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Taxable event in service tax
April, 27th 2009

I am writing this treatise to clear the cobwebs around the concept of taxable event in regard to service tax. From the circulars and judgements I find there are two misconceptions about taxable event of service tax on two issues.

The first misconception is that the taxable event in service tax is the realisation of payment. This is found in the judgement of the Tribunal where the following occurs: whereas in the case of Service Tax the taxable event is not the time of rendering of services but the same is realisation of payment for the services so rendered. If on rendering of service and in spite of raising the bills, no payments are received, liability to pay tax on such services will not arise. As such, it is clear that the tax liability has nexus with the realisation of the payments for such services and the value of such payments.

The above conclusion is defective. It relates the taxable event to the fact that the liability can vanish if no payments are made. Actually, subsequent payment has no relevance to the fact that the service has been rendered and the liability to duty has arisen. Even in the case of Customs after the act of importation (which is the taxable event) has taken place, the liability to tax vanishes if the goods are destroyed before clearance.

In the case of Central Excise also after the act of manu-facture (which is the taxable event) takes place, if the goods are destroyed, then the liability also vanishes. Taxable event does not depend on the subsequent liability to be destroyed, modified or realised. It is basically the act which makes something taxable. The Supreme Court has held that even though the taxable event is the manufacture or the production of an excisable article, the duty can be levied and collected at a later date.,

It is well settled by several Supreme Court judgements that the act of manufacture is the taxable event in excise, the act of import is the taxable event in the case of import duty, the act of exportation is the taxable event in the case of export duty, and the act of sale is the taxable event in the case of sales tax. In the same vein the act of adding value is the taxable event in the case of value added tax. And in the case of service tax the taxable event is the act of rendering service. It cannot be the realisation of payment for service.

The second misconception is that ownership is relevant for the taxable event of service tax. Actually it is not. So long as a service is pro-vided, irrespective of who owns the materials on the basis of which the service is provided, the service becomes a taxable service. This principle has not been properly appreciated in a recent circular No. 92/3/2007-Service Tax dated 12.3.2007. In this circular it has been written that the foreign exchange broker providing foreign exchange broking service does not hold title to the foreign exchange.

Accordingly, board is of the view that service tax is not leviable on money changing per se, as such activity does not fall under the category of foreign exchange broking. This clearly implies that the circular is based on the hypothesis that the brokers not owning the foreign exchange is the cause for his not being the service provider.

The conclusion is that the taxable event in the case of service tax is the act of rendering service and the ownership of the material on the basis of which the service is provided is not relevant.

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