Taxation Awareness Session - Services

Date 25th April 2014Author Arbind AggarwalTitle SE India – Tax Team

Training/2014/T&C/0125th April 2014

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Agenda

Central Excise, Service Tax and CENVAT Credit1

Sales Tax2

Taxation on Works Contract under Sales Tax and Service Tax3

Points to Remember4

1. Central Excise, Service Tax and CENVAT Credit

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1.1 Central Excise…Imported –> CVD, SAD Domestic –> ED + CessesApplicability of Excise Duty• When the goods are removed from the works of a manufacturer, Excise Duty

needs to be paid• There are certain specific exemption are available to the recipient of the goods;

and on compliance of those exemption – goods will be removed without payment of Excise Duty

Registrations• Every manufacturer is required to get himself registered under Central Excise

except a Manufacturer in SEZ• Any person other than a manufacturer who trades, imports, stores, excisable

goods (CENVATable goods) needs to get registration under Central Excise• Further, persons registered under Central Excise can only issue CENVATable

invoices

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1.1 …Central Excise – BasicsApplicability

Is payable on removal of goods from a factory of manufacturer

To be paid on each and every transaction whether sale or otherwise

There are certain exemptions available i.e. material can be removed without payment of duty on production of relevant Certificate or Forms

General Rate

General rate of Excise Duty is 12% plus 3% Cesses (12.36%) – this rate is 10.3% on most of the products manufactured by SE

Movement of Goods

Goods shall be removed only on Excisable Invoice

Input Duty Credit

Excise Duty paid on Inputs, Input Services and Capital Goods is available as Credit

CVD and SAD paid on imported inputs are also available as Credit

Manufacturer and/or Service provider is eligible to take credit

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1.1 …Customs– BasicsApplicability

Is applicable on Import of Goods into the Territory of India

To be paid on each and every transaction whether purchase or otherwise

There are certain exemptions available i.e. material can be cleared without payment of duty on production of relevant Certificate or Forms

General Rate

General rate of Basic Customs Duty is 10% but 7.5% on most of our products

Rate of CVD (equal to excise duty) is 12% for most of our products it is 10%

Rate of Cess is 3% on BCD

Rate of SAD is 4% on value plus all above

Input Duty Credit

BCD – Not Available as Credit

CVD and SAD paid on imported inputs are available as Credit

Manufacturer and/or Service provider is eligible to take credit

Apart from basic duties, anti-dumping duty, safe guard duty will be levied on certain products

Movement of Goods Goods shall be moved from Customs Ports

on filing of Bill of Entry and other import documents

Import Duties will be calculated based on the CIF value of Goods imported + 1% of landed cost in India

Restricted items when imported will be seized by customs

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1.2 Service Tax…

Applicability of Service Tax • Unless and until specifically provided Service Tax is charged on each and every

invoice• Exemption are always supported by valid document in the name of the Actual

Service Provider in order to get the exemption• 6% impeachment rule is also applicable in Services also however, there will be no

exemption when services are provided to SEZ• This 6% can not be charged on the face of the invoice from the customer

Point of Taxability – which ever is earlier

Date of receipt of payment

Date of issuance of Invoice

Date of completion of milestoneOR OR

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1.2 …Service Tax - Basics

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Applicability

Is applicable on Services

No Tax on Export of Services and provided to SEZ or specific exemption

Is to be paid by the receiver under reverse charge on GTA, Import of Services, Rent-a-cab, Legal, Manpower and Sponsorship, etc.

General Rate

General rate of Service Tax is 12% plus 3% Cesses

Input Duty Credit

Input Service Tax Credit, Excise Duty, CVD & SAD (on inputs and Capital Goods) are available subject to usage of the same in providing taxable services

There is a list of services on which no Credit is allowed like canteen services, rent a cab etc.

