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TMI BlogDefinition of 'service' under the new service tax law - 'simply' highly complicatedX X X X Extracts X X X X X X X X Extracts X X X X ..... Definition of 'service' under the new service tax law - 'simply' highly complicated - By: - S Sivakumar, Director S3 Solutions Pvt Ltd, Bangalore - Service Tax - Dated:- 6-6-2012 - - Definition of service under the new service tax law simply highly complicated? S Sivakumar, CA The FM has announced that the new service tax law would come into effect from July 1, 2012. With hardly a few weeks left for the new service tax to come into effect, it s perhaps time, to get some clarity on the most fundamental thing, viz. the very definition of service . The Government and its bureaucracy keep saying that, the proposed service tax law is a simple law, based on a simple definition of service , as contrasted to the existing ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vice tax. The emphasis on the simplicity of the new law is so obvious.....the word, simple appears about 24 times in the TRU Circular D.O.F. No. 334/1/2012-TRU dated 16 th March, 2012. Is the definition of service in the new law, really that simple? Let s take a quick look at what this simple definition of service reads, in terms of Section 65(44B) of the Finance Act, 1994 : (44) "service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include (a) an activity which constitutes merely, (i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or (ii) a transaction in money or actionable claim; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (b) a provision of service by an employee to the employer in the course of or in relation to his employment; (c) fees taken in any Court or tribunal established under any law for the time being in force. Unlike the definition of sale as appearing under the VAT law, which only covers activities in the course of business, under the proposed definition of service , all activities including non-business activities could get covered, so long as there are not included under the Negative List or are exempted. Patently non-business transactions between family members can get termed as services under the new law, especially, when one sees that, declared services includes agreeing to the obligation to refrain from an act, or to tolerate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an act or a situation, or to do an act . In my view, transactions between the husband and the wife and between the father and his son could be termed as services . For instance if I give Rs 20 lakhs to my wife and if the Service Tax Department takes the view that this amount has been given by me to my wife for her activity of tolerating me , this could be a service under the proposed, as this cannot be treated as a donation or a gift from me to my wife. Taking this logic forward . if a husband pays alimony to his wife or goes for an out-of-court settlement with his office arising out of a settlement/divorce, this could be a service. Further, if the husband pays an amount to his wife for her activity of refraining from filing a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... owry harassment case against him, arising out of a private settlement, this could be treated as a service under the new law. If I pay Rs 50 lakhs to a college to get an out-of-the turn admission to my daughter for her MBBS seat in a reputed university, not-withstanding the fact that what I have paid can be treated as a donation or an admission fee not covered under the new definition of service , the activity could still be termed as a service in as much as, my daughter might be performing the activity of refraining from creating problems in my house which is treated as a non-monetary consideration for the service performed by me, of getting her an admission in the said college. If my brother pays me a monthly amount, for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taking care of our parents who are staying with me, this activity could be treated as a service rendered by me to my brother, as I am refraining from sending my parents out of my house to his house, which could be treated as an activity under the proposed simple definition of service , attracting the levy of service tax. Taking this discussion forward .. as per the new definition of service , an activity which constitutes merely a transfer of title in goods or immovable property, by way of sale, gift or in any other manner is excluded. The use of the word merely could lead to a lot of confusion and the consequent litigation is inevitable. In terms of this new definition, any sale transaction which has a service element, cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld per se , get treated as a service . Any activity involving sale of goods with a commitment by the seller for rendering post sale services like free maintenance, inspection, etc. can get treated as a service under the new law, as these are not mere sales. A typical example would be sale of consumer items with post sale free warranty. Even, the sale of a car with free paid services and warranties cannot be treated as a mere transfer of title in goods by way of sale . In today s world, there is nothing like a mere sale transaction. Post sale services are part and parcel of today s commercial world and all of these transactions could get treated as services under the new law. Very fortunately, an employee is not treated as re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndering a service to the employer in the course of or in relation to his employment. By implication, services rendered by the employer to the employee would be treated as services . Typical examples are transport facilities and canteen facilities provided by employers, whether free of cost or on a chargeable basis. All of these employee welfare activities could get treated as services under the new service tax law, which is unfortunate. Now . under the sales tax law, we have an excellent definition of consideration to include money or money equivalents. The sales tax law does not recognize non-monetary consideration. In sharp contrast . the service tax law treats consideration as including non-monetary consideration If we have t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o go by the Circular and the Guidance Notes, most non-monetary transactions would get treated as services under the new law. If I, as a CA, give free advice to my colleague on a service tax matter and this colleague, reciprocates, by advising me on, let s say, income tax issues, both of us would be treated as service providers and service receivers. The question is .how does one track these transactions and how does one value these transactions? Will the Service Tax Department ask for my time sheet to ascertain these non-monetary transactions? Clearly, the proposal to levy service tax on non-monetary transactions is a very dangerous trend which could result in all around confusion and the inevitable litigation. Before concluding .. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It is clear that this rather simple definition of service is very highly complicated, for sure. Under the service tax law, the onus would be on the assessee to defend and prove that the activity is not a service and, if the activity is a service, to justify the consideration. Gone are the days when the service tax liability could be worked out on the basis of the financial and accounting records. The service provider would now need to track non-monetary activities and also develop valuation models in order to ascertain his monthly service tax liability. I had always believed that, under the GST era, service would be defined as a transaction or activity, which is not a sale . The new definition of service which only excludes m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ere sales travels goes much beyond this fundamental concept, in as much as, many typical transactions which are considered as sales under the VAT law, could also get treated as services under the new service tax law. The Circular and the Guidance Notes issued by the TRU make a disturbing (if not, an amusing) reading, unfortunately. The scope of the simple definition of service as proposed in Section 65(44B) of the Finance Act, 1994 , is sought to be significantly complicated by these pieces of delegated legislation and to what extent these would stand judicial scrutiny, is anybody s guess. The assessee is bound to suffer to a much larger degree under the new service tax dispensation, as the Department would go by the Circular ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s and Guidance Notes issued by the Board/TRU, in the absence of clear statutory definitions for critical terms like service , activity , consideration , etc. We are clearly moving from a somewhat objective service tax law, as is the present case, to a highly subjective law, which is bound to result in significantly increased litigation. - Reply By Swati Agrawal as = Activity shall not comprises a transaction in money or actionable claims meaning?? Dated: 12-10-2012 - Scholarly articles for knowledge sharing authors experts professionals Tax Management India - taxmanagementindia - taxmanagement - taxmanagementindia.com - TMI - TaxTMI - TMITax ..... X X X X Extracts X X X X X X X X Extracts X X X X
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