F.No. B1 / 4 / 2006-TRU
Government of India
Ministry of Finance
Department of Revenue
Tax Research Unit
New Delhi, dated the 19th April, 2006
Member, CBEC (ALL)
The Chief Commissioners of Central Excise (ALL)
The Director General (ALL)
The Commissioners of Central Excise (ALL)
The Commissioners of Service Tax (ALL)
Subject: Finance Act, 2006 (No. 21 0f 2006) - regarding
The Finance Act, 2006 (No. 21 0f 2006) has received the assent of the President on the 18th April , 2006.
2. Service tax on taxable services is leviable at the rate of twelve percent. of the value of the taxable services with effect from the date of the assent of the President. In addition, education cess @ 2% of 12% i.e. 0.24% is leviable. Thus, the total service tax leviable works out to 12.24% of the value of the taxable services.
3. Changes in the Finance Act, 1994 with respect to sections 66, 66A, 67, 73 (1A), 73A, 73B, 73C, 73D, 76, 83, 87, 93A, 94(2), 95(1C), 96C also come into force with effect from the date of the assent of the President.
4. The following rules have been issued under various provisions of the Finance Act, 1994:
(i) Service Tax (Determination of Value) Rules, 2006;
(ii) Taxation of Services (Provided from outside India and received in India ) Rules, 2006; and
(iii) Export of Services (Amendment) Rules, 2006;
4.1 Service Tax (Determination of Value) Rules, 2006
Ř Where the consideration received for provision of services is wholly in money, the value shall be the gross amount charged by the service provider for provision of service.
Ř Where the consideration received for provision of service is not wholly consisting of money, the value in such cases shall be the gross amount charged by the service provider for provision of similar service to any other person in the ordinary course of trade.
Ř If the value of similar service provided by the same service provider is not available, then the value has to be determined.
Ř Money value of non-money consideration received should be determined by the service provider.
Ř If the consideration received is not wholly consisting of money, equivalent money value of the consideration determined by the service provider shall be the taxable value for charging service tax.
Ř If the consideration received is partly in money and partly in non-money terms, the sum of consideration received in money and the equivalent money value of the non-money consideration determined by the service provider shall be the taxable value for charging service tax.
Ř The taxable value shall be determined by the service provider but the value so determined for the purpose of paying service tax should not be less than the cost of provision of such service.
4.1.3 The new section 67 and the rules issued for this purpose enable charging of service tax in cases where the consideration received is not in money terms. Where the service tax is charged on the basis of similar services provided by the same person, the same should be based on a normal transaction between two independent persons at an arm’s length price.
4.1.4 The value determined by the service provider under rule 3 for the purpose of payment of service tax should not be less than the cost of provision of such services.
4.1.5 However, where there are adequate reasons warranting verification of the value adopted by the service provider for payment of service tax, rule 4(2) specifically enables verification of records in such cases.
4.1.6 It is expected that the department should use this provision with extreme care and caution. Such verification should be undertaken only after the written instructions from the Divisional AC/DC. After verification of the records, if the department is of the view that the value so determined and adopted for payment of service tax warrants revision, the issue should be decided after issue of show cause notice and observing the prescribed procedures. Before issuing any show cause notice on matters relating to valuation, concurrence of Commissioner should be obtained.
4.1.7 Value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenditures or costs incurred by the service provider in the course of providing a taxable service forms integral part of the taxable value and are includable in the value. It is not relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client.
4.1.8 The service provider in the course of providing any taxable service may incur certain expenditure or cost as a pure agent of the client. The service provider seeks to exclude such expenditure or cost incurred by him as a pure agent of his client (generally known as reimbursable expenditure) from the value of the taxable services.
