Compliance Management under Service Tax law is relevant as well as crucial for Service Tax assessees as well as professionals. If compliances are properly made, there will be no room for adjudication, disputes and litigation. This article discusses various legal and procedural compliances / requirements under Service Tax, consequences of non-compliances and managing the same.
1. BACKGROUND OF SERVICE TAX IN INDIA
Tax on services is an indirect tax and though being 20 years old is still a relatively a new concept in India. Government of India had introduced the levy of Service Tax, i.e., tax on the services for the first time in July, 1994, borrowing the concept from foreign countries. All services are taxable under the comprehensive approach unless they are specifically excluded, whereas under the selective approach only specified services are taxable - a system which our country had adopted in 1994. It was in 2012 only when India moved ahead and migrated to a comprehensive approach with 17 broad categories of negative services which shall be out of tax net w.e.f. 1st July, 2012. The Finance Act, 1994 contains statutory provisions on Service Tax.
Presently, the service sector contributes about 67 per cent to India's GDP Service sector is one of the three main economic sectors of Indian economy - the others being manufacturing and agriculture.
Service Tax - An Indirect Tax
Service Tax has been imposed as an indirect tax which is demanded from a person on the expectation and intention that such person shall indemnify at the expense of other person who is consuming such service. The indirect tax is levied on goods and services and not on income or profits, thus, carrying the tax to the point of consumption.
Like tax on sale of goods, it is a destination based tax on consumption. Taxable services provided by service provider in taxable territory attract service tax only when service has been consumed in that territory.
2. WHAT IS SERVICE
Service [(Clause 44 of Section 65 (B)]
"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include-
an activity which constitutes merely,- (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ia) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution; or,
(ii) a transaction in money or actionable claim;
a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force.
Explanation 1. - For the removal of doubts, it is hereby declared that nothing contained in this clause shall apply to,-
(A) the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or
(B) the duties performed by any person who holds any post in pursuance of the provisions of the Constitution in that capacity; or
(c) the duties performed by any person as a Chairperson or a Member or a Director in a body established by the Central Government or State
Governments or local authority and who is not deemed as an employee before the commencement of this section.
Explanation 2.- For the purposes of this clause, the expression “transaction in money or actionable claim” shall not include––
(i) any activity relating to use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged;
(ii) any activity carried out, for a consideration, in relation to, or for facilitation of, a transaction in money or actionable claim, including the activity carried out––
(a) by a lottery distributor or selling agent in relation to promotion, marketing, organizing, selling of lottery or facilitating in organizing lottery of any kind, in any other manner;
(b) by a foreman of chit fund for conducting or organizing a chit in any manner. (w.e.f. 14.05.2015)
Explanation 3. -- For the purposes of this Chapter,-
an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons; an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons. Explanation 4.- A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory.
In summary, service means -
any activity carried out by a person for another for consideration includes declared service but does not include transfer in title of goods or immovable property transaction in money or actionable claim provisions of service by employee to employer deemed sale of goods duties performed by MP/MLA/Members of Municipal Corporation, Panchayats or Local authorities person holding constitutional posts. 3. CHARGING PROVISION (SECTION 65)
Section 66B seeks to levy Service Tax at the rate of twelve percent, on the value of taxable services, other than services specified in the negative list, provided or agreed to be provided in the taxable territory by a person to another. Thus, for a charge of Service Tax, following essential ingredients must be present -
(a) There should be a service involved.
(b) Such service should not be one included in the negative list as defined in section 66D.
(c) Services should be provided or agreed to be provided.
(d) Services should be provided in the taxable territory only.
(e) Services should be provided by one person to another person.
(f) Tax shall be levied on value of services so provided or agreed to be provided.
(g) Collection shall be in prescribed manner.
4. NEGATIVE LIST
Meaning of Negative List (Clause 34 of Section 65B/Section 66D)
Negative list has been defined under clause 34 of section 65B and such services are specified in section 66D of the Finance Act, 1994, as introduced by the Finance Act, 2012 and amended by Finance Act, 2014 w.e.f. 1-10-2014. Negative list of services would mean the services specified in section 66D which specifies seventeen broad categories of services.
