TAXATION OF SERVICES BY EMPLOYERS - (COMMENTS ON SERVICE TAX DRAFT CIRCULAR DATED 27 JULY 2012)

[Dr. Sanjiv Agarwal]

CBEC had issued a draft circular dated 27 July, 2012 in relation to certain services provided by the employer to the employees in the course of employment, supply of manpower, joint employment, Treatment of reimbursements made by the employer to the employee, services of directors and benefits to retired employees. This draft circular seeks to levy service tax on various activities which may be a point of litigation in future. Here are comments on the said draft circular.

General

Since definition of Service in section 65B(44) of Finance Act, 1994 itself excludes services provided by employee to employer, all related costs, consideration irrespective of mode of payment, in kind, perquisites etc should also be kept out of scope of Service Tax.

There is no definition of 'salary or perquisite' in the present law or any of the rules. To avoid confusions and eventual disputes, it would be desirable to define 'salary', 'perquisite' and 'cost to company' for the purpose of intended interpretation (which will be subject to judicial scrutiny) or borrow the meanings of these terms from Income Tax Act, 1961.

Any consideration, payment or perquisite falling under the definition of 'salary' as per Income Tax Act, 1961 should be out of the Service Tax net as services rendered by employees to employer are not covered under Service Tax at all.

Similarly, consideration or transactions emerging out of employment contract should be outside the scope of Service Tax.

Specific Comments

A. Manpower Supply

1. It is stated that erstwhile definition of manpower supply will not be applicable and it should be given its natural meaning. While the Draft Circular explains the intent, it would be desirable to bring in the term 'supply of manpower' which is already defined in Rule 2(1) (g) of Service Tax Rules, 1994 as under:

'supply of manpower' means supply of manpower, temporarily or otherwise, to another person to work under his superintendence or control.'

Thus, for the purpose of taxability, aforementioned definition has to be considered and clarification provided accordingly.

2. It is suggested that the word 'temporary' be clarified as in certain cases, short term deputation are provided to complete a particular task such as in colleges and universities, one time jobs in offices etc. (eg, deputation for one month for election / examination duty in a university or deputing a officer to a specific project etc). Such deputations should not be subjected to Service Tax, more so when no consideration is involved.

3. In case of business entities, where contractual employment is with 'A' company but services are wholly given to 'B' or other company on deputation, in such a case, manpower supply could be deemed to be provided. However, if such deputation is for less than a month at a stretch or say, upto three months in entire financial year, it may not be considered a case of manpower supply.

4. In partial secondment where employee of parent or Group Company is asked to perform some assignments of wholly owned subsidiaries occasionally, such cases should not be covered under manpower supply. It should also not cover the cases of transfer within the group involving recoupment of salary cost. It is the practice that appointment letters contain a clause that services will be transferable within the group.

5. Valuation of supply of manpower service has been a issue of dispute and litigation since long. It would be desirable to exclude from the value of taxable service the amounts attributable to only statutory contributions such as ESI, PF etc.

B. Joint Employment

1. Para (5) of Draft Circular perhaps addresses the issue where the employee renders service to more than one employer on part-time basis to all such employers.

2. Para (5) also states that if the employee is engaged by one employer and his services made available to other for a consideration, it shall not be a case of joint employment.

This may not be a correct proposition as if this stand is taken, there will not be much difference in a situation envisaged in para (6) of draft Circular. Infact, all such arrangements would fall in para (6) only.

3. It is suggested that in case of joint employment, following could be adopted –

(i) Joint employment with more than one employer, i.e., salary taken from all employers – governed by section 65B(44) and hence not taxable.

(ii) Employed be one  employer (say parent company) but services availed by other companies / entities within group (subsidiaries / associates) and cost shared / reimbursed – not to be considered a case of supply of manpower.

(iii) same as in (ii) above but consideration involves profit element  / mark-up / margin – to be taxed as supply of manpower service.

(iv) same as in (ii) above but engaged by any company / entity other than subsidiary /  group company – to be taxed as supply of manpower service.

4. For this purpose, meaning of group / subsidiary / associate could be borrowed from Companies Act, 1956 or SEBI regulations.

C. Directors

1. India has got over six lakh companies- listed, unlisted, public and private and a majority of such companies are family run or small. Even some companies exist on paper.

About 9000 companies are listed companies with broad based board of directors in place. Such listed companies do pay sitting fee and other forms of remuneration to its directors – eg, commission, bonus, ESOPs, right shares etc.

2. Directors on company boards could be executive or non-executive directors. Executive directors include executive chairman, managing directors, joint managing director, executive director or any other whole-time director, by whatever name called. Non-executive directors could be non-official directors or independent directors or nominee directors or elected directors who do not engage themselves in day to day activities of the company.

