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F.No 354/127/2012-TRU
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs
Tax Research Unit
146 North Block, New Delhi
Dated 27th July 2012
*Subject: - Draft Circular on leviability of service tax on staff benefits
and employment related transactions- reg *
Subsequent to the operationlisation of the Negative List, a number of
issues have been raised in relation to the manpower supply or the services
provided by the directors of a company or by the employer to the
employees. These
issues have been examined and are proposed to be clarified as follows:
*A. Scope of manpower supply*
2. After the operationlisation of the Negative List, the erstwhile
definition of the manpower recruitment or supply agency is no more
applicable. Thus, the words manpower supply would have to be given their
natural meaning. The manpower supply is understood to mean when one person
provides another person with the use of one or more individuals who are
contractually employed or otherwise engaged by the first person. The
essence of the employment should be that the individuals should be employed
by the provider of the service and not by the recipient of the service.
3. There could be certain contracts in which such manpower is made
available to execute another independent contract by the service provider. For
example, a person may agree to carry out construction or a manufacture for
another in which certain manpower may be engaged. As long as such manpower
is not placed operationally under the superintendence or control of the
recipient, it shall not be a case of manpower supply, though it will
continue to be judged independently whether it comprises any other taxable
service.
4. There are also cases of secondment whereby certain staff belonging to
an organization is placed at the disposal of a subsidiary company or any
other associate company. Such cases will be covered by the definition of
manpower supply as the contractual employment continues to be with the
parent company.
*B. Joint Employment*
5. There can also be cases where staff is employed by one or more
employers who normally share the cost of such employment. The services
provided by such employee will be covered by the exclusion provided in the
definition of service. However, if the staff has been engaged by one
employer and only made available to other for a consideration, it shall not
be a case of joint employment.
6. Another arrangement could be where one entity pays the salary and other
expenses of the staff on behalf of other joint employers which are later
recouped from the other employers on an agreed basis on actuals. Such
recoveries will not be liable to service tax as it is merely a case of cost
reimbursement.
*C. Directors*
* *
7. Services of a director on the board of a company have now become taxable. A
director may be appointed either in an individual capacity or to represent
an entity (including government) who has either invested in the company or
is otherwise authorized to nominate a director. When a director receives
payment in his personal capacity, the same is liable to be taxed in the
hands of the director. However, where the fee is charged by the entity
appointing the director and is paid to such entity, the services shall be
deemed to be supplied by such an entity and not by the individual
director. Thus
in the case of Govt. nominees, the services shall be deemed to be provided
by the Govt. and liable to be taxed under the exclusion sub- (iv) of clause
(a) of section 66D of the Finance Act, 1994 i.e. support services by
Government to business. Such services are liable to be taxed on reverse
charge basis.
*D. Treatment of supplies made by the employer to employees*
* *
8. A number of activities are carried out by the employers for the
employees for a consideration. Such activities fall within the definition
of "service" and are liable to be taxed unless specified in the Negative
List or otherwise exempted.
9. One of the ingredients for the taxation is that such activity should be
provided for consideration. Where the employees pays for such services or
where the amount is deducted from the salary, there does not seem to be any
doubt. However, in certain situations, such services may be provided
against a portion of the salary foregone by the employee. Such activities
will also be considered as having been made for a consideration and thus
liable to tax. Cenvat credit for inputs and input services used to provide
such services will be eligible under extant rules. The said goods or
services would now not be construed to be for personal use or consumption
of an employee per se and rather shall be a constituent to the taxable
service provided to an employee. The status of the employee would be as a
service recipient rather than as a mere employee when consuming such output
service. The valuation of the service so provided by the employer to the
employee shall be determined as per the extant rules in this regard.
10. However, any activity available to all the employees free of charge
without any reduction from the emoluments shall not be considered as an
activity for consideration and will thus remain outside the purview of the
service tax liability (facilities like crèche, gymnasium or a health club
which all employees may use without any charge or reduction from the salary
will be outside the tax net). However the Cenvat credit for such inputs and
input services will be guided by the extant rules.
11. Moreover, it would need to be seen whether the services provided by
the employer are otherwise covered by the Negative List or exempt. For
example, the services of food and catering provided by the employer in a
canteen would normally fall outside the tax net unless such canteen has
both the facility of air-conditioning as well as license to serve liquor
(S. No. 19 of the Mega exemption). Likewise, services provided by way of
guest house will also not be liable to tax if the tariff for such unit of
accommodation is below Rs.1000 per day or equivalent (S. No. 18 of the Mega
exemption). Similarly, services of telephone and motorcar for personal use
will be covered by the service tax.
*E. Treatment of reimbursements made by the employer to the employee.*
* *
12. Provision of service by an employee to the employer in the course of or
in relation to his employment is excluded from the definition of the
"service". Thus reimbursements of expenditure incurred on behalf of the
employer in course of employment would not amount to a "service" per se and
hence are non-taxable.
*F. **Treatment of supplies and reimbursements made by the employer to
ex-employees/ pensioners.*
13. The supplies made by the employer to the ex-employees or pensioners
will be of same status as those to an employee and thus would accordingly
attract taxability as per discussion in D above. The reimbursements to
pensioners will also be treated at par with those of current employees when
such reimbursements arise out of the initial employment contract or are in
relation to that employment.
14. Chambers, trade, industry and field formations are requested to go
through the draft Circular and offer their comments, views and suggestions.