5. POINT OF TAXATION RULES, 2011
The objective of Point of Taxation Rules, 2011 is to systemize and harmonise the rules in relation to point of taxation services.
Prior to these rules, basis of taxation was based on –
(a) taxable services provided or to be provided [section 65(105)]
(b) Charge of service tax on the taxable services (section 66)
(c) Payment of service tax within the specified period from the end of quarter or month, as the case may be, in which the payment is received (Rule 6)
(d) Payment of service tax on advance received (section 67)
The purpose of these rules is to introduce clarity and certainty in the matter of levy and collection of Service Tax particularly in situations of change in rate of service tax or imposition of service tax on new services. Prior to 1-4-2011, there was lack of clarity as to the date from which the changed rate or a new levy of service tax become payable and taxpayers as well as tax officials face uncertainty in this regard as the provisions are not explicit. Similar uncertainty prevailed in regard to cases of continuous supply of services. Such issues used to be addressed by CBEC through clarificatory circulars that accompanied such changes. A need was felt to put the regulatory framework on a transparent, clear and durable basis and hence these rules.
The general rule will be that the time of provision of service will be the earliest of the following dates:
(i) Date on which service is provided or to be provided
(ii) Date of invoice
(iii) Date of payment
6. PLACE OF PROVISION OF SERVICES RULES, 2012
To support the negative list approach to taxation of services, section 66C has been introduced by the Finance Act, 2012 w.e.f. 1-7-2012 to provide for ‘determination of place of provision of service’. The place of provision of service for the purpose of service tax shall be determined in accordance with the place of Provision of Services Rules 2012, as notified under section 66C. Thus, place of provision of services shall be governed by and determined by
• Determination of place of provision of service (section 66C)
• The Place of Provision of Services Rules, 2012.
Taxable and Non-taxable Territory
Section 65B(35) defines ‘non-taxable territory’ and section 65B(52) defines ‘taxable territory’ which are very much relevant for determining the place of location of service provider and service receiver. Accordingly,
“non-taxable territory” means the territory which is outside the taxable territory; [Section 65B(35)]
“taxable territory” means the territory to which the provisions of this Chapter apply; [Section 65B(52)]
The territory to which provisions of this Chapter (Chapter V of Finance Act, 1994, as amended) apply has been stipulated in section 64 of the Finance Act, 1994 where in it has been provided that “this Chapter extends to whole of India except the state of Jammu & Kashmir”.
Taxable territory would means whole of India excluding the state of Jammu & Kashmir, and Non taxable territory would mean territory other than the taxable territory, i.e, State of Jammu & Kashmir and other than India. For this purpose, ‘India’ would mean the territory of India as referred to in article 1 of the Constitution; its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976; the sea-bed and the subsoil underlying the territorial waters; the air space above its territory and territorial waters; and the installations structures and the vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof.
Place of Provision of Service Rules, 2012 as amended contains 14 rules and shall be in operation w.e.f. 1-7-2012. These rules pertain to following -
1. Title, extent and commencement (w.e.f. 1-7-2012)
2. Definitions – account, banking company, continuous journey, financial institution, intermediary, leg of journey, location of service provider, location of service receiver, means of transport, non-banking financial company, online information and database access or retrieval services, person liable to pay tax, provided, received registration, telecommunication service, etc.