4.1.9 There could be situations where the client of the service provider specifically engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases such goods or services so procured are treated as supplied to the client rather than to the contracting agent. The service provider in such cases incurs the expenditure purely on behalf of his client in his capacity as agent of the client. Amounts paid to the third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and not includible in the taxable value. However, if the service provider acts as an undisclosed agent i.e. acting in his own name without disclosing that he is actually acting as an agent of his client, he cannot claim the expenditure incurred by him as reimbursable expenditure. Whether the expenditure or cost incurred by the service provider in his capacity as a pure agent of the client or incurred on his own account is a question of fact and law and is to be determined carefully.
4.1.10 Indication of different elements of the transaction in the invoice or bill could often be misleading. One has to carefully examine the exact legal nature of the transactions and other material facts before taking a view as to whether or not the expenditure sought to be excluded from the value is reimbursable expenditure. Not only the form , but also the substance of the transaction should be duly taken into account.
4.1.11 Rule 5 pertains to reimbursable expenditure incurred by the service provider as a pure agent of his client. Explanation (1) to rule 5(2) clearly specifies the criteria to decide whether the service provider acts as a pure agent or not in a given situation. In the case of agency function, the agent neither intends to hold nor holds any title to the goods or services and also never uses such goods or services so procured. It is also important to note that the service provider only receives the actual amount incurred to procure such goods or services.
4.1.12 The service provider who seeks to claim exclusion of certain value from the taxable value should also fulfill all the conditions specified in rule 5(2).
4.1.13 In view of the comprehensive provisions on value of taxable services, all the circulars issued relating to value of taxable services are withdrawn. If there are any areas where specific clarification on valuation is needed, the same may immediately be brought to the notice for consideration.
4.2 Taxation of Services (Provided from outside India and received in India) Rules, 2006
Internationally, services provided by a foreign supplier to a domestic customer are subjected to VAT/GST under reverse charge or tax shift mechanism. Under the reverse charge method, a legal fiction is created treating as if the recipient had himself provided the services domestically and accordingly, the recipient of services is treated as deemed service provider.
4.2.2 Charging of service tax at the hands of the recipient of service where the taxable service is provided from outside the country is required to prevent distortion of competition. Explanation occurring at the end of clause (105) of section 65 of the Finance Act, 1994 and Rule 2(1) (d) (iv) of the Service Tax Rules, 1994 enabled charging of service tax in such cases.
4.2.3 In the Budget for 2006-07, Explanation to clause (105) of section 65 providing for charging of service tax on taxable services received from outside India has been omitted and for this purpose a new section 66A has been incorporated in the Finance Act, 1994. Section 66A is to be read with the Taxation of Services (Provided from outside India and Received in India) Rules, 2006. It may be noted that only services received in India are taxable under these provisions.
4.2.4 All taxable services are chargeable to service tax under this section. The service provider should be outside India and the recipient of service should be in India. However, taxable services received by an individual from outside the country other than for the purpose of use in business or commerce, are not chargeable to service tax. In other words, taxable services received by individuals from outside the country for non-business purposes are not leviable to service tax.
4.2.5 Provision of service by a permanent establishment outside India to another permanent establishment of the same person in India is treated, for the purpose of charging service tax, as provision of service by one person to another person. In other words, permanent establishment in India and the permanent establishment outside India are treated as two separate legal persons for taxation purposes.
4.2.6 Categorization of services under rule 3 of Export of Services Rules, 2005 is adopted for the purpose of the Taxation of Services (Provided from outside India and received in India) Rules, 2006.
4.2.7 Ten specified taxable services, which are provided from outside India in relation to an immovable property situated in India fall under rule 3 (i).
4.2.8 Specified taxable services, which involve physical performance, fall under rule 3 (ii) and the same are treated as services provided from outside India and received in India if such services are partly or wholly performed in India. For charging service tax in such cases, the total value is to be taken for the purpose of levy of service tax. Corresponding provision to this effect [ rule 7(2) ] has been incorporated in the Service Tax (Determination of Value) Rules, 2006.
4.2.9 Taxable services, not covered under the two categories specified above, are placed under rule 3 (iii). Services under this category are treated as taxable service provided such taxable services are received by a recipient located in India for use in relation to commerce or industry.