Point of Taxation

Receipt of amount, invoice date, completion of Service / milestone which ever is earlier

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1.3 CENVAT Credit…

Excisable GoodsExport of Goods

Taxable Services - not in negative list

Capital Goods Inputs Capital Goods Inputs Domestic Import

Imported –> CVD, SAD Domestic –> ED + Cesses Services –> Tax + Cesses

CENVAT CREDIT

OUTPUTFactory Service Provider

If something is meant only for exempted goods / service then, there will be no CENVAT Credit

Services on which no CENVAT Credit is allowed – Rent a cab, Medical Insurance, Group Insurance etc. mainly related to employee consumption

1.3 …CENVAT Credit – set off…Imported –> CVD, SAD Domestic –> ED + Cesses

Type of Input Duties & Input

Taxes

Manufacture, Service Provider Trader

Capital Goods Inputs Capital Goods Inputs

BCD and Customs Cess X X X X

Excise Duty, CVD and SAD Y Y X X

Services Y Y X X

VAT (no Credit to service provider) Y Y X Y

1.3 …CENVAT Credit…Imported –> CVD, SAD Domestic –> ED + CessesDocuments required for CENVAT Credit• Valid CENVATable Invoice i.e. Bill of Entry in case of imported goods, invoice of

depot of importer, first stage dealer, second stage dealer, manufacturer, depot of manufacturer

• Duplicate for Transporter of Excise Invoice is a valid invoice for the consignee to take CENVAT

• Service Tax Invoice having category of services, service provider’s STC, STC of Service Recipient, Separate amount of Service tax on the Invoice and etc. is a valid document for the taking CENVAT Credit

• Service Tax credit can be taking on the date of booking of invoice in ERP however, if the payment is not made within 90days then, CENVAT must be reversed

• In case Service Tax payment is made under reverse charge mechanism then, Tax payment challan is a valid document for availing CENVAT

Eligibility of CENVAT Credit• If output service or goods removed are exempt from payment of duty then, NO

CENVAT is allowed• However, for this separate set of accounts to be maintained• If, separate books can not be maintained then, 6% impeachment will be there

1.3 …CENVAT Credit…Imported –> CVD, SAD Domestic –> ED + Cesses6% impeachment rule and exceptions• However, against the exemption 6% Excise Duty on assessable value / transaction value needs

to be either reversed from CENVAT Credit or paid to the Govt. – normally known as impeachment• This impeachment can not be charged from the customer on face of the invoice• Supplies made to below mentioned are exempt from payment of Excise Duty; and there will be

no 6% impeachment:• Goods supplied to a unit in SEZ or SEZ developer for authorized operations (docs – LOA,

ARE1 authentication by SEZ)• Goods cleared to a 100% EOU Unit• Goods cleared to a unit in EHTP or STPI• Goods cleared to UN or an international organization for their official use or project funded by

them exemption notification 108/95 C.E. 28.08.1995• Goods supplied for use of Foreign diplomatic missions or consular missions or others

notification 12/2012 C.E. 17.03.2012• Goods cleared for export under bond• Goods imported and supplied to projects – against ICB, power project where power supply is

tied up through tariff based competitive bidding, power project awarded to a developer through tariff based competitive bidding (12/2012 C.E. 17.03.2012)

• Supplied made for setting up of solar power generation projects or facilities

Detailed CENVAT Credit Guidelines

2. Sales Tax

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2.1 In-Transit Sales - Definition

Central Sales – Sales between the States’

Occasioned from movement of goods (direct CST Sales or “bill to,

ship-to same customer”)

Effected by transfer of documents (in-transit sales)

Subsequent sale by transfer of documents during the movement of goods (E1 / E2 Sales)

Exempt from further levy of Central Sales Tax

Valid Endorsements, Issuance & receipt of declaration Forms i.e. E1/E2, Form “C” must be fulfilled

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2.1 In-Transit Sales – Golden Rules

