Learn how the Valuation of Service Tax is calculated

If you are an organization and want to understand the service tax regime and how the valuation of taxable services works then you must go through this article as we have covered all the aspects of the taxable services that will make you understand it in detail. So, let’s quickly move towards it!

Introduction 

In the year 2012, an amendment was made and a new regime was created to pay service tax on all the services except the negative list. The value of the taxable services is the gross amount charged by the service provider for the services so rendered. 

According to Section 66 of the then Finance Act, 1994 the service tax is levied at the rate of 14% along with the 0.5% of the cess as Swatch Bharat and Krishi Kalyan. Therefore, it becomes pertinent to know the value of the service provided so that the applicable cess and the service tax can be taken into consideration. 

Valuation of the Services under Section 67 of the Finance Act 1994 

Section 67 of the Finance Act deals with the valuation of the taxable services to ascertain the service tax. 

• Where Consideration is Money 

Where the value of the services provided or to be provided is money then the value of the service charge shall be the gross amount of the services rendered or to be rendered by the service provider. The gross amount includes any amount of the service incurred before, during or after the service but does not take into account any amount incurred prior to the incorporation of the service. 

• Where the Gross amount is inclusive of the Service Tax

In such a case the value of the gross amount shall be the amount of such applicable service tax including the value of the taxable service so rendered by the service provider. Therefore, the Gross Amount is equal to the Applicable Value of the Taxable Service plus the Applicable Service Tax. 

• Consideration is wholly or partially not for Money 

In the case where the consideration constitutes wholly or partially money then the amount of the consideration will be the value of the service including the service tax charged. 

• Consideration cannot be ascertained

Where the amount of the consideration cannot be ascertained the value of the service charge is determined on the basis of the Service Tax (Determination of Value) 

It is only the Central Government that is empowered to make the rules for determining the amount and the value of the taxable services under Section 67 of the Finance Act 1994. 

Valuation of the Taxable 

Where the consideration for the services is partially or wholly not for money then in  such a circumstance the Service Tax is either:

1. The Value of the Taxable Service is equal to the Gross amount charged by the Service Provider in providing a similar line of service to other person in the ordinary course of the business of the service provider. 

2. In any other case except the above the value cannot be less than the minimum Cost of the Provision of services. 

Dealing with Non-Monetary Considerations 

A situation/or the transaction is said to be a non-monetary consideration where the:

• Supplying goods and services in return for the provision of a service or;
• Refraining from performing an Act in return for a service or;
• Tolerating an Act in return for a service or;
• Agreeing to perform an Act  in return for a service 

In the above-mentioned scenarios, the Service Tax is payable on the fair value of the non-monetary value. 

Valuation of the Service Tax in case Service Tax is inclusive 

In the scenarios where the Service Tax is inclusive and does not charge exclusively the value of the taxable service shall be determined on the basis of the back calculation basis where the Gross amount shall also include any amount charged before, during or after the service has been rendered. 

Valuation of the Service Tax where the Consideration cannot be ascertained

In the case where the consideration amount cannot be ascertained, the value will be determined in accordance with the Service Tax (Determination of Value) Rules 2006 and the situations where the consideration cannot be ascertained are as follows:

• Service Value in the case of the execution of the contract works
• Service Value in the case of the money changing
• Service Value in the case of food or other articles of human consumption or drinks in a restaurant or in outdoor catering. 

Valuation Rules 

As we have already discussed Rule 67 states about the scenario where the consideration is wholly or partially consisting of the money in such a scenario the value of the taxable service is equal to the value of such consideration. However, if the value cannot be ascertained then it will be charged on the basis of the gross amount or on the basis of the amount of the taxable service. Where the consideration for the taxable service is non-monetary in such a case the above-mentioned rules will be followed. 

Determination of the value of the Service Tax by the Central Excise Officer 

The ultimate responsibility to arrive at or determine the value of the service tax is that of the Service Provider. However, the Central Excise Officer has the authority and power to call for the documents or information to satisfy themselves regarding the accuracy of the information, valuation or any documentation.

Upon such scrutiny, if the Central Excise Officer is satisfied that the value is not in accordance with the Valuation Rules then such an officer can issue a show cause notice to the Service Provider to present a statement regarding the discrepancy in the valuation. Lastly, the Excise Officer will determine the true value of the taxable service after giving the opportunity to be heard by the service provider. 

Goods and Service Tax 

Goods service was introduced to verify the system of deal collection in India. The tax system. It is with the regime of one nation & one tax.

How is the supply valuation under GST?

GST is charged on the transaction value. However, the most important question that arises is what the transaction value is.  Therefore, the transaction value is the price payable of the pair paid for the supply of goods & services (as the Act applies to both) between unrelated parties. The value of supply under GST includes –

• Any taxes, duties, cess, fees or charges levied under the Act except GST. 
• any amount that the supplier is liable to pay that has already been incurred by the service receiver but not included in the price. 
• value of all additional expenses related to the sale for commission and packaging. 
• all the subsidies that are linked to the supply, though the government subsidies are already included in the price/value of the supply. 
• late fees (penalty/interest for delayed payment of the consideration ament will also be included in the value.

Discounts

Discounts are treated as a different element under GST. Because the discounts given Before or at the time of the supply will be allowed as a deduction from the transaction value. The discounts are given after the supply will be allowed only if certain conditions are satisfied.

Service Tax (Determination of Value) Rules, 2006

This rule provides additional clarity on computing the value of services for tax purposes. Rule 5(1) states that all the expenditures incurred by the service provider during the term of providing the services shall be included in the taxable value. There is an exception to this rule which is where the service provider also acts as a pure agent on behalf of the client.

