indirecttax

OVERVIEW OF SERVICE TAX LAW
Madhukar N.Hiregange FCA, DISA (ICAI)

The purpose of this article is to provide a birds eye view of the provisions of service tax. Therefore a short introduction, the law and the procedures have been provided hereunder:
Service tax was being collected in India more than 3000 years back for a plethora of services some of them being ferry tax, betting tax, courtesans, and many others. Service Tax in its present shape was bought into existence in the year 1994. Initially 3 services were brought into the net, which today has expanded to 81 categories (85 clauses) covering millions of service providers. Nine more categories have been added in this budget. It is expected that the number of service tax assessees would rise rapidly and come near to the number of income tax payers in a few years. The general threshold limit of Rs. 4 lakhs is too small and a minimum of Rs. 10 lakhs would have been more reasonable. In recent times the Government has been looking at this sector to raise substantial resources and has fixed ambitious targets of collection. Telephones itself has assured 12500 crores in the current year. The insertion of one entry “ business auxiliary service” in 2003 and its expansion in 2004 brings in the concept of services provided on behalf of others also to be covered. The service tax liability on the receiver of Goods Transport Agency services w.e.f. 1.1.2005, would expand the number of persons liable to register substantially.
This article provides the reason why it is introduced, and the stage wise approach to understand the service tax law as it stands today.

Approach to Understand Service Tax

The service providers in India who have been covered are not restricted to the literate/ large/ organised sector. The illiterates, unorganized and small service providers are also covered under service tax. The service provider requires following the steps depending on the need and the stage at which the assessee is presently. Once the liability under Service Tax is confirmed then the procedural compliance to avoid demands and dispute is essential. This has also been provided stage wise. The detailed aspects of service, principles of classification, service tax credit, valuation broadly applicable to all services has been provided below:
Determination of the Taxability of Service

Introduction:
Service tax is applicable to defined service providers, providing defined taxable services, to defined service receivers, in India. The tax is liable on the gross amounts charged for such service less the deductions and exemptions set out therein normally at the rate of 10% (plus 2% education cess on 10%, effectively 10.2%). The levy should get attracted on providing of the services, whereas the charge is to crystallize only on receipt of the consideration. In Budget 2005 the services to be provided have also been covered and therefore the advances received for services to be provided would be liable on the receipt of the advance. Services, which are received by residents in connection with their occupation outside India, would also be liable as long as they do not have an establishment outside India where the services are received. This is against the cannons of taxation where only when there is tax due the same should be collected. The payment of the tax is to be made after utilizing of eligible service tax credits on input services as well as the eligible cenvat credit on inputs used for providing the taxable service and the capital goods credit used for providing taxable service.
The service tax is payable only on receipt of the monies for the service whether partially or fully. The non-payment of service tax component charged to the customer is not relevant and the amount received would be considered to be inclusive of Service Tax. As the levy of service tax is on the provision of service, the services provided before the date of the levy coming into being would not be liable. It also means that billing made for prior periods when the levy was not in place would not be liable. However it maybe prudent to ensure that the evidence of providing the service earlier is available.
Similarly, the credit on the input services is available only when the payments are made for the value of services. If there were a part payment of services, proportionate credit would be admissible.

Scope of Service Tax Provisions:
There is no separate Service Tax Act as on date and the Provisions contained in Chapters V & VA (Section 64 to 96-I) of the Finance Act 1994 govern the levy of Service Tax. Section 64 extends the same to whole of India except the States of Jammu & Kashmir. This means that the services provided outside India for persons in India would not be a subject matter of levy. The view of the bureaucracy that Service Tax is a destination based levy and consequently services though provided from outside India but consumed in India appears to be flawed and assumes extra territorial jurisdiction on other countries. This may not stand the judicial review. The services provided outside India by residents for their clients located outside India would also not be a subject matter of service tax as it is an export of services. Where a Non Resident/ Foreigner/ Foreign Company in India provides taxable services, the levy would be attracted. However as they may not have a permanent establishment or branch in India, the service receiver is made responsible for the payment of the service tax in terms of Section 2(d)(iv) of the Service Tax Rules 1994. Similarly the services of insurance auxiliary by an insurance agent the Insurer would be liable. Further in case of Goods Transport Agency, the consignor or consignee who pays for the freight is made responsible unless he is an individual or unregistered partnership firm.

