Section 79 of the Income Tax Act definitely needs to be amended!

Was again faced with a situation where another client incurred the wrath of Section 79 and is loosing the right to carry forward substantial genuine business losses just on account of taking on a new (majority) shareholder.

Till 1989, before clause (b) was deleted from Section 79, there was the possibility for a genuine loss making company to take on a majority partner/ shareholder and still claim set off of losses in subsequent years so as to mitigate some of the hardship suffered earlier. The object of clause (b) was to ensure that the assessee was not deprived of the benefit of carry forward of losses unless the change in shareholding had been made with a view to avoid or reduce the tax liability. However, as the section stands to day, there is no discretionary power in the hands of the assessing officer to do anything in the matter and in all cases where there is a 51% or greater transfer of beneficial shareholding the right to carry forward and set-off previous years’ genuine losses is lost. This is downright unfair, and hard, on genuine entrepreneurs who have, firstly, lost a lot of their money in the venture and have to now doubly suffer on account of this stricture of law.

It just goes to show the lack of trust that the government has in its own administrative machinery and instead of trying to plug the loopholes for the misuse of Section 79, it has simply taken the easy way out and done away with the discretionary powers given to its officers, in the process putting all genuine business owners at loss. Looking at it in the context of the overall direct tax collection of the government, I don’t think this kind of set off would have had any material impact on the same, however, from the company’s point of view the impact is huge on each such company that is put to a genuine hardship (loss) on this account.

Service Tax on providing Recruitment Services to Overseas Companies

I have been asked by some TPR associates as to what is the
correct position wrt Service Tax on Provision of Recruitment Services to companies abroad. 

In this connection I would like to, firstly, point out that Service Tax is a destination based consumption tax and it would, logically, be leviable only on services provided within the country and not be applicable on export of services.

However, as I had mentioned in one of my earlier posts, wef March 15, 2005 the Govt has introduced the Export of Services Rules, 2005 which have, subsequently, been amended from time to time. Hence, currently, the above query needs to be answered in the context of the said Rules and the amendments notified thereto.

As per Rule 3 all the taxable services have been divided into 3 parts, each part being represented by a sub-rule. Each part has a different set of criteria so as to treat the service provided therein as an “Export of Service” and hence become eligible for being treated as Exempt.

Suffice is to say that sub-rules (1) & (2) are not relevant to our query as they apply to

(1) Property based services i:e services which are related to immovable property and cover service providers such as Architects, Interior Designers, Real Estate Agents, Construction Services, Site Preparation Services, etc

(2) Performance based Services, i:e services which are performed by service providers either fully or partly outside India, the service is used in a business or for any other purpose outside India and payments are received by the service provider in convertible foreign exchange. Service providers covered under the said sub-rule are Stock Brokers, Practicing CA/CS/CWA, Security Agencies, Tour Operators, Event Managers, Travel Agents etc.

Manpower Recruitment or Supply Agency Services, along with many other services, are covered under the residual services category of sub-rule (3) of Rule 3 which is primarily for recipient based services and these services will be treated as Export of Services, if such services are used in or in relation to commerce or industry and the recipient is located outside India.

However, in case the recipient has any commercial or industrial establishment or office relating thereto in India, such services shall be treated as Export of Services only if the order for such service is made from outside India, the services are delivered outside India and used in the business of the recipient outside India as well as the payments are received, by the service provider, in convertible foreign exchange.

In case, the service provided is not used in or in relation to commerce and industry, the service provided will be treated as Export of Service only when the recipient of such service is located outside India at the time when such service is received. This would generally not be applicable to recruiters as their service would mostly be used in the business of the recipient outside India.

From the above the following situations emerge:

a) Where the Recruiter, in India, provides services to a Recipient (client) located outside India which does not have any commercial or industrial establishment or office relating thereto in India and such services are used in or in relation to commerce or industry by the recipient – then the said service is exempt and can be provided without payment of Service Tax.

b) Where the Recruiter, in India, provides services to a Recipient (client) located outside India which has an office or establishment in India but the order for commissioning such service is from outside India and such services are delivered outside India and also used in or in relation to commerce or industry by the recipient as well as the payments are received, by the service provider, in convertible foreign exchange – then the said service is exempt and can be provided without payment of Service Tax.

c) Where the Recruiter, in India, provides services to a Recipient (client) located outside India but such services are not used in or in relation to commerce or industry by the recipient – then the said service is exempt and can be provided without payment of Service Tax only in cases where the recipient is located outside India at the time when the service is received by it as well as the payments are received, by the service provider, in convertible foreign exchange.

In my opinion what is of great significance is that in the requirement of para (a) above there is no mention of monies being received in convertible foreign exchange and in para (b) there is an additional requirement of having to prove that the service was ‘delivered’ outside India.

As far as the para (a) requirement is concerned I am of the opinion that all Recruiters should play it safe and only treat those invoices as exempt from Service Tax where, even though they meet all the other conditions, the monies are actually going to be received in convertible foreign exchange.

As regards the requirement of proving ‘delivered’ under para (b) above, I guess, in case all the other requirements are met, then the Department needs to take a practical view in the matter and treat all such cases as exempt from Service Tax.

I look forward to all comments, queries and inputs.

Fringe Benefits Tax – FAQs

What is the meaning of Fringe Benefit Tax ?

A new Chapter XII-H is being introduced in the Income Tax Act, 1961 containing sections 115W to 115WL and Fringe Benefit Tax is the tax chargeable u/s 115WA of the Act. It has been introduced by the FM as he was of the opinion that there are benefits being provided, or are deemed to be provided to employees, by the employers that are escaping taxation. However, the way the provisions are currently structured it is obvious that it is not just the Fringe Benefit which is being brought under the tax net but genuine business expenditure is also being taxed under the garb of FBT.

