EXEMPTION UNDER SERVICE TAX TO SMALL SERVICE PROVIDERS

Service tax is a tax levied on the transaction of certain specified services by the Central Government under the Finance Act, 1994. It is an indirect tax, which means that normally the service provider recovers the amount of Tax from the service  recipient and then pays the tax to the Govt. ex Chequer barring small service providers

The Government granted exemption to small service providers by Notification No.6/2005 –ST dated 1-03-2005, w.e.f 01-04-2005, and exemption was provided to them from the payment of service tax, on the aggregate value was not exceeding Rs 4 lakh in any financial year .

The basic purpose behind exemption to small service provider was a welfare measure on the part of the Govt by providing relief  to the small service provider from the burden of  service tax collection and payment process .

Thereafter, w.e.f 01-04-2007, monetary limit of  exemption was enhanced to Rs 8 lakh .And, w.e.f 01-04-2008, it was again been enhanced to Rs10 lakh .

Now the said exemption has been granted by replacing the earlier exemption by Notification    No .33/2012-ST, dated 20.06.2012, however the exemption limit has been retained in the new Notification at Rs, 10 lakh. The summarized chart of Notifications with their effective date and amount is given below -:

Small Service Provider Tax exemption Limits

Effective Date       Amount         Notification No.

W.e.f 1/4/2005       04 lacs        6/2005 dated 01.03.2005

W.e.f. 1/4/2007      08 lacs        4/2007 dated 01.03.2008

W.e.f 1/4/2008       10 lacs        8/2008 dated 01.03.2008

W.e.f 1/7/2012       10 lacs        33/2012 dated 20.06.2012

What is meant by Small service Provider

A service provider is referred to as the small service provider if the amount of taxable services in the previous year does not exceed Rs10 lakh. Here for claiming exemption Previous year receipts are important for working out the applicability of exemption to a specific service provider, whether the service provider will fall in the exemption list or not.This mechanism of exemption can be understood with some of instances narrated hereunder:

1. 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.10lakh. Then no need to pay service tax .

2. If in the previous financial year aggregate value of taxable services provided was less than 10 lakh but this year aggregate value of taxable services provided is more than 10 lakh them you start paying service tax after crossing the threshold of Rs 10 lakh.

3. If in the previous financial year aggregate value of taxable services provided was more than 10 lakh but this year aggregate value of taxable services provided is less than 10 lakh them you start paying service tax from rupee one.

To Understand the above clearly refer to the chart below -:

Aggregate value of Taxable Services provided		Service Tax applicable
Preceding Financial  Year	Current Financial year
Less or equal to than 10 lakh	Less or equal to than 10 lakh	No service tax
Less or equal to than 10 lakh	More than 10 lakh	Service tax applicable after 10 lakh
More than 10 lakh	Less or equal to than 10 lakh	service tax applicable from Rs one ,No exemption available

The Finance Act 2012, has amended the provision relating to small scale exemption recognizing that the aggregate value up to Rs 10 Lakhs will be in terms of invoices issued/to be issued for taxable services and not payments received.(Notification no.33/2012-ST dated 20.6.2012). This is w .e .f 1.7.2012.

 For Example -If you issue invoices are  for 11 lakhs, but dont receive even a single rupee, you're no longer a small service provider as you have issued invoices exceeding 10 lakhs.

To Whom this exemption is available

The exemption of small  service provider is available to all type of person-The basic exemption is not restricted only to individual or partnership firm but it is available to all assesses.

‘Person’ is not restricted to natural person. ‘Person’ has been defined iin Section 65 B of the Act.  The following shall be considered as persons for the purposes of the Act:

      1. an individual
2. a Hindu undivided family
3. a company
4. a society
5. a limited liability partnership
6. a firm
7. an association or body of individuals, whether incorporated or not
8. Government
9. a local authority, or
10. every artificial juridical person, not falling within any of the preceding sub- clauses.
  
