25 Service Tax N Vat

SERVICE TAX & VAT FOR CA PCC/IPCC
Q.NO.1) WHAT IS THE NEED OF INTRODUCTION OF SERVICE TAX ? Need for Taxation of Services : It is the prime responsibility of the Government to fulfill the increasing development needs of the country and its people, by way of public expenditure. The Governments primary sources of revenue are Direct and Indirect taxes. While Direct taxes are imposed on persons Income directly, Indirect Taxes are levied on Goods and Services. Central Excise Duty on the goods manufactured and produced in India and Customs Duties on imported goods constitute the two major sources of indirect taxes in India. The revenue receipts from customs and excise duties have been declining due to WTO commitments and rationalization of commodity duties. On the other hand, Service sector has been growing phenomenally all over the world. Services are so widespread and encompass almost all activities like management, banking, insurance, travel, other professional services like CA,CS, Lawyer etc. Contribution made by service sector has also been increasing, thereby pushing back the traditional contributors like agriculture and manufacturing sector. Exclusion of service sector from indirect taxation leads not only to the loss of considerable potential revenue, but also creates distortion in allocation of resources. In 2002, Service sector accounted for 49.2% of GDP while agriculture accounted for 25% and industry 25.8% of GDP of India. Objectives of Introducing Service Tax are, To introduce value added tax (VAT) system to eliminate cascading and cost inflation effect in Indirect taxation. To widen the taxation base so as to make possible a reduction in the general level of rates of commodity taxes. To merge tax on goods & services for eliminating multiple levels and for bringing about single levels called Goods & Service tax (GST) through out country.
Q.NO.2) EVALUATION OF SERVICE TAX IN INDIA ? Service Tax in India : The levy of Service tax can be traced back to recommendations made in early 1990s by Tax reforms committee headed by Professor Dr. Raja J. Chelliah. The committee recommended imposition of tax on select services. Based on these recommendations, Dr.Manmohan Singh, the then Union Finance Minister, in his Budget Speech for the year 1994-95 introduced the new concept of Service Tax and stated as under: There is no sound reason for exempting Services from taxation, where goods are taxed and many countries treat goods and services alike for tax purposes. I, therefore, propose to make a modest effort in this direction by imposing a Tax on Services of Telephone facility, Non Life insurance, and Stock Brokers. Therefore, the Service tax was levied under Chapter V of the Finance Act, 1994. It was introduced for the first time on 3 services with a nominal rate of 5% thereafter in 2003 rate was increased to 8%, in 2004 to 10% and to 12% in the year 2006. However in 2009 the rate is again reduced to 10%. Subsequent Finance Acts have added more services within the ambit of Service Tax. As present there are 106 services in the net of Service Tax. The Service tax collections have grown manifolds since its inception i.e from Rs.410 crores in 1994-95 to Rs.14196 crores in 2004-05. Experts Professional Academy CA. Gopal R Rathis Initiative......... Page 1

There is substantial growth in number of assesses also i.e from 3943 in year 1994-95 to 774988 in the year 2004-05.
Q.NO.3) EXPLAIN BRIEFLY THE APPROACHES OF LEVY OF SERVICE TAX? Selective or comprehensive coverage of service tax: The levy of a service tax can be based on either of the following 2 approaches:
1.
Comprehensive coverage/approach: In comprehensive approach all services are taxable and a negative list is given in case some services which are to be exempted. Such a comprehensive approach is operational in many developed nations. Selective coverage/approach: In the case of selective approach, only selective services are subject to Service tax. In this case, the legislator attempts to specify and list the services that would be taxable and the scope of coverage of each service. There is no residuary category for taxing all services. India has adopted selective approach to taxation of Services where only those services which are specified are made taxable and others are not taxable at all.
2.
Q.NO. 4) BRIEFLY EXPLAIN THE NATURE OF SERVICE TAX? Nature of Service Tax: Service tax is a tax on Services. Service tax is not a tax on profession / trade but is a tax on the service provided in exercise of the profession/ trade. It is leviable only if there is provision of service. While Profession Tax is levied on a right of a person to carry on a profession even though Service is not rendered, Service tax is leviable only if taxable service is provided. What is Service ? Service means a useful result/product of labour, which is not a tangible commodity. i.e. which cannot be seen through eyes. Thus, service is a value addition that can be perceived but cannot be seen.
Q.NO. 5) WHAT IS THE CONSTITUTIONAL BACK GROUND OF SERVICE TAX ? Constitutional Background: According to Article 265 of the constitution India, no tax of any nature can be levied or collected by Central or State Governments expect by the Authority of Law. According to Article 246, law can be enacted by Parliament or the State Legislature, if such power is given by the Constitution of India. List I Union list Parliament has the exclusive right to make in respect of that entry. List II State list State legislature has exclusive power to make laws for such state or any part thereof with respect to such entry. List III Concurrent list The parliament or the legislature of a state has power to make laws with respect to any matter enumerated in List III. There are various matters enumerated in each list. Each matter in the list is known as an entry. Entry 97 of the Union list is the residuary entry and empowers the Central Government to levy tax on any matters not enumerated in List II (State List) or List III (Concurrent List). In 1994 the Service Tax was levied by the Central Government under the powers granted under the said Entry 97 of List I. Experts Professional Academy CA. Gopal R Rathis initiative.
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Entry 92C has been inserted to the 1st List in the VIIth Schedule (so as to make the enactment a subject matter of Union List). Thus it is expected that separate Service tax legislation will be enacted which will also pave the way for inclusion of services within the purview of VAT. In fact a draft Service Tax Act has already been prepared for consideration by the parliament but the Government is now planning to move to Goods and Service Tax (GST Act). Although the Government has amended the Constitution and inserted entry No.92C the List 1 of Schedule VII but No Separate Act has been passed yet and service tax is still being governed by entry 97 i.e. residuary entry.
Q.NO.6) WHAT ARE THE STATUTES GOVERNING SERVICE TAX? An understanding of the service tax law requires the study of the following: Service tax was introduced in 1994 but there is no independent statute on Service Tax yet. However following sources provide statutory provisions relating to Service tax : 1. Finance Act, 1994 :The provisions relating to Service Tax are contained in Chapter V of Finance Act, 1994. In the year 2003 chapter VA was also introduced to contain some provisions relating to Service Tax. 2. Rules on Service Tax. Central Government is empowered to make rules for carrying out the provisions relating to Service Tax. Rules should be read with statutory provisions contained in the Act. Rules are made for carrying out the provisions of the Act. Rules can never override the Act and can not conflict with the same. 3. Notifications on Service Tax Central government is empowered to issue notifications to exempt any service from service tax and to make rules to implement service tax provisions. 4. Circulars and clarifications issued by Central Board of Excise and Customs (CBEC). 5. Trade Notice issued by respective Jurisdictional Commissionerate. 6. Definitions given under other statutes, Judicial decisions of Supreme court, High Court.
Q.NO.7) EXPLAIN ADMINISTRATION OF SERVICE TAX ? The Department of Revenue functioning under Ministry of Finance exercises control in respect of matters relating to all the Direct Taxes and Indirect taxes through the two statutory borads namely, Central Board of Direct Taxes (CBDT) and Central Board of Excise and Customs (CBEC). Matters relating to the levy and collection of all the direct taxes (income tax, wealth tax etc.) are looked after by CBDT, whereas those relating to levy and collection of indirect taxes (customs duties, central excise duties etc.) fall within the purview of CBEC. The Board administers service tax matters though service tax zones and each zone is headed by a Chief commissioner of Central Excise.
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Ministry of Finance (Central Government)
Department of Revenue
Central Board of Excise and Customs (CBEC) (Monitoring Excise, Customs & Service Tax matters)
Central Board of Direct Taxes (CBDT) (Monitoring Income Tax, Wealth Tax matters)
Q.NO 8) WHAT IS THE ROLE OF CHARTERED ACCOUNTANT ? Service tax is an indirect tax and being a new legislation, there a great scope for professionals like Chartered Accountants, Company Secretaries and others. Unlike income tax only few professionals are practicing in the field of indirect tax. A CA can render numerous services to his clients or the employer. The nature of services that he can render are:1)Consultancy / Advisory Service : A CA can be an advisor who can interpret the law, who can understand the law and advice on applicability of service tax as since a selective approach is adopted to collect tax by the Government it is necessary to know which service tax is taxed and not taxed. 2)Assistance in procedural compliance : A CA can assist in registration, payment of tax, filing of returns etc. A CA can does ensure procedural compliance of the law. 3)Representational Service : A CA is allowed to represent the assessee before the excise & service tax authorities. A CA with experience & expertise can represent before Commissioner Appeals & Tribunal successfully. 4)Certification and Audit : In future, Department may require CAs to certify Service Tax returns and Financial Statements similar to Tax Audit under section 44AB of Income Tax Act, VAT Audit under Various State VAT Laws. Service tax is a new tax imposed in 1994. A CA can assist in audit of the books of accounts of the assessee with special reference to service tax and can ensure that the assessee has followed all the provisions of the act and the rules. A CA with continuous reading skills can keep pace with latest developments in service tax law like notifications, circulars, etc., which will add value to his clients or the employer. Q.NO 9) EXPLAIN AS TO HOW AND WHEN THE AMENDMENTS MADE IN FINANCE BILL, IN RESPECT OF SERVICE TAX MATTER COME INTO FORCE ?
Applicability of Service Tax Law :The law relating to service tax extends to whole of India except the State of Jammu and Kashmir. i.e. Services provided in the state of Jammu & Kashmir are not liable to Service Tax but if a person from the state of Jammu & Kashmir provides taxable service outside its state to any part of India, Services so provided will be liable to Service Tax. Experts Professional Academy CA. Gopal R Rathis initiative.
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Amendments in the Finance Bill : Amendments made in the Finance Bill in respect of Service tax matters become effective from the date when the relevant Finance Bill gets the assent of the President and it becomes Act. Further, new services which are introduced shall become taxable when these services are notified in the official gazette of India or from the date mentioned in such Notification. Service Tax is applicable to taxable services provided on or after the commencement of Chapter V of the Finance Act. 1994.
Q.NO.10) EXPLAIN THE FEATURES OF SERVICE TAX ? Salient features of levy of service tax : 1. Scope: It is leviable on taxable services 'provided' or 'to be provided' by a service provider. The services 'to be provided' in future are taxed only if payment in its respect is received in advance. Services provided or to be provided must be the one which is covered in section 65(105) of Finance Act, 1994. 2. Rate : It is leviable @ 10% of the value of taxable services. Education Cess @ 2% and Secondary and Higher Education Cess @ 1 % are chargeable on the amount of service tax, thus, making the Effective rate of service tax at 10.3% of the value of taxable service. 3. Taxable services : Service tax is leviable only on the taxable services. Taxable services mean the services mentioned under section 65(105) of the Finance Act, 1994. 4. Value : For the levy of the service tax, the value shall be computed in accordance with section 67 of Finance Act, 1994 read with Service Tax (Determination of Value) Rules, 2006. 5. Free services not taxable : No service tax is leviable upon the services provided free of cost. 6. Payment of service tax : The person providing the service (i.e. the service provider) has to pay service tax in such manner and within such period as is prescribed in the Service Tax Rules, 1994. The service tax is to be paid only on the receipt of payment towards the value of taxable services. 7. CENVAT credit : The credit of service tax and excise duty across goods and services is allowable in accordance with the CENVAT Credit Rules, 2004. Accordingly, output service provider (i.e. provider of any taxable service) can avail cenvat credit of Service tax paid on any input service consumed for rendering any output service. Excise duty paid on any inputs and capital goods used for rendering output service. CENVAT credit so availed can be utilized for payment of service tax on taxable output service. 8. Services provided by an unincorporated association/body to its members also taxable [Explanation to Sec. 65] : 'Taxable service' includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration. Hence, the services (falling under any category of taxable service) provided or to be provided by any unincorporated association/body to member thereof shall be liable to service tax. This provision is an exception to the 'principle of mutuality'.
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9. Performance of statutory activities/duties, not 'service': An activity performed by a sovereign /public authority under provisions of law does not constitute provision of taxable service to a person and, therefore, no service tax is leviable on such entities. 10. Import/Export of services: While import of services is chargeable to tax u/s 66A, the export of services has been made exempt from tax. Import/export provisions are discussed separately. 11. The Department of Revenue of the Ministry of Finance exercises control in respect of matters relating to all the direct and indirect taxes through two statutory Boards, namely,the Central Board of Direct Taxes (CBDT) and the Central Board of Excise and Customs (CBEC). The responsibility of administration and collection of service tax has also been vested upon the CBEC. Q.NO.11) SUMMARIZE THE EXEMPTION AVAILABLE TO SERVICE TAX ASSESSEES? Service Tax Exemptions: 1. General Exemption from Service Tax for certain assessee:
a) Service Provider
Services provided by the following are exempt: Reserve Bank of India (RBI) Small service Provider (SSP) (upto a turnover of Rs.10 lakhs) Entrepreneur in Technology Business Incubator (TBI) Entrepreneur In Science and Technology Entrepreneurship park (STEP)
b) Service Receiver
Service Provided to the following are exempt: Reserve bank of India(RBI) Developers of Special Economic Zone (SEZ) Unit in SEZ United nations, International organizations, Foreign Diplomatic missions 2. SMALL SERVICE PROVIDER EXEMPTION (SSP)
a) Exemption granted through notification No.7/2007 ST dt. 01.03.07. b) Exemption is upto a turnover (money received) of Rs.10,00,000 in a financial year.
i.e. To determine whether assessee is eligible to claim SSP exemption in current year, what is relevant is aggregate value of taxable services provided in preceding year shall be less than Rs.10 lakhs.
c) On crossing money received towards taxable service in excess of Rs.10,00,000/- tax is payable
at the usual rate and CENVAT credit can also be availed.