1. Purchase must be booked before sale

2. Sales and Purchases, both sale be booked in same month – in accounting books as well as Sales Tax Returns

3. Negotiable LR / RR must be used

4. Endorsements must be done on Negotiable Consignee foil of LR / RR

5. Endorsement must be done with date, stamp and signature of the dealer who is extending the sale

8. Date of Endorsement is the date of “extended sale”

9. Road Permit of end consignee shall be used

10. Form “C” to be issued by each buyer to it’s seller

11. Form E1/ E2 to be issued by each seller (who is extending the sales) to the respective buyer

7. Endorsement – after generation of LR / RR & before entry of goods into the destination State

6. Product description & quantity on the sale invoice shall be same as of Purchase invoice

Guidelines – In-Transit Sales

2.2 VAT Credit and Compliance

• Output is exempt• FOC, free sample &

like• Not used for specified

purpose

• In

• Local Taxable sales• Central Sales• Exports• Stock Transfer (inter-

State)

Reporting of Purchase

Usage of goods

purchase

No ITC

ITC Reversal&

proportionate Credit

• Local Taxable sales• Central Sales• Exports• Stock Transfer (inter-

State)

• Output is exempt• FOC, free sample &

like• Not used for specified

purpose

• In case of Stock Transfer (inter-State)

• In case of Central Sales (in T.N.)

• Proportionate Credit is allowed if having mixed business

• Purchase invoice to be booked within the same month of date of purchase invoice

• Online credit mapping has been implemented in many States

• Deadlines are different for each State for availing ITC

2.3 Other queries for Sales Tax…

VAT Input Tax Credit• There must be a valid Tax Invoice• Tax amount must be mentioned separately on the invoice• TIN of Seller as well as buyer must be mentioned on the Tax Invoice• Seller must have reported the relevant sale in his VAT return along with discharge

of liability• “Original for buyer” is the valid copy of Tax Invoice for claiming VAT Input Tax

Credit• Purchase must be reported and booked within the prescribed timeline, by the

buyer in his books and VAT returns• Tax invoice having mention “price is inclusive of tax” is not a valid document for

availing VAT Input Tax Credit

Sale of goods without charging Tax separately• Yes, goods can be sold without charging Tax separately on invoice i.e. inclusive of

tax• But in that case if the goods are purchased locally then, no VAT Input Tax Credit

will be allowed

2.3 …Other queries for Sales Tax…Excess of VAT Input Tax Credit on Output liability• VAT Input Tax Credit is available for set off against VAT and CST output liabilities• The excess of VAT Input Tax Credit can either adjusted against liabilities for

future Tax periods or refunded after assessment• However, if cost of goods purchased is higher than the sale price then, there

are possibilities that the VAT Authorities may restrict the VAT Credit amount to the tune of Output tax liability or they can also enhance the quantum of sales based on purchase price

Sales Tax and VAT• Tax on sales of goods is termed as “Sales Tax”• There are two sales transactions concluded within India

• Sales made within a State, generally called as “Local Sales”• Sales made between two or more States – called as “Central Sales or inter-

State sales”• On both these transactions Sales Tax is levied subject to exemption or other

conditions• Sales Tax levied on “Local Sales” is now called as “VAT – Valued Added Tax” i.e.

Sales Tax on value addition only as set off of Tax paid on local purchases is available

• Sales Tax levied on “Central Sales” is called as “Central Sales Tax”

2.3 …Other queries for Sales Tax

Entry Tax and movement of goods• Generally there is not impact of Entry Tax on movement of goods at Borders• Generally Entry Tax is being collected / paid on monthly basis under the Entry Tax

TIN or VAT TIN of the purchase• However, there are few States where Entry Tax needs to be paid in Advance at the

time of entry of goods in the State like Punjab

Sales Tax on Transport charges / Freight Charges• If the price term is “EX-WORKS” then, there will be no Sales Tax on freight; and

freight can not be charged through invoice also• If the price term is “FOR – Destination” then, Sales Tax needs to be charged on

freight also whether included in price or shown separately on the invoice or claimed separately

2.3 …Sales Tax - BasicsApplicability

Is applicable on sales of Goods in India

No Tax on Export of goods

Not to be charged on transactions otherwise than sale like Free issue or Stock transfers

