Service Tax exemtion of Rs. 4 Lacs - Does it apply on service tax taxable income of 4L or general turnover.?

Answer 1

It is on turnover >>>>>

Central Government can grant partial or total exemption, by issuing an ‘exemption notification’. Such exemption may be partial or total. Exemption may be conditional or unconditional. The only limitation is that exemption cannot be granted by Central Government with retrospective effect.

There are following general exemptions –

Small service providers – Small units whose turnover less than Rs four lakhs per annum are exempt from service tax. Provisions are discussed a little later.

EXPORT OF SERVICES - There is no service tax on export of services.

Service exempt upto 14-3-2005 if Payment received in foreign exchange – If payment is received in foreign exchange, service tax was exempt upto 14-3-2005 – Notification No. 21/2003-ST dated 20-11-2003. This notification has been rescinded w.e.f. 15-3-2005.

Services to UN Agencies/SEZ – Services provided to UN and International Agencies and supplies to SEZ or developer are exempt [Notification No. 16/2002-ST dated 2-8-2002 in respect of UN and International Agencies and Notification No. 4/2004-ST dated 31-3-2004 in respect of SEZ - earlier No. 17/2002-ST dated 21-11-2002].

GOODS AND MATERIAL SUPPLIED WHILE PROVIDING SERVICE – Service tax is not payable on value of goods and material supplied to the service recipient while providing service. There should be evidence about its value. Such exclusion is permissible only if Cenvat credit on such goods and material is not taken.

General Exemption to small service providers

So far, there was no basic exemption limit in case of service tax. Now, the small service providers whose turnover of taxable services from one or more premises did not exceed Rs four lakhs in 2004-05 will be exempt from service tax w.e.f. 1-4-2005. The provisions are prescribed in Notification No. 6/2005-ST dated 1-3-2005.

How to calculate four lakhs ? – The mode of calculations of Rs four lakhs is different for two different purposes. For the purpose of determining eligibility in current year, what is relevant is that ‘aggregate value of taxable services rendered’ in previous financial year should not exceed Rs four lakhs. ‘Rendered’ means ‘provided’.

Thus, it does not matter what were the payments received in the previous year. Normally, ‘rendered’ will mean taxable services ‘billed’ in previous financial year, assuming that billing is done in the same financial year in which service is provided.

Aggregate value not exceeding Rs four lakhs - For purpose of calculating exemption in current financial year, service tax is exempt to the extent of ‘aggregate value not exceeding four lakhs’.

Meaning of ‘Aggregate Value not exceeding Rs four lakhs’ – “Aggregate value not exceeding four lakh rupees" means the sum total of first consecutive payments received during a financial year towards the gross amount, as prescribed under section 67 of the said Finance Act, charged by the service provider towards taxable services till the aggregate amount of such payments is equal to four lakh rupees. However, it does not include payments received towards such gross amount which are exempt from whole of service tax leviable thereon under section 66 of the said Finance Act under any other notification [Explanation B to the notification].

Thus, exempted turnover is not required to be considered for purpose of availing the exemption notification.

Payment received in respect of previous year not to be ignored? - If certain payments are received in respect of bills raised in previous year, that will not have to be considered. The reason is that the service was ‘exempt’ when it was rendered. Taxable event in service tax is ‘providing/rendering service’ and not ‘receipt of payment’.

Billing done is not relevant – Billing made by service provider is not relevant in current year, but payment received is relevant. This is likely to create difficulties in respect of borderline cases. It may happen that billing might have exceeded Rs 4 lakhs, but payment received has not exceeded Rs four lakhs. As per strict interpretation, even if billing has exceeded Rs four lakhs, there is no liability till ‘payment received’ exceeds Rs four lakhs. Hence, the service provider is not required either to charge or pay service tax on such Bills during such period [It is not clear what is the intention, but as per strict interpretation of words used, this interpretation seems to be correct]. Of course, next year, he will not be entitled to any exemption from service tax at all.

Exemption available in 2005-06 even if turnover crosses Rs four lakhs in that year - Even if the service provider crosses turnover of Rs four lakhs in 2005-06, he will be liable to service tax only on turnover exceeding Rs four lakhs and not on his earlier turnover, if his taxable turnover during 2004-05 was Rs 4 lakhs or less.

However, if taxable turnover in 2005-06 exceed Rs 4 lakhs, there will be no exemption from service tax in 2006-07.

Service should not be under brand name of others – The taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; will not be exempt.

Some persons provide service under name of some brand name owner e.g. under brand name of franchiser like NIIT, McDonald etc. These service providers will not be entitled for the exemption available to small service providers.