What is Service? :
Where there is no service the levy of service tax would not be attracted. Service to self or divisions of the same entity would not be liable. Further there is no payment of service tax where there is no receipt of monies for the same. If services were not charged for at all then also liability to pay service tax would not be attracted. Section 65 (95) defines Service Tax as the tax leviable under the provisions of this Chapter. We need to examine whether “ service” exists. Service as per dictionary meaning, “ an intangible commodity in the form of human effort such as use of labour, skill or knowledge for the benefit of another.” There is no definition in the provisions of Service Tax law for the word “service”.

The Supreme Court in the case of State of Uttar Pradesh Vs Union of India { 2004 (170 ) ELT 385 } has held that merely because the service tax has been imposed on telephones, it does not stop the State Government to impose sales tax on rentals received from the customer. This was on the reasoning that in that particular activity both sales and service were involved.
In the case of supply contracts or works contract where some amount of service is also provided, the important decision to be taken is find out the dominant motive for the contract. This could be as under:
- Only supply: The contract maybe only of purchase and sale as a trader. In such cases the question of providing service does not arise.
- Only manufacture and supply: The contract maybe of purchase processing and sale thereafter. In such cases the question of providing service does not arise.
- Supply and Service: The contract may be for both. Here the possible break up of the contract is to be examined. If break up is possible as evidenced by the contract, offer, acceptance, then the component of service only would be taxable. In case the contract is composite and the break up is not possible then the examination to find out the basic intention and motive behind the contract would require to be examined. If the predominant objective were to supply then there would be no liability under service tax. This view has found favour with the Tribunal in the case of Daelim Industries [2003(155) ELT 457], which had been appealed to the Supreme Court and the civil appeal dismissed by Supreme Court. In case the predominant objective is either service or sales or manufacture with no clear predominant characteristic then the service tax levy would be applicable on the gross value less permissible deductions/ exemptions. This type of subjectiveness will invariably lead to a lot of judicial action.
- Manufacture and Service: The analogy as discussed in supply and service is also applicable in this case.
- Only Service: Then the levy maybe attracted if it is set out in the provisions.

At times it maybe preferable to use the principles of costing to artificially break up the sales, services portions and pay the service tax on the portion liable. However this also may not be free of issues as the amount allocated may not be reasonable for the Sales tax officer or the service tax officer.
Further where the provider of services is doubtful, it is advisable to examine the status of the service receiver. In the event that the receiver himself is eligible for the Service Tax credit then erring on the side of revenue maybe prudent.

All Service providers not Liable:
It requires examination whether the category of service provider is covered in the definitions. Only the defined service providers or persons are liable. In the definitions there are: commercial concerns, institutes, establishments, person, professionally qualified, specified authorities, any person. If a person other than those defined is providing the service the levy is not attracted to him though other defined person maybe liable for the same activity.
In case of the following services only the commercial concern is liable: advertisement, architect, business auxiliary service, courier, credit rating, dry cleaning, man power recruitment, market research, outdoor catering, security, sound recording and Videography, goods transport agency. In such cases an amateur, non-profit organisations, charitable and philanthropic organisations and individuals who do not have an organisations, government establishments would not be liable.

Taxable Services:
Examine whether the Services are specified in any of the 81 categories of specified taxable services as on date. ( Many more would be added in the next budget) Only those services, which are set out in the Section 65(105) as taxable services are liable to the tax. Only those services, which have been defined therein and that also only from the date the same was brought into charge in terms of section 66. Therefore only for the services provided after that date would be Service Tax be attracted. In the examination of the possible coverage under various services the confirmation whether the service would fall under Business Auxiliary Service should also be confirmed in the light of the broad definition. Expanding the coverage of this category to any extent may not be the intention of the legislature but to take shelter under that the judicial case law development is required. Though the tax is payable only of receipt of the amounts charged the liability starts from the date on which the service has been covered.