3. It is suggested that for the purpose of levy of Service Tax, only listed companies should be covered. This will facilitate cost effective tax collection, serve the objective and avoid smaller companies to fall under reverse charge. Alternatively, the criteria for CARO applicability may be followed so that all companies to which CARO applies will be covered in tax net. This limit is based on capital and turnover.

4. It is also suggested that tax should be collected from the service provider only and not made payable by the company under reverse charge basis. Since most of the directors on the corporate boards are educated, professionals and of high caliber, compliance is almost assured which will save companies from unnecessary and avoidable compliance under reverse charge.

5. It should be amply clarified that all executive / whole-time directors are not covered for Service Tax purpose.

6. Also, where a directors attends a meeting as a government / bank nominee and no fee is paid or is payable to such director or his/her nominating agency, then Service Tax should not be payable on the notional valuation invoking valuation Rules. There are instances where government officers attend the meetings of banks/PSUs etc for which no fees is paid either to the concerned director or his sponsoring agency.

7. It may also be clarified for the sake of clarity that only fees / commission is taxable and not the cost of attending the meeting, which is otherwise borne by the company itself.

8. There is a confusion prevailing about taxability of remuneration to partners paid by firms. Since partners provide service to their own firm, there should be no taxability. Moreover, partners can lawfully draw salary from the firm for the work done by them in the firm. The firm's profits are directly related to the efforts put in by the partners of the firm. Unlike a company which is a separate legal entity / artificial juristic person, a firm is represented by its partners. Company is managed by directors who may or may not be promoters / shareholders. In case of partners, it is not so and their liability is also unlimited. In view of this, it is suggested that it should be suitability clarified that partners' salary is not covered in the scope of Service Tax. The salary to partner is allowed, both under Income Tax Act, 1961 and Partnership Act, 1934.  taxmanagementindia.com

D. Supplies by Employer to Employees

1. It is proposed to tax the facilities provided by employer to employee for a consideration.

It is advisable that this is an area where appropriate interpretation is important and it cannot be said as a rule that all services / activities provided / undertaken by employer for employees for a consideration shall be taxable.

2. Income Tax Act, 1961 defines 'salary' and 'perquisite' and law of the land is that salary includes perquisites which could be in cash or kind. It would be desirable to clarify that any activity falling with the four walls of the terms of contract of employment duly documented / agreed upon by employer and employee shall not be liable to Service Tax as it is nothing but consideration in kind or a facility at a reduced value or at a subsidized price arising out of employment. Moreover, salary packages are designed and prepared differently for different employees but cost to company (CTC) is relevant.

Look at the following example –

Factor	Employee A	Employee B	Employee C
Consolidated Salary	20000	-	-
Salary	-	15000	25000
Reimbursement of Mobile Bill / Recovery	-	3000	(-) 3000
Value of use of Office Car / Recovery	-	2000	(-) 2000
Total / Net Salary	20000	20000	20000

It is evident from above that while net salary / outgo to all employees is same, Service Tax impact would be different, though the intention of employer – employee is not to evade Service Tax.

3. It is suggested that in case of employer – employee contracts, entire 'cost to the company' (CTC) should be out of Service Tax net and the proposed narrow interpretation being followed by the Department should be avoided. If it is not done, the salary contracts shall be revisited by companies / employees and the Department may not get the expected revenue. Moreover, it is also not desirable to tax perquisites looking at current levels of inflation and depreciating rupee.

4. Taxing services such as those of telephone and motor car for personal use may involve lot of dispute and litigation as it would be very difficult to justify the personal use. Even in cases where phones are installed at residences of officers, such officers do work for their employers on 24 x 7 basis and attend to office calls on 24 x7 basis only.

5. Department would end up fighting disputes as If would be a grey area to determine whether the use is personal or official in cases such as phone installed at factory manager / security officer's residence or a car provided to a doctor on 24 x 7 basis. It should not be expected to keep record / log book of personal use. This will also result in undue harassment by the field formations.

E. Reimbursements to Employees

1. Reimbursement of expenses incurred on behalf of employer whether in course of the employment or in terms of employment contract, both should be excluded from scope of Service Tax.

F. Benefits to Employees / Pensioners

1) A Circular cannot attempt to decide that employees would include ex-employees and pensioners. This may be set aside on judicial interpretation. Employee would not include ex-employees.

2) An employee ceases to be an employee on superannuation or on leaving the employment.

3) Reimbursement in relation to earlier employment and supplies in relation to earlier employment shall not be covered under the employer – employee relationship.

G. Miscellaneous

It is advisable to consult the related provisions of Companies Act, ESI Act, PF Act, SEBI guidelines, Income Tax Act, AS-15 on employee benefits etc. while finalizing the Draft Circular. 

(Based on the comments submitted by the author to the Ministry of Finance) 

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