Amendments - 23rd August, 2011

7/31/2019 Amendments - 23rd August, 2011

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CHAPTER 23 Furnishing of returns of Service Tax

23.1 Furnishing of Returns [Section 70 and rule 7]Every person liable to pay service tax shall himself assess the tax due on the services

provided by him and furnish a return in Form ST-3 (in triplicate) on a half-yearly basis.'Half year' means 1st April to 30th September and 1st October to 31st March of financialyear.

E-filing of service tax return : See para 23.7

23.2 Due dates of filing of returnsThe return has to be submitted by the 25th of the month following the particular half-

year.

Even a NIL return has to be filed if the assessee has not rendered any taxable serviceduring a particular half year.In case the due date of deposit of tax or filing of return happens to be a public

holiday, the service tax can be paid or the return can be filed on the next working dayimmediately following the holiday.

Return of Service tax has to be filed within prescribed period. If not filed, penalty isleviable under section 77. A form of show cause notice to be issued by Superintendent(Service Tax) has been prescribed. Further, a late fee has to be paid along with the filingof the return of service tax if the same is filed late (in which case there would be nofurther penalty levied).23.3 Penalty for delay in furnishing return [Rule 7]

Return of service tax has to be filed within the prescribed period. A late fee has to bepaid alongwith the filing of return of service tax if the same is filed late.

Where the return is furnished late the person liable to furnish return is liable to pay tothe Central Government a penalty, on the basis of period of delay subject to maximum of `

2,000.Period of delay from due date Penalty to be paid

Upto 15 days ` 50016 to 30 days ` 1,000After 30 days but upto 40 days ` 1,000 + 100 per day in excess of 30 daysAbove 40 days ` 2,000

23.4 Scheme for submission of return through Service Tax Return Preparer [Section71]

Without prejudice to the provisions of section 70, the Board may, by notification inthe Official Gazette, frame a Scheme for the purposes of enabling any person or class of persons to prepare and furnish a return under section 70, and authorise a Service TaxReturn Preparer to act as such under the Scheme.

A Service Tax Return Preparer shall assist the person or class of persons to prepareand furnish the return in such manner as may be specified in the Scheme framed underthis section.


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680 Systematic Approach to Service Tax Chap. 23

"Service Tax Return Preparer" means any individual, who has been authorised to act as aService Tax Preparer under the Scheme framed under this section as may be specified in thescheme.

The Scheme to be framed by the Board : The Scheme framed by the Board underthis section may provide for the following, namely:

(a ) the manner in which and the period for which the Service Tax Return Preparershall be authorised;

(b) the educational and other qualifications to be possessed, and the training andother conditions required to be fulfilled, by a person to act as a Service TaxReturn Preparer;

(c) the code of conduct for the Service Tax Return Preparer;(d ) the duties and obligations of the Service Tax Return Preparer;(e) the circumstances under which the authorisation given to a Service Tax Return

Preparer may be withdrawn;( f ) any other matter which is required to be, or may be, specified by the Scheme for

the purposes of this section.

23.5 Contents of the service tax returnThe return should include inter alia , monthwise details for each of the taxable

service rendered by the assessee Value of taxable service charged/billed; Value of services which are exempted with reference to the notification; Value of services which are exported; Abatement Claimed with reference to the notification; Value of taxable service realized for services already rendered; Value of taxable service realized for services yet to be rendered; Amount of service tax payable/paid; Amount of education cess payable/paid; Details of CENVAT Credit.

23.6 Enclosures to the ReturnThe following documents should be enclosed with the return:

Copies of GAR-7/TR-6 challans for the months covered in the return. Memorandum in Form ST-3A in case of a provisional assessment. List of accounts maintained in relation to service tax by the assessee should be

attached with the first return. Documentary Proof for adjustment of excess service tax paid in terms of rule

6(3). Worksheet of calculation of interest in case of delayed payment of service tax.

23.7 E-filing of ReturnsWhere an assessee has paid a total service tax of

`

10,00,000 or more, (including theamount paid by utilization of Cenvat Credit) in the preceding financial year, he shall have

to file the return electronically.The Central Board of Excise & Customs has introduced a scheme of e-filing of service tax returns. The broad scheme is as under:

1. Assessee should have the 15 digit STP Code (based on PAN) to avail the facilityof e-filing of returns.

2. The assessee should indicate his 15 digit STP code in the challans used by himfor the period for which the returns are being filed. (An assessee who has not


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Chap. 23 Furnishing of returns of Service Tax 681

done this may also opt for e-filing, but he will have to submit copies of Challans, evidencing payment of service tax to the concerned excise formationsafter indicating his 15 digit STP code on each challan).

3. The assessee should file an application to the concerned excise formation at leastone month in advance before the due date of filing of the return, in Annexure-I.User 'id' and 'password' for the assessee will be communicated to him within tendays after filing the application along with the necessary technical guidance.

4. After receipt of the said details the individual service provider can downloadform for entering details of ST3 returns and TR6 challans (GAR-7) from thecentral server using internet and enter the necessary details for the concernedreturn period.

5. The computer generates a key number which will depend on the STP code, dateof filing, value of services declared and tax paid and generates anacknowledgement giving these details which can be printed by the assessee andkept in his records as evidence of having filed the return.

6. The computer will verify the fact of payment from data obtained from Focal

Point Bank. Where details as declared by the assessees are not found theassessee will be contacted.

7. The Central Board of Excise & Customs has assured all assessees opting forE-filing of returns that the department will not invoke section 77 of the FinanceAct, 1994 prescribing a maximum penalty of

`

1,000 for non-filing of ST-3return for delay upto one month from the due date prescribed under the rules forfiling such return. It is to be clearly understood that this assurance does notextend to non-payment of tax in time or mis-declaration of the value of taxableservices rendered.

8. E-filing of return is mandatory in case of assessees who are liable to pay servicetax (including Cenvat Credit) of an amount exceeding

`

10 lakh in a year.23.8 Multiple Services Rendered

In case the assessee renders multiple categories of taxable services, he can file asingle return for all the categories of taxable services. However, complete informationshould be presented in the return month-wise and category wise. Also, the payment of service tax has to be made in separate challans or in one challan with separate codesmentioned clearly thereon.23.9 Revision of return [Rule 7B]

An assessee may submit a revised return, in Form ST-3, in triplicate, to correct amistake or omission, within a period of 90 days from the date of submission of the returnunder rule 7.

Where an assessee submits a revised return, the 'relevant date' for the purpose of recovery of service tax, if any, under section 73 of the Act shall be the date of submissionof such revised return.

If the original return has been filed late, this period of 90 days will be applicable

from the date when return has been actually filed and not from the last date when suchreturn was required to be filed with the department.

MULTIPLE CHOICE QUESTIONS

1 Return of service tax has to be filed:(A) monthly


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(B) quarterly(C) half-yearly(D) yearly

2 Due date of filing return is:(A) 5th of the month following the particular half-year(B) 15th of the month following the particular half-year(C) 25th of the month following the particular half-year(D) 30 days of the month following the particular half-year

3 Return of service tax is to be filed in:(A) Form ST-1(B) Form ST-3(C) Form ST-2

4 State whether True or False(A) There is no need to file a nil return(B) Separate returns will have to be filed if multiple services are provided(C) If due date of filing return happens to be a holiday, the return can be filed on the next

working day immediately following the holidayAnswers to Multiple Choice questions1. (C) 3. (B) 4. (B) (F)2. (C) 4. (A) (F) 4. (C) (T)

AnnexureRelevant Taxable Services

Announcement made by the ICAI on 18.11.2010Applicability of services for May and November 2011 examinations:Professional Competence ExaminationIt is clarified that in Part II: Service tax and VAT of Paper 5 : Taxation, students will notbe tested on specific questions covering individual taxable services.Integrated Professional Competence ExaminationIt is clarified that in Part II: Service tax and VAT of Paper 4: Taxation, students will beexamined only in respect of the following eight taxable services:

1. Commercial Training or CoachingProvisions at a Glance

1. Date of applicability : W.e.f. 1.7.2003, Notification 7/2003-ST, dated 20.6.2003.2. Service defined under section 65(26) : "Commercial training or coaching" means: any training or coaching provided by a commercial training or coaching centre.3. Service provider defined under section 65(27) : "Commercial training or

coaching centre" means: any institute or establishment providing commercial training or coaching for imparting skill or knowledge or lessons on any subject or field other than the

sports

with or without issuance of a certificateand includes

coaching or tutorial classesbut does not include


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pre-school coaching and training centre or any institute or establishment whichissues any certificate or diploma or degree or any educational qualificationrecognised by law for the time being in force.

