Indirect Taxes

Rajkamal R. Shah

The Circular explains provisions relating to new services that came into effect from
16-6-2005 under the taxable category and expansion of scope of some of the existing taxable services. It also deals with other provisions relating to taxability of service provided by a non-resident to a Indian resident, payment of service tax on advance receipt, provisions relating to small service providers and their registration at the time of receipt of Rs. 3 lakhs against taxable service provided, scheme of centralized registration, exemption to gem and jewellery sector, exemption to shipping industry and export of services.

As this circular deals with various amendments to the Finance Act, 2005, some of which are quite controversial, it is important to know the Government’s version on such issues. Keeping in view the importance, excerpts from this Circular is given hereunder for the benefit of readers.

New services

• Transport of goods through pipe line or other conduit

What is sought to be covered under this category is transport of goods, other than water, through pipe line or conduit generally employed to transport petroleum and other petroleum products, natural gas, LPG, chemicals, coal slurry and other similar products.

Under this category service provided relating to agriculture, irrigation, watershed, development, drilling, digging, repairing, renovating or restoring of water sources or water bodies are specifically excluded. Also service provided in the course of construction of roads, airports, railways, transport terminals, bridges, tunnels, dams, major and minor ports is exempted under Notification No. 17/2005.

"This taxable service covers dredging which is generally undertaken for removal of material such as silt, sediments, rocks etc. of rivers, ports, harbour, backwater or estuary for providing adequate draught for ships and other vessels and to maintain shipping channels. Service tax is leviable only on dredging of river, port, harbour, backwater or estuary and dredging in any other cases does not attract service tax. The definition of dredging is an inclusive definition and the activities specified are only indicative and not exhaustive".

• Survey and map making

"This service covers geological, geophysical, geochemical and other prospecting services by studying the properties of the earth and rock formation and structures.  It also includes services providing information on sub-surface earth formations by different methods such as seismographic, gravimetric, magnetometric methods or other sub-surface surveying methods".

"Further, it covers surface surveying, services of gathering information on the shape, position or boundaries of a portion of earth’s surface by methods such as transit, photogrammetric, or hydrographic, for the purpose of preparing maps. It also includes surveying or collection of data by satellites".

"The new taxable service of ‘survey and map-making’ classifiable under sub-clause (zzzc) of section 65(105) of the Finance Act, 1994, covers other such activities excluding "survey and exploration of minerals" classifiable under  sub-clause (zzv) of section 65(105) since 2004".

"Map making consists of preparation or revision of maps of all kinds such as topographic, hydrographic, roads, planimetric, cadastral, city maps etc. using various information sources".

"Service rendered under this category by an agency under the control of Government or authorized by the Government is specifically excluded".

• Cleaning services

Cleaning of commercial complexes such as multiplexes, shopping complexes, office complexes, industrial buildings, factory’s plant, machinery, tank or reservoir of industrial or commercial buildings, computer rooms, furnace, chimney, are covered under this category. It also covers specialized cleaning services such as disinfecting, exterminating of insects, rodents and other pest, fumigation, floor cleaning and waxing, wall cleaning, window cleaning, sterilization of objects.

Cleaning service in relation to agriculture, horticulture, animal husbandry and dairying is excluded. Also cleaning service in respect of non-commercial buildings and premises thereof are also not covered.

This taxable service covers within its ambit, the charges recovered by such clubs or associations for membership and providing various services. Exclusions have been made in respect of any body established or constituted by or under any law, trade unions, clubs or associations formed for promotion of agriculture, horticulture or animal husbandry , clubs or associations which are non-profit making bodies and are engaged in any activity which are in the nature of public service and are of a charitable, religious or political nature or associated with press or media.

"Legally, bodies which are established or constituted "under a statute" are different from bodies which are "formed and registered" under a statute. Companies and societies registered under the respective Acts are merely bodies "formed and registered" under these Acts and cannot be treated as "established or constituted" under these Acts. Therefore companies or societies would fall outside the scope of clause (25 a)(i) of section 65 of Finance Act. In other words, any body formed and registered as a company or society which provides services, facilities or advantages for a subscription or any other amount to its members is liable to pay service tax under section 65(25a) of the Finance Act, 1994".   