The Taxable Service Provider (TSP) should therefore examine the services for which he is liable and those, which are exempt, or not a service at all such as reimbursements. Recently w.e.f. 1st January 2005, All service receivers who pay the freight either as consignees or consignors except for the individuals, HUFs and unregistered partnership firm not being dealers under Central Excise or not coming under Factories Act. Alternatively there is a view that even individual, HUF and unregistered firms may get covered as persons liable to pay service tax if he is paying freight where the counter part(i.e. consignor or consignee) is not an individual or HUF or unregistered firm. This means that almost every person who is a trader/ businessman or an industrialist who uses transport for his business activities would be liable to register, pay and comply with the law.

Classification of Service:
The classification of the service provided should be with reference to the specific coverage within the 85 alternative clauses. It is possible that the services provided by one service provider may appear to fall under more than one category of specified services. It is possible that one service provider maybe providing numerous individual services or combined services. He would be required to Register under all of them. Where however the main service is provided along with other incidental and ancillary services the need to classify himself in all would not exist. The growth of service tax has also led to some of the services being more specifically covered at a later date. At this point whether the service was earlier covered at all is a question, which comes to mind.
Where the entry is not clear or more than one classification appears to be correct then reference is to be made to Section 65A for the rules of interpretation. This sets out that where the service is covered under a specific category the classification in the general category is not proper. In case of mixed service, the service, which provides the essential character is to be chosen. In the event that even then the same is doubtful, the classification appearing first in the sub clauses of the definition of taxable services [Section 65(105)] is to be chosen. Where an alternative with no taxability is chosen, the justification of the choice should be clear and legally defendable. This would also be equally applicable where any exemption is claimed. The exemption should squarely cover the service provided. In case of doubt, the erring on the side of revenue is preferable since the law is nascent. Alternatively, the entity may choose to pay the tax under protest and claim for refund if the incidence of the tax is not passed on to the customer.

The importance of proper classification could be gauged by the effect of incorrect classification of the service:
- In case of wrongly classifying, due to which additional liability of tax is burdened on the service provider, the customer at a later date would not be willing to pay for the same. This is especially true after the date of annual closing.
- Some of the exemptions / deductions are specific to one category which may not be claimed or wrongly claimed.
- The dispute with the department would add to the transaction cost with the cost of litigation, interest and penalty being added up.
- Further the possible loss/ denial of service tax credit/ input and capital goods credit exists.
- The customer may also not be able to avail the credit at a future date or may not be able to utilize the same (though there is a possibility to avail such benefit resorting the decisions of court).
- In case of erring on the side of revenue, competitors would become more cost effective. (Where services which are not liable are opted to be covered voluntarily)
- The image of a tax compliant assessee would also be tarnished to a certain extent if there is protracted litigation.

The Circulars, which are at present being issued along with the category being covered or a few days earlier to such coverage, can provide the departmental view. Certain favorable clarifications can be used and those, which go to expand the law, may require to be challenged. In many departmental clarifications the objective appears to be to issue circulars to cover borderline cases where there is a legal loophole. At times the Circulars go beyond the provisions / Rules and extend the law. This is a case where the tail wags the dog instead of the dog wagging the tail. It is judicially well settled that the departmental circulars are binding on the departmental officers and they cannot take a stand, which is at variance to the circular. {See decision of Supreme Court in British Machinery Supplies Co Vs UOI 1996 (86) ELT 449 & CCE Vs Maruti Foam P Ltd. 2004 (167) ELT 18} Since this is a central levy the clarifications issued anywhere in India would be equally applicable anywhere in India. {See decision in SAIL Vs CC 2000(115) ELT 42(SC)}

Exemptions:
We have ascertained that a taxable service is provided in India under one of the specified categories. The next examination is whether the service provider wishes to avail the exemptions if any, which are available at his option. There are some general exemption and some specific exemptions. The decision to claim the exemption should depend on the type of service as well as the customers’ orders. If the final taxable service is provided to the specified person then exemption should be claimed. For intermediary service provider availing credit on the input services and paying tax on the output service is preferable as the client/ customer is eligible for credit. The orders if generally received as basic + taxes as applicable would mean that the service provider would benefit by opting for tax payment. A comparative analysis of the two situations (opting for registration and opting for exemption) from the start of providing services to the ultimate consumption of the service would highlight to the benefit to the ultimate client. This maybe preferable even where there are many intermediate service providers. The service provider doing very low value addition may also find opting for registration preferable. With the movement towards unified goods and services tax (GST) or combined VAT by 2008-10, it maybe preferable to pay the ST especially where the eligibility for the exemption is doubtful. The exemption notification is to be examined carefully as non-following of the substantive conditions could lead to a denial of the benefit. The general exemption to the services is only with regard to services provided to certain diplomatic missions, SEZ, receipt in foreign exchange and exemption to the value of goods sold in providing of the service among some others. As on date though the Foreign Trade Policy statement has indicated that the 100 % EOUs are exempted from service tax, no corresponding notification has been issued. The refund provisions for exporters of service may also play an important role, as the same is not built into the drawback scheme.

