SERVICE TAX (DETERMINATION OF VALUE) RULES, 2006 - AN OVERVIEW

[Mr. M. GOVINDARAJAN]

                        Sec. 67 of the Finance Act, 1994 ('Act' for short) provides the definition of the value of taxable service on which service tax is to be paid. Service tax is chargeable only on any taxable service. The value of service tax shall be-

In a case where the provision of service is for a consideration in money, be the gross amount charged by the service provider for such service provided or to be provided by him;

In  a case where the provision of service is for a consideration not wholly or partly consisting of money, be such amount in money as, with the addition of service tax charged, is equivalent to the consideration;

In a case where the provision of service is for a consideration which is not ascertainable, be the amount as may be determined in the prescribed manner;

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 the tax payable, is equal to the gross amount charged. The gross amount charged for the taxable service shall include any amount received towards the taxable service before, during or after the provision of such service.

                        The term 'gross amount charged' includes payment by cheque, credit card, deduction from account and any form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited or debited, as the case may be, to any account where called 'suspense account' or by any other name, in the books of account of a person liable to pay service tax, where the transaction of taxable service is with any associated enterprise.

                        Section 94 of the Act gives power to the Central Government to make rules, by notification in the Official Gazette, for the determination of amount and value of taxable service under Sec. 67. By virtue of this power the Central Government made 'Service Tax (Determination of Value) Rules, 2006 ('Rules' for short).

MANNER OF DETERMINATION OF VALUE:  

                        The value of taxable service, where the consideration is not wholly or partly consisting of money, shall be determined by the service provider in the following manner-

Ø      The value of such taxable service shall be equivalent to the gross amount charged by the service provider to provide similar service to any other person in the ordinary course of trade and the gross amount charged is the sole consideration;

Ø      Where the value cannot be determined in accordance with the above procedure, the service provider shall determine the equivalent money value of such consideration which shall, in no case less than the cost of such taxable service.

VALUE OF SERVICES INVOLVED IN THE EXECUTION OF A WORKS CONTRACT:

                        The value of taxable service in relation to services involved in the execution of a works contract shall be determined by the service provider in the following manner:

Ø      Value of works contract service determined shall be equivalent to the gross amount charged for the works contract less the value of transfer of property in goods involved in the execution of the said works contract;

Ø      Where the value added tax or sales tax, as the case may be, has been paid on the actual value of transfer of property in goods involved in the execution of the works contract, then such value adopted for the purposes of payment of value added tax or sales tax, as the case may be, shall be taken as the value of transfer of property in goods involved in the execution of the said works contract for determining the value of works contract service.

The value of works contracts service shall include the following:

Labor charges for execution of the works;

Amount paid to a sub contractor for labor and services;

Charges for planning, designing and architect's fees;

Charges for obtaining on hire or otherwise, machinery and tools used for the execution of the works contract;

Cost of consumables such as water, electricity, fuel, used in the execution of the works contract;

Cost of establishment of the contractor relatable to supply of labor and services;

Other similar expenses relatable to supply of labor and services; and

Profit earned by the service provider relatable to supply of labor and services.

VALUE FO TAXABLE SERVICE PROVIDED FROM OUTSIDE INDIA:

                        The value of taxable service received shall be such amount as is equal to the actual consideration charged for the services provided or to be provided. The value for the services as are partly performed in India, shall be the total consideration paid by the recipient for such services including the value of service partly performed outside India.

INCLUSION IN VALUE OF CERTAIN EXPENDITURE OR COSTS:

                        Where any expenditure or costs are incurred by the service provider in the course of providing taxable service, all such expenditure or costs shall be treated as consideration for the taxable service provided or to be provided and shall be included in the value for the purpose of charging service tax on the said service.

                        The value of taxable service shall include the following:

The commission or brokerage charged by a broker on the sale or purchase of securities including the commission or brokerage paid by the stock broker to any sub broker;

The adjustments made by the telegraph authority from any deposits made by the subscriber at the time of application for telephone connection or pager or facsimile or telegraph or telex or for leased circuit;

The amount of premium charged by the insurer from the policy holder;

The commission received by the air travel agent from the airline;

The commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;

The reimbursement received by the authorized service station, from manufacturer for carrying out any service of any motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer;

The commission or any amount received by the air travel agent from the Railways or the customer;

The remuneration or commission, by whatever name called, paid to such agent by the client engaging such agent for the services provided by a clearing and forwarding agent to a client rendering services of clearing and forwarding operations in any manner; and

The commission, fee or any other sum, by whatever name called, paid to such agent by the insurer appointing such agent in relation to insurance auxiliary services provided by an insurance agent.

EXCLUSION FROM VALUE OF CERTAIN EXPENDITURE OR COSTS:

                        The value of taxable service does not include the following:

Initial deposit made by the subscriber at the time of application for telephone connection or pager or facsimile (FAX) or telegraph or telex or for leased circuit;

The airfare collected by air travel agent in respect of service provided by him;

The rail fare collected by rail travel agent in respect of service provided by him; and

Interest on loans;

The expenditure or costs incurred by the service provider as pure agent of the recipient of service.  This is subject to the following conditions:

Ø      The service provider acts as a pure agent of the recipient of service when he makes payment to third party for the goods or service procured;

Ø      The recipient of service receives and uses the goods or services so procured by the service provider in his capacity as pure agent of the recipient of service;

Ø      The recipient of service is liable to make payment to third party;

Ø      The recipient of service authorizes the service provider to make payment on his behalf;

Ø      The recipient of service knows that the goods and services for which payment has been made by the service provider shall be provided by the third party;

Ø      The payment made by the service provider on behalf of the recipient of service has been separately indicated in the invoice issued by the service provider to the recipient of service;

Ø      The service provider recovers from the recipient of service only such amount as has been paid by him to the third party; and

Ø      The goods or services procured by the service provider from the third party as a pure agent of the recipient of service are in addition to the services he provides on his own account.

REJECTION OF VALUE:

                        Where the Central Excise Officer is satisfied that the value determined by the service provider is not in accordance with the provisions of the Act or the rules, he shall issue a notice to such service provider to show cause why the value of such taxable service for the purpose of charging service tax should not be fixed at the amount specified in the notice.   The Central Excise Officer shall, after providing reasonable opportunity of being heard, determine the value of such taxable service for the purpose of charging service tax in accordance with the provisions of the Act and the rules.