The new Service Tax regime has not only impacted the practicing professionals of service tax and business entities but it also impacted the professionals who are discharging audit function.
Paragraph 4 (ix) (a) of Companies (Auditor’s Report) Order, 2003 requires an auditor to report, whether the company is regular in depositing undisputed statutory dues including Provident fund, Investor Education and Protection Fund, Employees State Insurance, Income tax, Sales tax, VAT, Service Tax Wealth Tax, Customs Duty, Excise Duty, Cess and any other dues with the appropriate authorities and if not, the extent of the arrears of outstanding statutory dues as at the last day of the financial year concerned for a period of more than six months from the date they become payable.
One of the law mentioned in the above said clause of CARO, 2003 called Service Tax law and which has under gone huge change with effect from 1st July, 2012 and this is the first financial year (F. Y. 2012-13) for which the companies are in the process of finalising their annual reports.
Earlier, as per the Finance Act, 1994, the services are used to be taxed on selective basis, but with effect from 1st July, 2012 on introduction of negative list based taxation, the scope of service tax compliances got increased.
So earlier your client(Auditee) may not fall under the service tax net but now with widening of service tax law (w.e.f. 1-7-2012) one may hit service tax liability on account of any of the following;
- If the activity carried out by him falls with in the definition of service.
- If the activity carried out by him happens to be a declared service.
- If he incurs any payment as specified in Notification No. 30/2012 (Service Tax) dated 20-07-2012 read with rule 2(d) of Service Tax Rules, 1994, then he will become liable for payment of service tax under reverse charge.
What is the definition of Service:
Clause (44) of Section 65B of Chapter V of the Finance Act, 1994 defines the service as:
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) 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;
c) fees taken in any Court or tribunal established under any law for the time being in force.
What are the Declared Services:
As per Section 66E of the finance act, 1994, the following shall The following shall constitute declared services, namely:––
a) renting of immovable property;
b) 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-certificate by the competent authority.
c) temporary transfer or permitting the use or enjoyment of any intellectual property right;
d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software;
e) agreeing to the obligation 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 or in any such manner without transfer of right to use such goods;
g) activities in relation to delivery of goods on hire purchase or any system of payment by instalments;
h) service portion in the execution of a works contract;
i) service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.
What are the services under which one may attract the service tax liability under reverse charge?
|Sl.No.||Description of a service||Percentage of service tax payable by the person providing service||Percentage of service tax payable by the person receiving the service|
|1||in respect of services provided or agreed to be provided by an insurance agent to any person carrying on insurance business||Nil||100%|
|2||in respect of services provided or agreed to be provided by a goods transport agency in respect of transportation of goods by road, where the person liable to pay freight is,(a). any factory registered under or governed by the Factories Act, 1948 (63 of 1948);(b) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any other law for the time being in force in any part of India; |
(c) any co-operative society established by or under any law;
(d) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944) or the rules made there under;
(e) any body corporate established, by or under any law; or
(f) any partnership firm whether registered or not under any law including association of persons;
|3||in respect of services provided or agreed to be provided by way of sponsorship to any body corporate or partnership firm located in the taxable territory.||Nil||100% |
|4||in respect of services provided or agreed to be provided by an arbitral tribunal to any business entity located in the taxable territory||Nil||100%|
|5||in respect of services provided or agreed to be provided by individual advocate or a firm of advocates by way of legal services to any business entity located in the taxable territory and having turnover exceeding Rs. 10 lakhs.||Nil||100%|
|5A||in respect of services provided or agreed to be provided by a director of a company to the said company||Nil||100%|
|6||in respect of services provided or agreed to be provided by Government or local authority by way of support services excluding,- (1) renting of immovable property, and (2) services specified in sub-clauses (i), (ii) and (iii) of clause (a) of section 66D of the Finance Act,1994 to any business entity located in the taxable territory||Nil||100%|
|7||(a) in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on abated value to any person who is not engaged in the similar line of business.(b) in respect of services provided or agreed to be provided by way of renting of a motor vehicle designed to carry passengers on non abated value to any person who is not engaged in the similar line of business||Nil |
|100 % |
|8.||in respect of services provided or agreed to be provided by way of supply of manpower for any purpose or security services||25%||75 %|
|9.||in respect of services provided or agreed to be provided in service portion in execution of works contract||50%||50%|
|For item no. 7, 8 & 9 above, the service provider should be any individual, HUF or partnership firm, whether registered or not including AOP, located in the taxable territory and service receiver may be any business entity registered as body corporate, located in the taxable territory|
|10||in respect of any taxable services provided or agreed to be provided by any person who is located in a non-taxable territory and received by any person located in the taxable territory||Nil||100%|
Please note that, if a person liable for payment of service tax under reverse charge, then he will not have any basic exemption limit like Rs. 10.00 lacs, which normally a service provider has.
So while confirming whether there exist any service tax liability, don’t look at only on receipts part of your client but even one need to look at the payments made by your client also especially for payments specified in item no’s 2, 5, 7, 8 & 9 of the above table, where majority of business entities will incur such type of expenditure in the normal course of their operations.
Therefore after introduction of negative list based taxation of services, the scope of service tax got increased and this is the first financial year for the companies who are already in the process of finalising their annual reports and be ensure (Auditors) while reporting under the clause no. 9 of the CARO report that the company has complied with the new provisions of the service tax law and has discharged its service tax liability accordingly.
This is being the first financial year after introduction of negative list based taxation of services and there may be an every chance that the service tax department may ask for the audited annual reports from the companies.
DISCLAIMER: This article is provided purely for the information of the readers and the views expressed above are the personal views of the author.
(The author, S. Raghava Reddy, is a Chartered Accountant from Hyderabad. He can be reached at –firstname.lastname@example.org)