Classification of Taxable Services upto 30.6.2012 - Service Tax Practice Manual / Ready Reckoner - Service Tax

Classification of Taxable Services upto 30.6.2012 A. First Step of Classification. B. If a taxable service prima facie, classifiable under two or more sub clauses: - [ Section 65A (2) ] C. Classification of services: Nature of Services versus Person providing Services D. Can exemption notifications determine / change the classification? E. Departmental Clarifications ========== Section 65A of the Service Tax ( Chapter V of the Finance Act, 1994 ) Section 65A has been inserted by the Finance Act, 2002 with effect from 14-05-2003. Before insertion of this section, there was no provision addressing the manner of classification in case of difficulty. In accordance with Section 65A the following situations may arise and to be settled in the manner prescribed; ========== A First Step of Classification: - [ Section 65A(1 )] First of all each and every service shall be classified in terms of sub-clauses of clause (105) of section 65 . If relevant sub-clause is existing for a specific taxable service that taxable service shall be classify under that category only. In applying the above provision the following difficulties may arise: a) There are more than two or more sub-clauses which are identical or similar to the service provided are in existence. b) A composite service is being provided whereas there are separate sub-clauses are in existence for the various services involved in the composite serve. c) Classification shall be determined in accordance with the taxable service or in accordance with the person who is providing taxable service. ========== B If a taxable service prima facie, classifiable under two or more sub clauses: - [ Section 65A(2) ] (i) Where the situation is similar to (a) above: [ Sec. 65A (2) (a) + (c)] Where a taxable service is, prima facie, classifiable under two or more sub-clauses of clause 105(65) than: The sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description. When a service cannot be classified in the manner as above, it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration. (ii) Where the situation is similar to (b) above: [ Sec. 65A (2) (b) + (c)] Where a composite service is provided consisting of a combination of different services and for any reason, it is, prima facie, classifiable under two or more sub-clauses than: The composite service shall be classified as if they consisted of a service which gives them their essential character, insofar as this criterion is applicable. But the provision of this clause shall be applicable only it the classification can not be determined in accordance with 65A (2) (a). When a service cannot be classified in the manner as above, it shall be classified under the sub-clause which occurs first among the sub-clauses which equally merit consideration. ========== C Classification of services: Nature of Services versus Person providing Services Sub-Clauses of clauses (105) of section 65 has been prescribed in a difference manner from one to another. Some services are taxable in accordance with the nature of service irrespective of the fact that who is providing those services. On the other side some services are taxable in accordance with the person who is providing the services irrespective of the nature of services. 1 Few examples of services taxable in accordance with nature of services - Manpower recruitment - Mandap keeping - Rent-a-cab operator - Management Consultant 2 Few examples of services taxable in accordance with the person providing services - Chartered Accountant in his professional capacity - Cost Accountant in his professional capacity - Company Secretary in his professional capacity - Architect in his professional capacity 3 Few examples where services taxable in accordance with the person providing services as well as nature of services - Stock broker - in connection with sale and purchase of securities - Telegraph authority - telephone / telex / pager/ facsimile / lease circuit In the above all examples, it may be cleared the first of all one has to find the relevant sub-clause for a particular taxable service than the provisions of section 65A (2) should be applied. ========== D Can exemption notifications determine / change the classification? An exemption notification is issued to provide exemption from the tax either partly or fully subject to some conditions or without any condition. But, the provisions of classification are independent to the notification issued for exempting service tax on any service and can not be read with such exemption notification. In each and every case we have to decide that what category of taxable service is suitable for a particular service provided by the provider of services and than an exemption notification should be applied. There is nothing in the Act or Rules made there-under that suggest that first exemption will be determined and than classification will be done. Under Service tax an exemption notification is issued under section 93 . This section no-where gives the power to amend or change the classification to give the effect to such exemption notification.