"Taxable services are defined as services provided to members by clubs or associations in relation to provision of services, facilities or advantages for a subscription or any other amount. Facilities or advantages are provided to members in return for a subscription or other consideration. The scope of the term any other amount is the amount paid by members, apart from membership fee or recurring subscription fee, such as amounts paid for provisions of services to the guests of a member, amount paid for get-togethers and functions charged over and above the subscription amount. This will also be liable to service tax. However, amount charged by club to its members for sale of items such as food or beverages would not be taxable provided the documents evidencing such sale are available".

"Any additional fee should be treated in the same way as subscription. Life membership fees must be treated in the same way as subscription. In certain professions, persons cannot practice unless they are registered with a statutory body and have paid fees which are prescribed by law. In such cases, the organization is not providing any service in the course of its business and it is merely carrying statutory functions. Since no service is provided, the question of levy of service tax does not arise. However, if there is no statutory requirement, service tax is liable to be paid".

• Packaging services

This taxable service would cover packaging activity undertaken by a person for any other person. These kinds of packaging services may be done for pharmaceuticals (aseptic packaging), fragile goods, heavy machinery and hardware, using variety of automated or manual packaging techniques, including blister forming, and packaging, shrink or skin wrapping, form filling and sealing, pouch filling, bottling or aerosol packaging. This service also includes labelling or imprinting of the package. However, packaging activity which amounts to manufacture within the definition of section 2(f) of Central Excise Act, 1944 would not be liable to service tax. Service tax would be leviable on the gross amount charged for rendering the packaging services.

• Mailing list compilation and mailing

"Business establishments such as banks, insurance companies, companies listed on stock exchanges, real estate agents and other similar commercial entities engage the services of persons who compile and provide lists of names, addresses and other information from telephone directories, internet or any other source of information for the benefit of the business. Some agencies also provide services of sending documents, materials, information or any other goods by addressing, stuffing, sealing, metering or mailing the envelope or packet for or on behalf of the client. Such services are taxable under this category of service. Mail order business companies may engage the services of mailing companies to despatch goods to customers. Such mailing companies are also covered under this service".

• Construction of residential complexes

"Post construction, completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall papering, wood and metal joinery and carpentry and similar services done in relation to a residential complex, whether or not new, would be included as part of the construction activity of residential complexes for the purpose of levy of service tax".

"The taxable service is the service provided in relation to construction of a residential complex. Service tax would be payable only on the gross amount charged by the service provider for the construction service provided and it would not include the cost of land and stamp duty paid for registration of land. However, notification No. 18/2005 –ST dated 7-6-2005 provides option to avail abatement and pay service tax only on 33% of the gross amount charged, subject to fulfilment of conditions specified in the notification".

"Repair, alteration, renovation or restoration of residential complexes would also be liable to service tax. Such services provided in relation to residential complexes which are in existence before the levy has come into force and are not new would also be liable to be taxed".

Expansion of scope of existing services

• Commercial or Industrial construction service

Post construction completion and finishing services such as glazing, plastering, painting, floor and wall tiling, wall covering and wall plastering, wood and metal joinery and carpentry especially if undertaken as an isolated or stand alone contract are now specifically included.

"At present, services rendered for construction of commercial or industrial buildings is taxable. However, construction of roads is not liable to service tax. A point has been raised that if a commercial complex is constructed which also contains roads whether the value of construction of roads would be liable to service tax".

"If the contract for construction of commercial complex is a single contract and the construction of road is not recognized as a separate activity as per the contract, then the service tax would be leviable on the gross amount charged for construction including the value of construction of roads".

"When services provided under a contract consist of a number of different elements, a view has to be taken on the basis of the facts and circumstances of each case as to whether the service provider has made a single overall supply or a supply of different services which are to be treated differently".

Maintenance is to keep a machine, building etc. in good condition by periodically checking and servicing or repairing. While repair is a one time activity, maintenance is continueous process of which repair may be incidental or ancillary.

"Prior to 16-6-2005, maintenance or repair carried out under a maintenance contract or agreement was covered under service tax. Repair or servicing carried out under a contract other than a maintenance contract or agreement was not covered within the purview of service tax. Maintenance or repair, including reconditioning or restoration or servicing of any goods or equipment, except motor vehicle (which is taxable under the category of authorized service station), undertaken as part of any contract or agreement (not necessarily maintenance contract or agreement) is now liable to service tax under this category of taxable service. To attract service tax under this category, the contract or agreement need not necessarily be a maintenance contract/ agreement".   

