Valuation for Service Tax
It had to come one day. Once the tax is on the value, the method of valuation is important. In Central Excise, valuation has been a major issue of contention. (personally, I made a small fortune writing a book on valuation) All the complicated concepts of Central Excise valuation were not imported into Service Tax all these days and finally in this year’s budget an honest attempt has been made by a sincere government to complicate Service Tax valuation. Section 67 is to be amended to include considerations other than money to the value for taxable services. The whole idea is to identify and unearth any undervaluation. After inserting some complex sentences into the Act, the Government has come out with the valuation rules for Service Tax. The draft rules have been published. The section itself is very complicated with even money being defined as not including currency held for numismatic value. So if you give a coin of Akbar’s period to your cable TV operator, maybe that is not money! And to complicate matters further, government has issued the Rules.
++ Money value of other than money consideration has to be determined by the service provider. ( obviously he should be able to explain to the department how he determined it)
++ This value cannot be less than the higher of a comparative price and cost of service.
++ Just because you determine the value, don’t think the department has no right to tinker.
++ If the value cannot be determined, it has to be determined as per the method of determination prescribed by the Board. (so Board will come out with another determination of value rules)
++ Costs for providing service to be included inn the value except under certain circumstances and the draft rules have given a few illustrations.
If your real estate agent gives an ad to sell your property and charges you for the ad, he is required to pay Service Tax for the total fee including the ad.
Illustration 1.– X contracts with Y, a real estate agent to sell his house and thereupon Y gives an advertisement in newspaper. Y billed X including charges for newspaper advertisement and paid service tax on the total consideration billed. In such a case, consideration for the service provided is what X pays to Y. X cannot contend that Y acted as agents on his behalf when obtaining newspaper advertisement even if the cost of newspaper advertisement is mentioned separately in the bill. Such services are in the nature of input services for the estate agent in order to enable or facilitate him to perform his services as an estate agent
If your management consultant stays in a star hotel and asks you to reimburse it, he will be required to pay Service Tax on the hotel bill too. Same is the fate of air tickets.
Illustration 2.– To provide a taxable service, a service provider incurs costs such as traveling expenses, postage, telephone, etc., in the course of providing a taxable service and may indicate these items separately on the invoice to the recipient of service. In such a case, the service provider is not acting as an agent of the recipient of service but procure the inputs or input service on his own account for providing the taxable service. Merely because such expenses are shown separately in an invoice do not mean that they are reimbursable expenditure.
Illustration 3.– A contracts with B, an architect for building a house. During the course of providing the taxable service B incurs expenses such as telephone charges, air travel tickets, hotel accommodation, etc., to enable him effectively to perform the provision of services to A. In such a case, in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as part of an inclusive overall fee, service tax is payable on the total amount charged by B. It is quite immaterial how the service provider computes the charges or how they break their invoice or bill down. Consideration for the service is what A pays B which is the taxable value for the purposes of levy of service tax.
Illustration 4.– To provide a taxable service of rent-a-cab, company X provides chauffeurs for overseas visitors. The chauffeur is given a lump sum amount during the tour to cover his food and overnight accommodation and any other incidental expenses such as parking fees. At the end of the tour, he returned the balance of the amount with a statement of his expenses and the relevant bills. Company X charged these amounts from the recipients of service. In such a case, the cost incurred by the chauffeur and billed to the recipient of service constituted part of the consideration for the provision of services by the company
Value includes-
(i) the aggregate of 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;
(ii) 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;
(iii) the amount of premium charged by the insurer from the policy holder;
(iv) the commission received by the air travel agent from the airline;
(v) the commission, fee or any other sum received by an actuary, or intermediary or insurance intermediary or insurance agent from the insurer;
(vi) the reimbursement received by the authorised 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;
(vii) the commission or any amount received by the rail travel agent from the Railways or the customer;
(viii) 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
(ix) 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.
Value does not include–
(i) 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;
(ii) the cost of unexposed photography film , unrecorded magnetic tape or such other storage devices, if any, sold to the client during the course of providing the service;
(iii) the cost of parts or accessories, or consumable such as lubricants and coolants, if any, sold to the customer during the course of service or repair of motor cars, light motor vehicle or two wheeled motor vehicles;
(iv) the airfare collected by air travel agent in respect of service provided by him;
(v) the rail fare collected by air travel agent in respect of service provided by him;
(vi) the cost of parts or other material, if any, sold to the customer during the course of providing maintenance or repair service;
(vii) the cost of parts or other material, if any, sold to the customer during the course of providing erection, commissioning or installation services; and
(viii) interest on loans.
For services received from abroad, value is the actual consideration. What does this mean?
Board has asked for your suggestions on the rules which may be sent by 31st March 2006.