Sub-Contract
The sub contractor who wishes to pass on the duty paid on services provided to customers who can avail the credit for the same could also be registered. In the initial stages where the service tax credit was not available, a number of clarifications for sub contractors were set out. In most of these circulars, the need for ultimate service provider having paid the service tax was specified. In practice the principal service provider other than in exceptional cases may not be inclined to provide the information of the amount charged by him as also who is the ultimate recipient due to business/ professional considerations. Therefore it is advisable that the sub contractor registers and discharges the service tax as applicable, which would be available as credit to the manufacturer/ service provided.

Input Service Distributor(ISD):
The concept of the service tax distributor has been envisaged where the corporate office or regional office or branch will be able to distribute the service received among the service providers within the entity. There is a requirement of Registration independent of the premises providing the service. The provisions would be somewhat similar to the registered dealer under central excise. He is also required to file returns every half year.

Cenvat Credit / Service Tax Credit:
The cenvat credit rules 2004 haves subsumed the service tax credit rules of 2002 and includes the cross sectoral credits of excise duty. The credit of excise duty paid on inputs used in the providing of the service would be eligible. The duty on capital goods used for providing the output service is also eligible for the service provider. The service tax credits for input services used by a manufacturer would be available. These credits would go to reduce the impact of service tax on the service provider. This move has come as a boon to the manufacturers as it can reduce their net cost of excise. There are some conditions on the eligibility and the restriction on utilisation at times of providing taxable and non-taxable manufactured goods or services.

Valuation of Services:
The valuation of the taxable services, which are now called the output services is normally on gross basis and is on the amounts charged for the services provided. The non-taxable services or non-service activities would not form part of gross value as Service Tax is on service. The reimbursements would also in normal course not form part of the value. As in any taxation statute this aspect would be much litigated. Unfortunately some departmental clarifications opine that reimbursements would be taxable whereas in other clarifications for other services the same is allowable as a deduction. Various exemptions, full and partial have been provided generally for all categories. Similarly generally and specific exemptions have been provided category wise. Some concessions/ deductions have also been notified and provided by way of departmental circulars. This also means that for the valuation of each category the valuation provisions as contained in Section 67, the clarifying circulars, the exemption have all to be considered and then value arrived at.

Conclusion:
It appears that the parliamentarians of our country give scant regard to the Budget, which has been year after year been passed in haste has let the administrators have a bigger say that is good. The tax gatherer in normal course cannot be made the lawmaker. The Kelkar Committee on tax reforms has also echoed this view. The use of retrospective amendments to make good the deficiencies in drafting of the law is eroding the trust of the honest taxpayer. However in this scheme of things many a times the Circulars issued by the Tax Research Unit, Central Board of Excise & Customs expand the scope of the levy whereas they are supposed to only provide the clarifications. The Web site (Http://www.cbec.gov.in) itself is standing testimony of the illegality of certain views, which have subsequently been moderated by the courts. The exercise of covering the assessee at any cost may only lead to unhappy taxpayers. However being a Central Provision the Circulars issued are binding on the officers. They are applicable to the whole of India. The Service Providers may challenge the circulars that seek to expand the scope or impose additional burden in the High Court. In fact the authors are of the view that the lack of judicial activism on the part of the assessees against poor, unreasonable laws has led to the unduly slow development of Service Tax. Further prior to the passing of the budget the representation by affected segments is also recommended.
The oral assurances of reforms and the movement towards one Value added Tax (Goods and Service tax) would be a difficult exercise where the Government itself goes against the basic premise of not allowing exemptions. The much awaited merging the indirect taxes into one in the view of the authors is a mirage as on date with the current political scenario and the continued apathy of the Citizens / taxpayers. The fact that now the phasing out of CST has been given a go bye may hamper the effectiveness of the State VAT.