CONDITIONS TO BE FULFILLED BY SERVICE PROVIDER TO AVAIL THE EXEMPTION OF SMALL SERVICE PROVIDERS

• Taxable service provider has the option not to avail the said exemption and pay service tax on the taxable service and such option are exercised in a financial year shall not be withdrawn during the remaining part of such financial year ;

• The provider of taxable service shall not avail Cenvat credit under Rule 3 of the Cenvat Credit Rules 2004, during the period in which the service provider avail exemption.

• The provider of  taxable service shall avail CENVAT Credit only on such inputs or input services received on or after the date on which the service provider starts paying service tax and used for provision of taxable services on which service tax is payable.

• The provider of taxable service shall be required to pay an amount equivalent to the CENVAT credit taken by him, if any, in respect of such inputs lying in stock or in process on the date on which he starts availing exemption under this notification.

• The balance CENVAT Credit lying unutilized if any after the adjustment of credit under (e) above, shall lapse on the day such service provider starts availing the exemption under this notification.

• This notification shall apply to the aggregate value of one or more taxable services provided from one or more premises and not separately for each premises or each service.

• The aggregate value of taxable services rendered by a provider of such service from one or more premises does not exceed Rs 10 lakhs in the preceeding financial year.

CONDITIONS WHEN SMALL SERVICE PROVIDER EXEMPTION WILL BE NON APPLICABLE TO THE SMALL SERVICE PROVIDERS

• Taxable service provided by a person under a brand name or trade name, whether registered or not, of another person(refer to the explanation given below)

Or

• Such value of taxable services in respect of which service tax shall be paid by recipient of service (Reverse Charge) under section 68 (2) of Finance Act read with Service Tax Rules, 1994. 

Explanation.

(A)“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. It can further be explained by the following-:

The person providing service under the brand name or trade name of others.

Some persons are providing the services under the brand name or trade name of others. These service providers would not be eligible to the exemption which is available to the small service providers.

      

If service provided under own brand name or trade name then eligible :

If a person is providing a service under his own brand name, he would be entitled to the exemption.

(B)“aggregate value” means the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service  tax leviable thereon under section 66B of the said Finance Act under any other notification. Under reverse charge basis the aggregate value of Rs 10 lakh, the value of taxable services on which servie tax is paid by the recipient of taxable services shall not be clubbed in the hands of the service provider.

Reverse Charge Mechanism Working for Small Service Providers

As it is clear stated from the name itself   THE REVERSE CHARGE  means the obligation or responsibility which is reversed on the other person.

And here we are talking about the responsibility of the  service provider to pay tax which is reversed on the other person  i.e on the service recipient.

Under section 68(2), services like insurance agent services, goods transport agency services, sponsorship services etc were notified (vide Notification No.36/2004-ST, dated 31.12.2004 and Rule 2(1)(d) of service tax Rules,1994) where the recipient is liable to pay tax for the entire amount of service tax. Further, more Finance act  , 1994 has been amended to empower the central government to notify the services on which service tax shall be payable by the person other than a service provider by specifying the extent of the service tax, which shall be payable by such person and remaining part shall be payable by the service provider .

Now the question is whether a service recipient liable to pay service tax would be entitled to take the benefit of exemption notification providing exemption to Small Service Providers.

In the Notification No .33/2012-ST it has been specifically debarred the applicability of said Notification to the person, who is liable to pay service tax on the value of taxable service as a recipient of service in terms of section 68(2) of the Finance Act, 1994.

Another point to be taken care under reverse charge mechanism is that if service provider is exempted being a small service provider (turnover less than Rs 10 lakhs ) then he shall not be obliged to pay any tax. However, the service recipient will be obliged to pay under reverse charge mechanism whether the amount of service received is a single penny. No exemption is available to service recipient under small service provider exemption

WHETHER EXEMPTION PORTION TURNOVER (BY WAY OF ABATEMENT TOBE EXCLUDED FROM A GROSS TURNOVER OF RS 10 LAKH?

No, Under service tax, for many taxable services, for instance, convention, mandap keeper outdoor catering services ,etc exemption has been provided to provide abatement from the portion of the value of the value of taxable services, primarily for the service where the service and material element cannot be separated. In terms of Notification No .33/2012-ST , the amount received in respect of such exempted portion of the value of  taxable services shall be included while determining the aggregate value not exceeding ten lakh  rupees as the same is not received in respect of a taxable service which is exempted from the whole of service tax.

