Recent amendments in service tax regulations implications for the printing industry

This essay has become imperative because the recent changes in the Service Tax regulations entail incidence of Tax falling directly on SERVICE RECEIVERS in Industry and Trade – thereby necessitating compliance with the prescribed procedures like Registration with S.T. Commissionerates and filing of half-yearly Returns. This will be an added responsibility, besides Sales-VAT and Central  Excise, the other two indirect taxes.

1.1   The far reaching changes made in the matter of concepts, ambit and exigibility in the Service Tax regulations, in the Budget 2012 as well as in subsequent series of Notifications, are of great consequence to the Trade and Industry. This essay attempts to discuss the implications for the Printing Industry, in particular – shorn of legalese and jargons.

1.2   Printers produce printed materials. As ‘Manufacturers’ of such materials they are liable for payment of Excise Duty – subject, of course, to the exemptions available in the Tariff itself or thro’ exemption Notifications. Thus, all Printers are manufacturers of ‘Excisable Goods’ – and not providers of any service. It is axiomatic that wherever excise applies, Service Tax cannot apply. Therefore, the first question that arises in everyone’s mind is whether a Printer becomes liable to Service Tax at any point, as a SERVICE PROVIDER.

1.3   The second question that arises is whether a Printer is liable to bear the burden of paying the  Service Tax himself, at any point, as a SERVICE RECEIVER. The general belief would be that only the Service Providers should be liable to pay the Service Tax. But, about three years ago, in the case of services provided by Goods Transport Agencies, the burden of paying the tax was shifted over to the shoulders of those who availed of such services. This was the first case of what is now termed as REVERSE CHARGE MECHANISM by which the responsibility for payment of Service Tax was fastened on the SERVICE RECEIVER (even without the benefit of the threshold exemption slab of Rs.10 lakhs). The Service Provider was left out of the Service Tax net, either wholly or partially.

1.4   Now, effective from 01/07/2012   (by Notification No.30/2012-ST dt.20/06/2012) this REVERSE CHARGE taxability has been made applicable to ELEVEN SERVICES [including the aforesaid ‘Goods Transport Agency Services’ which has been operative for a few years now) and the latest addition being ‘services provided by a Director to the Company’. (Notification No.45/2012-ST Dt.07/08/2012); and, perhaps, a few more additions are yet to come).

1.5   So, this essay is meant to shake the printers out of their complacency and alert them to the present reality (emerging from the changes made in the 2012 Budget and the series of Notifications issued so far) on the question of incidence of Service Tax on them as SERVICE PROVIDERS  as well as SERVICE RECEIVERS. And, therefore, to:-

a)  Register themselves with their jurisdictional S.T. Commissionerates;

b)  Pay the prescribed Tax within the stipulated time;

c)  File the half-yearly returns in the prescribed form, even if they are  ‘NIL’ Returns; and

d)  Comply with the other procedural formalities

2.   General concepts

2.1   Before examining the issues relating to the incidence of the tax, let us understand some basic concepts.

2.2   Definition of Service

2.2.1  For the first time since Service Tax was enforced in 1994,  the Government has come out with a definition for ‘SERVICE” only now.

2.2.2  ‘Service’ has been defined in clause (44) in the new section 65B to mean –

a)            any activity

b)            for a consideration

c)            carried out by a person for another and

d)           includes a ‘declared’ service

Here –
The term ‘Activity’ would include any act done, work done, deed done, an operation carried out, executions of an act, provision of a facility and so on and so forth. Thus, the incidence of tax encompasses a wider ambit than what would be commonly believed.

The term ‘consideration’ would cover even a compensation for the service otherwise than in terms of money. However, any activity done absolutely free will not constitute a taxable service.

The term ‘Person’ will cover natural persons as well as juridical persons, namely

·         an individual

·         a Hindu Undivided Family

·         a Company

·         a Society

·         a Limited Liability Partnership

·         a Partnership Firm

·         any association or body of persons

·         Governments – State as well as Central

·         A local authority (Municipality)

·         Any artificial juridical person, not covered above

(Thus, all Printers will be covered, be they Proprietary concerns/ Partnership Firms/Co-operative Societies/or Private or Public Limited Companies. This aspect is important to note because, in some cases the incidence of S.T. falls on limited companies only, and in others, on ‘business entities’ which will cover even proprietary concerns/partnership firms/or limited liability partnerships.)