PROCEDURES AT A GLANCE

Introduction
The professional advisor would know that points of law and interpretations are considerably less frequent than the day-to-day queries. Under Service Tax as in the case of Central Excise there have been numerous Circulars and Trade Notices, which could be used for specific purposes as long as they are not repugnant to the Service Tax Rules 1994. At times the clarificatory circulars are actually confusing an issue which is clear.
It is the experience of the paper writer that many possible commercial transactions / requirements as on date do not have a specified procedure set out in Service tax due to the law being in the initial stage of development and changing year after year. These issues would require the Trade Associations to take up the matter and seek relaxation without jeopardising the revenue.

Procedures at Glance
The service provider opting for registration and duty payment goes through some common procedures, which are set out in sequence below:

Registration:
Rule 4 of Service Tax Rules, 2002 deals with this aspect. The decision to register should be made prior to providing of the taxable service or immediately if due to budget changes as the service has become taxable. This has to be done within a period of 30 days of providing the taxable service. After decision of registration, the application is to be submitted complete in all respects. (Form ST-1) In case the service provider wishes that the registration certificate be sent by post, he can indicate the same in the covering letter for the same. A self-addressed envelop with sufficient postal stamps may hasten this process. The form duly filled should be accompanied by the PAN no proof, proof of premises and proof of status.( firm/ Company)
The Input Service Distributor and the service provider who reaches Rs.3 lakhs of taxable services receipts would be liable to register as any other service provider.
The Registration Certificate (ST-2) is generally issued within a couple of days but not more than 7 days. The registration number is based on the PAN No. In case of not having PAN No., a provisional registration number is allotted, which will be changed after the PAN is received. If Registration is not received within 7 days, the service provider is deemed to be registered under Service Tax. The registration number to be allotted for single premises assessees is the PAN No. followed by ST001.

Inspection of the premises is not required either prior to or after the registration certificate is issued. In fact the officers are barred from visiting the assessees for this purpose. Where the officers do not provide the acknowledgement for the application or ask for unnecessary details, delay in issue of the registration certificate a letter to the Deputy Commissioner of Central Excise with a copy to Commissioner of Central Excise is advisable.

The service providers who have multiple places for providing services can opt for the registration of only one place provided that they have centralized billing or even centralized accounting in that premises. In such cases they should apply to the Commissioner of Central Excise for the permission under Rule 4(3A) if within his jurisdiction. If under the Chief Commissioners jurisdiction then apply to chief commission and if located in multiple Sates then the application is to be made to the Director General Service Tax. Generally the permission is accorded. The copy of the permission maybe retained at each of the service providing outlets.

Readiness for Service Tax:
He/ she should find out the designated bank (Check with jurisdictional Range for approved bank and the code). The online service tax services also provide the alternative banks in some places. The choice of branch maybe made considering the levels of service and pro-activeness of the branch. In case of difficulty, the CBEC could be approached for allowing alternatives. The service subsequently should be provided, billed under the cover of a Bill/ Invoice with the registration number of the assessee, which should provide the required details. The suggested break up of the bill is: Taxable services, Exempted Services, Non-Taxable Service, Sale of Goods, Cost of Goods Involved, Unrelated expenses reimbursed, related expenses reimbursed, service tax and sales tax. The registration number maybe indicated for the service receiver to be in a position to avail the service tax credit. The Bills/ invoices should be raised on serially numbered invoices. (This restriction has been relaxed for banking companies.)

Initial Declarations:
The service provider who has registered is to provide a declaration of the books of account, returns and documents maintained for the recording and control of the his business/ profession of monetary transactions. The law enjoins on the service provider to keep record of service provided, service tax charged, amount received, proportionate service tax on amount received. The input services (paid for), inputs and capital goods similarly require the account of their usage and records of receipt, consumption and inventory as far as inputs and capital goods are concerned. The capturing of the information on payments made and received for the services used and provided is very important and could be a cumbersome exercise for the service providers who have been accounting on accrual basis. In case the accounts and registers are computerised the same maybe disclosed in the initial declaration. This is also an opportunity for the service provider to provide the details of his activities and provide the previous years financial. This could be useful in the event of any demand on them for suppressing any information.

