Servce Tax in India

Service Tax & VAT in IndiaSubmitted by Upasana GautamSonia YadavService tax an overviewService Tax Laws w.e.f. 1.7.2012. Section 66B of Finance Act,1994 as amended provides: There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed

AMBIT of Service TaxAs on 1st May, 2011,119 services are taxable services in India. These taxable services are specified in Section 65(105) of the Finance Act,1994.Section 64 of the Finance Act, 1994, extends the levy of service tax to the whole of India, except the State of Jammu & Kashmir. Generally, the liability to pay service tax has been placed on the service provider. However, in respect of the taxable services notified under Sec.68(2) of the Finance Act,1994, the service tax shall be paid by such person and in such manner as may be prescribed at the rate specified in Sec.66 of the Act and all the provisions of Chapter-V shall apply to such person as if he is the person liable for paying the service tax.Levy of service tax in IndiaEvery person providing services in excess of Rs 9.0 lacs in a financial year is required to apply for Service Tax Registration.Service tax is payable by an assessee if the value of services provided by him is in access of Rs 10 lacs.If assesee is individual or proprietary or partnership firm, tax is payable on quarterly basis. This facility is not available to HUF. In all other cases, service tax is deposited monthly.

Service Tax should be paid by 5th day (6th in case of e-payment) of the month immediately following the month/quarter in which service is deemed to be provided as per the Point of Taxation rules.

For the month of March or quarter ending march, it shall be payable by 31st March.

Method of charging service taxEarlier service tax was charged on cash basis for every service provider.Currently it is charged on cash basis from individual service providers, and on accrual basis from companies (i.e. companies are to deposit service tax as soon as the service is provided irrespective of collection of funds on the same).However, individual service providers have to deposit service tax only when the invoice amount has been collected.Negative List-Sec 66D of the Finance Act,1994Services provided by Government or a local authority (except Department of Posts by way of speed post, parcel etc).Service provided by the RBI to any person.All services provided by a foreign diplomat mission located in India.Services relating to agriculture.Purchased and sold goods are not liable to service tax.Any process amounting to manufacture or production of goods on which excise duty is leviable.Negative List-Sec 66D of the Finance Act,1994Selling of space or time slots for advertisements other than advertisements broadcast by radio or television.Services provided by way of access to a road or a bridge on payment of toll charges.Betting, gambling or lottery.Admission to entertainment events or access to amusement facilities.Transmission or distribution of electricity by an electricity transmission or distribution facility.Services by way of renting of residential dwelling for use as residence. It does not include places meant for temporary stay.Negative List-Sec 66D of the Finance Act,1994Specified services relating to education: preschool and education up to HSS , education as a part of a curriculum for obtaining a qualification, vocational education course.Services relating to transportation of passengers by a stage carriage, railways( except air conditioned coach), metro, inland waterways, public transport, taxis, auto rickshaws.Funeral, burial, crematorium or mortuary services.

services subject to be taxedThe following services have been notified under Sec.68(2) of Finance Act,1994A. Services...(i)in relation to telecommunication service; (ii)in relation to general insurance business;(iii)in relation to insurance auxiliary service by an insurance agent; and(iv)in relation to transport of goods by road in a goods carriage, where the consignor or consignee of goods-(a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);(b) any company established by or under the Companies Act, 1956 (1 of 1956);(c) any corporation established by or under any law;(d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law corresponding to that Act (e) any co-operative society established by or under any law;(f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) (g) any body corporate or a registered partnership firm

services subject to be taxed..(continued)A continued(v) In relation to Business Auxiliary Service of distribution of mutual fund by a mutual fund distributer or an agent, (vi) in relation to sponsorship service provided to any body corporate or firm located in India.B. Any taxable service provided or to be provided from a country other than India and received in India, under Sec.66a of the Finance Act,1994. Who pays Service TaxIn the following situations, the liability to deposit service tax is as follows :i.in relation to [telecommunication service](a)the Director General of Posts and Telegraphs, (b)the Chairman-cum-Managing Director, Mahanagar Telephone Nigam Ltd, Delhi,(c)any other person who has been granted a license by the Central Government.

ii. in relation to general insurance business, the insurer or re-insurer, as the case may be, providing such service;iii.in relation to insurance auxiliary service by an insurance agent, any person carrying on the general insurance business [or the life insurance business, as the case may be,] in India; iv. in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service;

Who pays service tax (continued.)v. in relation to taxable service provided by a goods transport agency, where the consignor or consignee of goods is- any factory, any company, any corporation, any registered society, any co- operative society, any registered dealer of excisable goods , any body corporate or a partnership firm;vi.in relation to business auxiliary service of distribution of mutual fund by a mutual fund distributor or an agent, as the case be, the mutual fund or asset management company, as the case may be, receiving such services;vii.in relation to sponsorship service provided to any body corporate or firm located in India, the body corporate or, as the case may be the firm who receives such sponsorship service;

Establishments to tax services in india67 Central Excise & Service Tax Commissionerates (CBEC), 7 exclusive Service Tax Commissionerates (23 Excise zones) and 5 Large Taxpayer Units administer Service tax collection in India.

