Guidance Note 3 – Taxability of services

• The taxability of services or the charge of service tax has been specified in section 66B of the Act. To be a taxable a service should be –
•  provided or agreed to be provided by a person to another
•  in the taxable territory
• and should not be specified in the negative list.

3.1 Provided or agreed to be provided

3.1.1 What is the significance of the phrase ‘agreed to be provided’?

• The phrase “agreed to be provided” has been retained from the definition of taxable service as contained in the existing clause (105) of section 65 of the Act. The implications of this phrase are –
•  Services which have only been agreed to be provided but are yet to be provided are taxable
•  receipt of advances for services agreed to be provided become taxable before the actual provision of service
•  advances that are retained by the service provider in the event of cancellation of contract of service by the service receiver become taxable as these represent consideration for a service that was agreed to be provided.

3.1.2 Does the liability to pay the service tax on a taxable service arise the moment it is agreed to be provided without actual provision of service?

No. The point of taxation is determined in terms of the Point of Taxation Rules, 2011. As per these Rules point of taxation is –

•  the time when the invoice for the service provided or agreed to be provided is issued;
•  if invoice is not issued within prescribed time period( 30 days except for specified financial sector where it is 45 days) of completion of provision of service then the date of completion of service;
•  the date of receipt of payment where payment is received before issuance of invoice or completion of service.

Therefore agreements to provide taxable services will become taxable only on issuance of invoice or date of completion of service if invoice is not issued within prescribed period of completion or on receipt of payment. For specific cases covered under the said Rules, including continuous supply of service, please refer to the Point of Taxation Rules, 2011.

3.2 Provided in the taxable territory

•  Taxable territory has been defined in section 65B of the Act as the territory to which the Act applies i.e the whole of territory of India other than the State of Jammu and Kashmir.
•  Detailed rules called the Place of Provision of Service Rules, 2012 have been made which determine the place of provision of service depending on the nature and description of service.
•  Please refer to the Place of Provision of Service Rules, 2012 and the detailed Guidance Paper: B on Place of Provision of Service.

3.3 Service should not be specified in the negative list.

As per section 66B, to be taxable a service should not be specified in the negative list. The negative list of services has been specified in section 66D of the Act. For the sake of simplicity the negative list of services has been reproduced in Exhibit AI to this Guidance Paper. For guidance on the negative list please refer to Guidance Note 4.

3.4 Relevant Questions relating to taxability of services

3.4.1 How do I know that I am performing a taxable service in the absence of a positive list?

The drill to identify whether you are providing taxable service is very simple. Pose the questions listed in Step 1 and Step 2 below-

Step 1

To determine whether you are providing a ‘Service’

Pose the following questions to yourself

S.NO.	QUESTION	ANSWER
	1	2
1	Am I doing an activity (including, but not limited to, an activity specified in section 65E of the Act) for another person*?	Yes
2	Am I doing such activity for a consideration?	Yes
3	Does this activity consist only of transfer of title in goods or immovable property by way of sale, gift or in any other manner?	No
5	Does this activity consist only of a transaction in money or actionable claim?	No
6	Is the consideration for the activity in the nature of court fees for a court or a tribunal?	No
7	Is such an activity in the nature of a service provided by an employee of such person in the course of employment?	No
8	Is the activity covered in any of the categories specified in Explanation 1 to clause (44) of section 65B of the Act

 [*if you are a person doing business through an establishment located in the taxable territory and another establishment located in non taxable territory OR a association or body of persons or a member thereof then please see Explanation 2 to clause (44) of section 65B of the Act before answering this question]

If the answer to the above questions is as per the answers indicated in column 2 of the table above THEN you are providing a service.

Step 2

To determine whether service provided by you is taxable

If you are providing a ‘service’ (Step 1) and then pose the following Questions to yourself-

S.NO.	QUESTION	ANSWER
	1	2
4	Am I providing or have I agreed to provide the service?	Yes
	Am I providing or have I agreed to provide the service in the taxable territory?	Yes
5	Is this activity entirely covered in any of the services described in the negative list of services contained in section 66D of the Act?	No

If the answer to the above questions is also as per the answers given in column 2 of the table above THEN you are providing a ‘taxable service’

3.4.2 Will I have to pay service tax for all taxable services provided in the taxable territory?

No. You will not have to pay service tax on taxable services provided by you in the following cases:

•  if in the previous financial year the aggregate value of taxable services provided by you was less than Rs.10 lakh and in the present financial year the aggregate value of taxable services provided by you is also less than Rs.10 lakh. (you start paying service tax after crossing the threshold of Rs 10 lakh) For details please refer to the threshold exemption given in Exhibit A3 to this guidance Paper).
•  If the taxable service provided by you is covered under any one of the exemptions issued under section 93 of the Act.

Service Tax is liable to be paid by you on all other taxable services provided by you.

3.4.3 How do I know that the service provided by me is an exempt service?

There are nearly 10 exemption notifications that will be finally issued under section 93 of the Act of which the main exemption is proposed to have 34 heads (mega notification). If the service provided by you fits into the nature and description of services specified in these notifications then the service being provided by you is an exempted service. For the sake of convenience the proposed mega exemption notification and gist of other proposed notifications has been reproduced in Exhibits A2 and A3 of this Guidance Paper respectively. (Please also refer to Guidance Note 6 for guidance on exemptions)

3.4.4 Are declared services also covered by exemptions?

Yes.

3.4.5 Are services other than declared services taxable?

Yes. All services, whether declared or not, which are covered under Section 66B of the Act are taxable if elements of taxability are present. The only purpose behind declaring activities as service is to bring uniformity in assessment of such activity across the country.

Taxability of services: services provided or agreed in the taxable territory are taxable unless excluded by the negative list or exemptions. A taxable service under section 66B is one provided or agreed to be provided for consideration in the taxable territory and not on the negative list; 'agreed to be provided' includes services agreed but not yet performed and advances, while the Point of Taxation Rules, 2011 determine when tax is chargeable (invoice issuance, completion of service, or receipt of payment).