Billing / Invoicing:
The goods at times maybe involved in the provision of services. The contract for the service should specifically include a clause to ensure that the goods involved would be sold to the service receiver wherever possible. This is however to be examined in the light of the provisions of applicable sales tax law and the effect of sales tax on total cost. In such cases wherever the sales tax is applicable the same would be payable. The control on the documents evidencing the purchase should be retained where the deduction for materials involved is allowed. It is expected that many of the problems which are to be faced by the service providers in the coming years would be in this area of non compliance, non maintenance or wrong maintenance of the documentation evidencing the purchase and sale. Demands due to incorrect deduction for sale, are expected to arise once the service provider’s start availing the deduction. The other areas of litigation could be availment of credits, lack of linking, inadmissible credit, double credits, credit on invalid documents, etc.

The incoming bill/ invoice for receiving of service or the outgoing invoice for providing of service is a vital document of control and therefore whenever invoices are brought into use the contents should be clear. The invoice in general is to have the clear name, address, service tax registration number, break up indicating the goods sold, exempted service, the taxable service, other deduction claimed, the out of pocket expenses receivable as re imbursement and service tax payable. In case of any doubt the written clarification from the service provider maybe obtained.

Records & Accounts:
There are no specific mandatory records. However the assessees’ own records, which will provide the information as to billing, date of receipts, credits etc would be acceptable. This means that the need to bill, account for the same, need to account incoming bills, tracking the date of payment would be required to be captured. Though this may not be a problem for the organised sector this additional record keeping for small service providers would lead to some difficulty. However with the advent of technology, the accounting software may help to minimize the difficulty.

Valuation:
Section 67: The valuation of services under service tax can be mainly examined in three bits. Firstly the specific service component, which has been defined, to be taxable is to be seen. Here the clarity of the specific service as differentiated from other Non specified/ taxable service and its independence from the taxable service could be vital. The time of providing the service is also important. (Especially when the service has just been brought into the levy). Secondly the deduction for goods sold in the course of providing the service maybe indicated separately. The law does not envisage that there would be no profit on the sale of goods. In certain cases where the deduction for cost of materials involved is provided (in the Circulars) the same would be only to the extent of cost of material, which is evidenced by documents. The last aspect of valuation is the examination of whether the particular service allows for deduction for reimbursement or the same would have to be included in the value of taxable services. In general the reimbursements (the obligation of which is by the service receiver and which are not directly relatable to the service) which as per the contract are payable separately can be claimed as deduction. An example could be, in the services provided by the Chartered Accountants in audits, the travel, boarding and lodging reimbursed are independent of the service of verification of the records and accounts and therefore should be deductible. However in the same service the staff salaries or telephone expenses or rent cannot be claimed as a deduction.

Cenvat Credit Rules 2004:
The service tax paid on all input services, inputs and capital goods, which are used for the providing of the output service (chargeable to tax) is available. This is now called the cenvat credit. This amount can be used in lieu of cash to discharge the service tax. The credit for input services can be availed only after payments have been made for the input service including the tax. The conditions in this regard are that the input service must be used for providing the output service on which service tax is chargeable, received under a valid bill/Challan/invoice indicating the service provided, the classification of the said service, value of the service, the service tax registration number of the service provider etc. The return under ST-3 should accompany the return under Rule 9(9) of Cenvat Credit Rules, 2004 wherever the service tax credits are being availed.
The assessee is advised to confirm the eligibility of inputs and capital goods credit if he is claiming any part exemption, as it is not allowed in most instances.
The inputs used for the providing of services and the capital good used for providing the service may have suffered central excise duty (Cenvat). These credits are also available for the discharge of either the inputs/ capital goods duty itself(on removal of the same as such) or the service tax on the services provided.

The service providers may find that they are providing service along with the trading of goods, providing of exempt services, manufacturing, exporting, etc where the one to one correlation between the input services and the output service may not be practically possible. At such times the facility of not maintaining the correlation maybe opted for. In such a case the input credit would be restricted to 20 % of the output tax payable. Here it has to be ensured that the input credits are equal to or more than the 20% calculation of output service tax. Otherwise the input credit would be restricted to the actual credit itself (amount of Service Tax paid on input services). Further it is also to be noted that no such credit can be taken on the input services, which are used exclusively used in providing the exempted service.