Following are the 7 Service tax Commissionerates:1. Mumbai-I2. Mumbai-II3. Delhi4. Chennai5. Kolkata6. Bangalore7. AhmedabadThere are 5 Large Taxpayer Units (LTUs) as listed below: 1. Bangalore, 2. Chennai, 3. Mumbai, 4. Delhi and 5. Kolkata

Value of Taxable ServicesThe valuation under service tax is governed by the provisions made under section 67 of the Finance Act, 1994

Value of taxable service shall be determined on the basis of one of the following:a. consideration in money for providing the service.b. consideration in money + consideration in any other formc. consideration in any form other than money The consideration in any form other than money shall be determined in a manner as prescribed in section 67(1) of the Finance Act, 1994.

Historical rates of service taxSr.No.PeriodRate of Service TaxRate of Education CessRate of Secondary & Higher Education Cess1Till 13.05.20035%NilNil214.05.2003 to 09.09.20048%NilNil310.09.2004 to 17.04.200610%2% of S.T.Nil418.04.2006 to 31.05.200712%2% of S.T.Nil501.06.2007 to 23.02.200912%2% of S.T.1% of S.T.624.02.2009 to 31/03/201210%2% of S.T.1% of S.T.701/04/2012 to date12%2% of S.T.1% of S.T.The table below shows the rate of service tax applicable at the relevant period of time.InterestThe table below shows the rate of interest applicable at relevant period of time, if service tax is not paid till due date.

Sr.No.PeriodRate of Interest1.Till 11.05.20011.5% per month2.11.05.2001 to 11.05.200224% per annum3.11.05.2002 to 10.09.200415% per annum4.From 10.09.2004 to 31.03.201113% per annum5.From 01.04.201118% per annumService Tax ExemptionTaxable service of aggregate value not exceeding Rs. 10,00,000 but registration is required when the aggregate value of invoice issued exceeds Rs.9,00,000.Example: A firm has been providing taxable services for several years. Gross value of invoice issued for the past 2 years was as under: FY 2010-1115 lakh FY 2011-128.70 lakhs During FY 2012-13, issued invoices for Rs. 11,90,000. what will be its service tax liability.Service Tax ExemptionSolution-for FY 2012-13, preceding FY shall be 2011-12, in which invoice issued is 8.70 lakhs less than 10 lakhs. Hence, the firm shall not pay any tax upto 10 lakhs. Service tax liability=12.36% of 1,90,000Services provided to the united nations or international organizations.Services provided to diplomatic missions for their official use as well as personal use.Services provided to units in SEZ.Services provided by technology business incubators(TBI) or science and technology entrepreneurship parks (STEP).Export of ServiceAs per rule 3 of Place of Provisions of Service Rule, 2012, the place of provision of a service shall be the location of the recipient of service.Hence, in case of export of services, no tax shall be payable as the recipient of service in most of the cases shall be located in a country outside India.Payment of Service TaxPayment of service tax compulsorily in accordance with Point of Taxation Rules, 2011.Point of Taxation means the point in time when a service shall be deemed to have been provided.Determination of Point of TaxationWhen the invoice is raised within 30/45 days of completion of service. The liability to pay service tax will arise on the date of Issue of invoiceThe receipt of payment Whichever is earlier.b) When invoice is not raised within 30/45 days of completion of serviceCompletion of provision of the serviceReceipt of paymentwhichever is earlier.Payment of Service TaxIn case of continuous supply of service where the provision of the whole or part of the service is determined periodically on the completion of an event in terms of a contract, which requires the receiver of service to make any payment to service provider, the date of completion of each such event as specified in the contract shall be deemed to be the date of completion of provision of service.Where the provider of taxable services a payment up to rupees 1000 in excess of the amount indicated in the invoice, the point of taxation to the extent of such excess amount, at the option of the provider of taxable service, shall be determined on the basis of invoice issued.Question: R ltd gives the following particulars relating to the services provided by it to its various clients for the month ending 31.07.2012.Total bills raised for Rs.17,50,000 out of which bill for 1,50,000 was raised on an diplomatic missions and payments for bills 2,00,000 were not received until 31.07.2012. Amount of 1,12,360 (including service tax) was received as an advance from XYZ Ltd. On 25.07.2012 to whom the services were provided in august, 2012.Compute: Value of taxable servicesAmount of service tax payableLast date of service tax payableValue Added Tax (VAT)Submitted by Upasana GautamSonia YadavIntroductionVAT is a tax, which is charged on the increase in value of goods and services at each stage of production and circulation. It is also chargeable on the value of all imported goods. It is charged by registered VAT businesses/persons/taxpayers. VAT has replaced a number of other taxes and its introduction has not resulted in either increased prices to final consumers or reduced profitability of business. VAT is levied on the difference between the sale price of the goods produced or the services rendered, and the cost thereof that is, the difference between the output and the input. EARLIER SALES TAX SYSTEMVAT SYSTEM1. Tax was levied at the stage of the first sale or at the final stage. Thus levied at one single stage.1. Tax is levied and collected at every point of sale. Thus, it is a multi stage tax system.2. Successive sales (resale) of goods on which tax is already paid did not attract tax.2. Tax is collected at every point of sale and the tax already paid by the dealer at the time of purchase of goods will be deducted from the amount of tax paid at the next sale3. Dealers reselling tax paid goods did not collect any tax on resale and file NIL returns3. Dealers reselling tax-paid goods will have to collect VAT and file returns and pay VAT at every stage of sale.4. Computation of tax liability was complex4. It is transparent and easier5.Sales Tax was not levied at the time of purchases against statutory forms but there was misuse of such reforms resulting in tax evasion5. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of tax payable on sale.6. Returns and challans were filed separately and the dealers had to give numerous details6. The returns and the challans are filed together in a simple format after self assessment done by the dealer himself7. A large number of forms were required 7. At the most a few forms are required8. Tax on goods only8. Tax on goods and services both9. Assessment was done by the department9. Self assessment is done by dealers10. Penalty for defaulters/evaders not strict10. Penalties are stricterFeaturesTax levied and collected at every point of sale. Tax collected at every point of sale and the tax already paid by the dealer at the time of purchase of goods will be deducted from the amount of tax paid at the next sale. Dealers reselling tax paid goods will have to collect VAT and file returns and pay VAT at every stage of sale (value addition) It is transparent and easier. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of tax payable on sale. The returns and the challans are filed together in a simple format after self-assessment done by the dealer himself. At the most a few forms are required. Tax on goods and services both. Self-assessments by dealers. Penalties will be stricter. TerminologyOutput VAT:Amount received by a seller as a percentage of the gross sale price of goods or services

