Valuation of Taxable Service

Table of content

1.0       INTRODUCTION

2.0       VALUATION OF TAXABLE SERVICES PRIOR TO INTRODUCTION OF SERVICE TAX REGIME BASED ON NEGATIVE LIST

3.0       VALUATION PROVISIONS IN THE FINANCE ACT 1994

4.0       VALUATION RULES

5.0       DETERMINATION OF VALUE BY CENTRAL EXCISE OFFICER

 

INTRODUCTION

Service Tax came into effect in 1994 through the Finance Act 1994, and was payable on a specified list of services. However, from 2012, Budget 2012 (which received assent of President on 28.05.2012) has made service tax applicable on all services except those in the Negative List, thus introducing the ‘New Service Tax Regime based on Negative List’. Vide Notification No. 19/2012-ST dated 05.06.2012, the Central Government has announced 01.07.2012 as the date of Introduction of the new regime.

As per Section 66B of the Finance Act 1994, which is the charging section, service tax is levied @ 14% on the value of taxable services, along with Swatch Bharat cess and Krishi Kalyan cess @0.5% each Therefore, value of service provided is relevant for determining the amount of service tax payable when a taxable service is provided by a person to another.

The manner of determining the value of service on which service tax becomes payable is provided in Section 67 of the Finance Act 1994. Further, Section 67A of the Finance Act 1994 provides that the rate of service tax, value of a taxable service and rate of exchange, if any, shall be the rate of service tax or value of a taxable service or rate of exchange, as the case may be, in force or as applicable at the time when the taxable service has been provided or agreed to be provided.

Prior to 18.04.2006, the definition of value of taxable service was confined to the gross amount charged in all situations by a service provider, meaning that only the ‘monetary consideration’ received by the service provider was the sole basis for determining the value of taxable service. Thus, if a service provider chose not to charge any money for the service provided, he was not required to pay tax on that service. Therefore, where consideration was received in kind or by way of reimbursement of expenses, fees etc., then such values would not be included for the purpose of determination of value of taxable service.
In order to overcome this difficulty, the Finance Act 2006 substituted section 67 and the new definition of value, became effective from 18.04.2006. Under the amended Section 67, the value of the taxable service would not be the amount charged by the service provider, but would be the cost of the service to the service provider. That is, the value of taxable service now depends upon the form and manner in which the consideration for providing the taxable service is received by the service provider. If the consideration is entirely in terms of money, the value shall be the gross amount of the money charged.

However, if the consideration is not wholly in terms of money or only partly in terms of money, then the value has to be determined applying the Service Tax (Determination of Value) Rules, 2006.

With the introduction of new system of taxation of services based on the negative list with effect from 1.07.2012, there has been no fundamental change in the manner of valuation of service for the purpose of payment of service tax. The broad scheme remains the same except some required changes carried out to align the scheme of valuation of taxable services and the Service Tax (Determination of Value) Rules, 2006 with the new system of taxation.

The Valuation Rules lay down the manner of determining the value of non-monetary consideration.

As per clause section 67(1)(ii), where the consideration received is not wholly or partly consisting of money the value of taxable service shall be the equivalent money value of such consideration. If the same is not ascertainable then the value of such consideration is determined under section 67(iii) read with rule 3 of the Service Tax (Determination of the value) Rules 2006 as follows:-

  • On the basis of gross amount charged for similar service provided to other person in the ordinary course of trade;
  • Where value cannot be so determined, the equivalent money value of such consideration, not less than the cost of provision of service.

Therefore, determining the value of non-monetary consideration under the Valuation Rules cover the following aspects:

  • Where the consideration received for provision of service is not wholly consisting of money, the value in such cases shall be the gross amount charged by the service provider for provision of similar service to any other person in the ordinary course of trade.
  • If the value of similar service provided by the same service provider is not available, then the value has to be determined.
  • Money value of non-money consideration received should be determined by the service provider.
  • If the consideration received is not wholly consisting of money, equivalent money value of the consideration determined by the service provider shall be the taxable value for charging service tax.
  • If the consideration received is partly in money and partly in non-money terms, the sum of consideration received in money and the equivalent money value of the non-money consideration determined by the service provider shall be the taxable value for charging service tax.

In cases where provision of service is for a consideration which is not ascertainable then the value of taxable service shall be the amount as may be determined by the Valuation Rules. The manner for determining this value has been prescribed under Service Tax (Determination of Value) Rules 2006 by providing provisions in respect of the following situations:

  • Determination of value of service portion involved in execution of works contract
  • Determination of value of service in relation to money changing
  • Determination of value of service portion involved in supply of food and any other article of human consumption or any drinks in a restaurant or as outdoor catering

In addition to the Service Tax (Determination of Value) Rules 2006, certain sub-rules in rule 6 of the Service Tax Rules, 1994 also provide provisions for determination of value of taxable services in specified situations.

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