d) The service Provider shall opt for the exemption. e) Option is irreversible till the end of that financial year. f)
Registration is necessary if the turnover (receipt of money towards value of taxable service) exceeds Rs.9,00,000.
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Eg. If CA.Gopal Rathi opts to claim SSP benefit during the Financial year 2009-10, he has to satisfy the criterion of Rs.10,00,000, during the Financial Year 2008 09.
g) Exemption is available in the current year, if in the previous year, the aggregate value of
taxable services provided does not exceed Rs.10,00,000/Exemption can be claimed upto aggregate money received towards value of taxable services during the current year upto Rs.10,00,000/-. However the above exemption shall not 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 section 68(2) of the said Finance Act read with Service Tax Rules, 1994 i.e. where service tax is payable by the service recipient instead of service provider. 3. Service tax not leviable on fee collected by public authorities while performing statutory functions/duties under the provisions of a law :It has been clarified that service tax shall not be leviable on fee collected by public authorities while performing statutory functions/duties under the provisions of a law. However, if such authority performs a service, which is not in the nature of statutory activity and the same is undertaken for a consideration not in the nature of statutory fee/levy, then in such cases, service tax would be leviable, if the activity undertaken falls within the ambit of taxable services. e.g Regional Transport Officer (RTO) issues license to the vehicles for that Fee as prescribed is charged and the same is ultimately deposited into the Government Treasury. Such activity is purely in public interest and it is undertaken as mandatory and statutory function. These are not in the nature of service to any particular individual for any consideration. Therefore it is not a taxable service and no service tax is leviable on such activity.
4. Exemption to services provided by a person located outside India in relation to booking of
accommodation for a customer located outside India in a hotel in India :The taxable services provided by a person, having his place of business, fixed establishment, permanent address or usual place of residence, in a country other than India, and which is received by a hotel located in India, in relation to booking of an accommodation in the said hotel, for a customer, who has his place of business, fixed establishment, permanent address or usual place of residence, in a country other than India are exempt from whole of the service tax leviable thereon. Hotel has been defined to mean a place that provides boarding and lodging facilities to public on commercial basis. Q.NO.12) EXPLAIN BRIEFLY THE INCIDENCE FOR LEVY AND COLLECTION OF SERVICE TAX AND EFFECTIVE DATE OF TAXATION ? Taxability: The taxability otherwise of a service with reference to the effective date for levy is as under
1.
Effective date = Date on which a service is made taxable for the first time (OR) date from which a service is included in the taxable service. On the date on which service is provided, Service must be taxable irrespective of date of receipt of consideration.
2.
Service will not be taxable even if the bills are raised or payment received after the effective date however service is provided before the effective date. Page 7

