Scope and Rates
Supplies of notified categories of services (referred to in the legislation as taxable services) are liable to Service Tax subject to a prescribed threshold level [currently, approximately USD 20,000 (assuming USD 1 = INR 50)]. At present, more than 100 categories of services are subject to Service Tax. Supplies of taxable services by non-residents to residents are also liable to Service Tax under the reverse charge mechanism in the hands of residents as per Import Rules.
Some of the key categories of services subject to Service Tax include:
- advertising services
- banking and other financial services
- business auxiliary services
- business support services
- cargo handling services
- consulting engineer services
- erection, commissioning, or installation services
- insurance services – general and life insurance services
- intellectual property services
- telecommunication services
- management, maintenance, or repair services
- management or business consultant’s services
- market research agency services
- on-line information and database access or retrieval service
- scientific or technical consultancy
- site formation and clearance, excavation, and earthmoving and demolition services
- works contract service
- information technology software service for use in the course or furtherance of business or commerce (including acquiring the right to use software supplied electronically)
- services provided by recognized stock exchange in relation to securities
- supply of tangible goods without transferring right of possession and effective control of such goods
- services provided by Air Conditioned Restaurants having license to serve liquor
- hotel accommodation
Service Tax is levied on gross value of taxable services rendered, subject to prescribed abatements and deductions. The value of services rendered for consideration other than money is determined in accordance with the prescribed Valuation Rules. Reimbursements claimed for expenses incurred by the service provider in the course of providing services are also included in the value of the taxable services, except when they have been incurred by the service provider as a ‘pure agent’ of the service receiver.
Further, in terms of the Point of Taxation Rules, Service Tax is liable to be paid on accrual basis (except in certain cases such as, advances where Service Tax is payable as soon as the advance is received, etc.).
A taxable person can avail credit of Service Tax paid on procurement of input services. In addition, a taxable person can also avail credit of Additional Customs duty (payable on import of goods) and Excise duty (applicable on manufacture of goods) paid on import/procurement of goods used in provision of output services.
Further, vide Union Budget 2012, the current system of positive list based taxation (wherein only specified services are taxable) has been proposed to be replaced by ‘Negative List’ based taxation (wherein only the notified services shall be exempt and rest would be taxable) from 1 July 2012. Thus, under this regime, besides services mentioned under the Negative List of services or specific exemption for certain specified services, all other services would be liable to Service Tax.
Some of the key services covered under the Negative List Regime are as follows:
- trading of goods,
- any process amounting to manufacture or production of goods,
- sale of space or time slots for advertisements other than advertisements broadcast by radio or television
- admission to entertainment events or access to amusement facilities, etc.
As mentioned above, under the Negative List Regime, any activity which would qualify as a ‘service’, other than those mentioned under the Negative list, would be liable to Service Tax. Service has been inter-alia defined to mean:
- any activity
- carried out by a person for another
- for consideration
- and includes a ‘declared services’
Currently, all taxable services attract Service Tax at a standard rate of 12 percent. In addition, education cess (tax) at the rate of 2 percent and secondary higher education cess (tax) at the rate of 1 percent is also levied on the Service Tax. Thus, the effective standard rate of Service Tax rate is 12.36 percent.
In respect of certain taxable services, abatements (ranging from 30 percent to 90 percent) in computing value of taxable service are allowed subject to fulfillment of prescribed conditions.
Additionally, in case of certain service categories such as Works Contract Services, Air Travel Agents Services, etc., options have been given to the taxpayers to pay tax at presumptive rates (ranging from 1 percent to 4 percent of the transaction value).
There are also some general exemptions [such as, provision of services to certain specified international organizations such as United Nations and to units in/developers of Special Economic Zones (SEZ)] as well as service category specific exemptions.
Exports of services are zero rated. Rules have been prescribed in order to determine what constitutes export of services.
The similar provision would more or less continue under the Negative List Regime.
Some of the key exemptions (other than the Negative List of Services) are as follows:
- sale of business
- services provided to or by educational institution
- services of construction, erection, commissioning, installation of road, bridge, civil structure, etc.
- temporary transfer of copyright relating to original literary, dramatic, musical, artistic works or cinematographic films, etc.
Yes, other indirect taxes include:
- VAT (see VAT Essentials)
- Customs duty
- Entry tax/Octroi
- Other local levies including Stamp duty, Entertainment tax and Luxury tax.
