CBEC vide Circular No. 185/4/2015-ST, Dated: June 30, 2015 has revised the earlier prescribed procedure for carrying out detailed scrutiny of returns laid down vide Circular No. 113/07/2009-ST dated 23-4-2009. With the introduction of the Point of Taxation Rules, 2011, which shifted the liability of payment of service tax from receipt basis to accrual basis, and the advent of negative list-based comprehensive taxation of services in 2012, need for revision became persistent. Thus, with effect from 01.08.2015, detailed scrutiny of ST-3 returns would be carried out in the prescribed manner.
In order to put in place a strong ‘return scrutiny’ system, a two part system of return was envisaged- a preliminary scrutiny which would be online covering all the returns; and a detailed manual scrutiny of scrutiny returns, identified on the basis of risk parameters, to be done by the Division/Range offices and should be carried out in the manner outlined in the Circular, illustrated as below:
- Preliminary Online Scrutiny
The purpose is to ensure the completeness of the information furnished in the return, arithmetic correctness of the amount computed as tax and its timely payment, timely submission of the return and identification of non-filers and stop-filers. On the basis of validation checks returns having certain errors are marked for Review and Correction (Rnc).
- Detailed manual scrutiny
The purpose is to ensure the correctness of the assessment made by the assessee and this includes checking the taxability of the service and the correctness of the value of taxable services. In doing this Proper Officer must rely mainly on assessment related documents like agreements/contracts and invoices.
- Selection of returns for detailed scrutiny
Core focus would be in respect of such assessees whose total tax paid (Cash + CENVAT) for the FY 2014-15 is below Rs 50 Lakhs. Each Commissionerate has to select equal number of assessees for carrying out returns scrutiny from each of the these three total tax paid bands (Cash + CENVAT) viz. Rs 0 to 10 lakhs, Rs 10-25 lakhs, Rs 25-50 lakhs for the financial year 2014-15.
Detailed scrutiny of returns must be conducted by the Service Tax Range headed by the Superintendent and assisted by a complement of inspectors. However, the Divisional DC/AC shall be responsible for the overall supervision of this business process in respect of his/her division. Before return scrutiny is initiated, the assessee must be given prior intimation of at least fifteen days and the purpose of the exercise must be spelt out in an intimation letter. To begin with, the returns for the financial year 2013-14 should be taken up for detailed scrutiny. One of the important objective of return scrutiny is to ensure validation of the information furnished in the self-assessed ST-3 return. The Validation exercise would require reconciling information furnished in the ST-3 return with ITR Form Nos. 4, 5, 6 and 26AA and any third party information made available.
- Documentation of Findings / Checklist
– Reconciliation for validation of the information furnished in the ST-3 return;
– Taxability in respect of services which may have escaped assessment;
– Classification (for the purposes of due availment of abatement/ exemption benefit);
– CENVAT Credit availment/utilization
Circular further provides for Proforma of Intimation Letter, Assessee Master Information, Checklist, Observation sheet for documenting scrutiny findings, Scrutiny Report, Monthly MIS Report and Draft Scrutiny Report.
[Circular No. 185/4/2015-ST, Dated: June 30, 2015]
Reverse and Partial Reverse Mechanism Chart with effect from 01.04.2015 and The extent of service tax payable thereon by the person who provides the service and any other person liable for paying service tax for the taxable services
|Sl. No.||Description of a service||Percentage of service tax payable by the person providing service||Percentage of service tax payable by any person liable for paying service tax other than the service provider|
|1||in respect of services provided or agreed to be provided by an insurance agent to any person carrying on insurance business||Nil||100%|
|1A||in respect of services provided or agreed to be provided by a recovery agent to a banking company or a financial institution or a non-banking financial company (Effective from 01.04.2015)||Nil||100%|
|1B.||in respect of services provided or agreed to be provided by a mutual fund agent or distributor, to a mutual fund or asset management company (Effective from 01.04.2015)||Nil||100%|
|1C.||in respect of service provided or agreed to be provided by a selling or marketing agent of lottery tickets to a lottery distributor or selling agent||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 to Company, Partnership Firm, Registered Factory, Registered Society, co-operative society, AOP, LLP, Person Registered Under Central Excise Act, 1944 including Excise Dealers||Nil||100%|
|3||in respect of services provided or agreed to be provided by way of sponsorship to anybody corporate or partnership firm||Nil||100%|
|4||in respect of services provided or agreed to be provided by an arbitral tribunal to any Business entity||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||Nil||100%|
|5A||in respect of services provided or agreed to be provided by a director of a company or a body corporate to the said company or the body corporate||Nil||100%|
|6||in respect of services provided or agreed to be provided by Government or local authority 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||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 by individual, HUF, firm or AOP to Body Corporate||Nil||100%|
|(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 by individual, HUF, firm or AOP to Body Corporate (Revised wef 01.10.2014)||50%||50%|
|8.||in respect of services provided or agreed to be provided by way of supply of manpower for any purpose or security services by individual, HUF, firm or AOP to Body Corporate||Nil||100%|
|9.||in respect of services provided or agreed to be provided in service portion in execution of works contract by individual, HUF, firm or AOP to Body Corporate||50%||50%|
|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%|
|11.||in respect of any service provided or agreed to be provided by a person involving an aggregator in any manner to any Business Entity(Effective from 01.03.2015)||Nil||100%|
Explanation-I. – The person who pays or is liable to pay freight for the transportation of goods by road in goods carriage, located in the taxable territory shall be treated as the person who receives the service for the purpose of this notification.