3.
Service will be taxable even if the advance was received before the effective date of levy.
In short, No service tax is payable for the part or whole of the value of services, which is attributable to services provided during the period when such services were not taxable. The time of receipt of payment towards the value of services will not be relevant for this purpose. For instance, no service tax shall be payable in case of newly introduced legal consultancy service which is rendered prior to 01.09.2009. (Legal consultancy service has become effective from 01.09.2009).
Q.NO.13) EXPLAIN THE VALUATION OF TAXABLE SERVICE FOR CHARGING OF SERVICE TAX ?
Valuation of taxable services for charging service tax: As per section 67, Service tax is to be charged @ 10% of the value of taxable service provided or to be provided. Hence, we have to determine the value of such taxable services so as to pay service tax. If the consideration consisting of Case 1) Where the provision of service is for a consideration in money, value of such service shall be the gross amount charged by the service provider for such service provided or to be provided by him. E.g If a CA charges Rs.50,000 as audit fee from its client, the value of the taxable service rendered by the chartered accountant will be Rs.50,000 and service tax shall be payable on this amount. Case 2) If the consideration for a taxable service is not wholly or partly in terms of money, then the value of such service shall be such amount in money, with the addition of service tax charged, is equivalent to the consideration. In other words, where the service rendered is for a consideration not wholly or partly consisting of money, the value of the taxable service is equivalent to the total value of the consideration. However, the total of such money and non-money value of the consideration has to be treated as inclusive the service tax payable thereon. E.g Mr. X, a company secretary provides taxable professional services to one of its clients. In lieu of rendering such services, Mr.X charges Rs.10,000 in lumpsum from its client and also asks its client to give him a Law book worth Rs.1,030. The total consideration in this case will be Rs.11,030 and the value of the taxable service shall be Rs.10,000 (11030 * 100/110.30) and Rs.1,030 shall be the service tax payable. Case 3) Consideration includes any amount that is payable for the taxable services provided or to be provided. Thus, an advance received for providing any taxable service shall also form part of the consideration. E.g Mr. A, an architect receives an advance of Rs.1,000 for providing architectural services. He gets Rs.6,000 on completion of provision of such services. The consideration in this case would be Rs.7000, i.e. it would include the amount that is payable for the taxable service to be provided and taxable service provided. Case 4) Where the gross amount charged by a service provider, for the service provided or to be provided is inclusive of service tax payable, the value of such taxable service shall be such amount as, with the addition of tax payable, is equal to the gross amount charged. Example : Mr. B, a management consultant charges a lump sum amount of Rs.22,060 as professional fee for rendering taxable services (i.e., he does not charge service tax separately). The value of taxable service in this case would not be Rs.22,060 but Rs.20,000 i.e. (22060 *100/110.30) and Rs.1,030 shall be the service tax payable. Experts Professional Academy CA. Gopal R Rathis initiative.
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1. 2.
Consideration also includes any amount which is payable for the taxable services provided or to be provided. Money includes any currency, cheque, promissory note, letter of credit, draft, pay order, travelers cheque, money order, postal remittance and other similar instruments but does not include currency that held for its numistatic value. Gross amount charged include payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment. Valuation where billing is inclusive of service tax: The assessee is to calculate service tax based on reverse working.
3. 4.
E.g.: If the billing is done inclusive of service tax (Consider billing Rs.100 (inclusive) and realization Rs.100 (inclusive), the assessee can claim that the bill amount should be bifurcated into value and service tax components. Accordingly the service tax payable shall be worked out in a reverse manner i.e. (100 10.3/110.3) = Rs.9.34.
Q.NO.14) WHAT ARE THE EXCLUSIONS IN THE VALUATION OF TAXABLE SERVICES ?
Sale value of goods to be excluded: Sale value of goods is to be excluded for payment of tax while value of materials consumed while rendering of service can not be excluded. However, There should be documentary proof specifically indicating the value of said goods and materials. In certain cases, supply of goods is integral to the rendering of services. The sale consideration for such supply of goods cannot be dissected from the service element and the same shall be exposed to liability for service tax. Similarly, it has been clarified that in case of commercial training and coaching institutes, deduction will be not be available for any study material or written text provided by the institute. Reimbursement of expenses to be excluded in certain cases: The reimbursement claim can be permitted only in cases where the service provider acts as a pure agent of the client when he procures the goods or services or incurs the expenses on behalf of the client.
Q.NO.15) WHO IS A PURE AGENT ?
Pure agent is a person who has an agreement with service receiver to act as his pure agent to incur expenditure for providing service. The salient features of a pure agent are:
1. 2. 3.
He has no title over the goods/services provided to the client. He cannot use them for his purpose. He gets from the service receiver only the actual cost of such purchases.
E.g.: Contractor procures cement, steel etc. on behalf of the flat promoter, passes on the actual cost to the recipient, possesses no title over the materials and leaves the balance materials at the site. In such cases, Assessable Value shall be exclusive of cost of materials. Experts Professional Academy CA. Gopal R Rathis Initiative.........
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Q.NO.16) EXPLAIN TAXATION OF FREE SERVICES ? No service tax on free services: No service tax is leviable if free services are provided by the service provider. However, if the authorized dealer of motor vehicle provides to customers free servicing of motor vehicles without charging any amount of service charge from the customers and vehicle manufacturer reimburses the amount to authorized service station on account of such free services, the authorized service station shall have to pay service tax on the amount received from the vehicle manufacturer for the purpose of servicing the vehicle.
Q.NO.17) EXPLAIN PROVISIONS REGARDING PAYMENT OF SERVICE TAX ? 1. Who pays Service Tax- Service Provider or Service Receiver? Sec.68 imposes the responsibility on a person for paying service tax. As provided in this section, service tax is payable by the Service Provider. Exceptions to this rule: In certain cases, as provided in Service Tax Rule 2(1)(d), the service tax shall be payable by the service receiver or the specified person and not by the service provider. The following table summarizes such services and the person liable to pay service tax: S.No 1. Nature of the Service Insurance auxiliary services Service provided to a person in India from outside India. (i.e Import of Service) Goods transport agency for transport of goods by road. Note: If the service receiver is individual, HUF etc., tax is payable by the service provider (GTA) Service Provider Insurance agent Service Receiver Insurance company Person liable to pay tax Insurance company Person in India i.e Importer of Service Person making the payment of freight (i.e. consignor or consignee)
2.
Person outside India

