(Updated as per Finance Act, 2014

confirmed by faculty on 24 April 2015)

CA Final Paper 8 Indirect Tax Laws Section B: Service Tax and VAT, Chapter 1

CA. Bimal Jain

© The Institute of Chartered Accountants of India

 • This lecture has been delivered by faculty members to supplement the
Study Material, Practice Manual and other content
1

• The views expressed in this lecture are of the Faculty Member.

2
• The content of this video lecture has not been specifically discussed
by the Council of the Institute or any of its Committees and the views
expressed herein may not be taken to necessarily represent the views
3 of the Council or any of its committees

© ICAI, 2015 2

The e-Lectures, PPT, Podcasts
and Video lectures on ICAI
Cloud Campus aim to
supplement the Study Material,
Practice Manual and
Supplementary Study Material
Due to changes in law, there is
likely to be some time gap
between these changes and the
recording of updated lectures.
© ICAI, 2015
(Updated as per Finance Act, 2014
confirmed by faculty on 24 April 2015)
The lecture recordings are made
according to the syllabus and
laws existing/ applicable as on
the date of recording.
Hence, students are advised to
refer to the Study Material
including Supplementary Study
Material, if any, and other
relevant legislation for latest
provisions/ amendments
required for forthcoming
examination.
3
 • Definition of Service
1

• Service Tax and its applicability

2

• Role of Chartered Accountants

3

• Paradigm shift in Service Tax from Selective to Comprehensive Approach

4

• Introduction of Negative List

5

• Declared Services
6

• Classification of Service
7

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 Global Economy down from 3.9% to 3.2%

GDP’s Growth: 5.5%  6.4% and Inflation around 6.5%

Fiscal Deficit  5.2% to 4.8%

Current Account Deficit  3.9% to 3.2%

Growth:
• Agriculture – 2.8%;
• Industry – 3.8%;
• Service – 8.8%;
• Contribution of Service Sector to GDP – 60%;

Tax to GDP Ratio: 9.9% (DT – 5.5%; IDT – 4.4%)

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 Union List (Contains matters in respect of which
a) List – I:
only CG has power of legislation)
State List (Contains matters in respect of which
b) List – II:
only SG has power of legislation)
Concurrent List (Contains matters in respect of
c) List – III:
which both CG and SG have power of legislation).

Taxes on Services”- Entry 92C of List I - VII Schedule to the

Constitution of India (Initially inserted under the Entry 97
‘Residuary Entry’).

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 Finance Act 1994
Service Tax Laws
Rules

Notifications

Circulars or Office letters

Orders

Trade Notices

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 In comprehensive approach all services are made taxable and a
negative list is provided to exempt some of the services. In
selective approach, selective services are subjected to service tax.

Taxation of services moved from:

Selective Approach
July 1, 1994

Comprehensive Approach
July 1,2012

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 Services Taxable
under Negative List

Existing Taxable
Services

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 Charging Section Section 66B prescribing 12%

“Service” Defined under section 65B(44)

Declared Services Provided under section 66E

17 Services under section

Overview of Service Tax Negative List
66D

Mega Exemption 39 categories of Services

Rule making power under

Place of Provision of Services
section 66C

Principles provided under

Interpretation
section 66F

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 Service

Services Under
Negative List

Services under Exempted List

Other Exemptions/Abatements

All remaining Services to be taxable

under the Negative List Approach

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 Restoration of Service Specific Accounting codes
for payment of Service tax & Registration (Circular
No. 165/16/2012-ST dated. 20-11-2012):

List of 120 Services provided with Accounting

Codes

If Registration obtained under Positive list Regime-

Service specific accounting codes continue

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 Where Registrations obtained/ amended under
‘All Taxable Services’, the taxpayer should file
amendment application online in ACES and opt
for relevant description(s) from the list of 120
descriptions of services provided

New Tax payers may register by selecting the

relevant descriptions among list of 120 services
provided

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 Ministry of Finance Service Tax Commissionerate

Department of Revenue Additional Commissioner

Joint Commissioner
Central Board of Excise And Customs

Assistant Commissioner/Deputy
Zones Headed by Chief Commissioners Commissioner

Superintendent
Central Excise Commissionerate Headed
By Commissioners

Inspector
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 To structure the • Input Credit/ Output Tax, Tax
planning, etc.
transactions