Explanation-II. – In works contract services, where both service provider and service recipient is 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.
Explanation-III. Hitherto, support services provided by a Government/Local authority to any business entity was subject to 100% reverse charge. The scope of reverse charge has now been extended in case of all services provided by the Government/Local authority to such business entities. The exclusion from reverse charge on renting of immovable property and some specified services of Sec. 66D of the Act shall continue.
All Service Tax assessees are hereby informed that they will not be able to file ST 3 returns in ACES now and have to wait until the modified version of ST 3 Form is made available in a few weeks.
Please revisit ACES website(http://www.aces.gov.in) for further information. Inconvenience caused is regretted.
Message From CBEC
Aggregate value of Taxable Services provided
Service Tax applicable
Preceding Financial Year
Current Financial year
Less than 10 lakh
Less than 10 lakh
No service tax
Less than 10 lakh
More than 10 lakh
Service tax applicable after 10 lakh
More than 10 lakh
Less than 10 lakh
service tax applicable from Rs one ,No exemption available
- an individual
- a Hindu undivided family
- a company
- a society
- a limited liability partnership
- a firm
- an association or body of individuals, whether incorporated or not
- a local authority, or
- every artificial juridical person, not falling within any of the preceding sub-clauses.
10. Abatement and exempted services is not to be counted for calculation of 10 Lakh: Various services has been exempted from service tax vide notification 25/2012 .If service provider is providing both exempted and taxable services than turnover of exempted services is not be added for calculation of 10 lakh .
Similarly abatement from gross amount charged by service provider has been defined in notification 26/2012 .To calculate 10 lakh part only taxable part after abatement is to be considered.
Relevant notification is given here under
SECTION 66B OF THE FINANCE ACT, 1994 – CHARGE OF SERVICE TAX ON AND AFTER FINANCE ACT, 2012 – EXEMPTION TO SMALL SERVICE PROVIDERS
NOTIFICATION NO. 33/2012-ST, DATED 20-6-2012
[SUPERSESSION OF NOTIFICATION NO. 6/2005-ST, DATED 1-3-2005]
In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of 1994) (hereinafter referred to as the said Finance Act), and in supersession of the Government of India in the Ministry of Finance (Department of Revenue) notification No. 6/2005-Service Tax, dated the 1st March, 2005, published in the Gazette of India, Extraordinary, Part II, Section 3, Sub-section (i), vide G.S.R. number 140(E), dated the 1st March, 2005, except as respects things done or omitted to be done before such supersession, the Central Government, being satisfied that it is necessary in the public interest so to do, hereby exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act:
Provided that nothing contained in this notification shall apply to,-
(i) taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or
(ii) such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994.
