TRU has issued a Draft Circular F. No 354/127/2012-TRU dated July 27, 2012 clarifying certain issues in relation to leviability of service tax on staff benefits and employee related transactions and trade, industry & field formations are requested to go through the draft Circular and offer their comments, views and suggestions.We have summarized those points for your ready reference and comments, views and suggestions, if any, for our onward submission to TRU on or before 24th August, 2012:-
A. Scope of Manpower supply
Post July 1, 2012, Section 65 of Finance Act, 1994 has been withdrawn. Consequently the definition of manpower supply under Section 65 is no more applicable. Now, the words manpower supply is to be understood as per their natural meaning.
The manpower supply mean when one person provides another person with the use of one or more individuals who are contractually employed or otherwise engaged by the first person (the person providing the service of manpower supply). In other words the manpower must be employed by the provider of service and not by the service recipient.
The following situations may be noted in this regard-
B. Joint Employment
In certain cases, staff may be employed by two employers who share the cost of such employment. The services provided by the employee in such cases will be outside the definition of service because the definition of service u/s 65B (44) of the Finance Act, 1994 specifically excludes the provision of service by an employee to the employer in the course of or in relation to his employment.
However, if the staff is engaged by one employer and made available to another for a consideration, such activity will be liable to service tax.
Further, in case of joint employers, one employer pays the salary and other benefits of the staff on behalf of other employers and later recovers the cost from other employers on actual basis then such recoveries will not be liable to service tax as it is merely a case of cost reimbursement.
C. Services by the Directors
Services provided by the directors to the Company may be in the individual capacity or they are representing any entity (including government) for a consideration, will be chargeable to service tax. If a director receives payment in his personal capacity, the same is taxed in the hands of the director. However, if any entity is charging any fee for nominating the director, such fee is also liable to service tax as it is an activity provided by one person to another for consideration.
In case of Government nominated director, if any fee is paid to the government for nominating the director, such fees is liable to service tax under the exclusion sub- (iv) of clause (a) of section 66D of the Finance Act, 1994 i.e. support services by Government to business entity. Such services are liable to be taxed on reverse charge basis by business entity.
D. Treatment of supplies made by the employer to employees
Provision of service by an employee to the employer in the course of or in relation to his employment is excluded from the definition of the “service”. A number of activities are carried out by the employers for the employees for a consideration will fall within the definition of “service” and are liable to be taxed unless specified in the Negative List or otherwise exempted.
Consideration may be in the form of portion of salary foregone by the employee or any reduction from the salary i.e. where the employees’ pays for such services provided by Employer e.g. a portion of money recovered by Employer on usage of Car, Telephone, Assets, etc., provided to the Employee for personal usage. However, the Cenvat credit of the inputs and input services used to provide the output services by the employer will be available to the employer as per extant Cenvat Credit Rules, 2004.
However, if any service is provided by the employer to the employee without any consideration (facilities like crèche, gymnasium or a health club, which all employees may use without any charge or reduction from the salary), it will not be chargeable to service tax.
Service provided by the employer to the employee which is either covered under the Negative list or otherwise exempted will not be chargeable to service tax. For example, the services of food and catering provided by the employer in a canteen would normally fall outside the tax net unless such canteen has both the facility of air-conditioning as well as license to serve liquor (S. No. 19 of the Mega exemption). Likewise, services provided by way of guest house will also not be liable to tax if the tariff for such unit of accommodation is below Rs. 1000 per day or equivalent (S. No. 18 of the Mega exemption).
Similarly, any recovery towards providing residential accommodation would be covered under the negative list entry – Section 66D (m) and not chargeable to service tax.
E. Treatment of reimbursements made by the employer to the employee
The reimbursements of expenditure incurred by the employee on behalf of the employer in course of employment would not amount to a “service” per se and hence are non-taxable.
F. Treatment of supplies and reimbursements made by the employer to ex-employees/ pensioners
If any service is provided by the employer to the ex-employees or pensioners for consideration, it will be liable to service tax. The treatment of such services will be at par with the services by the employer to the current employees.
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