3. Place of provision of service - generally to be the location of service receiver.
4. Place of provision of performance based services.
5. Place of provision of service relating to immovable property.
6. Place of provision of service relating to events.
7. Place of provision of service provided at more than one location.
8. Place of provision of services where provider and receiver are located in taxable territory.
9. Place of provision of specified services.
10. Place of provision or provisions of goods transportation services.
11. Place of provision of passenger transportation services.
12. Place of provision of services provided on board a conveyance.
13. Power to notify description of services or circumstances for certain purposes.
14. Order of application of rules.
7. REVERSE CHARGE MECHANISM
[(Vide Notification No 30/2012-ST dated 20.6.2012 and Section 68(2)]
The provisions of Section 68(2) of the Finance Act, 1994 read with rule 2(i)(iv)(d) of Service Tax Rules, 1994 and Notification No. 30/2012-ST dated 20.06.2012 provide for service receiver to be one of the persons liable to pay Service Tax. The liability of payment of Service Tax could, therefore be discharged by any one of the following –
• Service providers in ordinary course
• Service receivers under reverse charge
• Jointly by service providers and service receivers (proportional reverse charge)
Thus, for specified services as per Notification No. 30/2012-ST dated 20.06.2012 and conditions stipulated therein, payment of Service Tax shall be under reverse charge basis or mechanism.
The present reverse charge mechanism as applicable to various services is as follows:
Liability to pay under Reverse Charge by Service Receiver
Under Partial Reverse Charge (Proportional)
Under full reverse charge (100%)
Renting of motor vehicles to carry passengers Manpower supply & security services (up to 31.03.2015) Works contracts insurance business services by agents Services by recovery agents goods transportation by road sponsorship arbitral tribunals legal services company body corporate director's services services provided by Government/ local authority excluding specified services services provided by persons located in non-taxable territory to persons located in taxable in territory. Aggregator services (w.e.f. 1.3.2015) Manpower supply and security services (w.e.f. 1.4.2015) Lottery selling / marketing agent's services (w.e.f. 1.4.2015) Mutual funds agent / distributor services (w.e.f. 1.4.2015) 8. SCHEME OF CENVAT CREDIT (CENVAT CREDIT RULES, 2004 W.E.F. 10-9-2004)
CENVAT Rules provide a set of rules relating to goods and services. It covers inputs, capital goods and services. The interest and penalty amounts can not be taken as credit. It has wide applicability and simplified procedures. The burden of proof regarding the admissibility of CENVAT credit is on the manufacturer or service provider who is availing the credit. There is no one-to-one correlation between input goods/services and final goods or output services nor there is any condition of input output ratio to be met. There are no prescribed records for CENVAT and the records maintained by the manufacturer or service provider in respect of receipt, disposal, consumption or utilization and inventory of inputs, goods and services shall be acceptable to tax authorities. Transfer of CENVAT Credit shall be permitted in specified cases of transfer of undertaking by way of change in ownership or on account of sale, merger, amalgamation, lease or transfer of business to a joint venture with transfer of liabilities.
Obligations of Assessees under CENVAT Credit System
Assessees are under obligation to comply with the following requirements-
Registration of dealer, service provider or input service distributor. (b) Maintaining records of input and capital goods.
(c) Maintaining records of credit received and utilized.
(d) Maintaining records of credit carried forward.
(e) Maintaining separate records where out services include both taxable and non-taxable/exempt services.
(f) Submission of CENVAT Credit details in monthly or quarterly returns (Form ER-1 or ER-3) to the Central Excise Department.
(g) Submission of returns by dealers, service providers and input service distributors.
9. COMPLIANCE MANAGEMENT
Compliances under any statute have gained importance and more so with tax laws. When it comes to compliance under any tax law – direct or indirect or central or state, assessees have no option but to go all out to comply with the legal provisions and obligations as consequences of default are heavy in terms of monetary penalties, non-monetary impact such as arrests, prosecution etc. Further, well governed companies take it as a challenge to reputation risk and credentials and more as a governance issue. Compliance starts from the top and is therefore, a management function and many concerned business houses have a properly and professionally managed compliance and risk management Department under the direct supervision of Chief Finance Officer or Chief Risk Officer. In well governed companies, Audit Committee overseas the compliance function.
Compliance Management in an business entity is nothing but managing the compliances i.e., ensuring total compliance environment. Compliances also help in undertaking due diligence of entities which may be for any business purpose.
