Sandeep Ahuja & Co.

Established in the year 1986, we are a leading chartered accountancy firm based in Delhi & NCR rendering comprehensive professional services which include statutory audit, internal audit, direct tax, transfer pricing, GST, bank audit, propriety audit, cost accounting, internal financial controls and risk advisory.

Monday, November 5, 2012

Opinion on Chargeability of Service Tax on Certain Services Provided by Hotel incorporated as a Private Limited Company


1.       Airport transfers, pick-up and drop facility
2.       Sight-seeing income
3.       Income from swimming pool, internet facility, etc. incidental to hotel business
4.       Classification in case of bundled services

I.                  Airport Transfer Facility

If the hotel provides airport transfer facility and charges for it separately in the bill, it should be covered under the definition for hiring/renting of cab for transfer of passengers.

Services of transport of contract carriage are not exempt if they are meant for tourism, conducted tours, charter or hire. The taxable value under renting of motor vehicle under abatement is 40% where no CENVAT credit is available. The effect of reverse charge mechanism is described as below.

Reverse charge on renting of motor vehicle:
Service
Service Provider
Service Receiver
Liability
Renting or hiring of motor vehicle deigned to carry passenger to any person who is not in similar line of business.
Individual, HUF, proprietorship or partnership firm, AOP located in taxable territory.
Business entity registered as body corporate in taxable territory.
100% liability is of service receiver who is a business entity where tax on 40% of value has been calculated by provider of service.

If the service provider wishes to avail CENVAT credit, it can pay service tax on 60% of total gross value and service receiver shall be liable to pay tax on 40% of total gross value.

Since the Pvt. Ltd. hotel is not covered under Service Providers as specified above, reverse charge is not applicable. The hotel will have to deposit service tax @12.36% on the value of service as charged in the bill if it intends to claim CENVAT credit on such services. Otherwise, service tax @4.944% may be deposited and no CENVAT credit may be availed.

II.               Sight-seeing Income

Sight-seeing services provided by the hotel are in the nature of tour & travel services and should be chargeable to service tax accordingly. The percentage of total bill amount taxable is given below.

Service in relation to
Taxable Value
CENVAT Credit available
Bill/Challan issued to contain
(i)  a package tour
25%
No
The bill issued for this purpose indicates that it is inclusive of charges for such a tour.
(ii)  a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour
10%
No

The invoice, bill or challan issued indicates that it is towards the charges for such accommodation.
This exemption shall not apply in such cases where the invoice, bill or challan issued by the tour operator, in relation to a tour, only includes the service charges for arranging or booking accommodation for any person and does not include the cost of such accommodation.
(iii) any services other than specified at (i) and (ii) above.
40%
No
The bill issued indicates that the amount charged in the bill is the gross amount charged for such a tour.


III.           Income from Other Ancillary Services

The major impact and changes in the provisions relating to the Hotel industry can be tabulated as under:
S. No.
Provision
Prior to 1-7-2012
Post 1-7-2012
1
Taxability of Food supplied in Restaurants serving liquor and being Air conditioned
Taxable
Taxable
Accommodation in a Hotel for declared tariff of more than Rs. 1,000/- per day
Taxable for period for less than continuous three months
Taxable without any exclusion of period
Mandap Keepers' Service, Outdoor catering Service
Taxable
Taxable
Laundry Services (i.e. ‘Dry cleaning’ as well as ‘wet cleaning’), Telephone services, No Show charges, cancellation charges, etc.
Not taxable unless specifically defined
Taxable in view of the expanded definition of services
Sale of space/time for advertisement other than by radio/television broadcast
Taxable
Exempt
2
Valuation
Food supplied in Restaurants serving liquor and being Air conditioned
Taxable value : 30%
Taxable value : 40%
i.e. 4.944%
Accommodation in a Hotel for declared tariff of more than Rs. 1,000/- per day
Taxable value : 50%
Taxable value : 60%
i.e. 7.416%
Supply of food as a part of function for renting
Taxable value: 60%
Taxable value: 70%
i.e. 8.652%
Any other Service (excluding Banking and Financial Services)
Taxable value: 100%
Taxable value: 100%
i.e. 12.36%


IV.            Classification in case of Bundled Services 
In case of an event, which is a mix of various overlapping services, the service which gives the most pre-dominant color would be the category under which the same should be taxed as per the new Section 66F of the Finance Act, 1994 as made applicable from 1-7-2012. 