2. The exemption contained in this notification shall apply subject to the following conditions, namely:-
(i) the provider of taxable service has the option not to avail the exemption contained in this notification and pay service tax on the taxable services provided by him and such option, once exercised in a financial year, shall not be withdrawn during the remaining part of such financial year;
(ii) the provider of taxable service shall not avail the CENVAT credit of service tax paid on any input services, under rule 3 or rule 13 of the CENVAT Credit Rules, 2004 (herein after referred to as the said rules), used for providing the said taxable service, for which exemption from payment of service tax under this notification is availed of;
(iii) the provider of taxable service shall not avail the CENVAT credit under rule 3 of the said rules, on capital goods received, during the period in which the service provider avails exemption from payment of service tax under this notification;
(iv) the provider of taxable service shall avail the CENVAT credit only on such inputs or input services received, on or after the date on which the service provider starts paying service tax, and used for the provision of taxable services for which service tax is payable;
(v) the provider of taxable service who starts availing exemption under this notification shall be required to pay an amount equivalent to the CENVAT credit taken by him, if any, in respect of such inputs lying in stock or in process on the date on which the provider of taxable service starts availing exemption under this notification;
(vi) the balance of CENVAT credit lying unutilised in the account of the taxable service provider after deducting the amount referred to in sub-paragraph (v), if any, shall not be utilised in terms of provision under sub-rule (4) of rule 3 of the said rules and shall lapse on the day such service provider starts availing the exemption under this notification;
(vii) where a taxable service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services; and
(viii) the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed ten lakh rupees in the preceding financial year.
3. For the purposes of determining aggregate value not exceeding ten lakh rupees, to avail exemption under this notification, in relation to taxable service provided by a goods transport agency, the payment received towards the gross amount charged by such goods transport agency under section 67 of the said Finance Act for which the person liable for paying service tax is as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules, 1994, shall not be taken into account.
Explanation. – For the purposes of this notification,-
(A) "brand name" or "trade name" means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented word or writing which is used in relation to such specified services for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified services and some person using such name or mark with or without any indication of the identity of that person;
(B) "aggregate value" means the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under section 66B of the said Finance Act under any other notification."
4. This notification shall come into force on the 1st day of July, 2012.
The Finance Act, 2012 has ushered in a new system of taxation of services popularly known as negative list. The new changes are a paradigm shift from the system in force upto 30th June, 2012 where only services of specified descriptions were subject to tax. In the new system all services except those specified in the negative list will be subject to taxation. In short, it has changed the methodology for applicability of service tax from “inclusive” to “blanket applicability with the exception of certain specific categories”.
What is Service?
Service has been defined in clause 44 of new Section 65(B) of the Finance Act, 2012 as follows:
“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 with the meaning of clause 29(A) of article 366 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;
(c) fees taken in any Court or tribunal established under any law for the time being in force.
Is Service Tax payable on Sitting Fees/Commission paid by companies to Directors?
The services performed by a director (other than Managing Director/Executive Director/Wholetime Director who are employees of the Company) of a company fall within the ambit of taxable services with effect from 1st July, 2012.
In respect of services provided by any non-resident director who does not have any fixed establishment in India or is not a resident in India, the companies would be statutorily required to pay the service tax in respect of any consideration which is given to such non-resident directors.
Accordingly, service tax would be applicable on sitting fees and/or commission to Non-Executive Directors of the Company (NEDs).
Is Service Tax payable on reimbursement of expenses of NEDs by the company?
There is a ‘Pure Agent’ concept in service tax. Reimbursement of expenses to ‘Pure Agent’ is not liable to Service Tax.
In some cases, travelling and hotel expenses incurred by NEDs to attend meetings are reimbursed by the company. This would also attract Service Tax as NEDs would not fit within the definition of ‘Pure Agent’ as they do not perform any activity on behalf of the principal.
Can company bear the service tax payable by the NEDs Is it a deemed Remuneration?
As per the explanation to section 198 of the Companies Act, 1956 (“the Act”), the term ‘remuneration’ includes any expenditure incurred by the company in respect of any obligation which, but for such expenditure by the company, would have been incurred by the Director.
There is a view that payment of service tax is a liability or obligation of the NED. However NEDs have a right to pass it on to the service receiver i.e. the company. Since the company incurs expenditure in respect of such obligation, it may tantamount to ‘remuneration’. This may in some cases be treated as increase in remuneration compelling companies to apply to the Ministry of Corporate Affairs (“MCA”).
For example, if a company is paying the maximum permissible sitting fee to its NEDs, the payment of service tax would tantamount to increase in the remuneration beyond the maximum permissible limit or if a company is paying maximum permissible 1% commission on net profits to its NEDs, the payment of service tax could tantamount to payment of commission over and above the maximum permissible.
While considering the concept of "expenditure", it is important to dwell upon the concept of "Out of pocket". The expenditure that the company incurs in paying service tax to the director can be treated as 'input services' and can be set off by the company against its excise/service tax liability. However, depending upon the type of business, this may not be totally offset.
There are varying views emerging on liability of Service Tax on directors.
Whilst one view is that the Service Tax is merely collected by the NED from the company and paid to the authorities, the other view is that it is a liability of the NED which is assumed by the company attracting deemed remuneration requiring the Central Government approval.