4. Taxable service defined : Taxable service means any service provided or to beprovided: to any person, by a commercial training or coaching centre, in relation to commercial training or coaching.5. Scope of coverage of the service : From the abovementioned definition, the scope

of coverage of the service provider can be analysed as under:(i) It must be any institute or establishment: The requirement of a place of business

is important for the tax incidence to occur. Accordingly, it has been clarified thattuition teachers who conduct home tuitions at the residence of the studentswould not be liable for service tax. However, bureau services will be coveredand be liable for service tax.

(ii) It should provide commercial training or coaching.(iii) The training or coaching must be for imparting skill or knowledge or lessons on

any subject or field other than the sports: Thus any training or coaching relatingto the field of sports is excluded.

(iv) It includes coaching or tutorial classes: All sorts of coaching classes includingintensive batches and tutorial batches are included. Also, postal coaching isincluded within the purview of service tax.

(v) It does not include preschool coaching or training centre.(vi) It does not include any institute or establishment which issues any certificate or

diploma or degree or any educational qualification recognised by law for thetime being in force. Thus, all universities and recognized colleges would not beliable for payment of service tax.However, this exemption applies only to cases, where charges for such servicesare paid directly to the institutes and not to the coaching centres by the persons(students) undergoing such course.

(vii) Exemption has also been provided to following institutions:(a ) Vocational Training Institute : "Vocational training institute" means an

Industrial Training Institute or an Industrial Training Centre affiliated to theNational Council for Vocational Training, offering courses in designatedtrades as notified under the Apprentices Act, 1961;

(b) Services provided in relation to Modular Employable Skill coursesapproved by the National Council of Vocational Training, by a VocationalTraining Provider registered under the Skill Development Initiative Schemewith the Directorate General of Employment and Training, Ministry of Labour and Employment, Government of India.

(c) Recreational Training Institute : "Recreational training institute" means acommercial training or coaching centre which provides coaching or trainingrelating to recreational activities such as dance, singing, martial arts,

hobbies.(viii) If employer provides free training to their employees, it is not taxable. However,

if it hires some outside commercial coaching or training centre for impartingtraining to employees, then the payment made by employer to such coachingcentre will be chargeable to service tax.

(1) It has been clarified for the removal of doubts that the expression "commercial training orcoaching centre" shall include any centre or institute, by whatever name called, where


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training or coaching is imparted for consideration, whether or not such centre or institute isregistered as a trust or a society or similar other organization under any law for the timebeing in force and carrying on its activity with or without profit motive and the expression"commercial training or coaching" shall be construed accordingly.

(2) In case of commercial training and coaching institutes, deduction will be available only tothe sale value of standard text books, which are priced. Any study material or written textprovided by the institute will be subjected to service tax, i.e. it will not be allowable asdeduction.

(3) Training services provided online shall also be liable for service tax.

2. Information Technology Software ServicesProvisions at a Glance

1. Date of applicability : W.e.f. 16.05.2008, Notification 18/2008-ST dated 10.5.2008.2. Taxable Service defined u/s 65(105) : Taxable Service means any service

provided or to be provided: to any person, by any other person in relation to information technology software.Further, information technology software shall include:

(i) development of information technology software,(ii) study, analysis, design and programming of information technology software,

(iii) adaptation, upgradation, enhancement, implementation and other similarservices related to information technology software,

(iv) providing advice, consultancy and assistance on matters related toinformation technology software, including conducting feasibility studies onimplementation of a system, specifications for a database design, guidanceand assistance during the startup phase of a new system, specifications tosecure a database, advice on proprietary information technology software,

(v) providing the right to use information technology software for commercialexploitation including right to reproduce, distribute and sell informationtechnology software and right to use software components for the creationof and inclusion in other information technology software products,

(vi) providing the right to use information technology software suppliedelectronically.

3. Meaning of information technology software : "Information technologysoftware" means any representation of instructions, data, sound or image, includingsource code and object code, recorded in a machine readable form, and capable of beingmanipulated or providing interactivity to a user, by means of a computer or an automaticdata processing machine or any other device or equipment.

From the above definition it would be clear that the definition of informationtechnology software is very wide. It can include all representations of instructions. Thesoftware may be machine readable or readable using some other machine. It may bepackaged or customized.

1. IT Software service provided shall be liable to service tax in all cases whether or not suchservice is used in the course or furtherance of business or commerce.

2. Packaged I.T. software, pre-packed in retail packages for single use, is being exempted fromservice tax leviable under IT Software Service, subject to specified conditions, e.g. documentproviding the right to use such software, by whatever name called, if any, is packed along withthe software. These conditions include that either the customs duty (in case of import) orexcise duty (in case of domestic production) has been paid on the entire amount received fromthe buyer.


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3. Legal Consultancy ServicesProvisions at a Glance

1. Date of applicability : W.e.f. 1.9.2009, Notification No. 26/2009-ST, dated

19.8.2009.


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2. Taxable Service defined u/s 65(105) : Taxable Service means any serviceprovided or to be provided:

to a business entity ,

by any other business entity , in relation to advice, consultancy or technical assistance in any branch of law,in any manner.

However, any service provided by way of appearance before any court, tribunal orauthority shall not amount to taxable service.

The tax is not a tax on the profession of lawyers but on the services rendered by suchlawyers in the nature of advice, consultancy or technical assistance in the branch of anylaw. Further, the intention of the government is not to tax small and retail transactions.Accordingly, the following transactions are not taxable:

Individual lawyers providing any services Services provided by any business entity to individuals

The term business entity has been specifically defined through an Explanation whichis as under:

Explanation .For the purposes of this sub-clause, business entity includes anassociation of persons, body of individuals, company or firm, but does not include anindividual

Service Provider Service Recipient Whether taxable?Business Entity Business Entity YesBusiness Entity Individual NoIndividual Business Entity NoIndividual Individual NoBusiness Entity Other than Business Entity (For example,

charitable associations, Governments, etc.)No

3. The service should be provided in relation to advice, consultancy or technicalassistance in any branch of law : The services rendered should be related to advice,consultancy or technical assistance in any branch of law. Further, from the definitionitself, the services which are in the nature of appearance before any court, tribunal orauthority shall not be considered as taxable service since such representation is made tofight for any rights awarded by the constitution. Further, services provided in individualcapacity as well as services provided to individuals shall not be taxable. Also, if theservices are rendered in employment (whether full-time or part-time) the same shall notbe liable for service tax. For example, many lawyers also offer their services as part-timelecturers to colleges and universities. Such services are rendered by them in theirindividual capacity and hence cannot be considered as taxable.

4. The service may be provided in any manner : The term "in any manner" extendsthe scope of taxability to cover situations where-in the services may be providedindirectly (may be through the communication mediums or through third parties). Thus if a legal consultant sub-contracts a part of the service to another legal consultant, he wouldstill be liable for the service tax on the entire amount and not only on services which aredirectly provided by him.

4. Cargo Handling ServicesProvisions at a Glance1. Date of applicability : W.e.f. 16.8.2002, Notification No. 18/2002-ST, dated

1.8.2002.2. Meaning of cargo handling services : "Cargo handling service" means loading,

unloading, packing or unpacking of cargo and includes,


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(a ) cargo handling services provided for freight in special containers or for non-containerised freight, services provided by a container freight terminal or any other freight terminal,

for all modes of transport, and cargo handling service incidental to freight; and(b) service of packing together with transportation of cargo or goods, with or

without one or more of other services like loading, unloading, unpacking, but does not include,

(i) handling of export cargo or(ii) passenger baggage or

(iii) mere transportation of goods.3. Taxable Service defined : Taxable service means any service provided or to be

provided to any person, by a cargo handling agency in relation to cargo handling services.Analysis of definition of Cargo Handling Agency and Service:1. The existence of the word "agency" in the definition would imply that the person

handling the cargo should not be the owner of the cargo but should handle thesame in a representative capacity as an agent. In case the person is the owner of the cargo, it would not amount to a service at all.

2. Based on the clarifications issued by the Department, it is felt that whereindividuals undertake the activity of loading or unloading of cargo (like if someone hires labour/labourer for loading or unloading of goods in theirindividual capacity), they will not come under the purview of service tax as acargo handling agency. However, the same position will not prevail in case of proprietary concerns.

3. For the purpose of attracting the levy, it is important that the goods beinghandled should be "cargo" which means the handling of the goods while in theprocess of transportation.

4. The following service provided shall not be liable for service tax:(a ) handing services in relation to passengers baggage.(b) handling service provided for export cargo.(c) mere activity of transportation of goods.(d ) mere packing of goods.Further, taxable services provided to any person by a Cargo Handling Agency isrelation to agricultural produce or goods intended to be stored in a cold storageshall not be liable for service tax.

5. Although mere packing of goods is not covered under Cargo Handling servicebut services of packaging together with transportation of cargo or goods with orwithout one or more other services like loading unloading, unpacking, etc. shallbe liable for service tax.