4.2.10 Taxable services, namely general insurance, survey and map making and auctioneer provided other than in relation to an immovable property situated in India fall under rule 3 (iii).
4.2.11 Services provided in respect of air transport of passengers embarking in India for international journey and in relation to transport of persons by a cruise ship embarking in any port in India have not been mentioned under any of the three categories as services tax in such cases is charged from the service provider in India.
4.2.12 The recipient of service, being a taxable person, is required to take registration and comply with other provisions of the Finance Act, 1994 and the rules made there under. Rule 4 specifically states the obligation of the recipient of services.
4.2.13 The treatment of the recipient of service, as the deemed service provider under section 66A is only for the purpose of charging service tax on taxable services received from outside the country. Services provided from outside India and received in India, therefore, not treated as taxable service provided by the recipient for the purpose of CENVAT Credit Rules, 2004. However, where such service is used as an input for providing any taxable output, the service tax paid on such service can be taken as input credit.
4.3. Export of Services Rules, 2005
Rule 3 of the Export of Services Rules, 2005 has been amended vide Export of Services (Amendment ) Rules 2006. For the purpose of export of services, services have been categorized into three categories:
(i) services provided in relation to an immovable property which is situated outside India [rule 3 (1) (i)]
(ii) services provided where the place of performance is outside India [rule 3 (1) (ii)]
(iii) services other than specified in category (i) and (ii) above and received by a person outside India [rule 3 (1) (iii)].
4.3.2 The categorization of services under Export of Services, Rules, 2005 has been maintained without change.
4.3.3 Our of the fifteen services newly specified, the following two services have not been mentioned in the said categorization of services as they are services provided in India -
(a) in respect air transport of passengers embarking in India for international journey, [sub-clause (zzzo) of clause (105)] and
(b) in relation to transport of persons by a cruise ship embarking in any port in India [sub-clause (zzzv) of clause (105)]
4.3.4 Auctioneer services, [sub-clause (zzzr) of clause (105)] provided in relation to an immovable property situated outside India is specified under rule 3(1) (i). Auctioneer services provided other than in relation to an immovable property situated outside India is specified under rule 3(1) (iii).
4.3.5 Services specified under rule 3(1) (iii) may be provided either in relation to business or commerce, or other than in relation to business or commerce. If such services are provided in relation to business or commerce, they should be provided to a recipient of services who is located outside India. If such services are provided other than in relation to business or commerce, they should be provided to a recipient who is located outside India at the time of receipt of service and such services should be used outside India.
4.3.6 The above mentioned categorization of taxable services for the purpose of export is further subject to the conditions prescribed under rule 3(2). Services consumed in India do not fall within the scope of “export of services”
5. Notifications Issued
The following notifications have also been issued:
· Notification 8/2006-ST notifies the rate of interest chargeable under section 73B of the Finance Act as 13% per annum .
· Notification 9/2006-ST seeks to amend paragraph B of notification 36/2004-ST dated 31/12/2004 in line with the newly inserted section 66A of the Finance Act 1994.
· Notification 10/2006-ST seeks to align reverse charge under Rule 2(1)(d)(iv) of Service Tax Rules 1994 with the newly inserted section 66A of the Finance Act 1994.
· Notification 8/2006- Central Excise (NT) seeks to omit explanation to clause (p) of rule 2 of Cenvat credit Rules 2004 so as to align with provisions of section 66A of the Finance Act 1994 .
6. Notifications rescinded
The following notifications have been rescinded vide notification no 14/2006- ST
· Notification no 22/2005-ST dated 7/6/2005
· Notification no 25/2005-ST dated 7/6/2005
7. The above explanation of the changes of law is only for the purpose of guidance to facilitate understanding and implementation. It is not a part of law and does not override it. Adequate care may be taken to carefully read the relevant provisions of law.
Joint Secretary, (TRU)