It is requested that comments, views and suggestions on the same may be
forwarded to the undersigned on or before 24th August 2012. The same may
also be emailed to shobhit.jain@nic.in
F.No 354/127/2012-TRU
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs
Tax Research Unit
146 North Block, New Delhi
Dated 27th July 2012
*Subject: - Draft Circular on leviability of service tax on staff benefits
and employment related transactions- reg *
Subsequent to the operationlisation of the Negative List, a number of
issues have been raised in relation to the manpower supply or the services
provided by the directors of a company or by the employer to the
employees. These
issues have been examined and are proposed to be clarified as follows:
*A. Scope of manpower supply*
2. After the operationlisation of the Negative List, the erstwhile
definition of the manpower recruitment or supply agency is no more
applicable. Thus, the words manpower supply would have to be given their
natural meaning. The manpower supply is understood to mean when one person
provides another person with the use of one or more individuals who are
contractually employed or otherwise engaged by the first person. The
essence of the employment should be that the individuals should be employed
by the provider of the service and not by the recipient of the service.
3. There could be certain contracts in which such manpower is made
available to execute another independent contract by the service provider. For
example, a person may agree to carry out construction or a manufacture for
another in which certain manpower may be engaged. As long as such manpower
is not placed operationally under the superintendence or control of the
recipient, it shall not be a case of manpower supply, though it will
continue to be judged independently whether it comprises any other taxable
service.
4. There are also cases of secondment whereby certain staff belonging to
an organization is placed at the disposal of a subsidiary company or any
other associate company. Such cases will be covered by the definition of
manpower supply as the contractual employment continues to be with the
parent company.
*B. Joint Employment*
5. There can also be cases where staff is employed by one or more
employers who normally share the cost of such employment. The services
provided by such employee will be covered by the exclusion provided in the
definition of service. However, if the staff has been engaged by one
employer and only made available to other for a consideration, it shall not
be a case of joint employment.
6. Another arrangement could be where one entity pays the salary and other
expenses of the staff on behalf of other joint employers which are later
recouped from the other employers on an agreed basis on actuals. Such
recoveries will not be liable to service tax as it is merely a case of cost
reimbursement.
*C. Directors*
* *
7. Services of a director on the board of a company have now become taxable. A
director may be appointed either in an individual capacity or to represent
an entity (including government) who has either invested in the company or
is otherwise authorized to nominate a director. When a director receives
payment in his personal capacity, the same is liable to be taxed in the
hands of the director. However, where the fee is charged by the entity
appointing the director and is paid to such entity, the services shall be
deemed to be supplied by such an entity and not by the individual
director. Thus
in the case of Govt. nominees, the services shall be deemed to be provided
by the Govt. and liable to be taxed under the exclusion sub- (iv) of clause
(a) of section 66D of the Finance Act, 1994 i.e. support services by
Government to business. Such services are liable to be taxed on reverse
charge basis.
*D. Treatment of supplies made by the employer to employees*
* *
8. A number of activities are carried out by the employers for the
employees for a consideration. Such activities fall within the definition
of "service" and are liable to be taxed unless specified in the Negative
List or otherwise exempted.
9. One of the ingredients for the taxation is that such activity should be
provided for consideration. Where the employees pays for such services or
where the amount is deducted from the salary, there does not seem to be any
doubt. However, in certain situations, such services may be provided
against a portion of the salary foregone by the employee. Such activities
will also be considered as having been made for a consideration and thus
liable to tax. Cenvat credit for inputs and input services used to provide
such services will be eligible under extant rules. The said goods or
services would now not be construed to be for personal use or consumption
of an employee per se and rather shall be a constituent to the taxable
service provided to an employee. The status of the employee would be as a
service recipient rather than as a mere employee when consuming such output
service. The valuation of the service so provided by the employer to the
employee shall be determined as per the extant rules in this regard.
10. However, any activity available to all the employees free of charge
without any reduction from the emoluments shall not be considered as an
activity for consideration and will thus remain outside the purview of the
service tax liability (facilities like crèche, gymnasium or a health club
which all employees may use without any charge or reduction from the salary
will be outside the tax net). However the Cenvat credit for such inputs and
input services will be guided by the extant rules.
11. Moreover, it would need to be seen whether the services provided by
the employer are otherwise covered by the Negative List or exempt. For
example, the services of food and catering provided by the employer in a
canteen would normally fall outside the tax net unless such canteen has
both the facility of air-conditioning as well as license to serve liquor
(S. No. 19 of the Mega exemption). Likewise, services provided by way of
guest house will also not be liable to tax if the tariff for such unit of
accommodation is below Rs.1000 per day or equivalent (S. No. 18 of the Mega
exemption). Similarly, services of telephone and motorcar for personal use
will be covered by the service tax.
*E. Treatment of reimbursements made by the employer to the employee.*
* *
12. Provision of service by an employee to the employer in the course of or
in relation to his employment is excluded from the definition of the
"service". Thus reimbursements of expenditure incurred on behalf of the
employer in course of employment would not amount to a "service" per se and
hence are non-taxable.
*F. **Treatment of supplies and reimbursements made by the employer to
ex-employees/ pensioners.*
13. The supplies made by the employer to the ex-employees or pensioners
will be of same status as those to an employee and thus would accordingly
attract taxability as per discussion in D above. The reimbursements to
pensioners will also be treated at par with those of current employees when
such reimbursements arise out of the initial employment contract or are in
relation to that employment.
14. Chambers, trade, industry and field formations are requested to go
through the draft Circular and offer their comments, views and suggestions.
It is requested that comments, views and suggestions on the same may be
forwarded to the undersigned on or before 24th August 2012. The same may
also be emailed to shobhit.jain@nic.in
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