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Now chit funds to pay service tax
August, 25th 2007
Business chit funds and sub-contractors will now have to pay service tax. In a master circular that supersedes all previous circulars on the scope, valuation and classification of taxable services, the government clarified on Thursday that these two entities are liable to pay service tax.

In Union Budget 2007-08, the government had brought cash management services under the service tax net. However, there were doubts whether it covered the business chit fund service. The Central Bureau of Excise & Customs (CBEC) has now clarified that business chit funds will attract 12% service tax and the education cess, while simple chit funds will not.

This is in line with RBIs view that the business of a chit fund is to mobilise cash from subscribers and to keep it working. Therefore, the activity of chit funds is in the nature of cash management, which is provided for a consideration.

Therefore, it is leviable to service tax under banking and other financial services. In the case of simple chit funds, no consideration is paid or received for the services provided and, therefore, the question of levy of service tax does not arise.

The circular also clarifies that sub-contractors are liable to pay service tax.

In cases where the builder or developer constructs a residential complex of more than 12 residential units by engaging a contractor, the contractor is liable to pay service tax on the gross amount charged for the construction services. If the builder undertakes construction work on his own without engaging the services of any other person, then the question of providing taxable service does not arise, CBEC said.

Thursdays master circular includes all clarifications issued by the government in the last few years. However, the circular will have to be seen with other circulars issued at the time of the budget, said PWC principal consultant Anita Rastogi.

With the issue of this circular, all earlier clarifications issued on technical issues relating to service tax stand withdrawn. This circular is not to be treated as part of law and does not override the legal provisions. The relevant statutory provisions must be referred to and they will prevail, CBEC said.
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