SERVICE TAX EXEMPTION SCHEME FOR SMALL SERVICE PROVIDERS - UNDERSTANDING THROUGH QUESTIONS - ANSWERS (Part-II)

[Dr. Sanjiv Agarwal]

Threshold for small service providers is available to service providers vide Notification No 6/2005-St dated 1.3.2005 as amended by Notification No 4/2007-ST dated 1.3.2007 and Notification No 8/2008-ST dated 1.3.2008.

An attempt has been made to explain the small service providers exemption scheme with the help of following few Frequently Asked Questions (FAQ's) which will make the threshold exemption facility , as is applicable today, easy to understand.

Q.16     Whether franchises and brands are excluded from the exemption scheme?

Ans.     Explanation (A) to the notification defines brand name or trade name to mean a brand name or a trade name, whether registered or not, say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented word or writing which is used in relation to such specified services for the purpose of indicating or so as to indicate a connection in the course of trade between such specified services and some persons using such name or mark with or without any indication of the identity of that person.

Q.17     Does the exemption applies universally? If no, what are the conditions in which it will not apply?

Ans.     The exemption does not apply in blanket to all cases. The exemption would not be applicable in the following two cases -

a)      Where the taxable services are provided by any person under a brand name or a trade name (registered or otherwise) belonging to another person.

b)      Where person liable to pay tax under section 68 (2) are persons other than the service providers (such as insurance agent, non residents, mutual fund agents, GTA services etc).

Q.18     What could be the cases where brand names or trade names are used and exemption will not be available?

Ans.     Whenever taxable services are provided by the service provider under a brand name or a trade name which belongs to another person, exemption scheme cannot be availed. Thus, instances could be franchise services, IPR services or manufacturing or other services under an agreement which includes use of IPR rights etc.

Q.19     Is it true that receiver can not avail the benefit of exemption scheme?

Ans.     Yes, the exemption scheme is meant only for service providers. The exemption cannot be availed by service providers who are not liable to pay service tax on the services rendered by them. Similarly, service receivers who avail the services but are person liable to pay the tax under section 68(2) as a special case are not the service providers. As such, service receivers cannot claim the benefit of exemption scheme. Thus, this scheme will not be of any benefit to either the service receiver or the service provider in such cases. These will include mutual fund distribution, services rendered from outside India, life insurance and general insurance auxiliary services etc.

Q.20     What are the restrictions to claim exemption in case of goods transport agency services?

Ans.     The exemption scheme shall be applicable to goods transport agency (GTA) services but for the purpose of ascertaining the exemption limit in respect of taxable services provided by goods transport agencies, the payment received towards the gross amount charged by agency (GTA) under section 67 for which person liable to pay service tax are specified under section 68(2) (i.e., company, firm, factory etc), shall not be taken into consideration.

Q.21     Can the service provider claim both, Cenvat credit as well as base exemption of Rs. 10 lakh?

Ans.     No, if the service provider avails the benefit of basic exemption of Rs. 10 lakh, then he cannot claim the following benefits under Cenvat Credit Rules-

a)      Cenvat credit of service tax paid on any input services used for providing taxable services for which exemption benefit is availed.

b)      Cenvat credit on capital goods received in the premises of service provider during the period for which such exemption is claimed.

Q.22     What are the restrictions on Cenvat credit and exemption scheme?

Ans.       Following conditions apply in relation to exemption scheme vis-à-vis Cenvat Credit Scheme as both the benefits cannot be availed—

(a)   Cenvat credit on input services not allowed if output service is covered under the exemption scheme.

(b)   Cenvat credit on capital goods not allowed during the period in which exemption is availed.

(c)   Cenvat credit to be availed only on input services/input received and used after the date when service provider starts paying service tax.

(d)   Cenvat credit already availed to be paid back in respect of inputs in stock on the date from which exemption is claimed.

(e)    Balance unutilized Cenvat credit to lapse on the date from which assessee starts   claiming exemption.

Q.23     What would be the position of allowability of Cenvat credit on reaching the threshold limit of Rs. 10 lakh during the year?

Ans.     Service provider will be allowed to avail Cenvat credit on inputs or input service received on or after the date on which service provider cross the limit of Rs. 10 lakh and starts paying service tax provided such inputs or input services are used for providing taxable services for which service tax is paid.

Q.24     What will be the admissibility of Cenvat credit where the assessee had already availed Cenvat in 2008-09 and he opts for exemption in 2009-10?

Ans.     In such cases, he can still opt for basic exemption but the unutilized balance of Cenvat credit will lapse. He will also be required to refund back any credit taken in respect of closing stock or stock in process.

Q.25     Is the manufacturer engaged in manufacturing activities under a manufacturing licence or franchisee or brand use arrangement entitled to avail exemption?

Ans.     Perhaps no; This scheme is not available to the service providers who provide services by using any brand or trade name of another person. Persons using their own brand or trade name would not be subject to this restriction.

Q.26     Will the assessee / service provider gets the exemption facility once opted for future years as well?

Ans.     It will depend upon the value of taxable services rendered in the preceding financial year. If it is upto Rs. 10 lakh, then only it will be allowed to claim exemption facility. For example, if a service provider has a turnover of Rs. 9.75 lakh in 2008-09, he is eligible for exemption facility for the year 2009-10 but if his turnover exceeds Rs. 10 lakh in 2009-10, he will loose the right to claim the exemption in the year 2010-11. The eligibility criteria will therefore, have to be considered for each year separately.

Q.27     Whether the aggregate value of taxable services will include all services?

Ans.     No, the exempted services provided by the service provider shall not be considered for counting value of taxable services. Only taxable services shall be considered after allowing for abatements / exemptions.

Q.28     What are the requirements of registration of assessees availing exemption under the scheme?

Ans.     Notification No. 26/2005-ST dated 7.6.2005 provides that any provider of taxable service whose aggregate value of taxable service in a financial year exceeds
Rs. three lakhs shall be required to make an application for registration under section 69(2). The limit has been raised to Rs. 7 lakhs w.e.f. 1-4-2007 and Rs. 9 lakhs w.e.f. 1-4-2008. This is effective from 16th June, 2005.

Q.29     Where the value of taxable services exceed the limit of Rs. 10 lakh after opting for exemption, should the assessee charge the tax from all clients / customers to whom services were provided prior to limit crossing Rs. 10 lakh.

Ans.     No, it would not be required. Once the limit of Rs. 10 lakh is crossed, the service provider should start charging service tax on subsequent services / bills. The exemption of Rs. 10 lakh is the basic exemption and tax would be payable on the balance amount only.

Q.30     Whether the service provider should surrender his certificate of registration on opting for exemption scheme?

Ans.     Not necessarily because once the exemption is availed, it is possible that the limit of Rs. 10 lakh may exceed any time during the year and at that point of time, new registration would again be required. It is advisable not to surrender the certificate of registration, unless the circumstances so warrant.

Q.31     What is the form for making a declaration to opt for the scheme?

Ans.     No such form or application has been prescribed so far. In absence of any form being prescribed till 1^st April 2005, assessees would be advised to submit an application on plain paper declaring their turnover of the preceding year.

                                                                                                (Concluded)