In our opinion:

a) In case of 2N/3D package for accommodation with meals; the pre-dominant category would be accommodation even if the customer has food in the same restaurant like other walk- in customers. Hence, the hotel needs to charge service tax on 60% value of the total consideration.

b) In case of a Residential conference or a marriage; where a package has been designed for say three days including conference facilities, food, accommodation; since the pre-dominant intention is arranging of a function, the correct classification would be “Mandap keeper” and hence the hotel needs to charge service tax on 70% value of the total consideration. 

Note: For further clarification, please refer Relevant Notification No. 26/2012 dated 20.06.2012

Sample Service Tax Invoice under Reverse Charge Mechanism


Service Tax Illustrations: Reverse Charge


Computation of Service Tax
·         X is a Service Provider and Y is a Service Receiver such that they fall within the scope of reverse charge mechanism.
·         The ratio applicable is 25% and 75% for the Service Provider & Receiver, respectively.
·         An invoice of Rs. 15 lakhs (excluding tax) has been raised on 1st October, 2012.
For the given facts the computation of service tax shall be as under:
Particulars
Amount (in Rs.)
Invoice Value (excluding tax)
15,00,000/-
Service Tax @ 12.36% (A)
1,85,400/-
Total Value
16,85,400/-
Less: Tax attributable to Service Receiver and to be borne by him [75% of (A)]
1,39,050/-
Amount Payable by Service Receiver to Service Provider
15,46,350/-
Service Tax payable by Service Receiver
1,39,050/-
Service Tax payable by Service Provider
46,350/-
Raising service invoice
With reference to the example given above, while raising a service invoice, the total service tax payable of Rs. 1,85,400/- needs to be disclosed.
In addition to that, service tax attributable to the Service Receiver of Rs. 1,39,050/- shall be disclosed on the invoice so that the receiver knows the amount of service tax that is required to be paid by him. 
Illustrations
1.       Hiring or Renting of Motor Vehicles
-          Case 1 (Abated value): X (an individual) provides services to PQR Pvt. Ltd. in relation to renting of motor vehicles, designed to carry passengers, and charges Rs. 100
Service tax liability on abated value: Rs. (100 x 40% x 12.36%) = Rs. 4.944 i.e. Rs. 5 (Rounded off as per Section 37D of the Central Excise Act)
-          Case 2 (Total value): X (an individual) provides services to PQR Pvt. Ltd. in relation to renting of motor vehicles, designed to carry passengers, and charges Rs. 100. Further, the service provider charges Rs. 7.416 (i.e. Rs. 100 x 60% x 12.36%) as service tax on the face of the invoice.
In this case, the Service Receiver (PQR Pvt. Ltd.) will have to discharge Rs. 4.944 (Rs. 100 x 40% x 12.36%) as Service Recipient.
-          The Director of a Company avails services in relation to renting of motor vehicles to travel from one city to another on a business tour. He obtains the bill from the service provider in the name of the company and passes it on to the company to obtain reimbursement of expenses. In such a case, the company WILL be required to pay Service Tax as applicable on it under the reverse charge mechanism because the bill has been raised in the company’s name.
-          The Director of a Company avails services in relation to renting of motor vehicles to travel from one city to another on a business tour. He obtains the bill from the service provider in his own personal name and passes it on to the company to obtain reimbursement of expenses. In such a case, the company WILL NOT be required to pay Service Tax as applicable on it under the reverse charge mechanism.