6. If a person offers a package rate which includes transportation and handling

both, unless cost of transportation is shown separately in the bill, the wholevalue will be 'includible' as taxable service. However, if the amount of transportation is shown separately in the invoice, service tax is attracted only onthe cargo handling amount.

In a case where the role of the agency is merely restricted to provision of machinery on a hirebasis and there is no performance of work, the transaction cannot be taxed under this category.However, if the activity of handling is also included, there would be a liability to service tax.


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5. Customs House Agent's ServicesProvisions at a Glance1. Date of applicability : W.e.f. 15.6.1997, Notification No. 17/97-ST, dated

6.6.1997.2. Meaning of Customs House Agent : "Custom house agent" means a person

licensed, temporarily or otherwise, under the regulations made under section 146(2) of the Customs Act, 1962.

3. Taxable service defined : Taxable service means any service provided or to beprovided

to any person, by a custom house agent in relation to the entry or departure of conveyances or the import or export of

goods;4. Analysis of definition of Custom House Agent :(1) As per Customs Act, 1962 no person is entitled to act as a custom house agent

unless he is issued a licence under section 146(2) of the said Act. The issue of a licence isgoverned by the Customs House Agents Licensing Regulations, 1984. A custom houseagent is either granted a permanent licence (renewable every 5 years) or a temporarylicence (for 1 year). Both such l icence holders shall be liable for payment of service tax.

(2) Only licensed customs house agents are liable for payment of service tax andaccordingly, unlicensed agents are outside the purview of taxation. Since Customs Act,1962 prohibits the business of custom house agent in case there is no licence, suchunlicensed agents work under the banner of a licensed agent and accordingly, theprincipal licensed agent will be liable for service tax for such transactions even thoughthe transactions may be undertaken by another person.5. The service should be the service should be in relation to the entry or departure of conveyances or the import or export of goods

The services rendered by the custom house agent are not merely limited to theclearing of the import and export consignment. The CHA also renders the service of

(i) loading/unloading of import or export goods from/at the premises of theexporter/importer

(ii) the packing, weighment, measurement of the export goods, the transportation of the export goods to the customs station or the import goods from the customsstation to the importer's premises,

(iii) carrying out of various statutory and other formalities such as payment of expenses on account of octroi, destuffing, drawback survey, dock' fees, repairingand examination charges, landing and container charges, statutory labourcharges, testing fees, etc.

6. Valuation of Taxable Services The value of the taxable service shall be the gross amount charged to the client

(including amounts claimed as reimbursements). 6. Practising Chartered Accountant's Services

Provisions at a Glance1. Date of applicability : W.e.f. 16.10.1998, Notification No. 53/98-ST, dated

7.10.1998.2. Meaning of Practising Chartered Accountants : "Practising chartered

accountant" means a person who is a member of the Institute of Chartered Accountants of India and


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is holding a certificate of practice granted under the provisions of the CharteredAccountants Act, 1949, and

includes any concern engaged in rendering services in the field of chartered

accountancy.Thus from the definition above, it is amply clear that two types of entities are

covered under the scope of levy for practicing chartered accountants:

1. Any person who is a member of the Institute of Chartered Accountants of Indiaand is holding a certificate of practice granted under the provisions of theChartered Accountants Act, 1949.

2. Any concern engaged in rendering services in the field of charteredaccountancy.


to any person,

by a practising chartered accountant in his professional capacity,

in any manner;

It may be noted that the tax is not a tax on the profession of chartered accountancybut on the services rendered by such a chartered accountant who is in practice. Thereforetwo important criteria for taxability under this head would be the holding of a certificateof practice and also the rendering of services in a professional capacity of a charteredaccountant. The profession of chartered accountancy is governed by the CharteredAccountants Act, 1949 and the regulations made thereunder.

The service should be provided in his professional capacity

The services rendered by the chartered accountant should be in his professionalcapacity. Therefore if the services are rendered in employment (whether full-time or part-time) the same shall not be liable for service tax. For example, many charteredaccountants also offer their services as part-time lecturers to colleges and universities.Such services are not rendered by them in their professional capacity and hence cannot beconsidered as taxable.

Representation before statutory authority also covered

The service relating to representing the client before any statutory authority in thecourse of proceedings initiated under any law for the time being in force, by way of issueof notice were exempt as per Notification No. 25/2006. This notification has beenwithdrawn w.e.f. 1.5.2011 as per Notification No. 32/2011, dated 25.4.2011. Hence,representation services before statutory authorities shall now be covered under servicetax.

The service may be provided in any manner : The term "in any manner" extendsthe scope of taxability to cover situations where-in the services may be providedindirectly (may be through the communication mediums or through third parties). Thus if a chartered accountant sub-contracts a part of the service to another chartered accountant,he would still be liable for the service tax on the entire amount and not only on serviceswhich are directly provided by him.


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Valuation : The value of the taxable service shall be the gross amount charged to theclient (including amounts claimed as reimbursements).

7. Consulting Engineer's ServicesProvisions at a Glance1. Date of applicability : W.e.f. 7.7.1997, Notification No. 23/97-ST, dated 2.7.1997.2. Meaning of Consulting Engineer : "Consulting engineer" means any

professionally qualified engineer or any body corporate or any other firm who,either directly or indirectly, renders any advice, consultancy or technical assistance in anymanner to any person in one or more disciplines of engineering .

The word consult implies a conference of two or more persons or an impact of twoor more minds in respect of a topic in order to enable them to evolve a correct, or at leasta satisfactory solution. It will be evident from the above that the scope of consultingcovers engaging of experienced and knowledgeable persons to find solution to problems.It involves guiding, advising, etc., but not executing the advice.3. Taxable service defined : Taxable service means any service provided or to beprovided

to any person, by a consulting engineer in relation to advice, consultancy or technical assistance in any manner in one or

more disciplines of engineering including the discipline of computer hardwareengineering.

Explanation .For the purposes of this sub-clause, it is hereby declared that servicesprovided by a consulting engineer in relation to advice, consultancy or technicalassistance in the disciplines of both computer hardware engineering and computersoftware engineering shall also be classifiable under this sub-clause.

Service tax is leviable on advice, consultancy or technical assistance provided by consultingengineers.

Whether self employed professionally qualified engineers can be considered asconsulting Engineers : Consulting engineers include self-employed professionallyqualified engineer, whether or not employing others for assistance.

Services provided by such self-employed professionally qualified engineer to a clientin relation to one or more discipline of engineering is leviable to service tax underconsulting engineer service [section 65(105)( g)].

Non-engineers not covered : Where the service provider, a draughtsman, was noteven a graduate but was only a certificate holder from an Industrial Training Institute runby the Ministry of Labour and Rehabilitation, the Tribunal held that the service providercould not be called an engineer at all, let alone a consulting engineer, and that, in order tobe a consulting engineer, one has to be professionally qualified by obtaining a degree ordiploma in engineering from a recognized university.

Consultancy service liable : Service tax under this category is leviable on theconsultation element of the transaction and not the execution of a work. The serviceswhich attract the levy include all the services which are rendered in the capacity of aprofessional person and specifically include the services pertaining to structuralengineering works, civil/mechanical/electrical engineering works or relating toconstruction management.

In cases where the role of the engineering firm is merely to provide consultancy, theservices will be squarely covered under this category and become liable for payment of service tax


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The definition of taxable service is also very wide and shall cover services of anykind. In a particular case, the valuation of immoveable property was also considered to bewithin the ambit of taxable services provided by a consulting engineer services since all

the advice given by an engineer based on his engineering knowledge and skill would bein the realm of engineering advice.8. Manpower Recruitment or Supply Agency's Services

Provisions at a Glance1. Date of applicability : W.e.f. 7.7.1997, Notification No. 23/97-ST, dated 2.7.1997.2. Meaning of Manpower Recruitment or Supply Agency : "Manpower

recruitment or supply agency" means any person engaged in providing any service,directly or indirectly, in any manner for recruitment or supply of manpower ,temporarily or otherwise, to any other person.


to any person, by a manpower recruitment or supply agency in relation to the recruitment or supply of manpower , temporarily or

otherwise, in any manner.In order to provide more clarity to the scope of taxability the following explanation

has been inserted.For the removal of doubts, it is hereby declared that for the purposes of this sub-

clause, recruitment or supply of manpower includes services in relation to pre-recruitment screening, verification of the credentials and antecedents of the candidate andauthenticity of documents submitted by the candidate.

It is not only the manpower recruitment activities, but the man power supplyactivities would also be liable for service tax.

Manpower, recruitment or supply agency need not be a commercial concern : Amanpower recruitment or supply agency is defined to mean any person engaged inproviding service for recruitment or supply of manpower. There is no longer arequirement for the agency to be a commercial concern. Thus if an educational institutioncharges for placements, they would also be liable for service tax even though they wouldnot be commercial concerns. This aspect has been clarified by the Board in the context of campus interviews of institutes like, IIT's, IIMs, etc. Service tax is leviable on servicesprovided by such institutions in relation to campus recruitment.