Procedural • Envisage Registration, filing Return,

Review & Audit, Refund, etc.
Compliances

Personal • Adjudication/ Appellate Authorities,

TRU/ CBEC, etc.
Representations

Advisory & • Opinion, Due diligence, certification,

etc.
Certifications

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 16
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 S. 66 There shall be levied a tax on the Value of taxable services
referred to in various sub-clauses of (105) of S.65 and collected in
such manner as may be prescribed

S. 65(105) Any Service provided or to be provided (16-6-2005)

Association of Leasing & Financial Service Companies vs. UOI 2010 (20)
STR 417 SC  Taxable Event  Rendering of Service

S.65B (51) Taxable service means any service on which service tax is
leviable under section 66B;

There shall be levied a tax at the rate of 12% on the value of all
S. 66B services, other than those services specified in the negative list,
provided or agreed to be provided in the taxable territory by one
person to another and collected in such manner as may be
prescribed 17
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 S. 65B (44)  “Service" means Any Activity carried out by a Person for
another for Consideration, and includes a Declared service, but shall not
include

• (a) an activity which constitutes merely,-

• (i) a transfer of title in goods or immovable property, by way of sale, gift or
in any other manner; or
• (ii) such transfer, delivery or supply of any goods which is deemed to be
sale within Article 366 (29A) of the Constitution; or
• (iii) a transaction in money or actionable claim;

(b) a provision of service by an employee to the employer in the course of or in

relation to his employment; - Employer-Employee / Secondment/ Jt
Employment/ Director

(c) fees taken in any Court or tribunal established under any law for the time
being in force.
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 • Nothing contained in this clause shall apply
to functions performed by MP, MLA, Other
1 Govt. Officers or Govt. Bodies.

• Transaction in money shall not include any

activity relating to the use of money or its
conversion by cash or by any other mode,
from one form, currency or denomination, to
2 another form, currency or denomination for
which a separate consideration is charged.

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 • (a) an unincorporated association or a body of
persons, as the case may be, and a member
thereof shall be treated as distinct persons;
• (b) an establishment of a person in the taxable
3 territory and any of his other establishment in a
non-taxable territory shall be treated as
establishments of distinct persons.

• Person carrying on a business through a branch

or agency or representational office in any
4 territory shall be treated as having an
establishment in that territory;.

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 9 Activities declared to be Service:
a. Renting of Immovable Property (Entry 49 – List II)
b. Construction of a complex, building, civil structure for
which consideration received before issuance of
ccompletion
.Temporarycertificate
Transfer/Permitting Use or Enjoyment of IPR {IPR -
(Entry 49)
d. Development, Design, Implementation etc. of
10/9/2004}
Information Technology Software {IT Software Services –
16/5/2008}

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 9 Activities declared to be Service:

e. Agreeing to the obligation or to refrain from an act, or

to tolerate an act or a situation, or to do an act;

f. Transfer of goods by way of hiring/ leasing/ licensing

without transfer of right to use such goods {16/5/2008}

g. Activity in relation to delivery of goods on hire

purchase/ any system of payment by installments

h. Service portion in the execution of a works contract

{A -366 (29A)}

i. Service portion in an activity involving supply of

food/drinks/article of human consumption {A -366 (29A)}
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 Activity – Economic

Person – 65B(37)  Service Provider – Service Recipient

Consideration – S. 67/ Determination of Valuation Rules

• Monetary – Free Gift/ Charities/ Grant

• Non-Monetary: Kind
• Barter
• Advance – Services / Goods
• Deposit - Refundable/ Non- refundable
• Demurrage/ Accidental Damage – Penalty
• Late Payment - Interest
• Short received – Deficiency of Services
• Bad Debts
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 All Services would be taxed except certain services specified in the
negative list (S.66D)

Provisions relating to positive list approach, namely, sections 65, 65A,

66, and 66A  cease to operate from 1-7-2012 i.e. When the negative
list approach begins to operate.