A taxable person rendering taxable services in a financial year in excess of the prescribed threshold level (approximately USD 18,000) will be required to register and account for Service Tax. Also, a service recipient who is liable to pay Service Tax under the reverse charge mechanism (such as, a resident receiving taxable services from a non-resident, a person receiving services from a Goods Transport Agency, a body corporate/firm giving sponsorship money), is also required to register and account for Service Tax. Separate Service Tax registration is required in respect of each premise from where services are provided. However, a service provider who has centralized billing or accounting system in place has an option to seek a centralized Service Tax registration covering all offices/premises from where services are provided/ received.
Penalty for failure/delay in registration may be either approximately USD 200, or approximately USD 4 per day for every day’s delay in obtaining registration, whichever is higher.
In case taxable services are provided by an overseas company who does not have an office in India (which is involved in provision of such services), the liability to pay Service Tax (and obtaining Service Tax registration) devolves on the service recipient based in India under the reverse charge mechanism. Hence, an overseas company is not liable to register for Service Tax in India unless it has an office in India which is involved in provision of such services.
Service Tax grouping is not possible in India. However, one legal entity may obtain a centralized Service Tax registration in respect of services provided from various premises across India if it has centralized billing or accounting system in place.
A taxable person is liable to submit two half-yearly returns in every financial year as under:
- for the half year ended 30 September – on or before 25 October
- for the half year ended 31 March – on or before 25 April.
Proposed to be converted in to a monthly return submission under the Negative List Regime.
A taxable person can submit a revised return to correct a mistake or omission, within a period of 90 days from the date of submission of original return.
No. However, the Service Tax law has prescribed various intimations which need to be submitted to the authorities under specified circumstances.
There are no specific exchange rate rules.
No. Only registered persons who are either taxable service providers and/or who are manufacturers can recover (that is, avail credit of) Service Tax paid on services procured.
No. Refunds are available only to registered taxable persons.
A person who is neither a taxable service provider nor a manufacturer (such as, a trader, an electricity generating entity) cannot recover Service Tax. Further, Service Tax cannot be fully recovered (that is, it may be partially recovered) by a service provider or a manufacturer who provides/manufactures taxable as well as exempt services/goods.
Furthermore, a service provider/ manufacturer cannot recover Service Tax paid on certain specified services like car rental, catering services etc.
International Supplies of Goods and Services
Exports of services from India are free from Service Tax provided they satisfy the criteria prescribed in the Export Rules. The following four different primary criteria are prescribed for different categories of services:
- where service relates to an immovable property, if such property is located outside India
- if the service is partly or wholly performed outside India
- if the service recipient is located outside India
- in all the above cases, payment for the service is received in convertible foreign exchange in India.
Further, a service exporter can claim refund/rebate of Service Tax or central excise duties (that is, duties applicable on manufacture of goods) incurred on procurement of services or goods, as the case may be, used in provision of the exported services.
Under the Negative List Regime, the Export Rules and the Import Rules would be replaced by the Place of Provision of Services Rules, 2012 (‘the Place of Supply Rules’).
The Place of Supply Rules prescribes different criteria for determination of place of provision of services. Services that are deemed to be provided in the taxable territory (which has been defined to mean India excluding the State of Jammu & Kashmir) as per these rules are liable to Service Tax.
Imports of goods into India are subject to Customs duty and not Service Tax.
Imports of services into India are subject to Service Tax in the hands of recipient under a reverse charge mechanism as per Service Tax law. The Import Rules specify following different criteria for different categories of services to determine whether they would constitute imports of services or not:
- where service relates to an immovable property, if such property is located in India
- if the service is partly or wholly performed in India
- if the service recipient is located in India
Further, as mentioned above, the Import Rules would be replaced by the Place of Supply Rules under the Negative List Regime. Thus, only services which are provided from outside the taxable territory and received within the taxable territory would now be liable to Service Tax. Specific, Rules have been defined under the Place of Supply Rules for different types of services, in order to determine whether a particular service has been provided within the taxable territory or not.
Furthermore, liability to discharge Service Tax under such circumstances would continue to devolve on the service recipient.