Temporary supply of manpower also covered : Where, business or industrialorganisations engage services of manpower recruitment or supply agencies for temporarysupply of manpower which is engaged for a specified period or for completion of particular projects or tasks, such services will be covered within the scope of thedefinition of the taxable service and, since they act as supply agency, they fall within thedefinition of manpower recruitment or supply agency and are liable to service tax.

Service provided to Goods Transport Agency exempt from Service Tax : Serviceprovided by Manpower Recruitment or Supply Agency in relation to the recruitment orsupply of manpower, temporary or otherwise, to a goods transport agency for use by thesaid goods agency to provide any service shall be exempt from the whole of service taxleviable.

Valuation of Taxable Service : The value of the taxable service shall be the grossamount charged to the client (including amounts claimed as reimbursements).


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PRACTICAL QUESTIONS *

1. A partnership firm, gives the following particulars relating to the services provided to

various clients by them for the half-year ended on 30.9.2010:(i) Total bills raised for

`

8,75,000 out of which bill for`

75,000 was raised on an approvedInternational Organisation and payments of bills for

`

1,00,000 were not, received till30.9.2010.

(ii) Amount of `

50,000 was received as an advance from XYZ Ltd. on 25.9.2010 to whomthe services were to be provided in October, 2010.

You are required to work out the:(a ) taxable value of services(b) amount of service tax payable.Ans .:

`

7,50,000,`

77,450. [ See problem 27.1 of Practical Approach]2. Ajay Ltd. has agreed to render services to Mr. Guru. The following are the chronological

events:Contract for services entered into on 31.8.2010

`

Advance received in September, 2010 towards all services 60,000

Total value of services, billed in February, 2011 2,10,000Above includes non-taxable services of 70,000Balance amount is received in March, 2011When does the liability to pay service tax arise and for what amount? Contract contains clear

details of services; consideration and service tax are charged separately, as mutually agreed upon.Ans .: Service tax on advance

`

4,120, due date 5.10.2010, on balance portion`

10,300 in March2011. [ See problem 27.2 of Practical Approach]

3. R Ltd. has entered into a contract with X Ltd. on 31.7.2010 for rendering both taxable andnon-taxable services. The contract provides that consideration and service tax are to be chargedseparately. The following information is available to you in connection with above contract:

1. Advance received on 5.8.2010 from X Ltd. towards all services`

6,00,000 (exclusive of service tax)

2. Total value of services billed in August and September 2010`

21,00,000 which includes`

7,00,000 for non-taxable services. Balance consideration is received in March 2011.

Determine the service tax payable and the due date of payment of service tax.Ans .: 5.9.2010

`

41,200, 31.3.2011`

1,03,000. [ See problem 27.3 of Practical Approach]4. The following information is furnished to you for the half year ended 30.9.2010.Total value of bills raised (exclusive of service tax)

`

35,00,000 which includes a bill of `

3,00,000 for service rendered to a diplomatic mission and`

2,00,000 for service rendered in SpecialEconomic Zone.

`

15,00,000 (including`

3,00,000) for services rendered to diplomatic mission was received inAugust 2010 whereas the services were rendered in July 2010.

`

16,00,000 (including`

2,00,000 for services rendered in a special economic zone) wasreceived in September 2010

`

4,00,000 was received in September 2010 for which services will be provided in October.(Service tax was separately charged for such advance amount when the bill for it was raised with in14 days)

(a ) Compute the value of taxable service ( b) the service tax payable, and ( c) due date of payment of service tax.Ans .: 5.9.2010

`

1,23,600, 5.10.2010`

1,85,400. [ See problem 27.4 of Practical Approach]

* For solutions to these Practical Questions, refer Bharat's Practical Approach to Income Tax,Wealth Tax, CST, Service Tax & VAT (Problems and Solutions), 2011 edition, by the sameauthors.


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5. R Ltd. is engaged in the business of providing the information technology software serviceand sale of packaged I.T. Software. From the following information submitted to you, compute (a)value of taxable service (b) the service tax payable (c) due date of payment of service tax for thehalf year ended 31.3.2011.

Assume that Service Tax, if applicable, is charged extra in the bills raised.`

05.11.2010 Bills issued to S Ltd. for providing IT Software Service 5,00,00006.12.2010 Bill issued for packaged I.T. software which

includes excise duty @ 10.3% 2,20,60016.01.2011 Bill issued for providing IT Software Service 4,00,00025.01.2011 Amount received against bill raised on 5.11.2010 3,30,90009.02.2011 Amount received against bill raised for package I.T. Software 1,80,00028.03.2011 Amount received against bill dated 16.01.2011 2,42,66031.03.2011 Advance received for IT Software service to be rendered in April

2011 1,00,000Ans .: 5.2.2011

`

30,900, 31.3.2011`

32,960. [ See problem 27.5 of Practical Approach]6. RSG a firm of advocates submits you the following information for the half year ended

30.9.2010. Compute the (1) Value of taxable services (2) Service tax payable (3) the due date of

payment of service tax. `

5.4.2010 Bill No. 101 for consultancy service rendered to X Ltd. 3,00,0006.5.2010 Bill No. 102 for consultancy service rendered to 'Y' 1,50,00018.5.2010 Amount received from X Ltd. 3,00,0006.6.2010 Bill No. 103 raised in the name of P Ltd. for appearance in Court

relating to its case 2,10,0009.6.2010 Amount of fee received for 'Y' 1,00,0009.7.2010 Bill No. 105 for consultancy service rendered to Aparna

Charitable Trust 2,40,00018.8.2010 Amount received from P Ltd. 1,40,00018.9.2010 Amount received for S.L.G. Ltd. for consultancy service

to be rendered in October 2010 1,80,000Bill raised are inclusive of service tax if applicable

Ans .: Value of taxable services`

4,35,178, Service tax payable`

44,822, Due dates 5.6.2010`

28,014, 5.10.2010`

16,808. [ See problem 27.6 of Practical Approach]7. G, a Chartered Accountant, is holding a certificate of practice and has provided the

following services to its clients in the half year ended on 31.3.2011. Compute the service taxpayable and the due date of payment. The bills raised are inclusive of Service Tax, if applicable.

`

5.12.2010 Bill No. 101 for statutory audit fee charged to R Ltd. 3,00,0006.1.2011 Bill No. 102 Internal Audit fee charged to S Ltd. 2,40,0006.2.2011 Amount received for R Ltd. 3,00,0008.2.2011 Bill No. 103 raised in the name of P Ltd. for appearance before 2,60,000

Appellate Tribunal against notice issued to the client.The cheque has been received on the same date

5.3.2011 Amount received for S Ltd. 1,60,0008.3.2011 Amount received as part time lecturer 80,00028.3.2011 Amount received from P Ltd. 2,60,000

Ans .: 5.3.2010`

28,014, 31.3.2011`

14,941. [ See problem 27.7 of Practical Approach]


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CHAPTER 24 Evaluation of VAT in India and itsJustification

24.1 Historical BackgroundValue Added Tax or VAT is a broad based tax levied at multiple stage with tax on

inputs credited against taxes on output.VAT was first introduced in France in 1954. With this imposition, France became

the first European country to implement VAT on an extensive scale. VAT was introducedin Brazil in Mid 1960's then in many European countries in 1970s and subsequently it hasbeen introduced in about 130 countries.

In India, most of the States including Union Territories have implemented VAT

w.e.f. 1st April, 2005 which has substituted local sales tax laws and various other locallevies. It will not be out of the context to mention that VAT had already been introducedunder the Central Excise Law way back in 1986 and in Service Tax since 2002. Intersectoral credit is also allowed since 10th September, 2004. Under the inter sectoral creditsystem the assessee is allowed to take credit of central excise duty paid on input/capitalgoods while making the payment of service tax. Similarly the assessee is allowed to takecredit of service tax paid on input services while making payment of central excise duty.

VAT in India is not comparable with that of in other countries because it isreplacement of State level sales tax and not entire indirect tax structure. VAT in India is aState subject. The States Governments of Madhya Pradesh and Maharashtra hadincorporated the concept of tax on value addition in their respective Sales TaxLegislations during the mid 90's, but could not succeed in implementing the same in thedesired manner. With the joint efforts of the Central Government and the State

Governments, VAT was implemented by a majority of the States with effect from 1stApril 2005.VAT has replaced the general sales tax structure with the only difference in the

manner of its levy. The power to levy tax on sales transactions in the form of VAT isdrawn from entry 54 in List II of Seventh Schedule of the Constitution of India by theState Governments. Under VAT, every sale transaction taking place in the course of business is taxed enabling the State Government to collect revenue on value addition atevery stage. The cascading effect of VAT, being collected at every stage on the cost of goods, is reduced by providing set off of tax paid on the purchases .