Introduction of Negative List Vide New Sections, namely,

• 65B (Interpretation of various Terms),

• 66B (Charging Section),
• 66C (Determination of Place of Provisions of Service),
• 66D (Negative Lists),
• 66E (Declared Service) and
• 66F (Principle of description of Service)

Effective from 1st July, 2012

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  For implementing the Negative List approach, a number of changes
made

Consequential changes in Service Tax Rules, 1994, Service

Tax (Determination of Value) Rules, 2006, Cenvat Credit Rules,
2004, the Point of Taxation Rules, 2011

Place of Provision of Services Rules, 2012 (S.66C) is being

notified – Notification. No. 28/2012-ST dt. 20-6-2012

Rescind Existing ‘Export of Services Rules, 2005’ and ‘Taxation

of Services (Provided from outside India and received in India)
Rules, 2006’

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 S. 66D: Comprises of following Services - 17 heads

(a) Services by Government or a local authority excluding the

following services to the extent they are not covered elsewhere
i. Services by the Department of Posts by way of speed post, express
parcel post, life insurance and agency services provided to a person
other than Government;
ii.Services in relation to an aircraft or a vessel, inside or outside the
precincts of a port or an airport;

iii. Transport of goods or passengers; or

iv. Support services, other than services covered under clauses (i) to
(iii) above, provided to Business entities;

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 (b) Services by the Reserve Bank of India;

(c) Services by a foreign diplomatic mission located in India;

(d) Services relating to agriculture by way of

i. agricultural operations directly related to production of any

agricultural produce including cultivation, harvesting, threshing, plant
protection or seed testing

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 ii. Supply of farm labour;

iii. Processes carried out at an agricultural farm including tending,

pruning, cutting, harvesting, drying, cleaning, trimming, sun drying,
fumigating, curing, sorting, grading, cooling, or bulk packaging and
such like operations which do not alter the essential characteristics
of agricultural produce but make it only marketable for the primary
market;
iv. Renting or leasing of agro machinery or vacant land with or without
a structure incidental to its use;

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 v. Loading, unloading, packing, storage or warehousing of
agricultural produce;

vi. Agricultural extension services;

vii. Services by any Agricultural Produce Marketing

Committee or Board or services provided by a commission
agent for sale or purchase of agricultural produce;

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 e. Trading of goods;

f. Any process amounting to manufacture or production of goods;

g. Selling of space or time slots for advertisements other than

advertisements broadcast by radio or television;

h. Service by way of access to a road or a bridge on payment of toll

charges;

i. Betting, gambling or lottery;

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 j) Admission to entertainment events or access to
amusement facilities;

k)Transmission or distribution of electricity by an electricity

transmission or distribution utility;

l) Services by way of—

• i. pre-school education and education up to higher secondary school or
equivalent;
• ii. education as a part of a curriculum for obtaining a qualification
recognized by any law for the time being in force.
• iii. education as a part of an approved vocational education course;

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 (m) Services by way of renting of residential
dwelling for use as residence;

(n) Services by way of—

• (i) extending deposits, loans or advances in so far as the
consideration is represented by way of interest or
discount;
• (ii) inter se sale or purchase of foreign currency amongst
banks or authorized dealers of foreign exchange or
amongst banks and such dealers;

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 (o) Service of transportation of passengers,
with or without accompanied belongings, by
• a stage carriage;
• railways in a class other than
(A) first class; or
(B) an air-conditioned coach;
• metro, monorail or tramway;
• inland waterways;
• public transport, other than predominantly for tourism
purpose, in a vessel of less than fifteen tonne net; and
• metered cabs, radio taxis or auto rickshaws;

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 (p) Services by way of transportation of goods—

by road except the services of

(A) a goods transportation agency; or
(B) a courier agency;

by an aircraft or a vessel from a place outside India to the first customs

station of landing in India; or by inland waterways;

(q) funeral, burial, crematorium or mortuary services including

transportation of the deceased.