2.3   It is important to note, however, that the aforesaid definition of ‘Service’ DOES NOT include—

a)      any activity that constitutes only a SALE, that is, transfer of title in movable or immovables.

b)     Any process amounting to manufacture or production of  goods.

c)      Any service provided by an employee to an employer in the course of employment

d)     A transaction only in money or actionable claims

e)      Fees payable to a court or a tribunal

Printers will do well to note these exclusions from the ambit of ‘Service’ and, therefore, from the incidence of Service Tax.

i)        Firstly, any trade in goods is excluded. Trade is subject to Sales Tax (now Sales VAT) and so cannot attract another indirect tax viz. service tax. (Sale of immovable properties also do not attract either Sales-VAT or Service Tax).

ii)      Secondly, ‘any activity amounting to manufacture’ is also excluded from the ambit of Service Tax as it is subject to the levy of another indirect tax viz. Central Excise Duty. The underlying concept here is avoidance of double taxation, apart from the fundamental concept that the activity of production and sale of goods cannot, even in common parlance, satisfy the definition of service.

iii)    The third important exclusion is ‘service in the course of employment’ establishing an employer–employee relationship. So, for the employees engaged by a Printer, neither the employee is liable for the tax as the Service Provider nor the employer  as the Service Receiver.

iv)    However, a person engaged by the employer in private capacity, beyond the demands of employment will be taxable.

v)      On the other hand, services provided on contract basis, i.e. on principal-to-principal basis, are not services provided in the course of employment.

vi)    But, services provided by a casual worker to an employer, who gives wages on daily basis to the worker, are treated as in the course of employment and so exempt from Service Tax.

vii)  Similarly, part-time employees will also be exempt.
 

3.   Significant changes in the 2012- Budget and the Notifications upto 07/08/2012

3.1   As a marked departure from the practice of notifying every individual service, time and again, as covered for Service Tax applicability (aggregating to 119 Services hitherto), the Government has now notified (refer section 66D of the Finance Act, 1994) a NEGATIVE LIST  as well as the Mega Exemption Notification No. 25/2012-ST dated 20.06.2012, as services which will be exempted from the incidence of the Tax, although they otherwise qualify as services as per definition. Therefore effective from 01/07/2012, all services other than those specified in the negative list and the Mega Exemption Notification have become taxable.

3.2   Among the exclusions in the NEGATIVE LIST of Services, Entries (e) and (f) being relevent for trade and industry are reproduced below:

“(e)  Trading of goods

 (f)  Any process amounting to manufacture or production of goods.”

[As already explained, these two activities attract Sales-VAT and Central Excise Duty and so exempt from Service Tax – even on the labour component (excluding the value of material inputs) in these activities.]

3.3  Apart from the aforesaid Negative List of exemptions, the Government has thought fit to exempt, by what is referred to as ‘MEGA EXEMPTION NOTIFICATION’ (No.25/2012-ST dated 20/06/2012 enforced w.e.f 01/07/2012) covering some 38 services. Of significant importance to the Printers is entry No. 30 (a) therein which  exempts  activity of—  “carrying out an intermediate production process as job work in relation to printing” (apart from agriculture and textile processing)

As already explained in para 3.2 above, “any process amounting to manufacture or production of goods” is exempt in the NEGATIVE LIST itself, in tune with section 2(f) of the Central Excise Act, 1944. Now, the exemption in the Mega Notification aforesaid, covers even the “intermediate production processes in printing carried out as Job work by an outside Job-worker, whether or not such production process amounts to manufacture.

This talks about only the job works entrusted to an outside job worker. What will be position if such processes in printing, not amounting to manufacture, are done IN-HOUSE by the printer himself, to produce eventually a print-product? The answer, perhaps, is that when such activity is exempt for even an outside job worker, it should be exempt even for the printer who has entrusted the job-work. In any case, it is inconceivable that there could be any process or production operation in printing which will not amount to manufacture, when all the processes/operations eventually result in ‘production of goods’ i.e. print-products. Moreover, all print-products, are excisable goods covered in the Excise Tariff -- although some of them may attract ‘Nil’ Duty – and so all activities leading to their production should be treated as amounting to manufacture, and so outside the ambit of Service Tax.

 3.4   Thus, it is evident that Printing Industry does not attract Service Tax, as SERVICE PROVIDERS. BUT, they will be liable to Service Tax as SERVICE RECEIVERS , on some eleven services, as explained herein below.

4.   Service Tax incidence on ‘SERVICE RECEIVERS’ under the ‘REVERSE CHARGE SCHEME

4.1  We now come to another important change --- (apart from the new system of “Negative List” device to list the exempted services and tax all the other services -  thus obviating the pangs of classification issues) ---  namely additions to the Services which are taxable in the hands of the Service Receiver, instead of the Service Provider, as referred to in paras 1.3 and 1.4 above under a scheme of what is referred to as ‘REVERSE CHARGE MECHANISM’ 

4.2   As already stated, eleven services have so far been notified under the scheme of  Reverse Charge,

(Refer Not. No.30/2012-ST dt.20/06/2012;

Not. No.45/2012-ST dt.07/08/2012; and

Not. No.46/2012-ST dt.07/08/2012)

in terms of which Service Tax is payable by the Service Receiver, either wholly or partially. Out of these eleven services, nine services are relevant for the Printers. Let us look at them one by one.