24.2 Evolution of VAT in IndiaIndia already had a system of tax collection wherein the tax was collected at one

point from the transactions involving the sale of goods. The single point tax was collectedeither at the first stage or at the last stage.

The system of collecting tax at first stage had the following disadvantages:(a ) Since sales tax was levied and collected at the first stage ( i.e. , at the stage of the

wholesale), the tax rate had to be higher. This encouraged tax evasion and salestax became a tax on honesty, which means the more the honesty, more the taxliability.


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Chap. 24 Evaluation of VAT in India and its Justification 695

(b) In case somehow the goods escaped the tax at the first stage, the goods escapedtax net altogether since there was no way by which it could be caught at anysubsequent stage.

(c) There was ample scope for under-valuation of the value of the goods at firststage, as there was no tax payable at any subsequent stages, even if the goodswere subsequently sold at much higher prices.

In the system of collection of tax at the last stage also, several weaknesses werewitnessed:

(a ) The tax evasion was maximum since the price charged at the last point of saleincreases, which encouraged evasion, even if the tax rates were low;

(b) It was difficult to track the goods evading tax since there was no record of theirearlier movements and after the last point sale, the goods reached in the hands of the consumers;

(c) This also encouraged under-invoicing and involves generation of black moneydue to cash dealings at the last point of sale.

Since VAT is collected at various stages, all the above disadvantages andweaknesses have been overcome, the cascading effect of taxes is eliminated. Moretransparent structure is made up and compliance are improved.

India has been slow in adoption of VAT. In domestic trade taxes, it adopted exciseduty and service tax at the central level and sales tax at the State level for this purpose.

The State Governments had been indifferent in undertaking any reforms in their salestax system, although it accounts for approximately 60% of the State's own tax revenue.The existing sales tax system of the States was confronted with many drawbacks andweaknesses.

The Task Force known as Kelkar Committee observed that presently, "each Statelevies multiple taxes on the same item in different names or at different stages e.g. EntryTax, Luxury Tax, etc." However, it opined that "it is necessary that State VAT should bethe tax to unify all the State-level taxes i.e. Sales Tax, Purchase Tax, Turnover tax,Works Contract Tax, Entry Tax, Special Additional Tax, etc. should all be covered underState VAT.

The efforts were initiated towards introduction of VAT since last many years. TheCommittees of States' Finance Ministers (in 1995 and 1998, respectively) and of theChief Ministers (in 1999) have put forth recommendations to replace sales tax by VAT.This was ratified by the Conference of the Chief Ministers and Finance Ministers held onNovember 16, 1999 and introduction of State VAT in lieu of Sales Tax was finallyscheduled to be made with effect from 1.4.2003.

However, the schedule had to be revised in view of agitative traders' community. TheEmpowered Committee of State Finance Ministers agreed upon 1.6.2003 as the reviseddate of implementation of VAT and it was expected that most of the State and UnionTerritories will implement VAT from 1.6.2003, but it did not happen.

Later, the Finance Minister deferred the implementation of VAT for some more timeso that more conducive environment may be created and agitative opposition may be setto peace. Besides consensus of all the States over the model law and introduction of VATon uniform basis was also necessary. On 30.4.2003 he announced that unless all Statesconform to model draft law and agreed VAT rates, introducing VAT on 1.6.2003 will notbe possible. He stated that VAT should be implemented all over India. Patchwork will


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696 Systematic Approach to VAT Chap. 24

not serve the purpose. In this connection, the Empowered Committee of State FinanceMinisters met regularly and brought out a White Paper on State level VAT on 17.1.2005.

This White Paper on State-level Value Added Tax (VAT) was presented in three

parts:Part 1 : In this part, the justification of VAT and its background had been mentioned.Part 2 : The main design of State level VAT. While doing so, it recognized that this

VAT is a State subject and therefore the States will have freedom for appropriatevariations consistent with the basic design as agreed upon by the Empowered Committee.

Part 3 : Part 3 discussed the other related issues for effective implementation of VAT.

Justification of VAT and Background In the existing sales tax structure, there are problems of double taxation of

commodities and multiplicity of taxes, resulting in a cascading tax burden. For instance, in the existing structure, before a commodity is produced, goods

are first taxed, and then after the commodity is produced with input tax load,output is taxed again. This causes an unfair double taxation with cascadingeffects.

In the prevailing sales tax structure, several States levying multiplicity of taxes,such as turnover tax, surcharge on sales tax, additional surcharge, etc. Withintroduction of VAT, these other taxes have been abolished . In addition,Central sales tax is also to be phased out. As a result, overall tax burden will berationalized, and prices in general fall.

In the VAT, a set-off is given for input tax. VAT has replaced the existing system of inspection by a system of built-in self-

assessment by the dealers and auditing. The tax structure will become simple. That will improve tax compliance and

also augment revenue growth.The VAT will therefore help common people, traders, industrialist and also the

Government. It is indeed a move towards more efficiency, equal competition and fairnessin the taxation system.

The white paper also specified that registration under the State VAT Act shall not becompulsory for small dealers with gross annual turnover not exceeding

`

5 lakhs.However, the Empowered Committee of State Finance Ministers has subsequentlyallowed the States to increase the threshold limit for small dealers to

`

10 lakhs.


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25.3 Liability of tax under existing sales tax system and VAT if charged at eachstage

To curb the evasion of sales tax, the State Government had desired that instead of

levying the sales tax either at first stage or last stage, it should be levied at each stage.However, levying the sale tax at each stage would have resulted into the following twoanomalies under the existing sales tax system:

(a ) Sales tax would have been charged more than once on the same item(b) There would be sales tax on sales tax i.e. it would result into cascading effect .To overcome the above anomalies VAT was introduced so that VAT is calculated by

deducting input tax credit from the tax collected during the payment period.25.3a Input tax credit

The tax paid by the dealer on its purchases of inputs and capital goods is eligible forcredit while making the payment of VAT on the sale of such goods. Such credit is knownas input tax credit. Such input tax credit is allowed as set off from the output tax payableby the dealers on its sale.

Thus, VAT is calculated by deducting tax credit from tax collected during thepayment period.

A dealer cannot claim the input tax credit if the purchases of goods and capital goods are notmeant for business.

Illustration 25.1

R sells goods to S for`

1,00,000. He charges sales tax/VAT @ 10% on the sale price. S sellsthe same goods to T by adding

`

50,000 as his profit and charges sales tax/VAT @ 10%.Compute the tax payable under:(a ) the existing sale tax system assuming sales tax is charged at each stage(b) VAT

SolutionTax liability as per existing

sales taxsystem

Sales taxPayable

Tax liabilityas per VAT

VAT Payable

`

`

`

`

Value of sale made byR to S

1,00,000 1,00,000

Add : 10% Sales tax 10,000 Sales TaxPayable 10,000

10% VAT 10,000 VAT Payable10,000

1,10,000 1,10,000Cost of goods to S 1,10,000 1,00,000 VAT credit

available`

10,000Profit 50,000 50,000

1,60,000 1,50,000

Add : 10% sales tax 16,000 Sales taxpayable 16,000

10% VAT 15,000

VAT payable`

15,000 -10,000 = 5,000

1,76,000 1,65,000

Total sales tax payable `

10,000 + 16,000 =`

26,000


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Chap. 25 Design of State Level VAT 699

Total VAT payable `

10,000 + 5,000 =`

15,000

In the case of VAT, tax is payable only on value addition of `

50,000 i.e. `

5,000.

Difference of tax:`

26,000 15,000 = 11,000.

The above difference of `

11,000 is due to the following:

(1) Sales tax has been levied @ 10% on`

1,00,000 twice. Hence, thedifference amount is

`

10,000.(2) Sales tax has been charged on sales tax i.e. 10% has been charged on

sales tax of Hence, the cascading effect due to extra sales tax 1,000

Total difference 11,000

Illustration 25.2

10% Sales tax 10% VAT

Effect onPrices to final

consumer

Proceeds to thegovernment

Effect onPrices to final

consumer

Proceeds to thegovernment

A mines copper and sells it toa manufacturer B

100 100

Sales tax of 10%. 10 10 10 10

Total Cost to B 110 100

B converts it into a wire with hislabour/profit and sells it to C , awholesaler at 100% margin

220 200

Sales tax/VAT 22 22 20 20 10 = 10

Total cost to C 242 200

C sells to D, a retailer at a 20%mark-up

290 240

Sales Tax/VAT 29 29 24 24 20 = 4

Cost to D 319 240D sells it to the consumer at 100%mark-up

638 480

Sales tax/VAT 64 64 48 48 24 = 24

Cost to consumer 702 528

Total Proceeds to government 125 48

The first thing we observe from the above table is that with equal tax rates of 10%, the finalprice to the consumer is 33% i.e.

