenue growth• Uniformity: Greater uniformity in this system• Simpler System: VAT system is comparatively simpler than the sales tax system of taxation as there would be no dispute

regarding taxable stage of sale and classification of goods at a particular rate of tax and there would be minimum requirement of declaration form.

• Neutral The greatest virtue of VAT lies in its neutrality that is, non-interference with the choices or decisions of economic agents in the matter of location of

business, as well as business organization Under VAT, the allocation of resources is left to be decided by the free play of market forces and competition and not driven by tax consideration

• Stable source of revenue: In OECD countries t was found that every 1% point of VAT yields 0.4 percent of GDP in revenue.

Demerits of VAT

To get maximum benefit of VAT should……•Extends through the production and distribution chain aright up to the retail stage.•Has its base as broad as possible•Permits registered firms to obtain full and immediate credit for VAT paid on inputs•Limits the extent of rate differential and,•Follows the destination principle.

Demerits of VAT in Indian Context

• It does not cover goods as well as service– VAT extends to the retail stage, its base is nor comprehensive enough to compare all goods and

services that go into final consumption

• Exemptions– Under continuous pressure from various quarters the number of commodities, which are now

being exempted from VAT in various states.

• Floor Rate– There are supposed to applied uniformity in all states and so although they are describe as “floor

rates, the states will have no discretion to go below as above the prescribed rates, country to what a floor rate ordinary implies.

– There is also an exempted category, which will bear no tax, but no rebate will be given for taxes paid on their purchase at the time of sale at a final consumer.

• General rate of 12.5%– Unduly its high rate– A high rate became all the more necessary on revenue considerations because a large number of

commodities and industrial inputs have been included in 4% categories.

• Classification of capital goods– Classification of goods under different lists is, in many instance arbitrary and leaves wide room

for doubts and disputes as to whether a particular item comes within the lower rate category or not.

• Another major flaw of the rate structure is the inclusion of capital goods and industrial inputs in the 4% list.

Input Tax

It is the tax paid or payable in the course of business on purchase of any goods made from registered dealer on the state.

Output Tax

Output tax means tax charged or chargeable under the act, by a registered office dealer for the sale of goods in the course of business

Coverage of Set-off input tax credit

Input tax credit is generally given for the entire VAT paid within the state on purchase of taxable goods meant for resale/manufacture of taxable goods.•However, generally no credit is available in respect of purchases given below•Goods purchased from unregistered dealer• Goods purchased form other states/countries•Purchase of goods used in manufacture of exempted goods•Purchase of capital goods (n some cases credit is avail in installments)•Purchase of goods used in fuel and power generation•Purchase of goods used in manufacture of goods to be dispatched outside any state as branch transfer/consignments.•Purchase of goods in cases where the dealer does not have invoices showing amounts of tax charged separately by the selling dealer.•Purchase of non-creditable goods•Purchase from a dealer who has opted for composition scheme

Carrying over of Tax credit• If the tax credit exceeds the tax

payable on sales in a tax period, it shall be carried over to the next tax period. F there is any excess unadjusted input tax credit at the end of the financial year; it shall be eligible for refund.

• VAT collected in a tax period is lower than input tax credit in respect of local purchases and inter-state purchases, only the balancing amount is carried forward to the next period and it will be adjusted in the next tax period on the same basis.

• However, unadjusted tax credit at the end of the financial year is generally refunded.

• Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly installments.

• There is a negative list for capital goods not eligible for input tax credit.

Treatment of exports

• For all exports made out of the country, VAT paid within the state will be generally refunded in full within stipulated periods (generally it is 3 months).

• Units located in SEZ and EOU will be generally granted either exemption from payment of in put tax or refund of the input tax paid within the aforesaid period.

Variants of VATGross product variant

Income Variant Consumption variant

• This variant allows deductions for all purchases of raw materials and components but no deduction is allowed for capital inputs.

• In this way, capital goods such as plant and machinery are not deductible from the tax base in the year of purchase and depreciation on the plant and machinery in not deductible in the subsequent years.

• Capital goods carry a heavier tax burden as they are taxed twice.

• Modernization and upgrading of plant and machinery is delayed due to this dual tax treatment.