 * To be borne by the consignor or the consignee, as the case may be, as SERVICE  RECEIVERS (not by the GTA who is the SERVICE PROVIDER).

So all the Printers liable – either as consignors ofmaterials to customers or as consignees on input  materials, whoever  bears the freight charges.

Services availed from GTA exempt—

(i)    If the freight charged on a consignment transported in a  single vehicle does not exceed Rs.1500/-; or

(ii)   If the aggregate freight on all such goods for a single consignee does not exceed Rs.750/-

Printers, either as consignors or as consignees, are not eligible to  the threshold exemption limit of Rs.10 lakhs.

[Note :  It will be pertinent to take into account the Case Law covering several court judgments on this issue.]
 

·  Includes any services – just advisory or even representation before courts/tribunals etc., provided to a business entity.

·  S.T. 12.36% on 100% of the fees charged by the advocate.

·  No S.T. liability for advocates or for those who engage such services for one’s personal needs, unrelated to business

·  No threshold exemption
 

·  S.T. at 12.36% on 100% of the fees. of the arbitral tribunal.

·   No threshold exemption

[Printers may be aware that the MSE-FC i.e. Micro/Small Enterprises Facilitation Council established as a conciliation and arbitration body by the State Governments do not charge any Fee and so their Services will be outside the purview of S.T.]

·         There will always be two parties to the dispute. The party who pays the Fees will be burdened with the tax. Both will have to pay Service Tax where if, say, the Fees are shared 50% each.

·         Incidence of the S.T. is only on Business Entities availing of such services; as such all printers will be liable, as they are business entities.

 

·     A distinction is made between ‘abated value’ and ‘unabated value’ of this service: ST will be on 100% if the taxable value is ‘abated’. On unabated value, ST will be on 40% of such value.

·     The Service Receiver should be a company or a business entity registered as a body corporate, to attract the S.T.  Other types of Business Entities, not being body corporates, will not attract tax.

·     On the contrary, if the Service Provider is a company, he has himself to bear the S.T.

·     Services by metered cabs, call taxis, or auto rickshaws are exempt.

·      But, engaging a vehicle for transporting employees from and to the work place and home on a regular basis will be taxable.

·      Threshold Exemption limit of Rs.10 lakhs not available.

·     Service Receiver should be a company or a business entity incorporated as a body, to attract the S.T.  Other types of Business Entities, not being body corporates, will not attract tax.

·     On the contrary, if Service Provider is a company, the S.T. is payable only by him and not the Service Receiver.

·     The S.T. at 12.36% is payable by the Service Receiver on 75% of the value of the Service; and The Manpower Service Provider should himself bear the S.T. on 25% of the value of the Service.

·     Threshold exemption limit of Rs.10 lakhs is available only to the Service Provider. Service Receiver is not eligible for such threshold exemption, or any exemption for that matter.

·   Here also, the S.T. incidence falls on the Service Receiver only if he is a limited company or a business entity which is registered as a body corporate.

(Not on Printers who are proprietary concerns, partnership firms or HUF).

·   On the contrary, if  the Works Contractor is a limited company, the whole incidence of S.T. will fall only on him.

·   S.T. @ 12.36% on 50% of the service portion (excluding the value of materials) in the total contract value is to be paid by the Service Receiver and 50% by the Service Provider himself.

·   Threshold exemption limit is not available to the Printers as Service Receivers; but the contractor who is the Service Provider is eligible, in respect of the 50% share of the S.T. payable by him.

·   Printers should not confuse the Term “works contracts” used here, with the “job-work of processes or production operations in printing” outsourced by them to outside job-workers. Such job works are not relevant here as they relate to manufacturers of goods. Whereas, ‘works contracts’ here relate to civil works/capital works and cover the services,  like—

(i)   erection, commissioning or installation of plant, machinery, equipment or other structures;

(ii)   contracts for painting. renovation, repair, construction  of a building or laying floor or wall tiles, for exigibility  to S.T. provided that the contractor supplies both labour and material. Mere provision of labour to execute the works will not constitute “works contract”. Pure labour contracts would be exigible to tax like any other service and on full value, and payable by SERVICE RECEIVER as receiving the manpower supply.

·   Whole S.T. of 100% is payable by the SERVICE RECEIVER only if he is a body corporate or a Partnership Firm – not applicable to proprietary oncerns.