`

174 (`

702 `

528) higher in the traditional sales-tax system. Apart of the difference amounting to

`

77 (`

125 `

48) is owing to the higher tax receipts of thegovernment. The rest of the difference,

`

97, is taken by higher profits of the different intermediariesB , C & D .

The second thing we can observe is that almost every time the VAT is charged, it is not an

expense to the person who pays it, but just an advance to the government via the supplier. This istrue for all except the final customer who cannot claim the VAT deduction. Actually, he is the onlyone who pays the full amount.

We also observe from the last two lines of the above table that the consumer is benefited by`

174 (`

702 `

528) in the VAT system whereas the government loses by`

77 (`

125 `

48).25.3b Incidence of tax where more than one raw-material is used for production

The incidence of tax involving more than one transaction can be explained by the


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following illustration:Illustration 25.3

1. R is the manufacturer of two raw-materials viz., X & Y. These two raw-materials have

been manufactured by taking the basic produce of mines on which Vat has not beenallowed. The selling cost of raw-material X is

`

100 per kg. and the rate of VAT is 4%whereas selling cost of raw-material Y is

`

120 per kg and the rate of Vat is 12.5%.2. S has used 1 kg each of both the above raw-materials by purchasing it from R and

manufactured product Z. The quantity manufactured after allowing for loss inmanufacturing is 1.8 kg. The aggregate of wages, conversion cost and profit on the saleof produce Z is

`

500, Thus product Z has been sold for`

720 and VAT has been charged@ 12.5%.

3. T who has purchased the above product Z from S has sold the same to U for`

1000 andVAT has been charged @ 12.5%.

4. U sold the product Z to the customer W for`

1500 and charged VAT @ 12.5%

Manufacturer SVAT charged

`

`

Sale price 720 @ 12.5% 90

Less : VAT credit100 4 % 4120 12.5% 15 19

Net VAT paid 71

Whole seller TVAT charged

`

`

Sale price 1000 @ 12.5% 125 Less : VAT credit720 12.5% 90

Net VAT paid 35

Retailer UVAT charged

`

`

Sale price 1500 @ 12.5% 187.5

Less : VAT credit

1000 12.5% 125

Net VAT paid 62.5

Total VAT earned by the State Government`

19 + 71 + 35 + 62.5 = 187.5


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20% of gross was sold to T who is carrying on business in Mumbai by charging profit @ 30%on cost.

Balance 30% of the Goods was transferred by R to his Branch in Hyderabad.

Compute the input tax credit and its set off.SolutionComputation of input tax credit and its set off

Purchase price of goods in the hands of R`

6,75,000 100/112.5 = 6,00,000 Input tax credit available`

75,000 Less : 2% of the cost of goods on account of Input

credit of 30% of the stock transferred to Hyderabad branchwhich is not allowed

`

6,00,000 30/100 =`

1,80,000 2% 3,600

Balance input tax credit available 71,400

Sale of 50% of goods to S`

6,00,000 50/100 =`

3,00,000 125/100`

3,75,000

VAT @ 12.5% 46,875 Vat payable`

46,875

4,21,875

Sale of goods to U6,00,000 20/100 = 1,20,000 130/100 1,56,000CST @ 2% 3,120 CST payable 3,120

1,59,120

Carry forward of VAT allowed to next month =

`

71,400 46,875 (VAT payable) 3,120(CST payable) =

`

21,405

( 5) Treatment of input tax in case of export sales Export sales are zero rated and thereby exporters are either granted refund of input

taxes paid by them or they can adjust such input tax while making the domestic sales.Illustration 25.7

R of Delhi purchased goods from X of Delhi for`

11,25,000 which includes VAT @ 12.5% Rsold the goods to the following parties:

90% of the Goods was sold to S of Delhi by charging profit @ 20% on cost.2% of the goods was sold to T of Mumbai by charging profit @ 25% on cost CST charged

2%.2.5% of the Goods was sold to U of Germany by charging profit 10% on cost. No tax was

charged.Balance 5.5% goods was transferred to the Branch at Ludhiana (Punjab).Compute the input tax credit and the set off allowed and the VAT & CST payable.

SolutionComputation of input tax credit and set off

Cost of goods to R Input VAT credit11,25,000 100/112.5 = 10,00,000 1,25,000

Less : 2% of cost of goods on account of input credit of 5.5% stock transferred toLudiana (Punjab) which is not allowed

10,00,000 5.5/100 = 55,000 2% 1,100


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Balance input credit available 1,23,900

Sale of 90% of goods to S of DelhiSale price 10,00,000 90% = 9,00,000 120/100 10,80,000

VAT @ 12.5% 1,35,000 VAT payable`

1,35,00012,15,000

Sale of 2% goods to T of Mumbai

Sale price`

10,00,000 2% = 2,00,000 125/100 2,50,000 CST payable`

500CST @ 2% 500

25,500

Sale of 2.5% goods to U of GermanySale price 10,00,000 2.5/100 = 25,000 110/100 27,500 Tax payable NilTax charged Nil

27,500

Since export sale is a zero tax rated sale, input credit of goods purchased which was sold toGermany can be set off from the VAT payable on domestic sales

VAT payable on goods sold within Delhi 1,35,000 Less : Total input VAT credit available after deducting2% for stock transferred but including input credit on

purchases which have been sold to V of Germany 1,23,900

Net VAT payable 11,100

CST payable 500

25.6 Purchases not eligible for input tax creditInput credit is not be allowed in the following circumstances:1. Purchasing from unregistered dealers;2. Purchases from registered dealer who opt for composition scheme under the

provisions of the Act;3. Purchases of goods as may be notified by the State Government;4. Goods where purchase invoice is not available;5. Purchase of goods where invoice does not show the amount of tax separately;6. Purchase of goods, which are utilized in the manufacture of exempted goods;7. Purchase of goods used for personal use/consumption or provided free of charge

as gifts;8. Goods imported from outside the territory of India;9. Goods purchased from other States viz. inter-State purchases;

10. Goods purchased are given away as free samples;11. Goods purchased are destroyed by fire or are stolen or lost;12. Goods received on consignment sale or on stock transfer from other States;

13. Goods purchased and returned within the specified period;14. Purchase of automobile and its spare parts and accessories by a person other

than a dealer.25.7 Input tax credit on capital goods

Input tax credit on capital goods will also be available for traders and manufacturers.Tax credit on capital goods may be adjusted over a maximum of 36 equal monthly


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instalments. The States may at their option reduce the number of instalments.There is a negative list for capital goods (on the basis of principles already decided

by the Empowered Committee) which is not eligible for input tax credit.

25.8 Cenvat credit of Excise and Service TaxExcise Duty and Service tax are levied by the Central Government. Whereas VAT is levied by

the State Government. Hence, the assessee is allowed Cenvat credit of Excise and Service Tax oninput goods/input services while making the payment of Central Excise Duty and Service tax underthe Central Law. The Cenvat credit of Excise duty is allowed only when the buyer is alsomanufacturer of goods. On the other hand, input tax credit of VAT is allowed to every dealer(whether manufacturer or trader) against the VAT payable/CST payable under the State VAT Law.Central Sales Tax (CST) & Value Added Tax (VAT).25.9 Central Sales Tax (CST) & Value Added Tax (VAT)

Central Sales Tax is charged by the seller of goods when he makes an inter-State sale i.e. salemade to dealer/consumer in the other States. In this case, goods move from one State to anotherState. On the other hand, VAT is charged by the seller of the goods, when he makes an intra Statesale i.e. sale made a to dealer or a consumer within the same State.25.9a Who levies CST and VAT

CST is levied by the Central Government but it is collected and retained by the StateGovernment from where the movement of goods started.

VAT is levied by the respective State Governments and it is collected and retained by thesame State Government.

Inter-State purchases of goods is not vatable :Goods which are purchased from other Statesare subject to CST. Such CST is not eligible for input tax credit as CST has been received by otherState from where the movement of goods started. Hence, CST paid on purchases from other Statesis non-vatable.

CST charged on the sale made to other States In case of sale made to other States, CST is charged by the selling dealer. Although such CST

is levied by Central Government but it is payable to the State Government from where the Goodswere sold. A selling dealer is entitled to input tax credit on the purchase made within the State formaking sale of such goods to other State.Example

R of Delhi sells goods to S of Mumbai (Maharashtra) and S of Mumbai sells the same goodsto T of Chennai (Tamilnadu) and T of Chennai sold the same goods to U of Chennai (Tamilnadu).V of Chennai sold the same goods to consumer V of Coimbatore (Tamilnadu).

In the above case, State of Delhi will get CST from R on account of sale made by him to S of Mumbai.

State of Maharashtra will not allow input tax credit to S of Mumbai as tax was collected byDelhi Government. State of Maharashtra did not get any tax on purchases made from Delhi.

State of Maharashtra will get CST from S on account of sale made by him to T of Chennai(Tamilnadu).