Which entities are liable to pay FBT ?

Thank god for small mercies, as the FM has deleted i) Individuals, ii) HUFs and iii) registered funds or trusts from the ambit of FBT during the discussion in Parliament. The Central and State Govts were in any case out of the ambit of FBT from the beginning.

Thus all companies, partnership firms, AOPs, local authority and every judicial person not falling under any of the above sub clauses is covered under FBT.

What are Fringe Benefits ?

As per Sec 115WB (1) of the Act, “Fringe Benefits” means any consideration for employment provided by way of

a) any privilege, service, facility or amenity, directly or indirectly, provided by an employer whether by way of reimbursement or otherwise to his employees (including former employee or employees) or

b) any free or concessional ticket provided by the employer for private journeys of the employees and their family members; and

c) any contribution by the employer to an approved superannuation fund for employees.


What are Deemed Fringe Benefits ?

As per Sec 115WB (1) of the Act, fringe benefits shall be deemed to have been provided by the employer to the employees if the employer has, in the course of his business or profession (including any activity whether or not such activity is carried on with the object of deriving income, profits or gains), incurred any expense on or made any payment for, the following purposes, namely:—

(A) entertainment;

Service Tax implications for Recruiters - Budget 2005

Service Tax implications for Recruiters - Budget 2005

Well it’s a mixed bag for the Recruitment Industry. Lets take up the relevant points one by one:

Service Tax Notification No. 6/2005 exempts taxable services of aggregate value not exceeding four lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66 of the said Finance Act:

Provided that nothing contained in this notification shall apply to,-

(i) taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or
(ii) such value of taxable services in respect of which service tax shall be paid by such person and in such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service Tax Rules,1994.

The exemption contained in the said notification shall apply subject to certain conditions laid out therein, one of which is noteworthy i:e

(viii) the aggregate value of taxable services rendered by a provider of taxable service from one or more premises, does not exceed rupees four lakhs in the preceding financial year.

Further an Explanation to the said notification clarifies as under:

Explanation.- For the purposes of this notification,-

(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;
(B) “aggregate value not exceeding four lakh rupees” means the sum total of first consecutive payments received during a financial year towards the gross amount, as prescribed under section 67 of the said Finance Act, charged by the service provider towards taxable services till the aggregate amount of such payments is equal to four lakh rupees but does not include payments received towards such gross amount which are exempt from whole of service tax leviable thereon under section 66 of the said Finance Act under any other notification.

This notification shall come into force on the 1st day of April, 2005.

Service Tax Notification No. 7/2005 has made some amendments to the Service Tax Rules, 1994, whereby all invoices are to be issued not later than fourteen days from the date of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier.

This is fine so far as raising invoices for services rendered is concerned, however, this could create an issue where the payment is received as an ‘advance’ against the services to be rendered. An Invoice would still have to be issued within 14 days of the receipt of the advance and Service Tax paid thereon. In case later, for some reason, the service is not rendered it would create an anomaly where the Tax would have been paid but no service rendered.

· Further, the same Notification provides that where an assessee is providing a taxable service from more than one premises or offices and has centralized billing systems or centralized accounting systems in respect of such service, and such centralized billing or centralized accounting systems are located in one or more offices or premises, he may, at his option, register such premises or offices from where such centralized billing or centralized accounting systems are located. This is definitely going to ease the process and paperwork at the Service Provider’s end.

· The Rules for payment of Service Tax have been amended so as to give the following effect, namely:-

The service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the calendar month in which the payments are received, towards the value of taxable services:

Provided that where the assessee is an individual or proprietary firm or partnership firm, the service tax shall be paid to the credit of the Central Government by the 5th of the month immediately following the quarter in which the payments are received, towards the value of taxable services:

Provided also that the service tax on the value of taxable services received during the month of March, or the quarter ending in March, as the case may be, shall be paid to
the credit of the Central Government by the 31st day of March of the calendar year.”.


The scope of certain services has been extended and one them is wrt manpower recruitment services which would now include the supply of manpower, temporary or otherwise.

Who is liable to pay Service Tax ? and be Penalised for Default ?

The occurrence of a “Taxable event” triggers the imposition of Tax.

It is the act of ‘import’ that triggers the levy of Customs Duty.
It is the act of ‘manufacture’ that triggers the levy of Excise Duty
It is the act of ‘Sale’ that triggers the levy of Sales Tax
It is the act of ‘providing service’ that triggers the levy of Service Tax.

The liability to pay Service Tax is upon the Service Provider, just
like the other Acts mentioned above. Against imports it is the Importer
who has to pay the Customs Duty, it is the Manufacturer who is
liable to pay the Excise Duty and similarly it is the Trader who has
to pay the Sales Tax to the government – whether they include the
said duties/ levies in their price charged to the customer or not.

Thus, in case the Service Provider does not stipulate that the Service
Tax would be charged separately, at the rate applicable, then the
Price charged for the ‘service provided’ will be deemed to be inclusive
of the Service Tax component and the Service provider would be liable
to pay the same proportionately. It has been clarified by the govt that
it is not necessary to show the Service Tax charged separately in the
Invoice. In case of default it would be liable to be penalized as per law.

With the services sector now constituting more than 50% of the GDP
it is but natural that the govt look towards it to raise taxes and not just
rely on the manufacturing, trading and agriculture sectors.