a. b. c. d.
Person in India i.e Importer of Service Any registered factory Any company Any corporation Any registered Society / corporative society e. Any registered dealer of excisable goods f. any registered firm or body corporate Mutual fund company or Asset management company
3.
Goods transport agency
4.
Business Auxiliary Service of Distribution of mutual fund
Mutual fund distributor / Agent Sports Body providing such Service
Mutual fund company or Asset management company Any Body corporate / Firm in India
Sponsorship Service
Any Body corporate / Firm in India
Payment of Service Tax Only on Receipt :-
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It is to be noted that though the service provider charges service tax in his bill raised on his client as and when the service is provided, the service tax is payable to the Government only when the value of taxable services is received. Thus, if a CA raises a bill for auditing services say, on 15th December, 2009 for Rs.1,10,300/- (including service tax of Rs.10,300/-) and the client pays his bill only in February 2010, the liability to pay service tax to the Government would arise only in February 2010. Liability to pay Service Tax even if not collected from the client : This liability is not contingent upon the service provider realizing or charging the service tax at the prevailing rate. The statutory liability does not get extinguished if the service provider fails to realize or charge the service tax from the service receiver. However, sometimes it may happen that the assessee is not able to charge service tax because of the nature of service or he fails to recover the service tax from the client/customer as he is not aware that his services are taxable. Hence, in these cases the amount recovered from the client in lieu of having rendered the service will be taken to be inclusive of service tax and accordingly tax payable will be calculated by making back calculations. Liability to pay Service Tax on Advance Received : Service tax is payable as soon as the advance is received as taxable service includes service to be provided . For example, a security agency takes a contract to provide security services to a client for the month of October for a consideration of Rs.50,000. It receives an advance of Rs.25,000 from the client in the month of September. In this case service tax shall be payable by the security agency on the amount of Rs.25,000 received as an advance even though the service has not been provided at that time. When advance payment is received for a service which is non-taxable at the time of receipt of payment but becomes taxable during the course of provision of service, such payments would have to be apportioned appropriately between the two periods and that part of service provided on or after the service becomes taxable service, is only liable for service tax. When payment is received in advance for services to be provided but subsequently the services are not actually provided, then in such cases service tax paid is liable to be refunded. Q.NO 18) WHAT IS LIABILITY OF SERVICE PROVIDER IN CASE OF EXCESS COLLECTION OF TAX? Excess collection of tax Sec. 73A & 73B 1. The service provider shall not collect tax in excess of what he pays to the Government. 2. The case when his collection is more than his payment, he shall immediately deposit the excess with Central Government or where any person who has collected any amount which he is not required to collect from any person, such person should also immediately pay the amount so collected to the credit of Central Government. 3. Any delay in this regard attracts payment of interest @ 13% p.a.
Q.NO 19) WHAT ARE THE DUE DATES FOR PAYMENT OF SERVICE TAX? 1. Due dates for payment of Service tax. Service tax had to be paid on a monthly / quarterly basis depending upon the status of the service provider.
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Service provider Monthly/Quarterly due dates Due date for the month of March and Quarter ending March 5th of the month following the 31st March Quarter ended June, September, December 5th of the following Month 31st March 31st March
Individuals and Firms (Quarterly payment) Others (Monthly Payment) e-payment
6th of the following Month
2. Assessee who has paid Service tax of Rs.50 lakhs and more in the preceding year or has already paid service tax of Rs.50 lakhs and more in the current financial year should pay tax electronically through Internet banking. 3. If the last date for paying tax is a public holiday, tax may be paid on the next working day. 4. Tax is paid by debit to CENVAT account (if credit available) or through TR-6 challan in quadruplicate (4 copies). 5. The date of presentation of cheque to the designated bank shall be deemed to be the date of payment of service tax (But the cheque should not be dishonoured). 6. If tax has been paid to Government for service not provided i.e. on advance received, then the excess payment made to Government may be adjusted in future dues, provided, the excess is refunded to customer. 7. Service Tax collected by the Service provider/ Service receiver as the case may be, should be remitted within the due date to the credit of the Central Government. 8. Payment by cheque The date of payment is the date on which the cheque is tendered to the designated bank provided the cheque is not dishonoured in the course of clearing. 9. Rounding off of tax: The payment of service tax should be round of in multiple of Rupees. 10. Advance payment of Service Tax : - The assessee may on his own make advance payment of Service Tax and adjust the amount paid against service tax which he is liable to pay for subsequent period. However he should intimate the Jurisdictional Superintendent of Central Excise within 15 days of such payment and also indicate the details of advance payment and its adjustment in subsequent returns to be filed u/s 70. 11. A multiple service provider (a service provider rendering more than one taxable service) can use single TR-6 challan for payment of service tax on different services.
Q.NO.20) EXPLAIN THE PENALTY CONSEQUENCES FOR DELAYED PAYMENT AND NON PAYMENT OF SERVICE TAX? 1. Interest on delay in payment of Service tax Section 75
a) Delay in payment of tax attracts interest @ 13% p.a. b) The interest shall be payable for the period by which payment of tax is delayed. c)
The said period commences from the day following the due date and ends on the day of payment.
Eg: Mr.Gopal R. Rathi, Chartered Accountant, liable to pay service tax amounting to Rs.50,000/on 05.01.2010. But due to financial crunch, he has made the payment only on 31.3.2010. Whether he is liable to pay any interest on service tax, if so, what is amount of interest payable? Experts Professional Academy CA. Gopal R Rathis initiative.
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Ans: Mr. Gopal R. Rathi is liable to pay interest on delay remittance of service tax Sec.75. Particulars Amount Payable Due Date for payment Actual Date of Payment Period for calculation of interest Amount of Interest Amount Rs.50,000/05.01.2010 31.03.2010 06.01.2010 to 31.03.2010 (85 days) Rs.5,000 13% x 85/365 = Rs.151
2. Penalties Secs. 76, 77 & 78 S.No. Nature of Violation 1. Failure to pay Service tax (Sec.76)
Penalty Not less than Rs.200 per day of default or 2% per month of tax whichever is higher. In no case penalty can exceed the amount of tax. Rs.5,000 or Rs.200 per day whichever is higher from the first day after due date till the day of actual compliance. Maximum Rs.5,000/Maximum Rs.5,000/Maximum Rs.5,000/-
2. 3. 4. 5.
Failure of registration Failure to maintain books of accounts. Fails to pay through e-payment Where no penalty is mentioned
Q.NO 21) BRIEFLY EXPLAIN THE PROCEDURE FOR ADJUSTMENT OF EXCESS SERVICE TAX PAID? Adjustment of Excess Service Tax paid: There is no provision for an automatic adjustment of such excess service tax except in a situation visualized under Where an assessee has paid to the credit of central government service tax in respect of
1. 2.
Taxable service which not so provided by him either wholly or partially for any reason, and Taxable service the assessee has refunded the value of taxable services including service tax Thereon to the person from whom it was received.
Then the assessee may adjust the excess tax so paid against the service tax liability for the subsequent period. In case where an assessee has opted for centralized registration and has paid any service tax amount in excess of liability for a period due to non receipt of details of receipts from other premises or offices, the assessee may adjust such excess amount against his service tax liability for the subsequent period. Where the excess payment is due to any other reason the assessee has to applied for a refund U/s 11B of the central excess Act.
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Q.NO. 22) ARE SUB CONTRACTORS LIABLE FOR SERVICE TAX ? ANS : A taxable service provider may outsource a part of the work by engaging another service provider, generally known as sub-contractor. Service tax is paid by the service provider for the total work. A question arises as to whether service tax is liable to be paid by the service provider known as sub-contractor who undertakes only part of the whole work. A sub-contractor is essentially a taxable service provider. The fact that services provided by such subcontractors are used by the main service provider for completion of his work does not in any way alter the fact of provision of taxable service by the sub-contractor. Services provided by subcontractors are in the nature of input services (Input services are services which are used by a service provider for providing the output service). Service tax is, therefore, leviable on any taxable services provided, whether or not the services are provided by a person in his capacity as a sub-contractor and whether or not such services are used as input services. The fact that a given taxable service is intended for use as an input service by another service provider does not alter the taxability of the service provided. Q.NO 23) WHAT IS A PROCEDURE FOR REGISTRATION FOR SERVICE TAX ? Registration: Every Person who is liable to pay Service Tax is required to register with Central Excise Department within time limit as may be prescribed. It means every service provider who is providing taxable service is required to get himself registered with Central Excise Department. Application for Registration to be made in Form No. ST-1. Central government may specify such other person or class of persons, who shall make an application for registration within such time and manner as may be prescribed. 1. Persons notified by the Central Government Special Category Persons:
a) Input Service Distributor: (i) Office: Input Service distributor refers to an office of the
Manufacturer or Producer of final products or Provider of output service

(ii) Invoice: Which receives tax paid invoices (under Rule 4A of Service Tax Rules, 1994)
towards purchases of input services and issues invoice, bill or challan.

(iii) Purpose: For distributing the credit of service tax paid on the said services to such
manufacturer or producer or provider.

b) Small service provider whose aggregate value of Taxable Services exceeds Rs.9 Lakhs in a
financial year.
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Time limit for registration : Situation Time limit for registration
When Service Tax is imposed on a new service, Within 30 days from the date of levy of Service and the service provider already has been Tax providing that service In case a service provider commences the Within 30 days from business of providing the service which has commencement of business already been made taxable the date of
In case a service provider is already providing a No need for fresh registration, amendment for the same in registration certificate i.e. ST-2 taxable service and a) Starts providing another taxable service, should be applied within 30 days. or b) Provides a service which has now become taxable. Normally, applicant will be the service provider. However, in exceptional cases the service receiver with tax liability shall also register himself e.g. Importer of taxable Service is required to get register with CBEC. Registration certificate (RC) is issued in Form ST-2 within seven days. For all the services provided by a person a single RC will do.
Q.NO.24) WHAT ARE THE DOCUMENTS TO BE ENCLOSED ON REGISTRATION? Documents to be attached An application for registration has to be accompanied along with the following documents:
1. 2. 3. 4.
Application in Form ST-1 in triplicate duly signed Attested Copy of the PAN Card Proof of Address of the premises which is required to be registered Copy of the Document governing the constitution of the organization (Partnership deed in case of a partnership firm, Memorandum of Association in case of a company, Trust Deed in case of a trusts or associations) Authority Letters in favour of the person who is to collect the registration certificate on the Letter head of the organization applying for registration. Power of Attorney in case the documents are signed by an authorized representative
5.
6.
Q.NO.25) WHAT IS SERVICE TAX CODE NUMBER? Service Tax Code: The department has decided to introduce Service Tax Code based on PAN. The Service Tax Code is a digit alphanumeric code. First 10 digits will be 10 character PAN issued by Income Tax authorities. Next two characters will be ST. Last three will be numeric code 001, 002, 003 etc. For example, Service Tax code number may be AAACA 8821 G ST 001. Experts Professional Academy CA. Gopal R Rathis Initiative.........
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Q.NO.26) WHAT IS CENTRALISED REGISTRATION ? Where a person, liable to pay Service tax on a taxable service,1) Provides such service from more than one premises or office ; or 2) Receives such service in more than one premises or offices (applicable when service tax is payable by service recipient); AND Has centralized billing system or centralized accounting system in respect of such service, he may at his option, register such premise of office from where centralized billing system or centralized accounting system are located.
Q.NO.27) EXPLAIN THE CIRCUMSTANCE THAT CALL FOR MULTIPLE REGISTRATION. 1. Separate registration of multiple place of businessWhere an assessee provides a taxable service from more than one premises or offices and does not have centralized billing system or centralized accounting system, he shall make separate application for registration of each of such premise or office. 2. Multiple services: If an assessee provides more than one taxable services, he need not apply for separate registration for each such taxable service. Single application mentioning therein all the taxable services provided shall be sufficient. a. Commencement of services at the same time: The applicant in a single application may be made mentioning all the taxable services provided by him. b. Commencement of services at different points of time: The applicant has already registered for one service but subsequently becomes liable for another category of service, he should get his certificate endorsed for the category of service. 3. Changes in existing certification of Registration: a. Change in information provided in ST-1: Intimated in writing to the jurisdictional assistant commissioner within a period of 30 days of such change. b. Change of place: A new registration certificate should be applied for, and the previous registration certificate should be cancelled. c. Transfer of business: Where the assessee transfers his business to another person, the transferee should obtain a fresh certificate of registration. Q.NO.28)EXPLAIN CERTIFICATE? THE PROCEDURE FOR SURRENDER OF REGISTRATION OF
1. Surrender of Registration of certificate: a. Circumstances: Cessation of Services Change of Place Experts Professional Academy CA. Gopal R Rathis initiative.
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Transfer of Business b. Procedure for surrender of Certification of Registration: Assessee should surrender the service tax registration certificate (ST-2) Superintendent of central excise will cancel the registration certificate after insuring that the assessee has paid all service tax dues to the Government under the provisions of the Act. c. Non surrender of certificate: There is no statutory requirement for the assessee to make an application for surrender of certificate. However, the Assessee should furnish half yearly returns even if no service is provided.
Q.NO.29) EXPLAIN THE PROCEDURE FOR ISSUANCE OF BILL AND MAINTENANCE OF RECORDS ? Maintenance of Records STR 5
a. No separate form has been prescribed. b. Records may be computerized also. c. They should be preserved for a period of five years. d. They should be made available for inspection by departmental officers.
Procedure for issuance of bill:

a. Every person providing taxable service shall issue an invoice/bill/challan signed by such person
or a person authorized by him in respect of such taxable service provided or to be provided.

b. Time limit for issue of invoice/bill/challan: The invoice/bill challan shall be issued not later than
fourteen days from the date of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier. Where any payment towards the value of taxable service is not received and such taxable service is provided continuously for successive periods of time and the value of the such taxable service is determined or payable periodically, then, an invoice/bill/challan shall be issued by a person providing such taxable service, not later than fourteen days from the last day of the said period.
Q.NO.30) EXPLAIN THE PROCEDURE FOR ASSESSMENT AND RETURNS? Assessment and Returns Sec.70 and STR 7
1. 2.
The service provider shall himself assess and pay the tax. This process is known as Self Assessment. If he is not able to estimate the tax amount correctly, he may apply to the department for Provisional Assessment (PA). Provisional Assessment is a process through which the department arrives at the provisional tax liability on the services provided by the service provider without waiting for the complete assessment at the initial stage itself. However, the service provider has to provide an undertaking for bearing the final liability once the final assessment is completed. In case of provisional payment of service tax, the assessee has to file a statement giving details of the difference between the service tax deposited and the service tax liable to be paid for each month in a memorandum in Form ST-3A which should accompany the return in Form ST-3.
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3.
Return is to be filed half yearly in Form ST-3 (Form ST 3A for PA). The half yearly due dates are: For half year 1st April to 30th September Return to be filed on or before 25th October 25th April
1st October to 31st March

4. 5. 6. 7.
E-filing of returns is also permissible through the internet using computer. The website for filing e-returns is www.servicetaxefiling.nic.in If the due date is a public holiday then the return should be filed on the next working day. Revised returns may be filed within 90 days from the date of filing of original return. For delay in filing returns, late fee is payable as follows : Period of Delay Upto 15 days 16 days to 30 days More than 30 days Rs.500 Rs.1,000 Rs.1,000 plus Rs.100 per day (from the 31st day) till the date of filing returns (Maximum of Rs.2,000) Penalty to be paid
8.
Where the gross amount of service tax payable is nil, the Central Excise Officer may, on being satisfied that there is sufficient reason for not filling the return, reduce or waive the penalty (late fee). Nil return should also be filed within the prescribed time limit. in each of the columns of Form SR-3 have to be furnished separately for each of the taxable service rendered by him. Thus, instead of showing a lump sum figure for all the services together, service wise details should be provided in the return.
9.
10. Filing of single return is sufficient in case of multiple service provider. However necessary details
Q.NO 31) WHAT ARE THE CONTENTS OF RETURN ? Apart from the general details, like financial year, half year period (April-September or OctoberMarch), name of the assessee, registration number of the premises for which return is being filed, category of taxable services, the contents of the return inter alia, also include month-wise details of a) amount received towards taxable service b) amount received in advance towards taxable service to be provided c) amount billed for exempted services and services exported without payment of tax d) amount billed for services on which tax is to be paid e) service tax payable f) education cess payable g) TR-6 challan date and number Further, half yearly details of other payments like interest, arrears and excess amount paid and adjusted subsequently and details of amount payable but not paid as on the last day of the period for which the return is filed are also to be provided in the return.
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Q.NO.32) WHAT ARE THE DOCUMENTS TO BE ATTACHED ALONG WITH RETURN? Documents to be attached along with return The following documents that are to be attached along with ST-3
1. 2.
Copies of TR-6 challans, for payments made. Memorandum ST-3A, in case of provisional payment of tax giving full details of difference between the amount of provisional amount of tax deposited and the actual amount payable for each month. Form ST-3A is to be attached only when the assessee opts for provisional payment of service tax. In case of first return, details of accounts maintained in relation to Service tax should be furnished to superintendent of Central Excise, at the time of filing first half yearly return i.e., ST-3, a list of all accounts maintained by him in relation to service tax including memorandum received from his branch office.
3.
Q.NO.33) BRIEFLY EXPLAIN SERVICE TAX RETURN PREPARERS SCHEME? Service Tax Return preparers Scheme: 1. Definitions: a. Service Tax Return Preparer: It refers to an individual who has been authorized to act as a Service Tax Return Preparer under a scheme framed under this section. b. Specified Classes of persons: It refers to persons specified in the Scheme, who are required to furnish a return required to be field under section 70. 2. Power of Board: The CBEC is empowered to frame a scheme for furnishing return of income by any specified classes through a Service Tax Return Preparer. 3. Duty of Service Tax Return Preparer: Every Service Tax Return Preparer should assist the specified classes of persons to prepare and furnish the service tax return in the manner specified in the scheme. 4. Structure of the Scheme: The scheme framed by the Board may provide for the following a. Manner in which and the period for which the Service Tax Return Preparer shall be authorized, b. Educational and other qualifications to be possessed, and the training and other conditions required to be fulfilled, by a person to act as a Service Tax Return, Preparer, c. Code of Conduct for the Service Tax Return Preparer, d. Duties and Obligations of the Service Tax Return Preparer, e. Circumstances under which the authorization given to a Service Tax Return Preparer may be withdrawn, f. Any other matter which is required to be specified by the Scheme for the purposes of this section.
Q.NO.34) BRIEFLY EXPLAIN IMPORT OF SERVICES? Charge of service tax on service received from outside India (Section 66A) - Import Where any service specified in section 65(105) is provided or to be provided by a person who has: 1. established a business or has a fixed established in a country outside India, or 2. his permanent address or usual place of residence is India. Experts Professional Academy CA. Gopal R Rathis Initiative.........
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Such service is received by a person (i.e., recipient) who has his place of business, fixed establishment, permanent address or unusual place of residence in India. It will be treated as if recipient himself has provided such service in India and it will be chargeable to tax in his hands instead of the service provider. However, if the recipient of the service is an individual, such service shall not be taxable unless it has been received by him in any business or commerce. i.e. No service tax is payable on import of service for personal use of individual.
Q.NO.35) BRIEFLY EXPLAIN EXPORT OF SERVICES? Export: A service shall be considered as Export if following conditions are satisfied: 1. service should be performed from India and used outside India, 2. payment for such service should be received in Convertible Foreign Exchange.
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VAT - Concepts and General Principles Value Added Tax or VAT is a broad based tax levied at multiple stage with tax on inputs credited against taxes on output. VAT was first introduced in France in 1954, but it remained confined to handful number of countries till the 1980's. With this imposition, France became the first European country to implement VAT on an extensive scale. The development of VAT in other countries suggests that although it was not adopted by many countries until the sixties, over the years the tax has come to occupy an important place in the fiscal armory of nearly all industrialized countries and in a large number of Latin American, Asian and African countries. As many as 30 countries have switched over to VAT since 1980 and the total number of countries who have adopted VAT presently reached to more than 130. Thus, the augmentation of interest in VAT has been the most remarkable event in the evolution of commodity taxes in the present century. In addition, as of today, VAT is evenly distributed throughout the world, though it is particularly predominant in Europe and Latin America. VAT has replaced the general sales tax structure with the only difference in the manner of its levy. The power to levy tax on sales transactions in the form of VAT is drawn from entry 54 in List II of Seventh Schedule of the Constitution of India by the State Governments. Under VAT, every sale transaction taking place in the course of business is taxed enabling the Government to collect revenue on value addition at every stage. The cascading effect of VAT being collected at every stage on the cost of goods is reduced by providing set off of tax paid on the purchases. 1. Evolution of VAT in India India already had a system of tax collection wherein the tax was collected at one point from the transactions involving the sale of goods. The single point tax was collected either at the first stage or at the last stage. The system of collecting tax at first stage had the following disadvantages: (a) Since sales tax was levied and collected at the first stage (i.e., at the stage of the wholesale), the tax rate had to be higher. This encouraged tax evasion and sales tax became a tax on honesty, which means the honesty, more the tax liability. (b) In case somehow the goods escaped the tax at the first stage, the goods escaped tax net altogether since there was no way by which it could be caught at any subsequent stage. (c) There was ample scope for under-valuation of the value of the goods at first stage, since there was no tax payable at any subsequent stages, even if the goods were subsequently sold at much higher prices. In the system of collection of tax at the last stage also, several weaknesses were witnessed: (a) The tax evasion was maximum since the price level at the last point of sale increases, which encouraged evasion, even if the tax rates were low; (b) It was difficult to track the goods evading tax since there was no record of their earlier movements and after the last point sale, the goods reached in the hands of the consumers; (c) This also encouraged under-invoicing and involves generation of black money due to cash dealings at the last point of sale. Since VAT is collected at various stages, all the above disadvantages and weaknesses have been overcome, the cascading effect of taxes is eliminated. More transparent structure is made up and compliance are improved. India has been slow in adoption of VAT. In domestic trade taxes, it adopted excise duty at the central level and sales tax at the state level for this purpose. The Central Government attempted reforms in the central excise duty by introducing the Experts Professional Academy CA. Gopal R Rathis Initiative......... Page 21