"In view of the advent of set top boxes, the customers can now access the signals directly without the interface of MSO and cable operators. Service tax is leviable on provision of direct to home (DTH) signals by the broadcasting agencies to the customers. The liability for payment of service tax in case of broadcasting agencies or organizations having their head office outside India would be on the branch office, subsidiary or any representative or any agent appointed by such agency or organization in India".

"Prior to 16-6-2005, the definition of authorized service station covered only service or repair of motor cars, two-wheeled and light motor vehicles by service stations or centres authorized by the manufacturers. A number of motor vehicle manufacturers provide a scheme by which the old vehicles are sold to the customers after reconditioning or restoration. For this purpose, old vehicles are reconditioned or restored by such authorized service stations or centres. Such reconditioning or restoration of an old vehicle was not explicitly covered as a taxable service. Amendments have been made to specifically include reconditioning or restoration of motor cars, two-wheeled and light motor vehicles carried out by the authorized service stations or centres under this service tax".

"Service tax is to be charged on the full amount of consideration for the supply of manpower, whether  full-time or part-time. The value includes recovery of staff costs from the recipient e.g. salary and other contributions. Even if the arrangement does not involve the recipient paying these staff costs to the supplier (because the salary is paid directly to the individual or the contributions are paid to the respective authority) these amounts are still part of the consideration and hence form part of the gross amount".      

"Gem and Jewellery Export Promotion Council have represented seeking clarification that hiring of skilled artisans for making jewellery does not constitute supply of manpower taxable under "manpower recruitment services". When the artisans are hired by any organisation or business, directly, without engaging the services of any other person in any manner, in such cases, the artisans are contractually employed by the company. There is no  intermediary and hence no consideration is paid to or payable to any intermediary. The service tax would be leviable only when the services of a person  are engaged for recruitment or supply of  artisans".

• Franchise service

Effective from 16-6-2005 amendments have been made to define franchise as an agreement by which the franchisor grants representation rights to franchisee to sell or manufacture goods or provide service or undertake any process identified with franchisor by any symbol such as trademark, service mark, trade name or logo. No other condition is required to be fulfilled for levy of service tax.

"In view of the amended definition, License Production Agreements where principal allows production of goods bearing his brand name by another person would be covered under the purview of service tax under this category. Similarly, if rights are granted for rendering services identified with the principal on his behalf, such services by the principal to the service recipient would be taxable".

"A point was raised whether ‘production of goods on behalf of the client’ covers situations where the service provider undertakes job work for the client. In view of the amendment, production or processing (not amounting to manufacture) done either for the client or on behalf of the client would be liable to service tax". 

"Another taxable activity covered under business auxiliary service is ‘procurements of goods or services, which are inputs for the client’. In this case, the term ‘inputs’ had not been specifically defined in the Finance Act, 1994. The scope of the term input has been clarified by defining input (under Explanation in section 65(19) of the Finance Act, 1994)  for the purpose of this taxable activity as ‘inputs’ means all goods or services intended for use by the client. Thus, services rendered for procurement of any goods or services intended for use by the client would be taxable. This definition of input is different from the definition of input under Cenvat Credit Rules".

"To remove the  doubt, the present definition of "outdoor caterer" has been modified so as to provide that "outdoor caterer" includes caterer engaged in providing services in connection with catering at a place provided by way of tenancy or otherwise by the person receiving such services".

Other legislative changes

Insertion of Explanation u/s. 65(105) – Taxability of service rendered by a non-resident and chargeability in hands of recipient

"According to rule 2(1)(d)(iv) of Service Tax Rules, 1994 taxable services received from a non-resident were taxable in the hands of the recipient receiving such taxable services in India. The explanation pertains to provision of taxable services by a person who belongs in a country other than India and received by a person in India. In other words, the service provider does not belong to India and the service recipient belongs to India. In such cases, the recipient of taxable services himself is treated as the provider of the taxable services and the services are taxed in the hands of the recipient".

For this purpose, the service provider should have established his business or has a fixed establishment from which the service is provided or has his permanent address or usual place of residence in a country other than India. Consequently, the recipient of service should have his place of business, fixed establishment, permanent address or usual place of residence in India. The business establishment is the principal place of business, usually head office or headquarters or the seat from which business is run.  There can be only one such place. A business may have headquarters in one country but branches in many other countries. A company may be incorporated in one country but does the business entirely from a head office in another country. In such cases, business establishment is treated to be in a country where the business is entirely done from the head office.