The exemption will also not be available if brand name belongs to a group company or another firm in the same group. If a person provides service under his own brand name, he will be entitled for the exemption.

As per Explanation (A) to the exemption notification, "brand name" or "trade name" means a brand name or a trade name, whether registered or not, that is to say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented word or writing which is used in relation to such specified services for the purpose of indicating, or so as to indicate a connection in the course of trade between such specified services and some person using such name or mark with or without any indication of the identity of that person.

Exemption not applicable to service receivers who are liable to pay service tax – The exemption is not applicable in cases where the service receiver is liable to pay service tax as per provisions of section 68(2) read with rule 2(1) of Service Tax Rules. Thus, the exemption is not applicable to receiver of services of Goods Transport Agency or Mutual Fund Agency or insurance Company or recipient of service from a non-resident.

Conditions for availing Exemption are as follows -

Exemption is optional - The provider of taxable service has the option not to avail the exemption contained in this notification and pay service tax on the taxable services provided by him. Such option, once exercised in a financial year, shall not be withdrawn during the remaining part of such financial year. He can change the option in next financial year.

Cenvat credit restrictions - The provider of taxable service shall not avail the CENVAT credit of service tax paid on any input services, under rule 3 or rule 13 of the CENVAT Credit Rules, 2004 used for providing the said taxable service, for which exemption from payment of service tax under the notification (i.e. 6/2005-ST) is availed of. He cannot avail credit of capital goods received during period he was availing exemption. If he starts payment of service tax, he can avail Cenvat credit in respect of inputs or input services received after he starts payment of service tax. If he opts out of Cenvat at end of financial year, he will have to reverse Cenvat credit on inputs lying in stock. Balance Cenvat Credit shall lapse.

Services provided from all premises to be considered together – Where a taxable service provider provides one or more taxable services from one or more premises, the exemption under this notification shall apply to the aggregate value of all such taxable services and from all such premises and not separately for each premises or each services; and the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, should not exceed rupees four lakhs in the preceding financial year.

Goods Transport Agency exempt if its taxable turnover is less than Rs four lakhs – In case of Goods Transport Agency, the service tax is payable by service receiver. In few cases, the GTA (Goods Transport Agency) is liable to pay service tax. If its turnover in respect of which he is liable to pay service tax is less than Rs four lakhs, he can avail the exemption. Thus, total turnover of GTA is not required to be considered. Only his taxable turnover, i.e. on which he is required to pay service tax should be considered [para 3 of Notification No. 6/2005-ST dated 1-3-2005].

However, consignor/consignee who is liable to pay freight is not entitled to this exemption.

Specific Exemptions

In case of some services, service tax is payable at lower rates. The lower rate is applicable if the service provider does not avail Cenvat credit of inputs and capital goods. He can avail Cenvat credit on input services.

Some important exemptions are as follows –
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Mandap keeper providing full catering services has to pay service tax on 60% gross amount charged. This is also applicable to hotels providing ‘mandap keeper’ service - Notification No. 12/2001-ST dated 20-12-2001.
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Outdoor caterer has to pay service tax on 50% amount if he provides full and substantial meal - Notification No. 20/2004-ST dated 10-9-2004.
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Goods Transport Agency (GTA) has to charge service tax only on 25% amount in his invoice [Payment will be made by consignor/consignee who is actually paying freight] - Notification No. 32/2004-ST dated 3-12-2004.
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Tax on Construction Service is payable on 33% of gross amount charged for taxable services if gross amount included value of material (Notification No. 15/2004-ST dated 10-9-2004.
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Pandal and shamiana contractor providing full catering service is required to pay service tax on 70% of gross amount charged for the service - Notification No. 22/2004-ST dated 10-9-2004.
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Rent-a-cab operator is required to pay service tax on 40% of gross amount charged for providing taxable services – Notification No. 9/2004-ST dated 9-7-2004.
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In case of package tours, i.e. where charges include provisions for transportation and accommodation, service tax is payable only on 40% of gross amount charged - Notification No. 39/1997-ST dated 22-8-1997. This exemption is also available to tour operator providing service other than package tour – Notification No. 2/2004-ST dated 5-2-2004.
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If tour operator provides services only relating to arranging booking accommodation, service tax is payable on only 10% of gross amount charged for service provided in relation to tour – Notification No. 40/1997-ST dated 22-8-1997.
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Air Travel Agent is liable to pay service tax on his commission. He has option to pay service tax at flat rate on ‘basic fare’ on which he gets commission. The rate is 0.5% in case of domestic booking and 1% of basic fare in case of international booking – rule 6(7).