WHETHER TURNOVER FOR THE EXEMPTED PORTION OF TAXABLE SERVICES WILL BE EXCLUDED FOR THE PURPOSE OF DETERMINING THE AGGREGATE VALUE FOR GROSS TURNOVER Rs 10LAKH?

Yes, There are certain services for which a part of the taxable service is exempted from the whole of service tax. For instance service provided by mutual fund agents have been exempted from service tax. As per explanation B to Notification No.33/2012-ST ,the aggregate value not exceeding Rs 10 lakh does not include invoice issued towards gross amounts which are exempted from the whole of service tax leviable thereon under section 66B of the finance act.

WHETHER EXEMPTION OF SMALL SERVICE PROVIDER WILL BE   AVAILABLE TO EACH JOINT OWNER ?

Yes, As per Notification No. 6/2005-ST dated 1.3.2005 and amended vide Notification No. 08/2008-ST dated 1.3.2008, the threshold exemption limit of 10 lakh is applicable per service provider and not per service. Hence, all the co-owners or joint owners will be eligible to claim the commonly known small service provider exemption of Rs10 lakh.

 As mentioned in the above Notification exemption is a service provider based exemption and this is available on the taxable service or services provided from one or more premises by a service provider. Hence both the joint owners can claim exemption Individually and separately.

 For example-If a jointly owned property is given on rent for commercial purpose then it is the service, which is provided individually by both the joint owners because in case of renting of property nothing has to be done except for renting the property and this is the service as per the fiction of the law then the service is provided by both the joint owners individually. If there are more than two joint owners then it can safely be said all the joint owners are separate service providers and in that case all the joint owners can claim separate exemption.

 

 THE CONDITION OF EXEMPTION NOT TO AVAIL INPUT TAX CREDIT

Generally, it is understood that service tax is to be paid after reducing cenvat credit for Input and Input services used for providing taxable services. Rule 3 (1) of Cenvat Credit Rules, 2004 provides that-

A manufacturer or producer of final products or a provider of output service shall be allowed to take credit of excise duty, service tax etc paid on any Input or Capital Good or Input services used in providing output taxable services.

As per clause ( iv ) of Notification no 33/2012 which grants basic exemption limit of Rs 10 lakhs provides that –“the provider of taxable service shall avail the Cenvat credit only on such inputs or input services received, on or after the date on which the service provider starts paying service tax, and used for the provision of taxable services for which service tax is payable.”

Above can be explained with an example- If a person’s total taxable services  exceeds Rs 10 lakhs on 15^th December, 2012 during financial year 2012-13, he will be required to pay on taxable turnover in excess of Rs 10 lakhs on 5^th January, 2013. He will be able to avail cenvat credit for input and input services received in respect of excess amount over Rs 10 Lakhs. Though, in fact, he must have received and paid for Input and Input services, and the same must have been used in providing taxable services from 15^th December, 2012.

For the persons availing cenvat credit the small service provider exemption availment can arise in loss or benefit. This can be further explained by the following situations-

WHEN THE SERVICES ARE PROVIDED TO UNREGISTERED  SERVICE  RECIPIENT          
                                                                                    

 Situation1 – WHEN SSP EXEMPTION AVAILED

Suppose the cost of raw material of product is Rs 1000 and then after charging service tax @12.36% the cost of raw material will be Rs 1123.60 and if we are availing small service provider exemption then we cannot avail input credit of Rs 123.60 so cost to us of raw material will be Rs 1123.60 and after adding profit of Rs 876.40 .The cost of product comes outs to the service recipient (1123.60+876.40)= Rs 2000 as the small service provider exemption is availed then no service tax will be charged on Rs 2000.