State of Tamilnadu in this case will not allow input tax credit to T of Chennai (Tamilnadu) astax was collected by Maharashtra Government. State of Tamilnadu did not get any tax on purchasesmade from Mumbai (Maharashtra).

State of Tamilnadu will get VAT from T of Chennai (Tamilnadu) as the goods were sold

within Tamilnadu. But, State of Tamilnadu will not give input tax credit to T as tax on purchasesmade by T from Mumbai was not received by Tamilnadu State.U of Chennai will get the input tax credit on account of goods purchased from T of Chennai as

the Tamilnadu Government got VAT amount from T of Chennai. Further U of Chennai shall paythe VAT on the sale made to V of Coimbatore after setting off the input tax credit.

V of Coimbatore is although in the State of Tamilnadu and has paid tax on its purchases butwill not get any input tax credit as V is a consumer of goods and not the dealer of goods.


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25.9b Rate of CSTIf the goods are sold to a registered dealer under Central Sales Tax Act, in the other State, the

rate of Central Sale Tax shall be levied at VAT rate (local sales tax i.e. LST rate) subject tomaximum rate of CST which shall be 2%. In other words, CST rate shall be VAT rate or 2%whichever is less.

On the other hand if the goods are sold to any other person in the other State, CST shall beequal to VAT rate of State from where the Goods are sold.

It can be illustrated as under:ExampleVAT Rate in the State Sale to Registered Sale to any

dealer in another other person inState another State

1% 1% 1%2% 2% 2%4% 2% 4%12.5% 2% 12.5%

Illustration 25.8 Determine how much input credit shall be available to the dealer 'X' in Delhi in respect of the

following purchases:(1) Goods purchased from Mumbai

`

2,04,000 which includes Central Sales Tax (CST) @2%.

(2) Goods purchased from a dealer in Delhi 'A'`

3,00,000. VAT charged 12.5% i.e. `

37,500.Total value of purchase invoice

`

3,37,500.(3) Goods purchased from unregistered dealer

`

24,000.(4) Goods purchased from a dealer 'Y' under composition scheme

`

60,000. Y has paid 1%as tax under composition scheme.

(5) Purchases from dealer Z in Delhi for`

1,50,000. VAT charged @ 4%`

6,000. Total valueof purchase

`

1,56,000.(6) Purchases from dealer B in Delhi

`

42,000 VAT is not separately charged in the invoice.

(7) Purchase of capital goods`

7,20,000.`

6,30,000 is price of capital goods and`

90,000 isVAT amount separately charged.

(8) Goods purchased`

62,400 which includes 4% VAT which is separately shown. Suchgoods have been utilized in the manufacture of exempted goods.

(9) Value of goods imported from Germany`

6,00,000.Solution

Particulars Amount of input credit available(1) No input credit will be available on goods purchased

from other States (2) Purchases from dealer 'A' in Delhi 37,500(3) Purchase from unregistered dealer Nil(4) Purchases from dealer under composition scheme Nil(5) Purchase from dealer 'Z' 6,000(6) Purchasers from dealer B. VAT not separately charged Nil

(7) Purchases of capital goods 90,000*/36 2,500(8) Purchases of goods used for manufacturing exempted goods Nil(9) Goods imported from Germany Nil

Total VAT credit 46,000

* VAT credit on capital goods shall be allowed in 36 equal monthly instalments. Thus

`

90,000/36 =`

2,500 VAT credit on capital goods shall be allowed every month.


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Goods on which Goods purchasedSpecial rate of VAT from a dealer

is applicable e.g. underliquor, lottery tickets compositionpetrol, diesel scheme

etc. (See later)

Exempted goods : Under exempted goods category, the empowered committee haslisted about 50 commodities comprising of:

(a ) natural products;(b) unprocessed products;(c) items which are legally barred from taxation; and(d ) items which have social implication.Further, a set of maximum 10 commodities out of commodities listed in the

exempted category will be flexibly chosen by individual States which are of localimportance for the individual States without having an inter State implication.

Examples of few exempted categories of commodities are given below:(1) Books, periodicals and journals including maps, charts and globes(2) Blood including blood components(3) Fresh vegetables and fruits(4) Earthern Pot(5) Electricity energy(6) Course grains other than paddy, rice and wheat(7) Fresh plants, saplings and fresh flowers(8) Kum Kum, Bindi, Sindur, etc.(9) All bangles except those made of precious metels

(10) Curd, Lassi, butter milk and separated milk (11) Betel leaves(12) Animal driven or manually operated agricultural implements their spare parts,

components and accessories


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as they are taxed twice i.e. at the time of purchase of such capital goods and at the time of sale thereof.( b) Income Variant

In case of Income Variant, tax is levied on all sales but deductions for taxes areallowed on the following:(1) purchases of raw materials and components ( i.e. inputs)(2) tax on depreciation on capital goodsCredit of tax paid on purchase of the capital goods is allowed in the ratio of

depreciation over the life of the asset. The depreciation to be provided is dependent onthe life of an asset as well as on the rate of inflation, therefore there are many difficultiesconnected with the variant in measuring depreciation.( c) Consumption Variant

In case of Consumption Variant, tax is levied as all sales but deduction for taxesallowed on the following:

(1) purchase of raw-materials and components(2) capital goodsThus, gross investment is deductible in calculating value added. This variant of VAT

does not distinguish between capital and current expenditures hence there is no need tospecify the life of assets or depreciation allowances for different assets. However, inputtax credit on capital goods is being allowed by the States in 24/36 instalments.

The consumption variant of VAT is most popular and widely used variant among thethree variants of VAT. The reasons behind the preference of this variant over the otherare as under:

(a ) This variant is tax neutral as it does not affect decisions regarding investmentbecause the tax on capital goods is also set-off against the VAT liability.

(b) The consumption variant is convenient from the point of administrativeexpediency as it simplifies tax administration.

(c) It does not cause any cascading effect.Thus, VAT is payable under the above 3 variants as under:Gross product variant VAT payable on sales VAT credit allowed on inputs goods only.

Income variant VAT payable on sales VAT credit allowed on input goods and proportionate VATcredit allowed on depreciation on capital goods.Consumption variant VAT payable on sales VAT credit allowed both on input goods and capital goods.Illustration 26.1

R submits you the following information. Compute( a ) the setting price of the product ( b)cost to the consumer ( c) VAT payable to Government under: ( i) Gross product variant ( ii) incomevariant and ( c) consumption variant.Solution

`

Purchases of Raw-material and component 4,00,0004% VAT on the above purchases 16,000Purchase of capital goods being machinery (life 10 years) 12,00,00012.5% VAT on the above machine 1,50,000Direct and Indirect Expenses 3,00,000


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Chap. 26 Principles, Variants and Methods of Computation of VAT 711

Profit 20% on total costVAT payable on sales 12.5%Case I: Gross product variant

Computation of cost Raw-material cost 4,00,000Direct and Indirect expenses 3,00,000

Depreciation on Machine 10% of `

13,50,000 (VAT credit not available) 1,35,000

Total cost 8,35,000+ profit @ 20% of cost 1,67,000

(i) Sale price 10,02,000

Add : VAT 12.5% 1,25,250

(ii) Cost to consumer 11,27,250

VAT collected from consumer 1,25,250

Less : VAT credit on purchases 4% on`

4,00,000 16,000

(iii) VAT payable 1,09,250

Income variant Raw-material cost 4,00,000Direct or Indirect Expenses 3,00,000

Depreciation on machine 10% of `

12,00,000 (VAT credit available) 1,20,000

Total cost 8,20,000+ 20% profit 1,64,000

(i) Sale price 9,84,000+ 12.5% VAT 1,23,000


VAT collected 1,23,000VAT credit for purchase of raw material 16,000Proportionate VAT credit allowed on depreciation1,50,000 1,20,000/12,00,000 15,000 31,000

(iii) VAT payable 92,000

The balance VAT credit of

`

1,35,000 shall be allowed in subsequent 9 years proportionately.Consumption Variant

Raw-material cost 4,00,000Direct and Indirect Expenses 3,00,000

Depreciation on machine @ 10% of `

12,00,000 (VAT credit available) 1,20,000

Total cost 8,20,000Profit 1,64,000

(i) Sale price 9,84,000VAT @ 12.5% 1,23,000


VAT collected 1,23,000Input credit on purchase 16,000


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VAT credit on capital goods 1,50,000 1,66,000

Balance credit available 43,000(iii) VAT payable Nil

Note .Most of the States are allowing VAT credit on capital goods in 24 to 36 monthlyinstallments instead of the full amount at one time.

(2) Method for Computation of taxThere are several methods to calculate the 'Value Added' to the goods for levy of tax.

The three commonly used methods are as under:(A) Addition method(B) Invoice method/tax credit method, and(C) Substraction method.