principles of VAT in 1986 through the introduction of MODVAT. Over the period the rates have been rationalized, exemptions have been reduced and the coverage has been extended to almost all the commodities. MODVAT has now been converted into a central VAT, coined and called CENVAT. CENVAT is now also allowed on input services. The state governments had been indifferent in undertaking any reforms in their sales tax system, although it accounts for approximately 60% of the state's own tax revenue. The existing sales tax system of the states was confronted with many drawbacks and weaknesses. The Task Force known as Kelkar Committee observed that presently, "each State levies multiple taxes on the same item in different names or at different stages e.g. Entry Tax, Luxury Tax, etc." However, it opined that "it is necessary that State VAT should be the tax to unify all the State-level taxes i.e. Sales Tax, Purchase Tax, Turnover tax, Works Contract Tax, Entry Tax, Special Additional Tax, etc. should all be covered under State VAT. The efforts were initiated towards introduction of VAT since last many years. The Committees of States' Finance Ministers (in 1995 and 1998, respectively) and of the Chief Ministers (in 1999) have put forth recommendations to replace sales tax by VAT. This was ratified by the Conference of the Chief Ministers and Finance Ministers held on November 16, 1999 and introduction of State VAT in lieu of Sales Tax was finally scheduled to be made with effect from 1-4-2003. However, the schedule had to be revised in view of agitative traders' community. The Empowered Committee of State Finance Ministers agreed upon 1-6-2003 as the revised date of implementation of VAT and it was expected that most of the State and Union Territories will implement VAT from 1-6-2003, but it did not happen. Later, the Finance Minister deferred the implementation of VAT for some more time so that more conducive environment may be created and agitative opposition may be set to peace. Besides consensus of all the states over the model law and introduction of VAT on uniform basis was also necessary. On 30-4-2003 he announced that unless all States conform to model draft law and agreed VAT rates, introducing VAT on 1-6-2003 will not be possible. He stated that VAT should be implemented all over India. Patchwork will not serve the purpose. In this connection, the Empowered Committee of State Finance Ministers met regularly and brought out a White Paper on State level VAT on 17-1-2005. This White Paper on State-level Value Added Tax (VAT) was presented in three parts: Part 1: In this part, the justification of VAT and its background had been mentioned Part 2: The main design of VAT. While doing so, it recognized that this VAT is a State subject and therefore the States will have freedom for appropriate variations consistent with the basic design as agreed upon by the Empowered Committee. Part 3: Part 3 discussed the other related issues for effective implementation of VAT. Justification of VAT and Background In the existing sales tax structure, there are problems of double taxation of commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the existing structure, before a commodity is produced, puts are first taxed, and then after the commodity is produced with input tax load, output is taxed again. This causes an unfair double taxation with cascading effects. In the VAT, a set-off is given for input tax. In the prevailing sales tax structure, several States levying multiplicity of taxes, such as turnover tax, surcharge on sales tax, additional surcharge, etc. With introduction of VAT, these other taxes will be abolished. In addition, Central sales tax is also to be phased out. As a result, overall tax burden will be rationalized, and prices in general fall. Further, VAT will replace the existing system of inspection by a system of built-in selfassessment by the dealers and auditing. The tax structure will become simple. That will improve tax compliance and also augment revenue growth. Experts Professional Academy CA. Gopal R Rathis initiative. Page 22

The VAT will therefore help common people, traders, industrialists and also the Government. It is indeed a move towards more efficiency, equal competition and fairness in the taxation system. All States and Union Territories have gradually introduced VAT in India except the State of Uttrakhand. VAT has not been introduced in Jammu and Kashmir due to constitutional limitation. 2. What is VAT VAT is a tax, which is charged on the 'increase in value' of goods and services at each stage of production and circulation. It is also chargeable on the value of all imported goods. It is charged by registered VAT businesses/persons/taxpayers. VAT has replaced a number of other taxes and its introduction has not resulted in either increased prices to final consumers or reduced profitability of business. VAT is levied on the difference between the sale price of the goods produced or the services rendered, and the cost thereof __ that is, the difference between the output and the input. In other words It is nothing but multi-point Sales Tax. It is collected on value addition only at each stage. Tax paid by the dealer is deducted from the tax payable collected at every point of sale and the tax already paid. 3. How is VAT different from the Sales Tax? Sales Tax Under VAT 1. Tax levied at the stage of the 1. Tax levied and collected at every point of sale first sale or at the final stage 2. Successive sales (resale) of 2. Tax collected at every point of sale and the tax already paid by the dealer at the time of purchase goods on which tax is already of goods will be deducted from the amount of tax paid do not attract tax paid at the next sale 3. Dealers reselling tax paid goods 3. Dealers reselling tax-paid goods will have to do not collect any tax on resale collect VAT and file returns and pay VAT at every stage of sale (value addition) and file NIL returns 4. Computation of tax liability is 4. It is transparent and easier complex 5. Sales Tax is not levied at the 5. VAT dispenses with such forms and sets off all tax paid at the time of purchase from the amount of time of purchases against statutory forms but there is tax payable on sale misuse of such forms resulting in tax evasion. 6. Returns and challans are filed 6. The returns and the challans are filed together in a simple format after self-assessment done by the separately and the dealers have dealer himself to give numerous details 7. A large number of forms are 7. At the most a few forms are required required 8. Tax on goods only 8. Tax on goods and services both. 9. Assessment done by the 9. Self-assessments by dealers department 10. Penalty for defaulters/evaders 10. Penalties will be stricter not strict Experts Professional Academy CA. Gopal R Rathis Initiative......... Page 23