2.       Supply of Manpower Services
X (an individual) provides services to PQR Pvt. Ltd. in relation to supply of manpower and charges Rs. 100.
-          Liability to be discharged by the Service Provider: Rs. (100 x 25% x 12.36%) = Rs. 3.09 i.e. Rs. 3 (Rounded off as per Section 37D of the Central Excise Act)
-          Liability to be discharged by the Service Receiver: Rs. (100 x 75% x 12.36%) = Rs. 9.27 i.e. Rs. 9 (Rounded off as per Section 37D of the Central Excise Act)

3.       Works Contract Services
X (an individual) provides services to PQR Pvt. Ltd. in relation to works contract (original) and charges Rs. 200.
-          Service tax liability: Rs. (200 x 40% x 12.36%) = Rs. 9.888 (Alternate Rule)
-          Liability to be discharged by the Service Provider = 50% x Rs. 9.888 = Rs. 4.944
-          Liability to be discharged by the Service Receiver = 50% x Rs. 9.888 = Rs. 4.944

Valuation of Works Contract [Notification No. 24/2012-ST dated 6th June, 2012] (Alternate Rule)
Description of Service
% of ST payable on total amount charged
Original Works
40%
Maintenance or repair or reconditioning or servicing of any goods
70%
Other works contract – Completion & Finishing Services
60%
4.       Services of Directors in a Company
There are 3 Directors in a Company, out of whom 2 Directors are whole-time Executive Directors getting salary and other benefits from the company. The Non-Executive Director is getting sitting fees for attending the meetings of the Board.
(i)                 How will the service tax liability be calculated in this case and who will bear it?
In this case, reverse charge is applicable only on the payments made to the Non-Executive Director in the form of sitting fees and reimbursements. This Service Tax will be deposited by the Company on behalf of the Director under the reverse charge mechanism @12.36%.
(ii)               Will the Company be eligible to avail Cenvat credit on such payment of service tax?
Yes, the Company is entitled to avail the input of the Service Tax paid on the Directors’ remuneration on reverse charge basis. The service tax paid by the Company on Directors’ remuneration will be considered as common services and will be eligible under rule 6(3) of the Cenvat Credit Rules, 2004 as per the ratio of taxable and exempted services.
(iii)             Will the Service Tax be payable even if the Director is below the threshold limit of Rs. 10 lakhs and his income from such services to all service receivers is below such amount?
It is immaterial whether the Director falls within the threshold limit or not. Service Tax will have to be deposited by the Service Receiving Company.

5.       Security Services to a Business Entity
ABC Distributors (partnership firm) and PQR Distributors Pvt. Ltd. are two business entities receiving services of security guards from Shine Star Security Agency (Proprietorship).
(i)                 Will Reverse Charge be applicable in this case?
In case of security agency services, for reverse charge provisions of service tax to apply, the service recipient should be a business entity registered as a body corporate. A partnership firm is not a body corporate. Therefore, PQR Distributors Pvt. Ltd. will have to deposit 75% of the Service Tax under the partial reverse charge mechanism. However, ABC Distributors, being a partnership firm, will not be required to deposit the Service Tax as a Service Receiver. The whole of the service tax liability will be collected and deposited by Shine Star Security Agency.
(ii)               Will the treatment be different in case the Service Provider is a Company instead of a proprietorship/ partnership/ HUF?
In case the business providing such security guards is a company (say, Shine Star Security Agency Pvt. Ltd.) the whole of the service tax liability will be of the Service Provider irrespective of the status of the Service Receiver. In such a case, reverse charge will not apply and neither ABC Distributors nor PQR Distributors Pvt. Ltd. will be liable to deposit the Service Tax.
(iii)             Security Services were brought under the Reverse Charge Mechanism vide Notification No. 46/2012 ST dated 07.08.12. What about the service tax liability on such services from 1st Jul to 7th Aug, 2012?
-           If the security agency has already raised their invoice for the services provided by them during July 2012, before 7th August 2012, the service recipient’s liability to make the payment is recognized on the date of invoice and hence the point of taxation shall be the date of such invoice. Hence, if invoice has been raised by the security agency before 7th August 2012, reverse charge will not apply, even if the payment is made by the service recipient after 7th August 2012. But, if the invoice for the services provided from 1st August to 31st August 2012 is raised on 31st August 2012, the date of invoice, i.e. 31st August 2012 would be the point of taxation and hence the service recipient would be liable to make the payment of his portion of service tax liability under reverse charge, though part of the service has been provided before 7th August 2012.
-           Similar would be the case in respect of services provided by Non-Executive Directors to the Companies as such services were brought under the reverse charge mechanism vide Notification No. 45/2012 ST dated 07.08.12. If the liability to make the payment to the Director is recognized after 7th August 2012, reverse charge will apply and if such liability is recognized by the company before 7th August 2012, reverse charge will not apply.