A fixed establishment is an establishment other than the business establishment. It should have both the technical and human resources necessary for providing or receiving services permanently present. A business may have several fixed establishments including a branch. If there is no business or other fixed establishment in any country and the business is a limited company or a other corporate body, it belongs wherever it is legally constituted.

Individuals receiving services are treated as belonging in the country where they have their usual place of residence. An individual has only one usual place of residence at any point in time. Individuals are normally resident in the country where they have set up home with their family and are in full time employment. If either the provider of services or recipient of services have establishments in more than one country, the establishment most directly connected with the particular service would be the deciding factor. These provisions are intended to take care of taxable services where the service provider is located outside India and the recipient of service is located in India".

Rule 2(1)(d)(iv) of Service Tax Rules, 1994 has been amended in view of the above Explanation vide notification No. 23/2005-Service Tax, dated 7th June, 2005.

Charging service tax from the recipient when the service is provided by a non-resident is a well accepted international practice. This was enunciated in Rule 2(1)(d)(iv). In this year’s budget, for removal of doubts, suitable explanation has been made in section 65(105) of the Finance Act in this regard .

In cases where services are provided by a service provider who is situated outside India to the recipient of such service who is based in India, such services would be taxable at the hands of the recipient. In such cases, the service is deemed to be provided by the service recipient having his place of business or place of permanent establishment in India. However, notification No. 25/2005-ST dated
7-6-2005 exempts taxable services received and consumed outside India by an individual, not in  the course of commerce or industry or any other business."

"Taxable services received from abroad by a person belonging to India are taxed in the hands of the Indian recipient.  Relevant provisions are section 65(105) of the Finance Act, 1994 and rule 2(1)(d)(iv) of the Service Tax rules.  In such cases, the Indian recipient of taxable services is deemed to be the service provider".

Service tax on advance receipt

"Amendments have been made in section 65(105), section 67 and rule 6 of Service Tax Rules, 1994 to link payment of service tax with the receipt of payment for the taxable services provided or advance payment received towards taxable services to be provided in future. When payments relatable to taxable services are received during the course of provision of service, service tax is liable to be paid to the extent of receipt of payment. In other words, a person is liable to pay the tax as soon as the consideration towards the taxable services is received. 

In case of continuous supply of services (such as construction services) which are provided for a period of time and the consideration (payment), the whole or part of it, is determined as payable, periodically from time to time, the services are treated as provided separately and successively each time the payment is due or each time the payment is received by the service provider.

However, when advance payment is received for a service which is non-taxable at the time of receipt of payment but becomes taxable during the course of provision of service, such payments would have to be apportioned appropriately between the two periods and that part of service provided on or after the service becomes taxable service, is only liable for service tax. Similarly, when payment is received in advance for services to be provided but subsequently the services are not actually provided, then in such cases service tax paid is liable to be refunded".

Centralized registration

"Now the authority to grant such centralized registration has been clearly spelt out.  The Commissioner of Central Excise would grant centralized registration only if all the premises or offices, including the premises or office from where centralized accounting or centralized billing is done and all its sub-ordinate offices (for which such centralized accounting or centralized billing is done) are located within the jurisdiction of such Commissioner of Central Excise. If these offices or premises are outside the jurisdiction of Commissioner of Central Excise but within the jurisdiction of Chief Commissioner of Central Excise, in those cases, the jurisdictional Chief Commissioner would grant centralized registration. Further, if these offices or premises fall within the jurisdiction of more than one Chief Commissioner of Central Excise, the centralized registration would be granted by the Director General of Service Tax, Mumbai".

"Service providers who have opted for centralized registration may, at times, have difficulty in accurately computing their tax liability by the due date of payment. Facility has been extended to such service providers to make suo motu adjustments of the excess amount paid, if any, and utilize the excess amount for payment of service tax for the subsequent period. Rule 6 of the Service Tax Rules, 1994 is amended for this purpose vide notification No. 23/2005-ST dated 7-6-2005".

Threshold limit

"A threshold exemption scheme has been introduced in this year’s budget (effective from 1-4-2005) exempting from service tax aggregate value of taxable services not exceeding four lakh rupees received by the service provider during a financial year. A point has been raised whether payments received after 1-4-2005 towards the services provided prior to 1-4-2005 would be included while computing this threshold value of Rs. 4 lakhs.