Every person providing taxable service (except a non-resident service provider) is required to issue an invoice. Such invoice should be serially numbered, signed and contain the following particulars:
- name, address, and Service Tax registration number of the service provider
- name and address of the service recipient
- description, classification, and value of taxable service provided indicating abatement/deduction claimed, if any
- Service Tax payable thereon
- education cess (tax) payable thereon (including Secondary and Higher Education cess.
The Service Tax law does not specifically provide for electronic invoicing as the invoices are required to be signed by the service provider. However, as per the Information Technology Act in force in India, where the invoice is authenticated by a digital signature, the requirement of having signatures is deemed to have been satisfied.
The invoice can be raised in foreign currency.
Transfers of Business
Sale of a business as a going concern is not regarded as provision of a taxable service and hence it is not subject to Service Tax. Sale of business has been specifically exempted under the Negative List Regime.
Options to Tax
The Service Tax legislation in India do not provide for an option to tax transactions. However, there are alternative schemes for valuation and payment of Service Tax under specified taxable categories (such as, under Works Contract Services, an option to pay tax at the rate of 4.12 percent of entire value of the contract is available).
Head Office and Branch transactions
Transactions between head office and branch within India are not subject to Service Tax. However, cross-border transactions between head office and branch/project office/liaison office where one of them imports services into India could be subject to Service Tax depending upon the nature of transactions.
Further, under the Negative List Regime, for cross-border transactions between head office and branch/project office/liaison office where the place of provision of such services would be construed to be provided within the taxable territory, would be subject to Service Tax.
While there is no specific relief for bad debt, the excess tax paid can either be adjusted against subsequent tax liability (subject to fulfillment of specified conditions) or can be claimed as refund.
The Service Tax legislation in India does not specifically provide for a general anti-avoidance provision. However the Service Tax authorities may challenge the genuineness of the transactions in order to ensure transactions are not undervalued, underreported or structured, solely to evade payment of Service Tax. Thus, the application of anti-avoidance principles has to be examined on the basis of specific facts of each case. Further, Service Tax law provides for prosecution for specified offences such as provision of service without issue of invoice, availment and utilization of credit without actual receipt of inputs/ input services, non-payment of amount collected as Service Tax for a period of more than six months etc.
Delay in payment of Service Tax attracts mandatory simple annual interest at the rate of 18 percent per year.
In addition to levy of interest, the Service Tax legislation in India provides for the penalties. Some of them are as under:
- penalty for failure to pay Service Tax ranges between USD 2 per day or 1 percent of the unpaid tax for every month or part thereof until outstanding Service Tax is deposited whichever is higher. However, the penalty amount is capped to 50 percent of the amount of outstanding Service Tax liability.
- penalty for willful evasion to pay Service Tax such as, due to suppression, misstatement, misrepresentation, etc. can be levied up to the amount of Service Tax short paid or sought to be evaded.
- penalty for non-maintenance of books is capped at USD 200.
In all above cases, penalty can be waived off if the taxable person can prove that there was a reasonable cause for the failure to pay tax.
How often do tax audits take place?
Provision of tax audits (viz. frequency, competent authority, etc.) vary depending upon the legislation (viz. VAT, Service Tax, excise duty). Further, generally while there is no prescribed frequency of tax audits, the relevant tax authorities of each legislation depending upon their internal prescribed criteria (such as turnover, total tax payments, comparatives with the industry, etc.) conduct the audit. For example, in the state of Delhi, special audit is required where the same is directed by the Commissioner.
Are there audits done electronically in your country (e-audit)? If so, what system is in use?
At present, there are no provisions of e-audits under VAT, Service Tax and excise duty legislations.
Is it possible to apply for formal or informal advance rulings from the Service Tax authority?
Depending upon the legislation, there are specified criteria (such as the transaction has to be proposed, party seeking advance ruling need to be an overseas entity, etc.) which needs to be fulfilled in order for a person to be eligible to obtain an advance ruling.
Are rulings and decisions issued by the Service Tax authorities publicly available in your country?
While these are publicly available through different websites, there is no standard link/database.
- VAT provisions differ depending on the state VAT laws. Some state VAT laws have comparatively more liberal provision than others
- input tax credit for VAT paid on goods used in providing services/manufacture of goods cannot be utilized against Service Tax/Excise duty liability and vice-versa.
Under each legislation (viz. VAT, Service Tax, Excise duty), depending upon specified goods, area, capacity, etc, indirect tax incentives (viz. reduced rates, exemptions and zero rating, etc.) are available.