Service tax on Compensation

[A Wilson]

Dear Sirs,

Effective date: 1.7.2012

Scope of Declared Service Section 66E (e)

Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an
act.

Analysis:
This is a new category of activity which has been covered into service tax by this entry. It covers
followings activities: Agree to refrain from an act, Agree to tolerate an act, Agree to tolerate a
situation and Agree to do an act. All these activities if agreed upon for a consideration, it will
cover in this entry and will be liable to service tax.

Pls refer the above declared service and give your expert opinion on the following :

1. Applicability of service tax on compensation from the customer for order cancellation for supply of goods
2. Applicability of service tax on Recovery from employee for short notice period

Best Regards,

A.Wilson

[Rajagopalan Ranganathan]

Sir,

I do not think the gross amount charged for the above activities during the previous financial year or during the current year will exceed ₹ 10 lakhs. Therefore there will be no need to pay service tax.

[mahim dangi]

Hi A Wilson,

I am not sure about the 1st issue but in 2nd case you have to collect service tax from the employee

[A Wilson]

Dear Sirs,

Thank you very much for your reply. Our total taxable limit already exceeds the basic limit. Pls give your expert opinion for the applicability of service tax on compensation for agreed order cancelled.

Thx.

A.Wilson

AI Summary

Declared service: agreeing to refrain or tolerate acts may attract service tax on compensation for order cancellations. The declared service covers agreements to refrain from an act, to tolerate an act or situation, or to do an act; where such agreement is supported by consideration it falls within the declared service and may attract service tax. The text raises two questions-taxability of compensation for customer order cancellations and taxability of recoveries from employees for short notice-and records divergent practitioner views on threshold exemption and on treating employee recoveries as taxable consideration, with the enquirer noting the taxable-limit is exceeded.