The service provider doing trading of the inputs used for providing output services can also issue invoices debiting the duty of excise at the time of removal of the inputs as such. In such a case he can work as a registered dealer and is in a position to pass on the duty credit to the purchaser.
With the expansion of service tax, allowability of cenvat for the service providers, it is possible that the service provider can expand his area of operation.
However the duty paid on the traded goods (which are not used for providing output service) would not be available as credit for the payment of service tax.

The cenvat credit is also to be listed and maintained for internal purposes and the total is to be provided along with the return.
The stock account of inputs and capital goods is not required statutorily however to ensure that control exists the same should be maintained.

Payment of Service Tax:
The payment of tax becomes necessary where the credits are not sufficient to cover the output tax. This would mostly be the case for pure service providers until the cenvat credit are also allowed. In most of the cases the service tax would be payable in cash except for cases of timing differences. However for the manufacturers the possibility of paying either for the services / goods with the accumulated balance is possible. The payment of tax should be into the assessee account through one of the authorized banks. The requirement of payment is that for the amounts received from the clients/ customers towards the taxable service provided in that month or the earlier months. The payment should be made by the 5th of the subsequent month. However payment for Individuals and Partnership has to be made by 5th of the subsequent month from the end of the quarter. However it is important to note that for the month of March or quarter ending march, the payment should be made within 31st of March and the time upto 5th of April is not available. This payment is net of the available eligible credit for input services, inputs and capital goods upto the end of the previous month or quarter. It should be noted that if the input service has not been paid for the credit would not be admissible. If the value of input services were paid partially the credit would be available proportionately. Further that the input services and its payments are to be reckoned only upto the end of the month and not upto the date of payment of tax i.e. the 5th. The payment for the last month/quarter of the year may require some amount of estimation as activities may not be possible to be stopped to arrive at the accurate figure. This would certainly create a lot of hardships for small assessees as well as multi locations assessees. The delay in payment may lead to a mandatory penalty of Rs. 100 per day or Rs.200 per day, which appears to be draconian considering the large number of small assessees and the small amounts involved in many cases. The associations should make representations in this area. The date of payment would be the date of submitting to the bank provided that the cheque is honoured. The account of the payments and utilisation of the Service Tax Account could be maintained in the normal financial accounts of the concern.

Export of Service: The export of services can be done without payment of tax as the same has been explained as a destination based levy. The primary service provider should indicate in his invoice / bill the fact of the location of consumption of the service. The exemption is provided based on the type of service.
(i) Such the taxable services which are provided and used in or in relation to commerce or industry and the recipient of such services is located outside India:
Provided that if such recipient has any commercial or industrial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of services only if-
(a) order for provision of such service is made by the recipient of such service from any of his commercial or industrial establishment or any office located outside India;
(b) service so ordered is delivered outside India and used in business outside India; and
(c) payment for such service provided is received by the service provider in convertible foreign exchange;
(ii) such taxable services which are provided and used, other than in or in relation to commerce or industry, if the recipient of the taxable service is located outside India at the time when such services are received.

In case of service tax incurred, the service exporters of taxable services are eligible for the rebate.

Returns:
ST- 3: Service tax returns for service providers should provide the information on the services billed, amounts received, service tax on amounts received, the inputs services credit, cenvat credit on inputs, cenvat credit on capital goods and the balance payable. The return should also include an abstract of the duty credits available and utilised as well as the Cash payment made. Though there is no provision for carry forward of the excess cash payments made, the excess can be shown as adjusted out of the previous TR-6 Challan payment. In the absence of numerous number of intimations and declarations and the absence of any powers of scrutiny this return is not scrutinized in great detail. This means that the onus/ responsibility of proper filing is on the service provider.

