Service tax nuances

Written by fe Bureau | Updated: Sep 30 2011, 09:10am hrs
Here are some queries on taxation and service tax liabilities,

addressed by Ernst & Young. Readers may mail their queries to fesmes@gmail.com

We provide 24-hour maintenance services on behalf of various auto companies. In one of our contracts, we received advance payment from our client for carrying out the services and we deposited the applicable service tax with the government. However, later, our contract was terminated without any services being provided and we refunded the entire advance, including service tax collected from the client. Please let us know if we can recover the service tax deposited to government

According to the Rule 6(1) of Service Tax Rules, 1994, for the cases wherein the advance money is received for the services to be provided in future, the liability to pay service tax arises on the receipt of such advance money. However, as per Rule 6 (3), in case the services are not provided subsequent to the receipt of advance payment and the amount of such payment including service tax has been refunded back to the client, then the service tax paid can be availed of as credit.

We manufacture electric fans and carry out job work for one of our clientsa renowned electrical appliances company. The goods manufactured are assessed on MRP basis under the central excise. We raise an invoice for job work charges that include the labour component, and consumables & service charges. The principal manufacturer also pays excise duty to the government on our behalf. Do we need to separately charge service tax on this transaction

Production or processing of goods for, or on behalf of, the client is liable to service tax under the service category of business auxiliary services (BAS). However such production or processing does not include any activity that amounts to manufacture of excisable goods.

Excisable goods mean goods specified in the first schedule and the second schedule to the Central Excise Tariff Act, 1985. Electric fans are excisable goods, falling under Chapter 84 of the First Schedule under CETA. The activity of production of such fans from the steel sheets amounts to creation of a new substance altogether and is well within the meaning of the term manufacture as defined in Section 2(f) of the Central Excise Act, 1944. We understand that the excise duty is being deposited by the principal manufacturer on your behalf. Since the definition of BAS excludes activities amounting to manufacture from the levy of service, there should not be any service tax on the job work carried out by your company.

We undertake construction of roads for the government. Our services are exempt from payment of service tax. Recently, we received a mandate from a company for constructing a private road in a residential area for R8 lakh. Please let us know whether we should charge service tax on the same as it is below the threshold limit for applicability of service tax.

Notification No. 6/2005- ST dated 1 March 2007 (as amended by Notification8/2008-ST dated 1 March 2008) provides an option to the service provider to avail of an exemption from service tax on the provision of services of value not exceeding R10 lakh during a financial year. However, the above notification clearly provides that payments received towards the amount exempt from the service tax shall not be included in the threshold of R10 lakh. Since you are providing exempt services, the turnover for the same should not be included in the threshold limit for service tax purposes. As the value of taxable services is only R8 lakh, you will be able to take the benefit of the threshold and may not pay service tax on it.

The replies do not constitute profession aladvice. Neither E&Y nor FE is liable for any action taken on the basis of these replies