Situation2 – WHEN SSP EXEMPTION NOT AVAILED

 

Suppose the cost of raw material of product is Rs 1000 and then after charging service tax @12.36% the cost of raw material will be Rs 1123.60 and if we are not availing small service provider exemption then we can avail input credit of Rs 123.60 so cost to us of raw material will be Rs 1000 and after adding profit of Rs 876.40 .The gross amount comes out to be Rs (1000+876.40)= Rs 1876.40 and after charging service tax @12.36% the cost to the service recipient will be  Rs 2108.32(1876.40+231.92) because the service recipient here is unregistered so he cannot avail the cenvat credit.

Conclusion:

From the above said illustration we can say that SSP exemption is beneficial when the services are provided to unregistered service recipient as in the Situation 1

WHEN THE SERVICES ARE PROVIDED TO REGISTERED SERVICE RECIPIENT

Situation1 – WHEN SSP EXEMPTION AVAILED

Suppose the cost of raw material of product is Rs 1000 and then after charging service tax @12.36% the cost of raw material will be Rs 1123.60 and if we are availing small service provider exemption then we cannot avail input credit of Rs 123.60  so cost to us of raw material will be Rs 1123.60 and after adding profit of Rs 876.40 .The cost of product comes outs to the service recipient (1123.60+876.40)= Rs 2000 as the small service provider exemption is availed then no service tax will be charged on Rs 2000.

Situation2 – WHEN SSP EXEMPTION NOT AVAILED

Suppose the cost of raw material of product is Rs 1000 and then after charging service tax @12.36% the cost of raw material will be Rs 1123.60 and if we are not availing small service provider exemption then we can avail input credit of Rs 123.60 so cost to us of raw material will be Rs 1000 and after adding profit of Rs 876.40 .The gross amount comes out to be Rs (1000+876.40)= Rs 1876.40 and after charging service tax @12.36% the cost to the service recipient will be Rs 2108.32 but because the service recipient here is registered so he can avail the cenvat credit of R 231.92 the net cost to service recipient will be Rs 1876.40.

Conclusion: From the above said illustration we can say that SSP exemption is not beneficial when the services are provided to registered service recipient as in situation 2.

REGISTRATION OF SMALL SERVICE PROVIDERS

If  we wish to avail the benefit  of exemption there is no need of registration in case the taxable service does not exceed Rs 9 lakhs . However, the government by exercising the power under sub-section(2) of section 69 has specified that any provider of taxable services whose aggregate value of taxable services from all premises in a financial year exceeds Rs 9 lakhs shall make an application for registration under service tax even though he is not liable to pay service tax .

WHETHER A SERVICE PROVIDER AVAILING EXEMPTION UNDER SMALL SERVICE PROVIDER  CAN GET DEREGISTERED ?

Yes, A service provider exempted under Notification No.6/2005 can get himself deregistered provided that taxable services should not exceed Rs 9 lakhs.

Suppose a person provide taxable services in 2012 (previous year) is 9.5 lakhs and in 2013 (current year) is 8 lakhs so he can get deregistered in current year. But in the coming year i.e 2014 if the taxable services are less than Rs 9 lakhs then no need to get registered again but if in 2014 if the taxable services comes to be 11 lakhs which is more than Rs 9 lakhs then the person again has to get registered with the department. So the facility be made available at the ACES  regarding the re-activation of the old registration number, so that the process of getting registered again can be avoided .

FILING OF SERVICE TAX RETURN-WHETHER A PERSON IS REQUIRED TO FILE SERVICE TAX RETURN EVEN IF HE IS NOT LIABLE TO PAY SERVICE TAX BECAUSE OF EXEMPTION AVAILABLE TO SMALL SERVICE PROVIDER??

No, the board in its instruction through F. no 137/58/2007-CX.4,dated 29-03-2007 has clarified that a person who is not liable to pay service tax because of the availment of exemption under Notification No 6/2005-ST dated  01.03.2005 (now Notification No.33/2012-ST, dated 20.06.2012 ) is also not required to file Service tax return. The board has further clarified that any show cause notice issued for non-filing of return whose annual turnover is far below the exempted limit may be disposed off accordingly.

Priyanka Bansal (Pursuing CA)
Article With Shiv Jindal and Co.
Under the Guidance of CA. Shiv K. Jindal