The exemption is related to first payments received in a financial year irrespective of the actual date of provision of services. Thus, the payments received after 1-4-2005 even if they relate to taxable services provided prior to
1-4-2005, will be taken into account for the purpose of computation of the threshold limit.

At present exemption from the gross amount charged (abatement) has been prescribed for certain taxable services such as construction and transport of goods by road. However, abatement scheme is not applicable to other than specified taxable services.

A point has been raised about application of abatement scheme in case of single provision of service which consists both  category of taxable services, in such cases, what portion of the gross contract would get the benefit of abatement.

In all such cases, it is required to take a view as to whether the taxable service provided is a single service or multiple supply of services and thereafter classify the service provided as per the provisions of section 65A of the Finance Act, 1994 which lays down principles for classification of services. The benefit for abatement would be extended only if the taxable service is classifiable under the category for which abatement scheme is applicable".

Abatement under Goods Transport Agency

An abatement of 75% in taxable service of goods transport by road is available on the condition that the goods transport agency has not availed credit on inputs and capital goods used for providing taxable service and has also not availed benefit of Notification No. 12/2003-Service Tax dated 20-6-2003 (vide Notification No. 32/2004-Service Tax, dated 3-12-2004).

It has been requested that in cases where liability for tax payment is on the consignor or consignee, the procedure as to how it should be confirmed by such consignor or consignee that the goods transport agency has not availed credit or benefit of notification No. 12/2003-Service Tax may be prescribed. In such cases it is clarified that a declaration by the goods transport agency in the consignment note issued, to the effect that neither credit on inputs or capital goods used for provision of service has been taken nor the benefit of notification No. 12/2003-Service Tax has been taken by them may suffice for the purpose of availment of abatement by the person liable to pay service tax.

Exemption to gem and jewellery section

Notification No. 21/2005-Service Tax, dated 7-6-2005 exempts the taxable services of "production or processing of goods for, or on behalf, of a client" referred to in sub-clause (v) of clause (19) of section 65 of the Finance Act, 1994, provided by a commercial concern, in the course of manufacture of cut and polished diamonds and gem stones or plain and studded jewellery of gold and other precious metals.  However, other taxable services, such as, supply of manpower, banking and other financial services, other business auxiliary services, provided in the course of manufacture of cut and polished diamonds and gem stones or plain and studded jewellery of gold and other precious metals, are leviable to service tax and no exemption for these services is provided. All taxable services received from abroad by an Indian recipient in relation to these goods are held to be liable to be taxed under "Reverse Charge " norms.

Exemption to shipping industry

Notification No. 22/2005-ST dated 7-6-2005 exempt certain specified taxable services provided by non-resident person, outside India and consumed outside India in the course of sailing of a ship. For this purpose ship should have been registered under certain categories of licensed/chartered/ owned by a citizen of India or Indian company etc.

"The exemption is applicable only to those specified taxable services provided in relation to handling of ships in a port outside India or handling or storage of goods carried in a ship in a port outside India or any other services related to handling of ships or goods carried in a ship.  The scope of the term ‘non-resident person’ has been explained in the notification.

It may be noted that there is a distinction between a vessel and a ship.  Vessel includes any ship, boat, sailing vessel or other description of vessel used in navigation.  However, ship does not include a sailing vessel.  Barges and rigs are only sailing vessels and do not fall under the category of ships.  The term ship is defined in the Merchant Shipping Act, 1958.  The exemption is applicable only to ships and not for vessels other than ships.  Vessels going outside the country for dry-docking (maintenance or repairs) are not eligible for the exemption.

It may be noted that the service tax is leviable on taxable services, other than specifically mentioned in the notification, received by the Indian shipping companies from abroad, under the reverse charge method from the Indian recipient of taxable services". 

Export of services

"To avail relief from service tax on export of taxable services, taxable services exported are to be delivered outside India and used outside India and payment for the services exported should have been received by the service provider in convertible foreign currency. Amendments to this effect have been made in sub-rules (1) and (2) of rule 3 of Export of Services Rules, 2005. Newly introduced services have also been categorized for the purposes of export of services. Notification No. 28/2005-ST dated 7-6-2005 amends Export of Service Rules accordingly".

Important clarification on applicability of Circular

It has been clarified that explanation given under the Circular of various changes and provisions of law is only for purpose of guidelines to facilitate, understanding and implementation of various provisions. It is not a part of the law and does not override it. Adequate care may be taken to carefully read the relevant provisions of law.