Objectives of Compliance Management
Risk assessment exercise Business risk profile To determine the past, present and future tax liabilities of the target entity, including disclosed, undisclosed, realized and unrealized tax liabilities. To identify the valuation and the type of tax warranties and indemnities to be included in any agreement To determine the tax profile of the target entity and assist in the development of an appropriate acquisition and funding structure. Tax planning aspects Important Statutory Compliances at a Glance
Charge Service Tax on all taxable service provided or agreed to be provided as per section 66B of Finance Act, 1994 Determine the place of provision of service as per section 66C of Finance Act, 1994 read with Place of Provision of Services Rules, 2012 Value its taxable service as per section 67 of Finance Act, 1994 read with the Service Tax (Determination of Value ) Rules, 2006 Make the payment of Service Tax as per section 68 of Finance Act, 1994 read with Rule 6 of ST Rules, 1994 Take a registration under Service Tax ( both by service receiver and service provider as the case may be )as per section 69 of Finance Act, 1994 read with Rule 4 of Service Tax Rules, 1994 Furnish the requisite returns as per section 70 read with Rule 7 of the Service Tax Rules, 1994 File revised returns within time limit as prescribed in rule 7B of the Service Tax Rules, 1994 (i.e. 90 days) Maintain records ( books of accounts) as per Rule 5 of the Service Tax Rules, 1994 Scope of Compliance Management
Identification of areas to be covered Risk tolerance and appetite for mitigation Tax attributes Tax credits Impact on significant economic events Analysis of tax findings Periodic due diligence Regular reporting on reviews Why Service Tax is Important for Compliance Management ?
An important tax for all Major contributor of revenue as well as in GDP Highest tax evasion is in Service Tax only Unsettled Law subject to inconsistent interpretation Being indirect, consequences are fatal Simple but complex in implementation Almost all companies are covered, directly or indirectly Management Reviews under Service Tax Compliances
Review the financial statements of the target Company Review the contingent liabilities of the target Company Review the tax provisions and tax paid in the Balance Sheet Review Internal Audit Report & observations therein Review Tax Audit Report & observations therein Review CARO Report & observations therein Review the minutes of Directors' Meetings and Management Meetings Review business plans and forecast financial information Consequences of Non- Compliances
Section 75 Interest
Section 76 / 77/ 78 Penalties
Section 82 Search
Section 89 Offences & penalties
Section 90 Cognizance of offences
Section 91 Power to arrest
Reporting for Compliances
Applicability of indirect taxes Reporting key exposures on account of various indirect taxes Pending litigation matters - exposure/ disputes Compliance status Examine eligibility of tax credits and export benefits (as applicable) Statutory returns/ records and documentation Identify tax exposures and inefficiencies Identification and specification of tax risks on the basis of our review Recommended measures to minimize tax risks and optimize tax burden POWER TO ARREST – AT A GLANCE Offence u/s 89
Imprisonment on first default
Imprisonment on subsequent defaults
Cognizable or non- cognizable
Knowingly evades payment of Service tax
3 years **
Avails & utilizes credit of taxes without actual receipt of inputs/ services, whether partly or fully
3 years **
Maintains false books or fails to supply any information or supplies false information
3 years **
Collects any amount as service tax but fails to pay the same to government exchequer within 6 months of due date
7 years **
Any other offence
** Provided that in absence of special and adequate reasons to the contrary to be recorded in the Judgment of the Court, such imprisonment shall not be for less than six months ** if amount exceeding ? 50 lakh
Possible Measures to avoid Arrest
Suo moto compliance Independent due diligence Promptly attending to notices / summons Ensuring timely / full payment of Service Tax – Taxes not to be used for working capital / funding other requirements Where delay is expected, get in touch with Department. Take aggressive tax positions with utmost care – Risk Management Strengthen internal processes and controls to avoid unintended failures ------------------------------------------------------------------------------------------------------------------------------------------------------------
*Based on the back ground material prepared / presented at National Conference of Chartered Accountants held at Udaipur on 12.10.2015.