Input VAT :Amount paid by a buyer as a percentage of the gross purchase price for goods or services used in production.

Zero Rated :Transactions in which the seller collects no output tax and the corresponding input tax is fully refundable. Exports are zero rated

Exempt :Transactions in which the seller collects no output tax but the corresponding input tax is non-refundable and absorbed by the seller. Financial services are commonly exempt.

How to calculate VAT?

A trader registered for VAT effectively pays VAT only at one stage when he sells his goods.This tax is the only amount, which has an effect on his selling price which includes VAT. The VAT that he has paid as a part of his purchase price is charged on him by his suppliers.This is not a cost to him because he gets it back by deducting it from tax on his sales (Output Tax).Therefore, VAT should have a minimum impact on his selling prices.

Liability of taxLiability of tax under existing sales tax system and VAT if charged at each stage.To curb the evasion of sales tax, the State Government had desired instead of levying the sales tax at first or the last stage, it should be levied at each stage.However, levying it at each stage would have resulted into the following two anomalies under the existing sales tax system:Sales tax would have been charged more than once on the same itemThere would be sales tax on sales tax i.e. it would result into a cascading effect.To overcome the above anomalies, VAT was introduced so that VAT is calculated by deducting input tax credit from the tax collected during the payment period.

1. Input Tax CreditTax paid by the dealer on its purchase of inputs and capital goods is eligible for credit while making the payment of VAT on the sale of such goods. Such input tax credit is allowed as set off from the output tax payable by the dealers on its sale.Thus, VAT is calculated by deducting tax credit from tax collected during the payment period.

A dealer cannot claim the input tax credit if the purchases goods and capital goods are not meant for business.Question 1.