• Deduction are allowed for purchase of raw materials and components as well as depreciation on capital goods

• In practice there are many difficulties connected with specification of any method measuring depreciation, which basically depend on the life of assets as well as on the rate of inflation

• Under this variant, deduction is allowed for purchase for all business purchases including capital assets.

• In other words, the economic base of the tax is equivalent to total private consumption.

• It does not distinguish between capital and current expenditure.

Different methods of computation of VAT

Addition method

• This method is based on the identification of value added, which can be estimated by summation of all the elements of value added.

• This method is also known as the income approach.

• This method is that is does not require matching of invoices in order to check tax evasion

Tax credit method

• The tax credit method, the tax on inputs is deducted from the tax on sales to arrive at the VAT payable by the dealer.

• This method is also known as the invoice method

Subtraction Method• The subtraction method estimates value-added by

means of difference between outputs and inputs• This is also known as the product approach• Subtraction method has further variants in the

way subtraction is attempted among– Direct subtraction method is equivalent to a

business transfer tax whereby tax is levied on the deference between the aggregate tax exclusive value of sales and aggregate tax exclusive value of purchase.

– Intermediate subtraction method is based on deduction of the aggregate tax-inclusive value of purchase from the aggregate tax-inclusive value of sales and the taking deference between them

– Indirect subtraction method

What are administrative procedures which are generally adopted by

different cities? • Compulsory issue of tax invoice, cash memo or bill

– Serially numbered tax invoice with prescribed particulars– Tax invoice will be signed & dated by the dealer or his employer with

required particular– The dealer keeps a duplicate of such tax invoice duly signed and dated– Failure to comply with the above will attract penalty

• Registration, Small dealers & Composition Scheme– Registration of small dealer with gross annual turnover above a specified

limit (Say RS. 5 Lakh) is compulsory– All dealer under the old system of locals sales tax have been

automatically registered– A new dealer is generally allowed 30 days time from the date of liability.– Small dealers with gross annual turnover not exceeding a specified

amount, who are otherwise liable to pay VAT, shall however have the option for a composition scheme with payment of a tax at a small percentage of gross turnover.

– The dealers who obtain composition scheme will not be entitled to input tax credit.

What are administrative procedures which are generally adopted by different cities?

(Cont…)• Taxpayer’s identification No.

– It consists of a 11 digit numerous throughout the country– First 2 character will be represented the state code by the govt. of India– Next 9 characters be different in different states.

• Return– Files monthly/quarterly as specified in the state acts with payment Challan– Every return furnished by dealer will be scrutinized and if any technical mistakes are

detected, the dealer will be required to pay the deficit appropriately.• Procedures to self assessment of VAT liability

– VAT liability will be self-assessed by the dealer themselves– Voluntary return will be submitted after setting off the tax credit.

• Audit– Correctness of self assessment will be checked through a system of departmental audit.– However evolution detected on audit, they concerned dealer may be taken up for audit

for previous period also.– The audit team will conduct its work as a time bound manner and audit will be

completed within a stipulated period.– The audit report will be transparently sent to the dealer also– Simultaneously, a cross checking computerized system is being worked out on the basis

of co-ordination between central excise & income tax authority.– This cross-checking system will help to reduce tax evasion and also lead to significantly

growth of tax revenue

What are administrative procedures which are generally adopted by different cities?

(Cont…)• Declaration form

– There will be no need for any provision for concessional sale under the VAT act, since the provision for setoff makes the input zero rated, hence there will be no need for declaration

• Other taxes– Other taxes like turnover, surcharge and additional surcharge have been abolished.

• Penal provision– Penal provisions under the VAT are not more significant than in the sales tax

system.• Coverage of goods under VAT

– All the goods, including declared goods will be covered under VAT and will get the benefit of input tax credit.

– Generally exempted category includes liquor, lottery ticket, petrol, diesel, aviation fuel and other motor spirit since there price are not fully market determined.

• VAT rate and classification of commodities– Only two rate is exist one is 4% and other is 12.5%– Exempted categories generally include natural and unprocessed products in

unorganized sector, items which are legally barred from taxation and items which have social implications.

– Included in this exempted category is set of commodities flexibly chosen by individual states?

service tax and vat

Education

service tax act service

charge of service tax

imposing service tax

domain of service tax

nature of service tax

value of service

specified service

service taxmatter