Determination of the value of taxable services is a critical component in arriving at the service tax liability of a service provider. Valuation of services, in contrast to the valuation of goods, has been based on the simple principle of the gross amount that is charged by the service provider for provision of taxable services. Valuation of goods, on the other hand, both under the Central VAT and the State VAT, is based on different principles. 
 
This seemingly simple basis of valuation of taxable services was in force from the time of inception of service tax in 1994 till early 2006. While there were several issues that had cropped up even under these erstwhile provisions, it was nevertheless true that the valuation provisions did not pose any formidable problems. 
 
Moreover these provisions extended only to a situation where the consideration for taxable services was received in monetary terms and there were no specific provisions to determine the value in situations where the consideration was wholly or partly in non monetary terms. 
 
There was no concept of deemed consideration under these erstwhile provisions and service tax was typically not levied in situations where the consideration was in non monetary terms. One final aspect of the erstwhile provisions was the deduction that was granted, through administrative instructions, for recoveries, as reimbursements from customers, of certain out of pocket expenses on boarding, lodging and similar costs, if supported by appropriate documentation. 
 
The Finance Act, 2006, has quite significantly changed the aforesaid position in relation to valuation of services. The Service Tax (Determination of Value) Rules, 2006 (Valuation Rules), were brought into force with effect from April 19, 2006 and provide for the methodology for determination of the value of taxable services where the consideration comprises of non monetary elements as well. 
 
Detailed rules have been laid down in order to determine the value of the non monetary consideration for provision of services. Typically, this value is required to be ascertained in terms of the monetary consideration that is received for similar services rendered by the service provider, provided that for such services the monetary consideration is the sole consideration. 
 
This methodology presents its own challenges. There are no rules for determining as to what would constitute a similar service as above. In addition, the determination of the entirely monetary consideration in relation to such similar services is itself a challenge. It is also arguable whether this methodology is a fair one, given that increasingly service providers are required to compete fiercely. 
 
The Valuation Rules do of course provide an alternate method to determine the equivalent money value of non monetary consideration of taxable services in a situation where no such similar services based on wholly monetary consideration are provided. The alternate methodology requires the determination of the non monetary value through identification of the costs of provision of such services. 
 
There are several issues which are required to be clarified in relation to this methodology as well. There is no commonly agreed formula for determining the cost of provision of services, as to whether it would be on the basis of full costs comprising both direct and indirect costs or whether it would only extend to direct costs incurred for providing the services. 
 
This is particularly true in relation to determination of the costs of services, as opposed to determining the cost of supply of goods. A connected problem is the determination of the time of payment of the service tax in such situations since the payment of the service tax is only required upon receipt of the value of the consideration for providing taxable services. 
 
Now, in a situation of determination of consideration through the above methodology, it is not clear as to how the determination of the receipt of consideration at a point in time will be done so as to require the payment of the service tax. 
 
Another feature of the Valuation Rules is the withdrawal of the deduction for out of pocket expenses, except in specified circumstances which are limited to expenses that are incurred by agents acting on behalf of principals. Therefore, the earlier dispensation, albeit through administrative instructions, of a generalised deduction for out of pocket expenses is no longer available. 
 
This has brought forth a set of issues, especially in situations where such out of pocket expenses are significant or where the service provider is not able to offset the service taxes, in the absence of a corresponding output tax liability. 
 
Further, the implications of this withdrawal of deduction is that if such expenses are incurred by the recipient of the service, they are not required to be incorporated in the value of taxable service under the Valuation Rules. This would mean that the service tax base would change, based on who is incurring these specified costs. 
 
The Rules exclude from their purview a situation of provision of services without consideration. In such a situation of provision of free services, no service tax liability will be attracted. This is to be contrasted with the CENVAT provisions where the tax is required to be discharged even in such situations. 
 
Another issue in relation to the determination of the value of taxable service is the question of abatements. There are several services in relation to which abatements are provided under service tax law. These services typically relates to situations where both goods are supplied as well as services are provided. 
 
The abatements are typically in relation to the goods or the material content of such combined supplies so that the service tax is limited to the service element of such supplies. Prior to the amendments to the Finance Act, 2006, the benefit of the abatements was available in all situations except where the service provider availed CENVAT credits on the goods (inputs or capital goods) used in providing the services. 
 
This was an eminently reasonable provision. However, the benefit of the abatements has now been restricted further and is no longer available even if the service provider were to limit himself to availing service tax credits on input services. This further condition has essentially meant that in order to avail the benefit of abatements, the service provider must necessarily forego all input tax credits on both goods and services. 
 
This has caused a fair amount of hardship to several service sectors. Since the percentage of abatement has remained constant under both the erstwhile situation and the present one, of 67% of the gross value of taxable services, in terms of Notification No. 1/2006, it can be argued that the further disallowance of input tax credits on services has caused an unintended hardship to companies. 
 
These are issues which are required to be discussed and debated so that appropriate modifications are made to the provisions in order to limit the service tax liability to the service element of omnibus contracts. 
 
The issue becomes doubly urgent if one were to consider the fact that typically the VAT would also apply to such combined supplies, albeit on the materials or the goods portion of such contracts. The recent Supreme Court judgement in the BSNL case is a landmark one in that it states that VAT and service taxes typically operate in mutually exclusive domains and, as a corollary, both taxes cannot apply on the same base. 
 
It is true that both the VAT and the service tax provisions require the respective taxes to be paid on the respective bases, to be determined in an appropriate fashion under the respective laws. However, there are challenges in determining these respective bases for each of the aforesaid two taxes. 
 
To summarise, there is an urgent need to lay down comprehensive and well thought out provisions for valuation of taxable services in various situations, some of which have been illustrated above. 

S Madhavan 
(The writer is Leader, Indirect Tax Practice, PwC)