(A) Addition methodIn this case VAT is levied only on the value of addition made by a manufacturer or a

dealer which will also include profit charged by him.Illustration 26.2

R purchases raw material for`

1,00,000 (excluding VAT of `

4,000) and incurred the followingmanufacturing and trading expenses:

`

(1) Direct and indirect manufacturing expenses excluding depreciation 80,000(2) Depreciation on assets used for manufacturing activities 10,000(3) Trading expenses 15,000(4) Depreciation on assets used for purposes other than manufacturing 4,000(5) Profit 20,000

VAT payable 4% on salesCompute the tax payable by following the addition method.SolutionTotal additional cost incurred for the goods manufactured and sold`

80,000 + 10,000 + 15,000 + 4,000 + 20,000 1,29,000

VAT payable @ 4% on`

1,29,000 5,160

(B) Invoice method/Tax credit methodTax credit method involves payment of tax by the seller i.e. manufacturer or dealer at

full selling price and credit of tax is allowed, which he has paid at the time of purchase.Thus, the tax is levied on full sale price, but credit is given of tax paid on purchases andeffectively, tax is levied only on 'Value Added' only.

It's an easy and simple way to ensure that tax is paid. It helps elimination of cascading effect of tax on consumers.Illustration 26.3

R a 'manufacturer' sells goods in Delhi to 'S' a distributor for`

10,000. R was not entitled toVAT credit on the purchases of raw material as the raw-material was not liable for VAT. S, thedistributor sells the same goods to whole sale dealer T for

`

12,000 (which includes freight and other

expenses`

1,500 and his profit`

500). T sells the same goods to dealer U for`

13,000 and V sold thesame goods to consumer V for

`

15,000.Compute VAT payable at each stage assuming rate of VAT at each stage is 12.5%.Solution

` ` `

Sale by R to S


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Sale price 10,000 Input VAT credit VAT payableavailable

VAT @ 12.5% 1,250 Nil 1,250

12,500Sale by S to T Sale price 12,000VAT @ 12.5% 1,500 1,250 1,500 1,250 = 250

13,500

Sale by T to V Sale price 13,000 1,500 1,625 - 1,500 = 125VAT 12.5% 1,625

14,625

Sale by U to V Sale price 15,000 1,625 1,875 1,625 = 250VAT 12.5% 1,875

Cost to consumer V 16,875Total tax payable to the Government =

`

1,250 + 250 + 125 + 250 =`

1,875

Thus, the Government will get tax on the final retail sale price of `

15,000. However,the tax will be paid in installments at different stages. At each stage, tax liability isworked out on the sale price and credit is also given on the basis of tax charged in thepurchase invoice.

If the first seller is a manufacturer, he will get the credit of tax paid on raw materials,etc. which are used in the manufacturing. From the above illustration, it is clear thatunder this method tax credit cannot be claimed unless and until the purchase invoice isproduced. As a result, in a chain, if at any stage the transaction is kept out of the books,still there is no loss of revenue. The department will be in a position to recover the fulltax at the next stage. Thus, the possibility of tax evasion, if not entirely ruled out, will be

reduced to a minimum. However, proper measures should be implemented to prevent theproduction of fake invoices to claim the credit of tax at an earlier stage.It is said that in this method the beneficiary is the trade and industry because in the

above example, the total tax collection at the various stages is`

6,250 (`

1,250 + 1,500 +1,025 + 1,875) whereas tax received by the State is only

`

1,875. The set-off available isalso tax paid. If the profit margin is to be kept at the Constant level then the set-off willhave to be considered to avoid cascading effects of taxes.Illustration 26.4

Manufacturer A of Mumbai sold product X to B of Delhi @`

1000 per unit. He has chargedCST @ 2% on the said product and paid

`

80 as freight.

B of Delhi sold goods to C of Delhi @`

1250 per unit and charged VAT @ 12.5%.

C of Delhi sold goods to D, a consumer @`

1500 per unit and charged VAT @ 12.5%

Solution B Liability of VAT

`

Cost of product X purchased from Mumbai`

1000 + 20 (CST) +`

80 1,100(Credit of CST shall not be allowed under VAT)


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Sale price 1,250VAT payable 156.25C Liability of VAT

Purchase price exclusive of VAT 1,250VAT credit to be taken 156.25

Sale price 1,500VAT payable @ 12.5% 187.50VAT credit allowed 156.25

Net VAT payable 31.25

(C) Substraction method

Under subtraction method, the purchase price is deducted from selling price and taxis paid on the net amount only i.e. value added. Thus, when the tax is paid on net amount,dealer's margin is disclosed.

This method is unpopular and cumbersome. It is practically impossible when various

inputs are used in the manufacture of numerous outputs. It is also not preferred by dealersas their margin gets disclosed.The substraction method can be divided into:

(a ) Direct substraction method : In this cases aggregate value of purchases exclusiveof tax are deducted from the aggregate value of sale exclusive of tax.

(b) Intermediate substraction method : In this case aggregate of value of purchasesinclusive of taxes deducted from the aggregate value of sale inclusive of tax.

Example

Suppose a manufacturer sells goods to a trader for`

220 which includes tax charged@ 10%. The trader sells the same goods to a consumer for

`

308 which also includes taxcharged @ 10%. The tax in this case shall be worked as under:

Direct subtraction method Sale price exclusive of tax`

280 200

(Purchase price exclusiveof tax) = Value addition

`

80

Tax`

8 Intermediate subtract method Taxable turnover shall be 8308 220 = 88 88 [88 10/110]

Tax payable`

8.In the above system also, the incidence of tax is at each stage.The subtraction method of computing VAT is normally applied where:

(a ) the tax is not charged separately and(b) the same rate of tax is attracted on all purchases including consumables and

services added at all the stages of production/distribution.26.3 Advantages of VAT

VAT being a broad based tax levied at multiple stages is generally perceived as anexplicit replacement of State sales tax for raising additional revenue for the Government.The purpose of a tax system is to bring in revenues to the Government. Tax revenues canbe raised in many ways. However, the main characteristic of good tax system should


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be The tax system should be fair or equitable; It should cause the least possible harmful effects to the economy and to the

extent possible, it should promote growth to the economy; It should be simple both for its compliance by the payer and for its

administration by the Government; It should be income elastic.

Keeping in view the above objectives, VAT is being implemented in various Statesin place of the local sales tax payable by the seller. VAT is also expected to be moreeffective and efficient for every person including Government, manufacturers, traders andconsumers and hold the following advantages:

(i) Easy to Administer & TransparentThis system of charging tax is easy to administer because of its simplicity. It also

reduces the cost of compliance by the dealers and is transparent, as tax is to be charged inevery bill and there will be no local statutory forms.(ii) Less Litigation

There will be no litigation with respect to allowability of items, as under VAT noitems will be specified in the registration certificate of the dealer. The dealer will beallowed to purchase any of the items of his choice in which he intends to deal. He willalso be allowed to purchase any item he requires as raw material for the purpose of manufacturing or for packing.(iii) Tax Credit on purchase of Capital Goods

The dealer will be allowed to purchase capital goods for manufacturing after payingVAT and will be entitled to get set off tax paid on such purchases from his VAT liability,which will arise on the sales made by him.(iv) Abolition of Statutory Forms

There are no forms under VAT. Therefore, all problems related to formsautomatically get resolved. Dealer will not have to make visits to department to get theseforms issued. Similarly, there will be saving to the department both in terms of cost andin terms of time. Assessing Officers will be saving lot of time which otherwise was beingwasted in issuance of statutory forms, and now this can be utilised for other usefulpurposes including monitoring of tax collection and better administration. Tax collectioncost of the department will go down. There will be a direct reduction and the amountspent on the cost of paper and printing of statutory forms will become NIL. Secondly, thedepartment will also be able to serve more dealers with existing staff and that too moreefficiently.(v) Self-Assessment

Dealers are not required to appear before the Assessing Authority for their yearlyassessments, as under VAT there is provision for self-assessment. All the cases will beaccepted by the department as correct and only a few will be selected for audit as is beingdone by Income Tax Department and Excise Department at present.(vi) Deterrent against Tax Avoidance

It will act as deterrent against tax avoidance. Under the present system, tax ischarged either on first point basis or at last point basis hence the incentive to evade tax ishigh because the dealer saves the whole amount of tax due on such transaction, whereasunder VAT the incentive to evade tax is low because the dealer saves only a part of tax


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to be the simplest method, however, it is more complicated than a simple first point tax.Many small dealers maintain only primitive accounts and it is very difficult for them tokeep proper and detailed records required for VAT purposes. It will also be difficult to

administer the tax systems at wholesale and retail stage as they usually deal in numerousproducts and commodities, which carry different rate. Thus matching of output and inputtaxes is difficult. Ideally VAT should have very few rates which does not seem to bepossible i

Amendments - 23rd August, 2011

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