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CHARGE OF SERVICE TAX, TAXABLE SERVICES AND VALUATION

AUTHOR’S ANALYSIS

Valuation of taxable services

1	Consideration in money	Gross money Charged
2	Consideration wholly or partly in non-monetary terms	Gross money Charged + Money Value of non-monetary item
3	Consideration is unascertainable	Prescribed manner[1]

There are basically 3 types of determination of value of services. These are well presented in pictorial form below:

Now we will see some illustrations based on above 3 categories:

I. Mode of payment of consideration

Illustration [Consideration is in terms of money.]

Chartered accountant charges Rs.50,000 from its client.

Value of the taxable service rendered by the chartered accountant will be Rs.50,000 and service tax shall be payable on this amount.

Illustration [Consideration is partly in money and partly in non-monetary terms.]

Chartered accountant charges Rs.50,000 from its client (who has paper manufacturing company); besides this Chartered accountant also takes paper worth Rs. 2000 free from his client.

Value of the taxable service rendered by the chartered accountant will be Rs.52,000 and service tax shall be payable on this amount.

II. Time of receipt of service charges

Lets us take an example:

If you take CA. Final coaching and pay

Ø Rs. 1000 as advance charges (Also known as booking amount);

Ø Rs. 10000 during the course ;and

Ø Rs. 2000 after the completion of course.

What is the amount that you have paid to take coaching services??

Rs. 1000 + Rs. 10000 + Rs. 2000 = Rs.13000.

Thereby, service tax would be payable on Rs 13000.

III. How do you quote fee to client (Inclusive method & Exclusive methods)

There are 2 methods of quoting fee to the clients:

Inclusive method – Here you ask client to pay one consolidated amount which will also include Service tax.
Exclusive method - Here you ask client to pay two amounts separately i.e. amount for value of services and amount for service tax.

Illustration [Inclusive method.]

Chartered accountant charges Rs.50,000 (including service tax) from its client.

Now Service tax is to be paid by Chartered accountant, let’s see how will he calculate it?

Let A = Value of Services rendered by CA.

We know that

Value of services + Service Tax = Rs. 50000

“A” + A x10.30% = Rs. 50000

A = 50000 x 100

110.30

A = 45331

Service tax = Rs. 4669

Alternative method is also there for computing service tax:

Service Tax = 50000 x 10.3

110.30

= 4669

Illustration [Inclusive method.]

Chartered accountant charges Rs.230,000 (including service tax) from its client.

Calculate value of Services rendered by CA.

Illustration [Exclusive method.]

Chartered accountant charges Rs.50,000 (Service tax extra) from its client.

Service tax is to be paid by Chartered accountant, let’s see how he will calculate it.

We now have value of services rendered = Rs. 50000

Service tax = 50000 x 10.30%

= Rs. 5150

This implies total price paid by Client = Rs. 55150

Illustration [Exclusive method.]

Chartered accountant charges Rs. 230,000 (Service tax extra) from its client.

Calculate Service tax, value of services and total amount paid by client.

General Points for determination of Value in all cases

Service tax is chargeable on Gross amount charged. However there are certain cases which we shall discuss specifically. All these case are divided into 2 components:

1. Inclusions in Value – ‘Gross amount charged’ shall include following:

Ø Expenses incurred for providing services/ Out of Pocket Expenses.

As per Rule 5 of Service Tax (Determination of Value) Rules, 2006 - Expenditure or costs are incurred by the service provider in the course of providing taxable service, 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.

Explanation.– For the removal of doubts it is clarified that the value of the taxable service is the total amount of consideration consisting of all components of the taxable service and it is immaterial that the details of individual components of the total consideration is indicated separately in the invoice.

Examples of out of pocket expenses
Legal consultancy firm	Architect for building a house	Rent-a-Cab
In the course of providing a taxable service, Law firm incurs following expenses: Ø Traveling expenses, Ø Courier charges, Ø Telephone/ Mobile, Ø AMC charges being paid for various services hired, Ø Security charges,	During the course of providing the taxable service by architect, he incurs following expenses: Ø Telephone charges, Ø Air travel tickets, Ø Hotel accommodation.	Meru Cabs Ltd. provides chauffeur-driven cars. Company incurs following expenses: Ø Food and refreshment to driver; Ø Overnight accommodation; Ø Parking fees.
All these expenses are includible in ‘gross amount charged’ i.e. service tax is chargeable on these amounts.

2. Exclusions from Value

Ø Sale Of Material

Refer Notification No. 12/2003 ST, dated 20.6.2003

Ø Security Deposit - 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;

Ø Airfare collected by air travel agent in respect of service provided by him;

Ø Rail fare collected by rail travel agent in respect of service provided by him

Ø Interest on loans.

Ø Costs incurred by a pure agent - As per Rule 5 of Service Tax (Determination of Value) Rules, 2006 - Expenditure or costs incurred by the service provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable service if all the following conditions are satisfied, namely:

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

(ii) 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;

(iii) The recipient of service is liable to make payment to the third party;

(iv) The recipient of service authorises the service provider to make payment on his behalf;

(v) 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;

(vi) 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;

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

(viii) 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.

“Pure agent” means a person who–

(a) enters into a contractual agreement with the recipient of service to act as his pure agent to incur expenditure or costs in the course of providing taxable service;

(b) neither intends to hold nor holds any title to the goods or services so procured or provided as pure agent of the recipient of service;

(d) receives only the actual amount incurred to procure such goods or services.