SERVICE TAX & VAT
Suggested Answer
CA PCC – June 2009
25 Marks
by CMA.MOHD. RAFI – INDIRECT TAX FACULTY
The author is a member of ICWAI. He can be reached at rafigowsi@gmail.com /99400 78723
Q6. Answer any five of the following: 5 x 2 = 10 Marks
(a) Mr. X a service provider who pays service tax regularly, was of the opinion that a particular service was not liable for service tax. He, therefore, did not charge service tax in his bill. He received the bill amount without service tax. How will service tax liability of Mr. X be determined in such case?
(b) Whether service tax return can be furnished after the due date?
(c) How can the excess payment of service tax be adjusted?
(d) Discuss the accountability of an "input service distributor" who may not be liable to pay service tax.
(e) Discuss the word "Transparency" in the context of VAT system.
(f) When does a small service provider require to register under the Service Tax Act, but not liable to collect and pay Service Tax?
Q7. (a) Compute the VAT amount payable by Mr. A who purchases goods from a manufacturer on payment of Rs.2,25,000 (including VAT) and earn 10% profit on sale to retailers? VAT rate on purchase and sale is 12.50%. 3 Marks
(b) An unregistered "Service provider" provides following details in respect of taxable services provided during the Financial Year 2008-09. 3 Marks
Date Particulars Amount
30.6.2008 Advance received from customer 1,00,000
30.9.2008 Part payment received against a bill of
` Rs.9,50,000 raised on a customer 5,00,000
31.12.2008 Money received against taxable services
provided during December, 08 3,00,000
31.1.2009 Taxable services rendered during January, 09 1,00,000
31.3.2009 Taxable services provided during March, 09 2,00,000
The service tax provider complies with the provisions of registration and collection of service tax per service tax laws. He gets registered during the year. He received the money against the bills raised during the months January and March 2009. Compute the service tax liability of service provider for the year 2008-09 considering the rate of service tax @12.36%.
Q8. Answer any three of the following: 3 x 3 = 9 Marks
(a) How the value of taxable services determined when the consideration against taxable services is received in other than monetary terms?
(b) What are the sources of Service Tax Law?
(c) How can an auditor play role to ensure that the tax payers discharge their tax liability properly under the VAT system?
(d) Discuss the 'Subtraction method' for computation of VAT.
Answers:
Q6. (a) As per the provisions of Service Tax Mr. X is liable to pay services tax even though he is not collected the service tax from his client, by considering the service tax is inclusive in the value of the bill.
(b) Yes, half yearly return ST -3 can be furnished after the due date. However, it attracts the penalty.
(c) An assessee can adjust the excess service tax paid by him on pro ratea basis. But, the service provider must have refunded the value of taxable service and the service tax thereon to the person from whom it was received (i.e. service receiver). For example, If the assessee, who is an individual has paid Rs.12,000 in excess of service tax liability during the previous half year he can adjust Rs.6,000 only per quarter in his subsequent tax liability and not at a stretch.
(d) The input service distributor is required to register under the provisions of service tax without the threshold limit of Rs.10,00,000. He has to raise the invoices for distributing the input tax credit on input services among its sub units. He should not distribute the input tax credit more than that of available for distribution.
(e) Transparency: under the VAT system, VAT dealer is eligible to take the input tax credit on his purchases only when he maintains the records transparently by showing clearly the cost of purchases and the tax component in his books of accounts. Tax component from each stage can be assess for taking the decisions by the respective State Governments.
(f) Registration is required if the service provider provides taxable turnover more than Rs 9 lakhs during the year. However, he need not wants to pay the service tax during the current year up to Rs.10,00,000 on receipts basis, only if the taxable turnover of the previous year does not exceeds Rs. 10,00,000.
Answers
Q7. (a) Inputs (purchases) Taxable Turnover VAT Total
12.5% Purchases 2,00,000 25,000 2,25,000
Out put (sales)
12.5% Sales 2,22,222 27,778 2,50,000
Calculation of VAT amount payable by Mr. A
VAT payable on sales = Rs.27,778
Less: VAT paid on purchases = Rs.25,000
Net VAT payable = Rs. 2,778
Working Notes: Rs.
(1) Cost of Purchases = 2,00,000
Add: 10% Profit on sales = 22,222
2,00,000 x 10 / 90 ------------
Taxable Turnover = 2,22,222
Add: 12.5% VAT on 2,22,222 = 27,778
------------
Sales = 2,50,000
------------
(b) Calculation of service tax liability during the financial year 2008 – 09
Advance received on 30.06.2008 = 1,00,000
Part payment received on 30.09.2008 = 5,00,000
Money received against taxable services on 31.12.2008 = 3,00,000
Money received against the bills raised during the months
January and March 2009 = 3,00,000
---------------
= 12,00,000
Less: amount not taxable on receipt basis = 10,00,000
----------------
Value of services attract the service tax = 2,00,000
----------------
Service Tax Liability = 2,00,000 x 12.36% = Rs. 24,720
Answers
Q8. (a) When the consideration against taxable services is received in other than monetary terms then Valuation under service tax is only with reference to the valuation rules namely "Service Tax (Determination of Value) Rules, 2006".
Consideration received is not wholly or partly consisting of money
Rule 3(a): Valuation shall be on the basis of gross amount charged by service provider for similar services.
Rule 3(b): Valuation shall be on the basis of equivalent money value of such consideration, which shall not be less than cost of provision of such services. [Rule 3(b) is applicable if value cannot be determined as per Rule 3(a)].
The value of services as per the equivalent money in no case shall be less than the cost of provision of such taxable service. Such cost will have to be worked out on the basis of usual costing principles of normal costs and allocation of normal overheads including reasonable profit thereon. A certificate from a practicing Cost Accountant or a practicing Chartered Accountant should be obtained for this purpose.
(b) There is no separate Act for Service Tax. The provisions of service tax are contained in Chapter V of the Finance Act, 1994 and administered by the Central Excise Department. Service tax is being imposed and the scope is enhanced by amending Finance Act, 1994 from time to time.
The Authority of levy of Service Tax on specified services is contained in Section 66 of the Finance Act, 1994 as amended. At present this, section stipulates a rate of tax of 10% of the taxable value of these services and Education Cess @2% and Secondary/Higher Education Cess @1% in liable on the Service Tax levied and collected under Section 66 of the Finance Act, 1994.
(c) The role of the Auditor under the VAT system:
(i) Proper book keeping: the auditor has to ensure the proper maintenance of the records of input credit and its proper utilization for availing the input tax credit. The auditor also ensures the proper accounting of VAT purchases and sales.
(ii) Tax saving: the auditor has to advise the client to keep the tax invoice copies which is primary documentary evidence for availing the input tax credit and ensure the proper filing with in the due dates by incorporating full input tax credit. The auditor also analyses various alternatives to minimize the cost of administrative and accounting system of VAT.
(iii) Assisting to Departmental Audit: the auditor by virtue of his experience and knowledge has to clarify the audit queries and objections of the departmental audit staff.
(iv) Certification: the qualified auditor is required to certify the VAT audit reports.
(d) Subtraction method: Tax is charged only on the value added at each stage of the sale of goods. Since, the total value of goods sold is not taken into account, the question of grant of claim for set-off or tax credit does not arise. This imposing tax, 'value added' is simply taken as the difference between sales and purchases.
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