Can be charged at concessional rate subject to specific conditions

General Rate

General rate of VAT varies from 12.5% to 15% - State specific

IT products are taxed from 4.5% to 6.03% - State specific

Central Sales tax will be 2% against Form “C” or Full VAT of selling State

Central Sales tax will be NIL against Form I to SEZ

Movement of Goods

Goods must move under the cover of a Invoice

Road permits (inward and outward) wherever applicable

Valid L.R. / G.R. (wherever applicable)

Input Duty Credit

VAT paid to Vendors is available as Credit and can be set off against VAT and CST

There is a list of negative goods also on which no Tax Credit is available

Reversal of partial Input Tax Credit on Stock Transfers outside the State

3. Taxation on Works Contract under Sales Tax and Service Tax

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3.1 Definition of Works Contract

Works Contract under Sales Tax

“Works Contract” includes any agreement for carrying out for cash or for deferred payment or for valuable consideration, the building construction, manufacture, processing, fabrication, erection, installation, fitting out, improvement, repair or commissioning of any moveable or immovable property

Works Contract under Service Tax {Sec. 65B(54) of the Finance Act, 1994}

“Works contract” means a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting out, repair, maintenance, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property;

3.2 Treatment under Service Tax

Valuation under Service Tax {Sec.2A – Service Tax (Determination of Value) Rules, 2006}

Value of Goods and Services are bifurcated

When value of Goods and Services are not bifurcated

Service Tax @ 12% + 3% Cesses on Services = 12.36%, will be charged on value of services

Service Tax @ 12% + 3% Cesses on Services = 12.36%, will be charged on value of services derived as per Rule.

Opt 1 12.36% on 40%

Opt 212.36% on 70%

Opt 312.36% on 60%

Section 2A – Service Tax (Determination of Value) Rules, 2006

Service Tax calculations on works contract as per valuation rules

3.3 Treatment under VAT Laws

What is Taxable under Sales Tax ?Value of Goods/ property transferred during the execution of works contract

Valuation of Goods/Property

Value of Goods is determined

Standard deduction / abatement Method Composition Method

VAT will be charged on total amount charged for Works Contract excluding Service Tax

VAT will be charged on total amount charged for Works Contract excluding Service Tax

VAT rate as per schedule shall be charged on the value of Goods / Property transferred

Valuation under VAT Laws – Standard Deduction, Rate of WCT and etc.

4. Compliance Requirement – points to be noted

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4. Points to remember….

Invoice once generated can not be changed

• Number, Date, Value, Quantity, Description

No WCT-TDS on

• Pure Service bills, Central Sales

Complete payment details are required

• Amount remitted in Bank, IT-TDS, WCT-TDS, retention etc.

Collection of TDS Certificates

• IT-TDS (Quarterly), WCT-TDS (Monthly)

Follow up and Collections (Quarterly)

• Form “C” / “I”– Customer, Form “E1” – Vendor

4. …Points to remember…

Follow up and Collections (Quarterly)

• Form “C” / “I”– Customer, Form “E1” – Vendor

Service Tax paid to vendors is

• A cost in case of exempt services• Not a cost in case of taxable services

Purchase invoices shall be booked

• Before generating sales invoice• Within same month for taking ITC benefit• Within same month for taking E1 sales benefit

Receipt of goods at site

• By the Consignee in case of E1 Sale• By the Customer in case of Direct Central Sale• By SE in case of VAT projects

4. …Points to remember…Goods must accompany

• A valid Sale / Tax Invoice and not STO• Transporter to be used in case of in-transit sales• Endorsements to be done on Negotiable Consignee LR in case

of E1 Sale• Date of Endorsement is the date of Sale in E1 sale• Outward Road Permit of Consignor• Inward Road Permit of Consignee – E1 Sale• Inward Road Permit of Consignee / Customer – Direct Central

Sale• Inward Road Permit of SE – Final VAT Sale

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Thank You

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