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 S. 66F. Principles of interpretation of
descriptions of services or bundled services
(1) Unless otherwise specified, reference to a service (herein
referred to as main service) shall not include reference to a
service which is used for providing main service.
• Exemption  Main Service & Service w.r.t Main Service – Toll Collection

(2) Where a service is capable of differential treatment for any

purpose based on its description, the most specific description
shall be preferred over a more general description.
• Abatement  Mandap Keeper/ Shamiana with Outdoor catering

(3) Subject to the provisions of sub-section (2), the taxability of a

bundled service shall be determined in the following manner,
namely:-

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 (a) if various elements of such service are naturally bundled in the ordinary
course of business, it shall be treated as provision of the single service which
gives such bundle its essential character;
•  Hotel Stay with complimentary breakfast

(b) if various elements of such service are not naturally bundled in the ordinary
course of business, it shall be treated as provision of the single service which
results in highest liability of service tax

•  Single rent deed for renting of Property – Residential/ commercial

Purpose
Explanation.- For the purposes of sub-section (3), the expression "bundled service" means
a bundle of provision of various services wherein an element of provision of one service is
combined with an element or elements of provision of any other service or services.';

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 S. 67A  The rate of service tax, value of a taxable service and
rate of exchange will be the one as in force or as applicable at
the time when the taxable service has been provided or agreed
to be provided.

Here “Rate of Exchange" means as determined by the Board;

or ascertained in such manner as the Board may direct, for the
conversion of Indian currency into foreign currency or foreign
currency into Indian currency.

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 S. 65B(41)  “Renting" means:

Allowing, permitting or granting access, entry,

occupation, use or any such facility, wholly or partly, in
an immovable property, with or without the transfer of
possession or control of the said immovable property;
and

Includes letting, leasing, licensing or other similar

arrangements in respect of immovable property;

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 Permitting use of immoveable
1. property for placing
vending/dispensing machines
Allowing erection of
2. communication tower on a
building for consideration.
Renting of land or building for
3.
entertainment or sports
Renting of theatres by owners to
4.
film distributors
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Chargeable to service tax as
permitting usage of space is covered
in the definition of renting
Chargeable to service tax as
permitting usage of space is covered
in the definition of renting
Chargeable to service tax as there is
no specific exemption.
Chargeable to service tax as the
arrangement amounts to renting of
immovable property.
If….. Then……
(i) A Residential house taken on rent
the renting transaction is not covered
is used only or predominantly for
in this negative list entry.
commercial or non-residential use.
the renting transaction is not covered in
(ii) If a house is given on rent and the this negative list entry because the person
same is used as a hotel or a lodge taking it on rent is using it for a commercial
purpose.
the renting transaction is not covered in
(iii) Rooms in a hotel or a lodge are let out
this negative list entry because a hotel or a
whether or not for temporary stay
lodge is not a residential dwelling.

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If….. Then……
(iv) Government department allots houses such service would be covered in the
to its employees and charges a license fee negative list entry relating to services
provided by government and hence non-
taxable.
(v) Furnished flats given on rent for these are in the nature of lodges or guest
temporary stay houses and hence not treatable as a
residential dwelling

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 Following activities of renting not taxable to service as
covered under Negative List of Services are:

Renting out of any property by Govt. or local

authority to a non- business entity

Renting out of any property by Reserve

Bank India

Service in relation to agriculture by way of

renting of agro machinery or vacant land

Renting of residential dwellings use as

residence

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  Following activities of renting are exempt as covered
under Mega Exemption NN.25/2012-ST are -

• Renting of precincts of a religious place for general public

Entry 6

• Renting to an exempt educational institution

Entry 9

• Renting of hotel, inn guest houses, club, campsite or other

commercial places meant for residential of lodging purposes,
Entry 18 having declared tariff of a room below Rs. 1,000 per day

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 • Construction of a complex, building, civil structure or a part
thereof, including a complex or building intended for sale to
a buyer, wholly or partly, except where the entire
consideration is received after issuance of completion-
S. 66E(b) certificate by the competent authority;

• Service portion in the execution of a works contract;

S. 66E(h)

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 S. 65B(54) - Works Contract means a contract wherein
transfer of property in goods involved in the execution of
such contract is leviable to tax as sale of goods and such
contract is for the purpose of carrying out construction,
erection, commissioning, installation, completion, fitting out,
repair, maintenance, renovation, alteration of any moveable
or immovable property or for carrying out any other similar
activity or a part thereof in relation to such property; -Labour
/ Rate Contract??
• Challenge remains how to arrive at Material/ Service Value in Works
Contract:-
•- Actual Material/ Service portion
•- Standard Material/ Service portion
•- Composition Tax (Alternative Option)

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 Overruled in LB – CESTAT Delhi – CCE vs. BSBK Pvt. Ltd.
(2010) 26 STT 263 – “Turnkey project can be vivisected &
service element involved in works contract”.