4. How to calculate VAT? VAT is calculated by deducting tax credit from tax collected during the payment period. Further, every time the VAT is charged, it is not an expense to the person who pays it, but just an advance to the government via the supplier. This is true for all except the final customer who cannot claim the VAT deduction. Actually, he is the only one who pays the full amount. 5. Eligible purchases for availing input tax credit The input tax credit is available only when the taxable goods are purchased for the following purposes (1) For sale/resale within the State; (2) For sale in the course of inter State trade or commerce; i.e. Goods are sold to any other State or Union Territory of India; (3) To be used as (i) Containers or packing materials; (ii) Raw materials; or (iii) Consumable stores, and the goods so manufactured by the use of the above raw-materials, packing materials are sold within the State or in the course of inter State trade commerce; (4) For being used in the execution of a works contact; (5) To be used as capital goods required for the purpose of manufacture of taxable goods; (6) To be used as (a) Raw materials; (b) Capital goods; (c) Consumable stores; and (d) Packing materials/containers and goods so manufactured by the use of above items are sold in the course of export out of the territory of India. 6. Coverage of Set-Off/Input Tax Credit (1) Instant credit of input tax This input tax credit will be given both to the manufacturers and traders for purchase of inputs/supplies meant for both sales within the State as well as to other States, irrespective of when these will be utilized/sold. This also reduces immediate tax liability. (2) No input credit on central sales tax paid on purchases from other States At present, there is no credit of CST if inputs are purchased from outside the State. For example if the goods are purchased by Delhi dealer from Mumbai for Rs. 1,02,000 which includes CST of Rs. 2,000, Delhi dealer will not get input tax credit of Rs. 2,000. If goods are sent outside State on stock transfer basis, credit (set off) of tax paid on inputs purchased within the State is available only to the extent of tax paid in excess of 2% e.g. if tax paid on inputs is 12.5%, input credit of 10.5% is available. (3) Input credit on stock transfer to other States When CST rate is reduced to Nil, full credit of tax paid on inputs will be available i.e. inter-state sales and dispatches will be 'zero rated' and not 'exempt'. Experts Professional Academy CA. Gopal R Rathis initiative.
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7. Purchases not eligible for input tax credit Input credit is not be allowed in the following circumstances: 1. Purchasing from unregistered dealers; 2. Purchases from registered dealer who opt for composition scheme under the provisions of the Act; 3. Purchases of goods as may be notified by the State Government; 4. Purchase of goods where invoice does not show the amount of tax separately; 5. Purchase of goods, which are utilized in the manufacture of exempted goods; 6. Purchase of goods used for personal use/consumption or provided free of charge as gifts; 7. Goods imported from outside the territory of India or goods purchased before it reaches the custom frontiers of India; 8. Goods purchased from other States viz. inter-State purchases. 8. Input tax credit on capital goods Input tax credit on capital goods will also be available for traders and manufacturers. Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly installments. The States may at their option reduce this number of installments. There is a negative list for capital goods (on the basis of principles already decided by the Empowered Committee) which is not eligible for input tax credit. 9. Coverage of Goods under VAT In general, all the goods, including declared goods will be covered under VAT and will get the benefit of input tax credit. The only few goods which will be outside VAT will be liquor, lottery tickets, petrol, diesel, aviation turbine fuel and other motor spirit since their prices are not fully market determined. These will continue to be taxed under the any other State Act or even by making special provisions in the VAT Act itself, and with uniform floor rates decided by the Empowered Committee. 10. VAT Rates and Classification of Commodities Under the VAT system covering about 550 goods, there will be only two basic VAT rates of 4% and 12.5%, plus a specific category of tax-exempted goods and a special VAT rate of 1% only for gold and silver ornaments. 11. Non-availability of input credit in certain cases In the following cases credit of tax paid on inputs shall not be allowed: 1. Where final product is exempt Credit of tax paid on inputs is available only if tax is paid on final products. When final product is exempt from tax, credit will not be allowed. If credit was availed, it will have to be reversed on pro rata basis. Experts Professional Academy CA. Gopal R Rathis Initiative.........
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2. No credit if input lost/damaged/stolen before use Where the inputs have been lost or damaged or stolen before these have been used, credit of tax paid on such input shall not be allowed. If credit was availed, it will have to be reversed. 3. No credit on certain purchase Generally, in following cases, credit is not available (a) Purchase of automobiles (b) Fuel. However, some States are allowing input credit for the same. 12. Origin/destination principle The following two principles are relevant for implementation of VAT (a) Origin principle. (b) Destination principle. (a) Origin principle: Under 'origin principle', value added domestically on all goods whether they are meant for exports or to be consumed in India is subjected to tax. Hence, if there is value added abroad tax cannot be levied on such value added in India. This principle confines VAT only to goods originating in the country of consumption. Whereas exports are taxable under this principle but imports are exempt. It is mostly used in conjunction with income VAT and is unpopular for obvious reasons. (b) Destination principle: Under this principle, value added irrespective of the place of origin is taxable. All goods are taxed if they are consumed within the country. Consequently, exports are exempt while imports are subjected to tax. Destination principle is normally used along with consumption VAT. In a federal set-up like India, destination principle is preferred for taxation of products consumed within the various States of the country. A very important feature of this principle is that imported goods are treated at par with domestic products whereas in the origin principle imported goods are not taxable and hence it gives preference to goods produced abroad. In the EEC countries, origin principle was once considered for eliminating border controls and problems of valuation, but was subsequently given up as being impractical. Thus the destination principle is now being followed in those countries. 13. Variants of VAT (a) Gross Product Variant In case of Gross Product Variant, tax is levied on all sales but deductions for taxes on all purchases of raw materials and components (i.e. inputs) are allowed. However, no deduction is allowed for taxes paid on capital inputs with the result that in this variant of VAT, capital goods carry a heavier tax burden as they are taxed twice. (b) Income Variant In case of Income Variant, tax is levied on all sales but deductions towards purchases of raw materials and components (i.e. inputs) as well as depreciation on capital goods are allowed. Those following this variant of VAT hold incentives by classifying purchases as current expenditure to claim set-off. In this variant, gross investment minus depreciation i.e. net investment is taxed. The depreciation to be provided is dependent on the life of an asset as well as on the rate of inflation, therefore there are many difficulties connected with the variant in measuring depreciation. (c) Consumption Variant In case of Consumption Variant, tax is levied as all sales but deduction on all business purchases including capital assets is allowed. Thus, gross investment is deductible in calculating value added. The economic base of the tax, under Consumption Variant of VAT is equal to the total private consumption. This variant of VAT does not distinguish between capital and current expenditures hence there is no need to specify the life of assets or depreciation allowances for different assets. This form is neutral between the methods of production; there will be net effect on tax liability due to the Experts Professional Academy CA. Gopal R Rathis initiative. Page 26