The Service Tax, being an indirect tax, it is an established fact that the service providers (NEDs in the present case) generally collect the service tax from the service receivers (company in the present case) and pay it to the Government. The company when paying the Service Tax amount to the NED, does not pay it on his behalf to a third party. The NED in turn is supposed to pay it to the Government and discharge his statutory obligation.
The Board of Directors of a company, if required, can pass a suitable resolution authorising payment of service tax on sitting fees and / or commission to NEDs but it appears that if it is treated as a deemed remuneration, it would require approval of Central Government.
As many companies would bear the service tax component of sitting fees / commission / reimbursement of out of pocket expenses payable to NEDs, MCA will be flooded with multiple applications on this subject.
Service Tax Additional burden on NEDs
Applicability of service tax on sitting fees / commission to NEDs would inter-alia put following additional burden on the NEDs.
1) Obtain service tax registration number.
2) Raise invoice for sitting fees and service tax component separately for each and every meeting of Board / Committee and for commission and Service Tax as and when the commission becomes payable.
3) Issue invoice within 30 days of completion of service/receipt of payment, whichever is earlier, on a running serial number commencing from No.1 for the Financial Year.
4) Pay service tax quarterly i.e. 5th of the month following the quarter (or 6th if deposited thru internet banking) in which the service is provided. However, Service Tax for the month of March or quarter ending in March is to be paid by 31st March of the financial year.
5) Electronic filing of Return is mandatory by 25th of the month following the half year (viz. for April to Sept. by 25th Oct and Oct to March by 25th April). Nil return to be filed, even if no services have been provided.
6) Submit list of all accounts maintained at the time of filing first return.
The recent amendments made to Schedule XIII to the Companies Act dealing with the ‘Managerial Remuneration’ have liberalized the ‘Managerial Remuneration’ to a great extent. As per the new provisos introduced, a company which is neither a listed company nor a subsidiary of the listed company need not approach Central Government for permission for managerial remuneration subject to fulfillment of certain conditions. Similarly, the listed companies and its subsidiaries have also been exempted from the Central Government approval subject to fulfillment of certain conditions as stipulated in the amended Schedule XIII.
The Companies Bill, 2011 which has substantially liberalized the Managerial Remuneration does not envisage approval of Central Government in such cases.
Clarifications required from MCA
It would be in the interest of fairness that reimbursement of service tax should be kept outside the purview of ‘Managerial Remuneration’.
It would also be in the interest of the NEDs as well as the corporates if MCA issues a circular clarifying that the payment of Service Tax by the company to the Director in respect of sitting fees and/or commission would not tantamount to remuneration / increase in remuneration of the Director.
Clarifications required from MOF
CBEC vide its circular No. 115/09/2009 dated 31st July 2009 had clarified that the service tax is not payable on fees and commission payable to the Non Executive Directors on the Board of a company as they do not provide taxable service. The directors have fiduciary duties towards the shareholders and remunerations paid to Directors of companies would not be liable to service tax.. Even today, there is no change in the role of NEDs and the logic on which the CBEC had issued the said circular still holds good.
It would be in the interest of the NEDs as well as the corporates if MOF confirms that the clarification issued by CBEC vide Circular No. 115/09/2009 dated 31st July 2009 equally applies to fees and commission payable / reimbursement of expenses to Non-Executive directors and as such is not a taxable service under the newly inserted Section 66B of the Finance Act 2012.
If for some reason it is considered taxable under Section 66B, then it is requested to apply ‘reverse charge’ principle under which the company on whose Board they are appointed may be made liable to pay service tax on such payments.By: Narayan Shankar, Sr. VP & Company Secretary, M&M
The author would like to thank Mohan Raghavan, VP (Excise), M&M for his inputs.
Disclaimer: The views expressed above are the individual views of the authors. These views are not of the organisations they belong to and the organisation need not necessarily subscribe to their views.
In addition to the above –
|S. No.||Description of service||% of service tax payable by person providing service||% of service tax payable by person receiving service|
|1)||Services provided or agreed to be provided by a director of a company to the said company||Nil||100%|
|2)||Security services provided or agreed to be provided by an- Individual, Hindu Undivided Family, Partnership firm, whether registered or not, Association of persons||25%||75%|
Accounting Code for payment of service tax under the Negative List approach to taxation of services, with effect from the first day of July 2012 – regarding.
Name of Services
All Taxable Services