Other Services  Works/ Composite Contract –e.g.

• Commercial or Industrial Construction Services; 10/9/2004 - 67%/ 75%

• Construction of Residential Complex Services; 16/6/2005/ 1/7/2010 -
67%/75%

Difference between Works Contract & Other Services  When

State Sales Tax/VAT payable on transfer of property in
execution of Works Contract

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 Intellectual property right
includes :-

Any other similar right to

Copyright Patents Designs
Trademarks an intangible property

Temporary transfer of
a patent registered
outside India would be
Registration of
declared service if the
intellectual right is not
place of provision of
required in India.
service of temporary
transfer of IPR is in
taxable territory.

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 Sale of pre-packaged or canned software Vs. Customized Software

Site development of software

Providing advice, consultancy and assistance on

matters relating to information technology software

Providing a license to use pre-packaged software

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 What is the basis of
Classification of Services?

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 Under Section. 66F (Earlier S. 65A)

Reference shall not draw same status quo, which is used for providing
main service.

Where a service is capable of differential treatment for any purpose

based on its description, the most specific description shall be preferred
over a more general description.

Bundled Service – Naturally or Not naturally

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 Whether Service tax leviable
if process undertaken by Job
Worker is not manufacture?

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 Under Section 66D(f)

Any process amounting to manufacture or production of goods

is not chargeable to service tax, as explicitly stated in Section
66D(f) of Finance Act 1994 . Thus, Service tax is leviable if
process undertaken by Job Worker is not manufacture.

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 What is the difference between
Negative list of Services and
Exempted list of Services?

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 Both, the services under negative list and exempted are not liable to service tax but there
exist a difference.

Negative list covered under Section 66D, enlist 17 services not liable to service tax since July
1, 2012 while 39 exempted services are effective from 1-7-2012 as stated under Mega
Exemption Notification No. 25/2012- Service Tax, dated the 20th June, 2012, as amended
by in N/N no. 3/2013-ST dated. 1-3-2013.

Change in Negative List/ Exempted List

Export of Negative List/ Exempted List

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 Constitutional Validity of Double Taxation i.e.
Service Tax and VAT on Works Contract?

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 Every Works contract involves an element of sale of goods and provision
of service.
 In terms of Article 366 (29A) transfer of property in goods involved in
execution of works contract is deemed to be a sale of such goods. It is a
well settled position of law, declared by the Supreme Court in BSNL‘s
case [2006(2) STR 161 (SC)], that a works contract can be segregated into
a contract of sale of goods and contract of provision of service
 Aspects theory: Federation of Hotel & restaurant Assoc V UOI -Subjects
which fall in one aspect within the power of one legislature may fall in
another aspect within another legislature power
 SLP (C) No.24690/2009 filed by M/s. Idea Mobile Communication Ltd. -
Value of SIM includible for Service tax when VAT was paid on it.

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 Whether services provided by Employer to Employee is taxable
State with reasons whether the following are liable to service
tax:-
 Services by way of training or coaching in recreational
activities relating to arts, culture or sports.
 Services provided by a player to a franchisee which is not a
recognized sports body.
 Pre-school education and education up to higher secondary
school or equivalent

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 i. Services by way of training or coaching in recreational
activities relating to arts, culture or sports are not liable to
service tax as it is specifically exempt under the mega
exemption notification.
ii. Service of a player to a franchisee which is not a recognized
sports body is taxable as it does not get covered under the
mega exemption notification.
iii. Pre-school education and education up to higher secondary
school or equivalent is not liable to service tax as it is
included in the negative list under section 66D of the Finance
Act, 1994.

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 • Constitutional validity of Service tax and levy, chargeability,
importance, role of Chartered Accountants, opportunities in
1 Service Sector, etc.

• Paradigm shift from selective to comprehensive approach

of service tax lead service tax applicability to all service
2 except mentioned in negative list or specially exempt.

• Easy to learn and understand Negative List regime of

Service Tax and it’s comparison with Positive list regime
3

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 CA. Bimal Jain

© ICAI, 2015