10 grey areas in Service Tax


There are many ambiguities related to service tax provisions that are not clear to business owners. Many new provisions have been introduced under service tax act but certain grey areas still prevail. Let’s discuss such 10 grey areas in Service Tax:

This is what you are missing out on Service Tax compliances

  1. If we talk about construction business, first of all it is unclear to many business owners that service tax is not charged on constructed property. It is chargeable in case of flats which are under construction. Secondly, service tax rate does not vary from state to state & is uniformly applicable to whole country at one rate. The calculation of service tax is also one of the biggest grey areas that are unclear to construction business owners. They do not know the fact that service tax is calculated only on the labor and service cost incurred under construction project. They must know the fact that land cost is not subjected to service tax. But under composition scheme, value of land is included while charging service tax. This is the biggest mistake made by many builders.

  2. Another issue that is unclear under service tax provisions is whether self-service activity should be taxed or not. No light has been thrown on this issue from many years, and it is still unanswered. If it is assumed that self-service activity is charged to tax under GST, then a business will keep on paying reverse charge on services that are exchanged between different branches located at different places. It will greatly affect the business working capital & cash flow.

  3. One of the other grey issues is regarding service tax liability on home delivery. There is ambiguity regarding service tax chargeability on food delivered at home. When we eat in restaurant, service tax is charged but there is no tax liability on home delivery services. But there are some restaurants which are charging service tax on home delivery too.

  4. Another grey area is regarding service tax chargeability on online advertising. Earlier online advertising was in negative list because of which service tax exemption was enjoyed by businessmen. But during 2014-15 budgets, it has been removed from the negative list, which means service tax will be charged on online advertising. Some businessmen were treating their online income as online advertising and were claiming exemption. But from 2014-15, online advertising will be charged service tax but if the advertising income is not crossing the limit, exemption can be claimed.

  5. Chargeability of service tax on sponsorship of sport events is another area that needs clarification. Even service tax commissioners are in doubt in this area. They also collected service tax from sponsors by sending notices to protect revenue. As per the ambiguous provisions of definition of section 65 of finance act, many companies sponsoring IPL teams were taking advantages and were claiming exemption from service tax. But the amendment in budget specifically brought this area under the scope of service tax. Many companies are still fighting their cases related to this issue.

  6. The main ambiguity in service tax provisions is related to negative list introduced by finance minister. It was hoped that this division of positive & negative list will make the provisions simple. But it led to more ambiguities. For instance the core services provided by Indian railways have been exempted under transportation of goods & services but transportation through roads is still taxable. Also there are many transactions that are subjected to service as well as sales tax which means these transactions are coming under scope of double taxation.

  7. As per the new provisions of service tax both service providers as well as service recipients are liable to service tax. It creates more ambiguities & hassles for service recipients. This is because most of the businessmen are unclear as when they are liable to pay service tax.

  8. There has been deletion of provisions of section 80 as a result of which penalties imposed under section 76, 77 & 78 has been waived provided reasonable cause of failure established. This has created ambiguity regarding appeals which are pending & seeking relief under section 80. There is confusion whether CESTAT can adopt new norms for deciding those pending appeals or not.

  9. Another major issue is regarding classification of services. For instance, Makemytrip company was classified by DGCEI as hotel service provider while company asserts that they are operating as tour operator. They said that they are not liable to pay service tax on hotel service rather it is the responsibility of actual service provider. The travel operators are just charging commission for getting the bookings done. So they are not responsible for whole services provided by hotels.
  1. Service tax provisions related to IT services also has some ambiguities. It was announced that AMC and other IT related services shall be subjected to service tax. This gave rise to some confusion in the mind of tax payers regarding exact definition of AMC. It was made clear by tax experts that service tax is charged on services rendered and AMC is not mentioned as related to some particular industry. It was made clear later on that service tax is compulsory for service providers belong to IT segment. However, there are certain notifications specifically exempting some IT related services.

The above points are some areas that need strong clarifications and need to be known by business owners. These are certain grey areas which allow the business owners to take advantages and evade service tax. Some may evade tax because of ignorance or some do it intentionally. More clarifications in the act can stop such practices to a greater extent.

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