Grey Areas in Service Tax


Grey Areas in Service Tax

As all are aware, the service tax is here for the past 23 years from Sept, 1994. The original provisions of the law contained in the Finance Act, 1994 have been subjected to various changes almost every year. Still, there are many ambiguities related to service tax provisions that are not clear to business owners. Complexities and grey areas in interpretation are at the core of tax demand being received by many assessees.

 Let’s discuss such 5 grey areas in Service Tax:

Utilization of Cenvat Credit against taxable services in India, in case of partial export of services by assesse

One of the very unclear issue in Cenvat Credit Rules is whether the Cenvat credit received against export of services can be utilized for the output tax to be paid.

As per Export of Service Rules, 2005, where taxable services are exported without payment of tax, but CENVAT Credit was availed, the refund of accumulated CENVAT Credit may be claimed as refund under rule 5 of the CENVAT Credit Rules, 2004.

There are no rules which prescribe that Cenvat Credit should not be utilized for the payment of output service tax in case of partial export. There is ambiguity in regards to this. Some business owners take the service tax input (on domestic expenses incurred for export services) to pay the output service tax on domestic turnover. Contrary to that some do not take the input credit on the expenses related to export and keep on paying the output service tax on domestic turnover.

Whether Service tax registration is required if export turnover exceeds Rs 9 lakhs?

This is again a grey area in Service tax which needs to be addressed. As per the rules of Service Tax every service provider is required to apply for the registration if the value of the services provided by him during a financial year is more than 9 lakhs. Registration is only not applicable for the services covered in negative list. This is again a very unclear issue that whether service tax registration is required for export or not?

Service tax on on free Pick-up/Home delivery of food

Service tax on take away is a grey area. Technically, Service Tax is supposed to be levied on a transaction, only if the dominant nature of the transaction is Service, as in sitting down and eating there, and not when Sales is dominant, like takeouts and deliveries. Though not legally required to, some restaurants do levy service tax, even on takeaways or home deliveries, for various reasons. Unless the restaurant has a strong back-end record maintenance process, it becomes practically difficult to substantiate during an indirect tax audit, which portion of the revenue earned was via takeaways. The risk of litigation tempts some restaurants to levy service tax even when the meal is not served in-house. Also, in cases where restaurants levy service tax they do get a Cenvat credit, which they can use to offset indirect taxes they have to pay, thereby benefitting to an extent, in the process. This is still kind of a legal grey area as of now. Restaurants choose to charge the tax just to avoid the hassle of having to maintain separate databases, and having to check them every time during tax audit. What is exactly to be done, is not yet clarified by the government yet.

Reimbursement of expenses

Every service provider, during the course of rendering the output service incurs lot of out of pocket expenses, which normally comprise travelling, stay expenses, telephone expenses, printing and stationery, etc. These expenses are normally reimbursed at actual by the customer. However, section 67 of the Finance Act, 1994 dealing with valuation of taxable service indicates clearly that the value shall be gross amount charged by the service provider for the service rendered or to be rendered. Many service providers are not including the expenses reimbursed at actual by their customers and there is no clarity in this regard. Legally speaking, reimbursement of expenses, though at actual, is not permitted as a deduction or exclusion from the value of taxable service.

The anomaly is very glaring here which needs to be addressed. Since reimbursement of expenses is only against documentary evidence, it should be allowed to all service providers subject to specific clause in the contract or order from the customer and the invoice/bill clearly indicates this aspect at the time of raising the bill on the customer.

Service tax on Intermediary Services

The term ‘intermediary’ has been defined to mean a broker or an agent who arranges or facilitates a provision of service between two or more persons, but does not include a person who renders the main service on his account. The term ‘main service’ is not very clear in a number of cases.

Generally, an “intermediary” is a person who arranges or facilitates a supply of goods, or a provision of service, or both, between two persons, without material alteration or further processing .

It appears that in the present Service tax regime, the agreement between the parties deserves a paramount importance; hence, proper attention should be given while arranging the transactions.

There has been a lack of clarity on persons arranging or facilitating provision of composite activities such as works contracts, which involves both supply of goods and services. Further, it is unclear as to what is the precise extent of activities that are covered as ‘arranging’ or ‘facilitating’ a provision of service or supply of goods. The scope of ‘intermediary’ should be adequately defined.


There should be absolute clarity in tax treatments, so that all can abide by legislative provisions in the most diligent manner rather than grappling with the tax authorities in legal battles. While one hopes for wishful announcements on tax reforms, but an immediate and substantive resolution of any unwarranted alternate interpretations to ensure proper adherence to existing provisions is also expected. 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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