method of production (i.e. substitution capital for labour or vice versa). The tax is also neutral between the decision to save or consume. The consumption variant of VAT is most popular and widely used variant among the three variants of VAT. The reasons behind the preference of this variant over the other are as under: (a) This variant is tax neutral as it does not affect decisions regarding investment because the tax on capital goods is also set-off against the VAT liability. (b) This variant relieves all exports from taxation while imports are taxed which is harmonious with the destination principle i.e. if the destination of goods is foreign country, it should not be taxed in India. (c) The consumption variant is convenient from the point of administrative expediency as it simplifies tax administration as it distinguishes between purchases of intermediate and capital goods on the one hand and consumption goods on the other hand. (d) It does not cause any cascading effect. 14. Method for Computation of tax (A) Invoice method/Tax credit method Tax credit method involves payment of tax by the seller i.e. manufacturer or dealer at full selling price and credit of tax is allowed, which he has paid at the time of purchase. Thus, the tax is levied on full sale price, but credit is given of tax paid on purchases and effectively, tax is levied only on 'Value Added' only. It's an easy and simple way to ensure that tax is paid. It helps elimination of cascading effect of tax on consumers. (B) Subtraction method Under subtraction method, the purchase price is deducted from selling price and tax is paid on the net amount only i.e. value added. Thus, when the tax is paid on net amount, dealer's margin is disclosed. This method is unpopular and cumbersome. It is practically impossible when various inputs are used in the manufacture of numerous outputs. It is also not preferred by dealers as their margin gets disclosed. Example Suppose a manufacturer sells goods to a trader for Rs. 220 which includes tax charged @ 10%. The trader sells the same goods to a consumer for Rs. 388 which also includes tax charged @ 10%. The tax in this case shall be worked as under: Manufacturer sells the goods to traderTurnover VAT @ 10% 220 20 [220 10/110] Trader sells the goods to consumer Taxable turnover shall be 8 308 - 220 = 88 88 [88 10/110] Total tax Rs. 20 + 8 = Rs. 28. In the above system also, the incidence of tax is at each stage.
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15. Advantages of VAT VAT being a broad based tax levied at multiple stages is generally perceived as an explicit replacement of State sales tax for raising additional revenue for the Government. The puSrpose of a tax system is to bring in revenues to the Government. Tax revenues can be raised in many ways. However, the main characteristic of good tax system should be The tax system should be fair or equitable; It should cause the least possible harmful effects to the economy and to the extent possible, it should promote growth to the economy; It should be simple both for its compliance by the payer and for its administration by the Government; It should be income elastic. Keeping in view the above objectives, VAT is being implemented in various states in place of the local sales tax payable by the seller. VAT is also expected to be more effective and efficient for every person including Government, manufacturers, traders and consumers and hold the following advantages: (i) (ii) (iii) (iv) (v) (vi) (vii) (viii) (ix) (x) (xi) (xii) (xiii) It is easy to administer and transparent because of its simplicity. There are less scope of litigation Tax Credit on purchase of Capital Goods is also allowable. There are no statutory forms under VAT. Therefore, all problems related to forms automatically get resolved. There is provision for Self-Assessment It will act as deterrent against tax avoidance. It does not have cascading (tax on tax) effect due to system of deduction or credit mechanism. It supports Effective Audit & Enforcement Strategies The system will be more effective because of minimum exemptions. It ensures removal of anomaly of First Point Taxation Export can be freed from domestic trade taxes in real sense. It is an instrument to tax consignment of goods Economic Advantages (a) (b) (c) (d) Buoyant Revenue, Efficient tax collection, Neutrality with minimum dist, Interference in market forces is minimum. 16. Limitations of VAT (i) (ii) (iii) (iv) (v) (vi) Detailed Records are required for VAT purpose. VAT causes Inflation No provisions for early refund of tax in case of exempted goods or export of final goods. There are many functional problems Dealer will be making purchases after paying tax, therefore investment in stock will go up the extent of tax paid. No Credit for Tax paid on Inter-state Purchases
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(vii) (viii) (ix) Introduction of composition scheme will obstruct the flow of audit trail and this scheme can be misutilised by unscrupulous dealer. Financial planning by Department Audit under VAT
It will also be difficult to administer the tax systems at wholesale and retail stage as they usually deal in numerous products and commodities, which carry different rate. Thus matching of output and input taxes is difficult. Ideally VAT should have very few rates which does not seem to be possible in India due to varying and diverse fiscal and social requirements. In case matching requirement is waved off there is a possibility of tax evasion as explained hereunder: Purchases made by a Dealer Amount (In Rs.) 1% 4% 8% 20% Total 1,000 1,000 1,000 1,000 4,000 Tax Paid 10 40 80 200 330 Sales Shown by Dealer Case A I II III IV Total 1,200 1,200 1,200 1,200 4,800 12 48 96 240 396 Tax Liability (Rs. 396 - Rs. 330) = Rs. 66 Case B I II III IV Total 1,400 1,200 1,200 1,000 4,800 14 48 96 200 358 Tax Liability (Rs. 358 - Rs. 330) = Rs. 28. 17. Need of audit under VAT (A) Lack of Education among Traders Community In our country the trading community is not educated enough therefore they face problem in understanding the requirements of tax laws. Moreover the VAT system of taxation is new to the trading community. Due lack of knowledge and unawareness, the traders are not well equipped to understand the implications of the VAT system of taxation. Keeping these factors in view the State Government in order to arrange their business affairs to fall in line with the requirements of the State Level VAT, calculate and discharge their exact tax liability under the VAT Law have incorporated audit provisions in VAT Acts. (B) Lack of Resources with Taxation Authorities The taxation authorities do not have sufficient resources to educate the tax payers and inform them about the procedural requirements and accounting changes that are required under VAT system. Due to lack of resources, the taxation authorities are also not in a position to ensure that all the requirements of VAT are being fulfilled and there is no loss of Government revenue. Therefore, it is desirable to prescribe for an audit under VAT by a qualified professional so that the taxation authorities may the procedural requirements. (C) Self-Assessment under VAT regime Another reason for prescribing an audit under the VAT by a Chartered Accountant, is that under the VAT system a major thrust is to be laid on the 'self assessment'. The dealer/assessee calculates its tax liability himself and thereafter pays the same. The tax payers through their periodical returns Experts Professional Academy CA. Gopal R Rathis Initiative......... Page 29

inform the Department about its business affairs. These periodic returns are accepted by and large and the tax payers are not to be called for substantiating their tax liability as shown by them in the returns by producing books of account and other relevant material. The assessments with books of account will be an exception. Therefore there is a strong need to see that the tax payers discharge their tax liability properly while filing the returns. This can be ensured only where the particulars furnished by the tax payers are verified by an independent auditor in minute details by going not only through the books of account but also by analyzing and interpreting the provisions of the State Level VAT Laws and reporting, whether any under-assessment was made by the dealer requiring additional payment or whether there was any excess payment of tax warranting refund to the tax payer. Due to these factors and requirements audit under VAT become essential and shall be performed on a regular basis. However, it is not possible to conduct the audit of all the VAT dealers. Therefore, the criteria for audit can be the amount of turnover or the class of dealer dealing in specified commodities. 18. General requirement for VAT System (a) Compulsory issue of tax invoice and Retail Invoice: The entire design of VAT with input tax credit is crucially based on tax invoice, or retail invoice. Tax invoice: Every registered dealer, having turnover of sales above an amount specified, shall issue to the purchaser serially numbered tax invoice with the prescribed particulars. This tax invoice will be signed and dated by the dealer or his regular employee, showing the required particulars. The dealer shall keep a counterfoil or duplicate of such tax invoice duly signed and dated. Failure to comply with the above will attract penalty. The purchaser will get input credit on the basis of the said tax invoice. Retail invoice: Where sales are made to a consumer or in the course of inter-State trade and commerce, the dealer shall issue retail invoice. No input credit is available to purchaser on the basis of this retail invoice. (b) Registration: There is a compulsory registration of the dealer if the aggregate turnover exceeds a certain specified limit. It is Rs. 5,00,000 in most of the States whereas in Delhi it is Rs. 10 lakhs. Small dealers whose gross turnover does not exceed Rs. 5 lakh/10 lakh shall not be liable to pay VAT. These small dealers will not be allowed input tax credit on their purchases. Small dealers may also get voluntary registration and come under the purview of VAT provisions. (c) Composition scheme: A small dealer whose turnover does not exceed a specified limit (say in Delhi Rs. 50 lakhs) can opt for composition scheme where he shall have to pay tax himself at a small percentage of gross turnover and in this case buyer of goods with not be entitled to input VAT Credit. (d) Tax Payer Identification Number (TIN): There will be a taxpayers identification number of 11 digit numericals which will be unique to each dealer. First two characters will represent the State Code as used by the Union Ministry of Home affairs. The set up of the next nine characters may, however, be different in different States. (e) Simplified return of VAT are to filed monthly or quarterly as specified by each State. Every return furnished by dealers will be scrutinized expeditiously within prescribed time limit from the date of filing the return. If any technical mistake is detected on scrutiny, the dealer will be required to pay the deficit appropriately.
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(f) Self-assessment by dealers. Procedure of Self-Assessment of VAT Liability The basic simplification in VAT is that VAT liability will be self-assessed by the dealers themselves in terms of submission of returns upon setting off the tax credit. Return forms as well as other procedures are simple in all States. There will not longer be compulsory assessment at the end of each year as is existing now. If no specific notice is issued proposing departmental audit of the books of accounts of the dealer within the time limit specified in the Act the dealer will be deemed to have been selfassessed on the basis of returns submitted by him. (g) Audit under VAT has been made compulsory by various States. (h) No requirement of any declaration form as bill will be raised for each sale and VAT shall be levied. (i) Comprehensive coverage as only few commodities have been exempted from VAT.
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SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis Initiative.........

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis Initiative.........

SERVICE TAX & VAT FOR CA PCC/IPCC

at the usual rate and CENVAT credit can also be availed.

Experts Professional Academy CA. Gopal R Rathis initiative.

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis Initiative.........

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

Q.NO.14) WHAT ARE THE EXCLUSIONS IN THE VALUATION OF TAXABLE SERVICES ?

Q.NO.15) WHO IS A PURE AGENT ?

SERVICE TAX & VAT FOR CA PCC/IPCC

Person outside India

Goods transport agency

Business Auxiliary Service of Distribution of mutual fund

Mutual fund distributor / Agent Sports Body providing such Service

Any Body corporate / Firm in India

Payment of Service Tax Only on Receipt :-

Experts Professional Academy CA. Gopal R Rathis initiative.

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis Initiative.........

SERVICE TAX & VAT FOR CA PCC/IPCC

Individuals and Firms (Quarterly payment) Others (Monthly Payment) e-payment

6th of the following Month

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis Initiative.........

SERVICE TAX & VAT FOR CA PCC/IPCC

Manufacturer or Producer of final products or Provider of output service

towards purchases of input services and issues invoice, bill or challan.

manufacturer or producer or provider.

Experts Professional Academy CA. Gopal R Rathis initiative.

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

Procedure for issuance of bill:

or a person authorized by him in respect of such taxable service provided or to be provided.

Experts Professional Academy CA. Gopal R Rathis Initiative.........

SERVICE TAX & VAT FOR CA PCC/IPCC

1st October to 31st March

Experts Professional Academy CA. Gopal R Rathis initiative.

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis initiative.

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis Initiative.........

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis initiative.

SERVICE TAX & VAT FOR CA PCC/IPCC

SERVICE TAX & VAT FOR CA PCC/IPCC

Experts Professional Academy CA. Gopal R Rathis initiative.

SERVICE TAX & VAT FOR CA PCC/IPCC