·    So, if such Printers sponsor any event of a customer, they have to bear the whole of the S.T. liability on 100% of the sponsorship amount. Whereas, the customer who provides for e.g. the service of publicity space to  such Printer  in return for the sponsorship,  is wholly exempt.

·    Similarly, an Association of Printers which receives such sponsorship from suppliers or others, for providing publicity space or time-slot for promoting the products of such suppliers, it is such sponsors who have to bear the S.T. as Service Receivers.

·    Mere donations will not constitute sponsorship. So, if a Printer gives a donation for a charitable activity (like, say, health camps) he is not liable to tax.

·  Only, those activities of Government or local authorities where they compete with private entities are taxable, in the hands of Service Receivers in order to provide a level playing field to private entities and to avoid break in the Cenvat chain.

·   The specified services provided by the Government or local authorities are taxable only to the extent they are not covered elsewhere i.e. either in the negative list or in the exemptions.

·   It is difficult to visualize, just yet, if printers avail of such services, and so, attract tax liability.

·  This is the latest addition to the list of Services, where the Reverse Charge tax liability is fastened on the Service Receiver wholly i.e. 100%

·   But, we are advised that this entry will not apply to a Managing Director or an Executive Director who is paid a salary (with other perquisites), as they will be rendering service as employees of the company “in the course of employment” – which is exempt.

·   Accordingly, this entry will relate only to non-executive directors,  who may be paid ‘sitting fees’ for attending meetings of the Board of Directors and General Meetings, or who may receive any other payment. But, they do not attend to the day-to-day functions of the business and so, an employer-employee relationship is not established.

·   Threshold exemption limit of Rs.10 lakhs not available.

4.2.10  Of the remaining two services (out of the eleven services) viz.
(i) the services of an Insurance Agent provided to any person carrying on insurance business and (ii) services by any person located in a non-taxable territory (say Jammu and Kashmir) provided to any person located in the taxable territory, the first service of Insurance Agent is not relevant to the Printers, and the second may be relevant, but are not dealt with in this essay.

5.1  Barring the aforesaid eleven services falling under the Reverse Charge     Mechanism – in all other cases, the Service Providers themselves are liable to pay the Tax;  but they will pass it on to the Printers through a separate charge in their invoices on the Printers—for e.g. telephone services, courier services, services by auditors etc. In these cases, it is the Service Providers who will have to register with the department  (subject to the threshold exemption limit of Rs.10 lakhs), pay the appropriate Tax, file half-yearly returns and comply with the other formalities like maintenance of records etc.

5.2  The Printers can take CENVAT Credit of Service Tax paid to the Service Providers as aforesaid, AS WELL AS the Service Tax they themselves have borne as Service Receivers as explained above, WHEREVER THEY ARE ELIGIBLE  to take such credit under the CENVAT Credit Rules;  and set them off against their own liability to pay CENTRAL EXCISE DUTY as well as Service Tax. (Printers enjoying the threshold SSI exemption limit of Rs.150 lakhs under Central Excise, can take CENVAT CREDIT of such Service Tax paid only from the day they cross this limit, and start clearances of excisable goods against payment of Central Excise Duty.)

[However, it remains to be clarified with reference to the  Cenvat Credit Rules, whether Printers can set off the Service Tax payable by them under the Reverse Charge Mechanism against the Service Tax paid by  them to the other SERVICE PROVIDERS, in the normal course, even during this Central Excise exemption period upto Rs.150 lakhs of initial clearances of excusable goods. After all, the threshold exemption limit of Rs.10 lakhs is not available to the Service Receivers, under the Reverse Charge Mechanism.]

 6.   Defaults by Service Provider/Service Receiver – REPERCUSSIONS

Non-compliance with formalities like Registration, payment of the appropriate Service Tax promptly on due dates,  filing of Half-Yearly Returns, and maintenance of records are visited with stringent penalty and interest provisions. Therefore Printers will be well advised to strictly comply with the requirements of the amended provisions.

7.  CONCLUSION:

7.1  This essay is an attempt to provide only an outline of the more important aspects of the changes in Service Tax regulations, recently brought into force with effect from 01/07/2012 and does not cover the intricate details. Printers are requested to take the advice of their own Tax Consultants, in the matter of (i) their S.T. liability as Service Receivers, or as Service Providers wherever liable, (ii) Valuation of the Services (iii) Cenvat Credits to which they are eligible (iv) Maintenance of records and so on.

7.2   The author of this essay is only a Printer, like any other, and the views expressed here are his own so much so that Printers would need to take advice from legal experts, and not act solely on the basis of the views expressed herein.