Understanding the gross amount of consideration

Gross amount charges shall include everything that the service provider receives in providing a service because this amount is the basis for calculating the service tax. it also does not only include the cash consideration for providing the services but it also incorporates within itself the other forms of consideration such as the goods or services provided as part of the transaction because the non-monetary considerations are also taxable.

For instance, if an architect receives furniture as a consideration for providing their services in designing the house then in such a case the furniture is included in the taxable value.

Reimbursements as a Taxable Value

Reimbursements provided by the service provider in the course of delivering their services are included in the taxable value of the services unless the service provider qualifies as a pure agent.it is a situation where the service provider incurs expenses on behalf of the client without making any profit from the reimbursements.

Valuation of the different types of Services

Works Contract Services

Work contract services where both the goods and services are involved have a unique set of rules for the valuation of the service tax. The value of the taxes will be determined by considering the value of the transferred goods and the services provided.

Under the service tax (determination of value) rules, 2006, the value of the service tax will be computed as the gross amount received minus the value of the goods involved in the transaction.

Other services

Apart from the work contract services, there are other specific services with their unique requirements. These specific services may include travel agencies, insurance and stock broking.

These stockbroking, commission and brokerage fees are included in the taxable value and the other fees like security transaction tax (STT) and stamp duty are excluded from these calculations.

What are the penalties for incorrect valuation?

Misreporting of the service value

In the case of incorrect reporting or the suppression of the value of the taxable services, the service reporter under section 78 of the Finance Act, 1999 has to face a hefty penalty that also includes the recovery of the unpaid service tax, interest and additional fines. 

In other cases, intentional suppression of the facts may lead to the payment of 100% of the service tax in addition to the criminal liability.

Examples

How to Calculate Service Tax on a Gross Amount

Let’s walk through an example to better understand how to calculate service tax. Suppose a consultant provides a service and charges a gross fee of ₹1,00,000. The consultant also incurs travel expenses worth ₹10,000 during the service, which is billed to the client. Since these expenses are directly related to providing the service, they will be included in the taxable value unless the consultant qualifies as a pure agent (as explained earlier). If the consultant is not acting as a pure agent, the taxable value becomes ₹1,10,000 (₹1,00,000 + ₹10,000)​.

In this case, service tax will be calculated on ₹1,10,000 at the prevailing service tax rate.

Handling Non-Monetary Consideration

If a service provider receives non-monetary compensation, such as goods or services in return for providing a service, this also forms part of the gross value. For example, if a legal firm receives office equipment instead of cash for a legal consultation, the fair market value of the equipment will be considered as part of the taxable value. The service provider must assess the market value of the non-monetary compensation and include it in the gross value for service tax calculation​.

Common challenges in calculation of the taxable services

1. Handling services outside India

In the case of the services provided outside India and availed within India. Under section 66A of the Finance Act services received from abroad are taxable for the services used in India. The service tax is paid on the actual consideration paid to the service provider for their rendered services.

For instance, if a business in India hires a consultant from the U.S. for ₹5 lakh, the entire ₹5 lakh is subject to service tax. If the consultant spends part of the contract duration outside India, service tax still applies to the entire amount paid for the service, making it crucial for service providers to handle such cases correctly.

2. Misunderstanding of pure agents

The challenge service providers face is the misunderstanding of the pure agent rules, in the case of the failure to fulfill all the eight specified conditions/ reimbursements under rule 5(2) of service tax (determination of value) rules, 2006 for obtaining the reimbursements under the taxable services.

For example, a marketing consultant might pay a third party for venue rentals on behalf of their client. If they fail to mention that they are acting as a pure agent in the invoice or if they charge more than what they paid, those expenses may become taxable. This misunderstanding can lead to additional tax liability for the service provider.

Conclusion 

A tax service is valued based on different formulas of the made of consideration whether the payment is made wholly or partly with money or whether it is not for the money consideration. The service tax is valued in accordance with the provisions of Section 67 of the Finance Act.

Frequently Asked Questions on Valuation of Taxable Services

Q1. What is the valuation of services in GST?

Ans1. Taxable Value is also known as the transaction value which is either the price paid or the price payable where price is the only consideration. 

Q2. How is service tax calculated in India?

Ans2. Service Tax is currently calculated at 15% in India

Q3. What is the valuation of the taxable services in service tax?

Ans3. The valuation of the taxable service tax is the gross amount charged by the service provider for providing the services. 

Q4. What is the rule 27 of valuation under GST?

Ans4. Rule 27 of valuation deals with the value of the taxable services in which money is not the only consideration. 

Q5. How do you calculate taxable value of service?

Ans5. The taxable value of service is calculated by multiplying the total taxable amount to the prevailing GST rate. 

Q6. What is the taxable limit of service tax?

Ans6. Small-scale service providers can obtain a maximum of 10 lakhs of the exemption  

Q7. What is the definition of the taxable services under the Service Tax?

Ans7. A taxable service is a service on which the service tax is levied as mentioned under Section 66B

Q8. What is the tax valuation method?

Ans8. The three prominent tax valuation methods are the market, cost and income approach. 

Q9. What is the rule of the Service Tax?

Ans9. In the case of the service tax the service provider pays the tax on the services to the government however in reality it is the service receiver who pays the tax.

Q10. What are declared services under service tax?

Ans10. Declared services are those services/activities that are carried out by one person for another for consideration and such activity is covered under Section 66E.