Name Designation Discipline City Date of Meeting

1. GLOBAL SERVICE/ INDUSTRY Place Presentation Title Here Implementation and Administration of Service Taxation Selected Aspects AUDIT / TAX / ADVISORY / LINE OF BUSINESS 19 September, 2009 NameDesignation DisciplineCityDate of Meeting

2. Contents Reverse Charge-Domestically Supplied Services 1 2 Reverse charge-Internationally Supplied Services - Imports 3 Services Supplied Internationally - Exports 4 Composite Contracts 5 Annex

3. Reverse Charge MechanismDomestically supplied services… • Transportation of goods by road in goods carriage - Goods Transport Agency ( GTA) – introduced in 01.01.05 • Implementation challenges • Trade characteristics: • Unorganized • Dispersed • Semi-literate • Inadequate access to banking system • Strong bargaining power – essential service

4. …Reverse Charge MechanismDomestically supplied services… • How addressed? • Abatement – effective ITC • Intra-service providers – no service tax • 7 specified categories ( organized businesses) - reverse charge- optional between consignee and consignor • Others, especially, individuals – GTA – exemption for small and individual consignments • Experience • Generally, working well • Organised transporters providing bundled services would prefer direct charge as against reverse charge

5. …Reverse Charge MechanismDomestically supplied services… • Sponsorship • Implementation Challenges • Primarily, charities/NGOs – voluntary workers • Semi-organised – lack of resources for record maintenance and compliance • Changing management team – fixing responsibility/liability

6. …Reverse Charge MechanismDomestically supplied services… • How addressed? • Reverse charge • Sponsoring business to pay – compliance responsibility of sponsoring business • Experience • Working well • Loss of ITC on costs incurred by sponsorship receiving entity

7. …Reverse Charge MechanismDomestically supplied services… • Financial Services – Insurance and Mutual Fund Agents • Implementation challenges • Semi organised • Large number of small individuals – largely operating from homes • Dispersed • Semi-literate • Not much bargaining power

8. …Reverse Charge MechanismDomestically supplied services • Solution • Reverse charge - Insurance companies and Funds to pay service tax • Few tax payers for administration – Less than 100 against say, 1 million • Experience • Loss of threshold exemption for Agents • Loss of ITC for Agents – not very significant • Loss to Agents – made to bear Service tax ? • ITC – accumulation for Funds – no or insufficient output tax

9. Reverse Charge Mechanism-Internationally supplied services… • Evolution of mechanism/Law and Regulation • No place of supply rules • Import of Service – Act & Rules – specific for category of service • Three groups • Based on location of immovable properties • Based on place of performance of service • Based on location of recipient of service • Branch – treated as separate establishment • More than one establishment – connected with providing service relevant

10. Reverse Charge Mechanism-Internationally supplied services… • Experience • Service received outside India – double taxation – carve out - determination of place of performance of service in specific cases like repair, testing • Multiple element contracts – classification • Cost sharing agreements • Reimbursements - valuation

11. Services supplied internationally – export… • Evolution • Export of Service Rules – category wise • Three Groups • Based on location of immovable properties • Based on place of performance of service • Based on location of recipient of service • Additional conditions- export of service • Consideration in foreign currency • Service provided from India and used outside India

12. Services supplied internationally – export… • Export without service tax – no zero rating concept – Instead, rebate for input services/inputs used in providing taxable export service • Issues • Export of non-taxable service – input tax cost • Exports by traders – goods – refund of input taxes • Refund of input taxes to service providers • Cross border services provided remotely from India

13. …Services supplied internationally – export • Solution • Special Refund Schemes for traders and service providers • Service provided remotely – carve out - place of performance for some category of services, example, ship repair • Experience • Processing of refund claims – huge challenge

14. Composite Contracts… • Characteristics • Contracts involving supply of goods and services – construction, EPC contracts • Essentially, resulting in immovables like buildings, plants • Transfer of property in goods during execution of such contracts – State VAT • Service element – Union Service tax

15. …Composite Contracts… • Challenges • Partly within State scope and Partly within Union scope • States taking aggressive positions – significant revenue involvement • EPC Contracts – divisible v/s indivisible • Daelim Judgement – SC ( 2004) • Telecommunication Service • Telephone connections, leased line, SIM Card, DTH Service, Ring Tones ( Value Added Services), game parlors, software maintenance • Hotels - banquets

16. …Composite Contracts… • Application and interpretation by judiciary • Gannon Dunkerley/Builders Association • Rainbow Color Lab ( 2000) • ACC ( 2001) • BSNL( 2006) • Imagic Creative ( 2008)

17. …Composite Contracts… • Solution • Abatement Scheme – simplification measure • Composition Scheme – simplification measure • Introduction of Works Contract Service category • Experience • Litigation continues • More clarity required • Significant uncertainties and costs for businesses

18. Annex

19. Service Taxation inIndia - Overview • Central Level: • Union Service Tax – Uniform across the country • Introduced in 1994 – evolved over a period of time • Taxation of specifically notified services – covers almost all services except for general education and medical – more than 100 categories of services • Destination principle • VAT mechanism – across CENVAT ( VAT on goods up to manufacturing stage) and services • State Level: varies from State to State – on specified services like entertainment

20. 14 May 2003 Inter-category 10 September 2004 Inter-sectoral 16 August 2002 Intra-category Input Tax Credit (ITC)- Union Level

21. Input Tax Credit (ITC) – General… • From 1994 (Introduction of Service Tax) till August 2002 – No ITC • Rate of Service tax - moderate – 5% • Tax on few select services • No ITC • From August 2002 till date • Gradual increase in rate of Service Tax – 5 % to 8 % to 10 % to 12% to 10 % ( reduction as fiscal stimulus) • ITC introduced – intra-category – 16.8.2002

22. …Input Tax Credit (ITC) – General… • ITC expanded to inter-category – 14.05.03 • ITC across CENVAT & Service tax – 10.09.04 • More than one Unit of Taxpayer – treated as separate tax payers – optional centralised registration- treated as single tax payer • Head Office/Regional Office – Input Service Distribution mechanism • ITC – Capital goods – introduced from 10.09.04 - spread over 2 years • Not on all goods/services – terms specifically defined • No cash refund except for exports

23. …Input Tax Credit (ITC) - General • Taxable & Exempt – goods and services – evolution of law • Identification Method – separate records required – 16.08.02 • Alternatives: • Restriction on utilization – 35% ( reduced to 20 %) of ITC • Replaced by payment of specified percentage of value of exempt goods/services ( 01.04.08) • 100 % ITC of specified services (16 categories) • Added – Optional -proportionate credit mechanism ( 01.04.08)

24. Thank You!!! Presenter Bhavna Doshibdoshi@kpmg.com + 91 98923 33374