Repercussions in Case of Default in Payment of Service Tax Liability by Either Party and Availability of CENVAT Credit under Reverse Charge
It is clarified by CBEC that the liability of the Service Provider and the Service Receiver is for the respective amounts payable by them and is not influenced by compliance or the lack of it by the other side. Hence, if either party defaults, there shall be no repercussion for the other party.
Service Provider is allowed Cenvat credit of tax paid by him on inputs and input services. The respective portions have been attempted such that the credits available will be well below the amount required to be paid by such persons. In extreme situations the small service provider is also being allowed the refund of unutilized Cenvat credit if any, available with him. Suitable changes will be made in Cenvat Credit Rules to this effect.
Cenvat Credit cannot be used to pay tax by a Service Receiver. He will have to make such payment through the GAR 7 challan. However, the service receiver may claim the credit of service tax paid based on the invoice issued by the service provider. For service tax paid on reverse charge, credit may be claimed based on the TR-6 challan by which payment is made.

Rates of Service Tax to be Deposited by Service Receiver or Service Provider in Case of Various Services Covered under Reverse Charge Mechanism


Description
of Service


Explanation
ST  rate applicable to Service Recipient under Reverse Charge
ST rate to be charged by Service Provider in invoice (non-
company)
ST rate to be charged by Service Provider (company)
1
Services of an Insurance Agent to any person carrying on insurance business w.e.f. 01.07.2012.
Covered: Payment to insurance agents by insurance companies for their services. Service Recipient (insurance company)’s liability is 100%.

This was in effect even before Finance Act, 2012.
12.36%
                    -
                    -
2
Services of Goods Transport Agency in respect of transportation of goods by road w.e.f. 01.07.2012.

This was in effect even before Finance Act, 2012.
Covered: Transportation of goods by road through a GTA which issues a consignment note, by whatever name called. Person who pays or is liable to pay freight shall be treated as the person who receives the service.
Excluded:
-  Courier, express cargo, carriage of certain food/drink items, freight upto Rs. 750/- per consignee per carriage and upto Rs. 1500/- per goods carriage. 
-  Service provided by truck owner directly and not through GTA to end user is covered by the negative list entry and is not liable to service tax.
Service Recipient’s liability is 100%.

Applicability: The reverse charge is applicable only when consignor or consignee is a factory registered under the Factories Act, registered society, co-operative society, any dealer registered under the Central Excise Act, any body corporate or any partnership firm.

Non availability of Cenvat Credit: Service Tax payable is 25% of the value if Cenvat credit has not been availed by the Service Provider. Hence, it is necessary to obtain certificate from the Service Provider (GTA) that he has not availed any Cenvat credit. Otherwise, service tax will be payable on 100% of the value.
3.09%
                    -
                    -
3
Services by way of Sponsorship w.e.f. 01.07.2012.
This was in effect even before Finance Act, 2012.
Covered: All sponsorships.
Excluded: Advertisement / business promotion, certain sports related sponsorships. 
Service Recipient’s liability is 100%.
Note: If such body corporate or partnership firm is not located in taxable territory, the service provider (i.e. person receiving the sponsorship money) will be liable to pay the service tax.

Applicability: Service Receiver should be a body corporate or partnership firm.
12.36%
                    -
                    -
4
Services of an Arbitral Tribunal w.e.f. 01.07.2012.
Covered: Any payment for any service. 
Service Recipient’s liability is 100%.

Applicability: The Service Provider is the Arbitral Tribunal and the Service Receiver is a business entity having turnover over Rs. 10 lakhs in the preceding financial year.
12.36%
                    -
                    -
5
Services of Advocates (individual/firm) w.e.f. 01.07.2012.
Covered: Advice, consultancy or assistance in any branch of law, in any manner and includes representational services before any court, tribunal or authority.
Service Recipient’s liability is 100%.

