Dr. Sanjiv Agarwal

Under the new service tax regime, any services not mentioned in the negative list will be subjected to Service Tax, if not otherwise exempt. If services are provided against a portion of the salary foregone by the staff, then it will be considered as having been made for a consideration and thus liable to tax. But facilities that are available to employees without any charges or reduction from salary by the employer will be outside the tax net. Companies will be able to claim credit for such service tax paid. Independent directors would also be liable to service tax on the remuneration paid to non whole time directions.

It seems that the government is now seeking to stretch the definition of ‘service’ too far to cover almost every thing which comes in its imagination. For example, remuneration to directors on company boards has been made taxable thoughIndiais still struggling for efficient, effective and impacting persons on company boards so as to enhance corporate governance. The sitting fee and other remuneration payable to them will attract Service Tax. This does not at all seem to be justified. Most of these directors are people of high eminence, retired bureaucrats or professors or professionals or even celebrities. Surprisingly, in case of nominee directors, Service Tax will not be charged from directors but from their institutions.  There will be no tax on government directors. Non-executive directors get compensated in the form of sitting fee for the meetings attended, commission or ESOPs. Government may not get even Rs. 5 crore as tax revenue from this as a high percentage of such directors may not be having total income over Rs. 10 lakh. Infact, SEBI and MCA should oppose it and seek exemption.

Salary package of employees offered by corporates are flexible and often ‘Cost to Company’ (CTC) approach is followed. Now going by Government’s intention, if any service / facility is provided by employer to employee at a confessional rate / charge, it will be a service provided by employer to employee and Service Tax charged despite it being part of package. This is absurd. Another silly interpretation is charging Service Tax on salary paid to partners in the absence of employer – employee relationship, though it is legal to pay salary to partners, both under Income Tax and partnership laws. Moreover, payment of salary to partners is very common inIndia.

Generally, employees are provided certain facilities or perquisites for a concessional or subsidized amount but such activities will be taxed in the hands of service provider (employer) as if he is providing services to employees, although it is a part of salary package.

Examples could include subsidized working lunch, use of motor vehicle etc. However, any activity available to all the employees free of charge without any reduction from the emoluments shall not be considered as an activity for consideration and will thus remain outside the purview of the service tax liability (facilities like crèche, gymnasium or a health club which all employees may use without any charge or reduction from the salary will be outside the tax net). Reimbursements to employees in course of employment would not be taxed.

In case of group companies, it is a common practice that staff belonging to one company is deputed to other group company (say a subsidiary company) and cost of employee is defrayed. Even such cases will be covered as manpower supply as the contractual employment continues to be with holding company and Service Tax levied. However, joint employments will not be taxed.

The supplies made by the employer to the ex-employees or pensioners will be of same status as those to an employee and thus would accordingly attract taxability. The reimbursements to pensioners will also be treated at par with those of current employees when such reimbursements arise out of the initial employment contract or are in relation to that employment.

Thus, effective 1st July, 2012, employers will have to be careful while employing people and draft the appointment letters keeping Service Tax in mind.

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  1. jay says:

    building a “service provider – recipient” angle in an employment is a real headache for
    both employers & employee. as it is, the salaried class are always targeted by the Income tax Deppt for taxation of various perks – now added to that, the service tax deppt will also join in harassing this sector.
    clearly, the service tax deptt is becoming more & more greedy – not surprising, if tomorrow they levy a service tax on all domestic help & even for services rendered in a wife – husband relationship OR in in parent – children relationship.
    sky is not the limit for their imagination.

  2. Ashok Jain says:

    Dear Mr. Sanjiv, In case of company, promotoer directors and other directors are also work as full time employee. There is relationship as employer-employee. Does service tax is applicable in these cases also? best regards.

  3. Ashok Jain says:

    Dear Mr. Sanjiv, there are promoter directors in compnay which are getting salary from company and having employer -emmployee relationship. Will they cover under new provisions and lible for service tax?

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October 2021