R sells goods to S for Rs. 1,00,000. He charges sales tax/VAT @10% on the sale price. S sells the same goods to T by adding Rs. 50,000. as his profit and charges Sales Tax/VAT @ 10%.Compute the tax payable under:The existing sale tax system assuming sales tax is charged at each stage.VAT

Total Sales Tax Payable = Rs 10000 + 16000 = Rs 26000Total VAT payable = Rs 10000 + 5000 = Rs 15000

In the case of VAT, tax is payable only on value addition of Rs 50000 i.e. Rs 5000.Difference of tax: Rs 26000 Rs 11000

The above difference is due to the following reasons:Sales Tax has been levied @ 10 % on Rupees 100000 twice. Hence the difference amount is : Rs100002. Sales Tax has been charged on sales tax i.e. 10% has been charged on sales tax of : Hence, the cascading effect due to extra sales tax: Rs 10003. Total Difference: Rs 110002. When raw material is used more than once for productionIncidence of tax involving more than one transaction can be explained by the following illustration:QUESTION 2R is the manufacturer of two raw materials X & Y. These two raw materials have been manufactured by taking the basic produce of mines on which VAT has not been allowed. The selling cost of raw material X is Rs 100/kg and the rate of VAT is 4% whereas the selling cost of raw material Y is Rs 120/kg and the rate of VAT is 12.5%.S has used 1 kg each of both the above raw materials by purchasing it from R and manufactured product Z. The quantity manufactured after allowing for loss in manufacturing is 1.8 kg. The aggregate of wages, conversion cost and profit on the sale of produce Z is Rs 500. Thus, product Z gas been sold for Rs 720 and VAT has been charged @12.5%.T who has purchased the above product Z from S sold the same to U for Rs 1000 and VAT has been charged @12.5%.U sold the product Z to the customer W for Rs 1500 and charged VAT @12.5%.Find out the total VAT earned by the State Government??

Total VAT earned by the State Government = Rs 19 + 71 + 35 + 62.5 = Rs 187.5Central Sales Tax(CST)It is charged by the seller of goods when he makes an inter State sale, i.e., sale made to dealer/consumer in other states.Goods move from one state to anotherVAT is charged by the seller of the goods, when he makes an intra State sale i.e. sale made to a dealer or a consumer within the same State.CST is levied by the Central Government but it is collected and retained by the State Government from where the movement of goods startedWhereas, Vat is levied by the respective State Governments and it is collected and retained by the same State Government.

3. Eligible Purchases for availing Input Tax CreditIt is available only when the taxable goods are purchased from the same State for the following purposes:For sale/resale with the StateFor sale in the course of inter State trade or commerce, i.e., Goods are sold to any other State or Union Territory of IndiaTo be used as:Containers or packing materialsRaw materialsConsumable storesFor being used in the execution of a works contactTo be used as capital goods required for the purpose of manufacture of taxable goodsTo be used asRaw materialsCapital goodsConsumable storesPacking materials/containers

364. Coverage of Input Tax Credit and its Set - OffInstant credit of Input Tax this will be given both to the manufacturers and traders for purchase of inputs/supplies meant for both sales within the State as well as to other States, irrespective of when these will be utilized/sold. Carry forward of VAT credit If the input VAT credit exceeds the tax payable on sales made within the State in a month, the excess credit will be adjusted against Central sales Tax payable on inter State sales but if there is still excess left it will be carried over to the subsequent month(s) and the unadjusted VAT credit at the end of the specified period is eligible for refund.Question R purchases goods from X for Rs 2,25,000 which includes VAT@12.5%. R sells 20% of goods to T in the same State by adding profit @25%on cost. Balance 80% of goods are sold to V who is carrying on business in another State. The profit charged in this case was 25% on cost. VAT charged is 12.5% and CST charged is 2%. Compute the input tax credit and its set off allowed to R.

No input credit on CST paid on purchases from other States There is no credit of CST is inputs are purchased from the other states. For example if the goods are purchased by Delhi dealer from Mumbai for Rs 102000 which includes CST of Rs 2000. The cost of purchase in this case shall be Rs 102000.Input credit on stock transfer to other States Stock transfer to branches or on consignment basis does not amount to sale. Therefore, it is not subject to VAT or CST. However, if goods are sent outside State on stock transfer/consignment basis, credit (set off) of tax paid on inputs purchased within the State is available only to the extent of tax paid in excess of 2% as 2% is retained by the State Government.For example if tax paid on inputs is 12.5%, input credit of 10.5% is available. If the tax paid on purchase is 4%, input credit of 2% (4% - 2%) is available. However, if the goods are transferred on stock transfer basis to other branches in the same State, full input tax credit shall be available to the dealer.Purchases not available for Input Tax CreditPurchases from unregistered dealersPurchases from registered dealer who opt for composition scheme under the provisions of the ActPurchases of goods as may be notified by the State GovernmentGoods where Purchase Invoice is not availablePurchases of goods where invoice does not show the amount of tax separatelyPurchases of goods, which are utilized in the manufacture of exempted goodsPurchases of goods used for personal use or provided free of charge as giftsGoods imported from outside the territory of IndiaGoods given away as free samplesGods purchased from the other states viz. inter State purchases.