Applicability: Applicable when the Service Receiver is a business entity having turnover over Rs. 10 lakhs in the preceding financial year.
12.36%
                    -
                    -
6
Services of Directors of a Company w.e.f. 07.08.2012.
Covered: Any payment to non-executive directors for any service. E.g. sitting fee, reimbursements.
Excluded: Executive directors in employment. If Company itself arranges lodging, boarding, travelling, etc. for the non-executive directors and the bill is raised in the name of the Company.
However, it may be covered under any other category, e.g. car hire charges.
Service Recipient’s liability is 100%.
12.36%
                    -
                    -
7
Support Services by Government or Local Authority w.e.f. 01.07.2012.
Covered: “Support services” means infrastructural, operational, administrative, logistic, marketing, or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others, and shall include advertisement and promotion, construction or works contract, renting of immovable property, security (police protection), testing and analysis.
Excluded: Renting of immovable property, services of Department of Posts by way of speed post, express parcel post, life insurance and agency services, services in relation to an aircraft or a vessel, transport of goods or passengers, municipal, public convenience and other public services like water supply, sanitation, and solid waste management.
Service recipient’s liability is 100%.
Examples of Support Services by Local Authority / Govt./ Development Board: Marketing support by Silk Board, Coir Board, Coffee Boards.

Applicability: Where Service Receiver is any business entity.
12.36%
                   -
                    -
8
Import of service w.e.f. 01.07.2012. This was in effect even before Finance Act, 2012.
Covered: Any payment for import of taxable services from any place outside the taxable territory.
Service Recipient’s liability is 100%.
It is to be noted that Service Tax will be calculated on gross value including TDS on the contract value.

Applicability: Any taxable service provided by any service provider to any service receiver.

It is to be noted that the state of Jammu & Kashmir does not fall in the taxable territory therefore; services provided by a person located in J&K to a person located in the rest of India shall also be liable under reverse charge. Location of service provider and service receiver shall be determined as per Place of Provision of Services Rules, 2012 which have not been notified yet.
12.36%
                    -
                    -
9
(a) Renting of a motor vehicle designed to carry passengers on abated value w.e.f. 01.07.2012.
If service provider is not availing input credit, 9(a) is applicable; otherwise 9(b) is applicable.
Covered: Hiring passenger cars, cabs, buses etc.
Excluded: Radio taxi, metered cab, three wheeler, auto rickshaw, stage carrier, contract carriage and packaged tour, public transport not predominantly for tourism purpose e.g. Meru cabs, bus having contract permit hired for transportation of employees.

Applicability: Where Service Provider is Individual/ Proprietorship/ Partnership firm/ HUF and Service Receiver is a business entity registered as a body corporate in taxable region.
Also, the Service Receiver should not be in the same line of business as the Service Provider.

Note: If motor vehicle is taken on hire (operating lease) without driver, it is ‘transfer of right to goods’. Then it is deemed sale of goods and Vat will apply – not service tax.
In case Service Provider does not avail input credit.
4.944%
                    -
4.944%
(to be wholly paid by Service Provider instead of Service Receiver in case Provider is a company)
(b) Renting of a motor vehicle designed to carry passengers on non - abated value w.e.f. 01.07.2012.
In case Service Provider avails input credit.
4.944%
7.416%
12.36%
(to be wholly paid by Service Provider instead of Service Receiver in case Provider is a company)
10
Supply of manpower for any purpose w.e.f. 01.07.2012 or security services w.e.f. 07.08.2012.
Covered: Payment for services of the staff seconded/ deputed with the company under an arrangement where the staff remains on the payroll of the original employer only, payment for services of staff (not on payroll of the recipient of service) supplied by an agent/person under an arrangement where it is placed operationally under the superintendence or control of the recipient of service (e.g. housekeeping staff supplied by manpower agency), all security/detective services.
Excluded: Joint employment, outsourcing the activity/service itself e.g. outsourcing house-keeping work to an outside agency instead of getting the manpower supplied by an agent for house-keeping work, Recruitment / placement agency service.
Service Recipient’s liability is 75% and Service Provider’s liability is 25%.