Assessment / Check on Accuracy:
Service Tax is a self assessment scheme and normally the return filed acknowledgement itself is the assessment order. The scrutiny powers of the Departmental Officers do not exist where they cannot ask for any further information including examination of the books of account to verify the correctness of the tax computed. The earlier Section 71 and 72 have been done away with. As the tax is in the voluntary compliance phase this is not to be done for all and only in cases where there is some cogent reason to believe some malafide. However the real check would be only by way of an audit, conducted by the Internal audit party of the Division/ Commissionerate, preventive wing or the Auditor Generals Office. The extent of audit depends upon the type of assessee and the size of assessee. These audit have started. The Government is also examining the possibility of compulsory audit in lines of Section 44 AB of Income Tax Act in time to come.

Internal Check:
The assessee may at the time of an internal audit (internally or by professionals) or while preparing the reconciliation observes that short payment/ no payment has taken place. In such cases it is advisable that the duty so short discharged be debited by way of a supplementary bill/ invoice indicating the errors as well as the cross reference to the transaction where the same took place. The same may also be intimated to the Asst. Commissioner or Deputy Commissioner to avoid any show cause Notice. The customer if also a service provider who is liable for payment would be admissible to tax credit on such supplementary invoice. However if the same were issued consequent to a show cause notice, invoking the extended period, then the duty credit may not be admissible to the customer.

Demands:
The demands for non-payment or short payment of duty could be within a period of 1 year or 5 years. The demands by the department are to be preceded by a show cause notice and should quantify the amount payable and the basis for reaching the allegations. The assessee is advised to provide all the facts and grounds at this stage so as to avoid the dismissal at the appeal stage due to new grounds being advanced. In the event the adjudicating officer confirming the demand, the assessee can opt to pay up.

Interest:
The interest liability would be reckoned from the first date of the month following the month in which duty ought to have been paid. The rate of interest was 18% per annum upto 15.7.01 and from 16.7.01 to 15.8.02 the same was 24%. This was reduced to 15% for the period 16.08.02 to 9.9.04 and subsequent to 10.9.04 this was aligned to the central excise interest rate of 13%.

Penalty:
The provisions pertaining to penalty is dealt under Section 75, 76,77,78 and 80.
The mandatory penalty of Rs.500 for failure to register has been done away with by Finance Act 2004 w.e.f. 10.9.2004.

The penalty for failure to collect or pay the tax is Rs.100 per day, which can be extended to Rs.200 per day of default.

The penalty under Section 78 envisaged a maximum limit of twice the amount of service tax demand. This however is not mandatory and could be lower depending on the circumstances in each case. The requirement of mens-rea (mala fide/ premeditation/ deliberation), proving that the intent was faulty is a pre-requisite to charge this penalty . In case of bona fide belief then there should be no penalty or there can be only nominal penalty.

Adjudications and Appeal:
The principles of natural justice require that once the assessee or his authorised representative should be provided an opportunity to be heard before any order is passed against him. The order after the personal hearing could be in favor fully partially or not at all. The adjudication order can be appealed to Commissioner (Appeals)( where the order is passed by officers junior to Commissioner) by the assessee or the department within a period of Three Months from the date of communication. In case of the manufacturer filing the appeal, it should also be accompanied by an application of waiver of pre deposit pending disposal of the appeal. The personal hearing provides one more opportunity for the assessee to plead his case. The order of the Commissioner (Appeals) could be further appealed against to the Tribunal. The adjudication order of Commissioner also can be appealed against to the Tribunal. The requirement of pre deposit exists here also. Most of the cases culminate at this stage. All questions of law cannot be raised beyond this stage. However where there is a question of law the high court and further appeal to the Supreme Court could be examined.

Service Tax Audit:
The service tax audit is the only check in the era of self-assessment. The object of this audit is to ensure that revenue leakages are not taking place. The Service Tax Audit Manual has envisaged a professional and in depth methods of verification. The records perused in service tax would cover the entire gamut of financial records. Therefore the reconciliation between the Service tax returns and the financial records becomes crucial as also the sales tax returns and the deduction claimed in the service tax returns. The Service Providers could at their option go for verification by professionals on their own accord, which may avoid the surprises and ensure that compliance of law is high. It may also ensure that benefits available under the provisions are availed. For the professional this would ensure that he could use the opportunity as and when the audits are entrusted to the practicing professionals.

This article provides an overall understanding of the important facets of the law and the common procedures for tax compliance.