Applicability: Where Service Provider is Individual/ Proprietorship/ Partnership firm/ HUF and Service Receiver is a Company registered under the Companies Act, 1956 or a business entity registered as a body corporate in taxable region.
9.27%
3.09%
12.36%
(to be wholly paid by Service Provider instead of Service Receiver in case Provider is a company)
11
(a) Works contract w.e.f. 01.07.2012.
Covered: Any contract involving the use of labour plus material on which VAT is leviable under any schedule of VAT Act on any material used in execution of works contract and such contract is for any new construction; any addition and alteration to abandoned or damaged structures on land that are required to make them workable; any erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise. 
Service Recipient’s liability is 50% and Service Provider’s liability is 50%.

Applicability: Where Service Provider is Individual/ Proprietorship/ Partnership firm/ HUF and Service Receiver is a Company registered under the Companies Act, 1956 or a business entity registered as a body corporate in taxable region.
2.472%
2.472%
4.944%
(to be wholly paid by Service Provider instead of Service Receiver in case Provider is a company)
(b)Works contract w.e.f. 01.07.2012.
Covered: Any contract involving the use of labour plus material on which VAT is leviable under any schedule of VAT Act on any material used in execution of works contract  and such contract is for maintenance or repair or reconditioning or restoration or servicing of any goods e.g. AMC of movable items/ office equipments. Service Recipient’s liability is 50% and Service Provider’s liability is 50%.

Applicability: Where Service Provider is Individual/ Proprietorship/ Partnership firm/ HUF and Service Receiver is a Company registered under the Companies Act, 1956 or a business entity registered as a body corporate in taxable region.
4.326%
4.326%
8.652%
(to be wholly paid by Service Provider instead of Service Receiver in case Provider is a company)
(c) Works contract w.e.f. 01.07.2012.
Covered: Any contract involving the use of labour plus material on which VAT is leviable under any schedule of VAT Act on any material used in execution of works contract and such contract is other than as mentioned under 11(a) & 11(b) or is for maintenance, repair, completion and finishing services such as glazing, plastering, floor and wall tiling, installation of electrical fittings of an immovable property, e.g. interior and furnishing work, electrical work of items other than movable ones.
Service Recipient’s liability is 50% and Service Provider’s liability is 50%.

Applicability: Where Service Provider is Individual/ Proprietorship/ Partnership firm/ HUF and Service Receiver is a Company registered under the Companies Act, 1956 or a business entity registered as a body corporate in taxable region.
3.708%
3.708%
7.416%
(to be wholly paid by Service Provider instead of Service Receiver in case Provider is a company)
Works Contract Note:
Independent valuation of the works contract service by service receiver: As per Explanation-II to Notification 30/2012-ST, dated 20.06.2012, in works contract services, where both service provider and service recipient are the persons liable to pay tax, the service recipient has the option of choosing the valuation method as per choice, independent of valuation method adopted by the provider of service.

Practical difficulty: If the receiver of works contract service (contractee) wants to pay service tax on actual value of services and the service provider/contractor chooses to pay under alternate method, then a practical difficulty will arise in the valuation of service by the service receiver.
In most of the cases, contractee would be depending upon the contractor’s Running Account bills or accounting maintained by contractor for determining the amount of material and service/labour element involved in the contract.
If the contractor is paying service tax under alternate method then he may not bother to find out the actual services/labour element in the works contract as he has to calculate service portion at a fixed percentage of total amount under alternate method. In such a case, if the contractee wants to pay service tax on actual value of services, it would be very difficult for him to find out the actual value of labour/service element involved in works contract in the absence of proper accounting by contractor.
Similarly small contractors who are covered under SSI exemption i.e. having turnover less than Rs. 10 lakh may not be maintaining regular books of accounts under any law i.e. under Income Tax (Due to being covered u/s 44AD) or VAT laws (opting for composite scheme). In such a case, it would again be difficult for the service receiver to pay service tax under actual scheme.


Notes:
Business entity” means any person ordinarily carrying out any activity relating to industry, commerce or any other business or profession. Thus, Government and charitable organisations are not ‘business entity’.
Body Corporate” – Company, LLP, Cooperative Society is Body Corporate – Firm, HUF, Trust is not ‘Body Corporate’ [Society registered under Societies Act is legally not ‘body corporate’].
Supply of manpower” means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.