Dear Shri Mukeshji,
Good work done by you for professional brothers.
Keep it up.
C A Shah D J
USA
From: Mukesh Saran <saranfca@gmail.com>
To: lucknow-ca <lucknow-ca@yahoogroups.com>; ghaziabad_ca <ghaziabad_ca@yahoogroups.com>
Sent: Thursday, August 16, 2012 7:05 AM
Subject: [Gzb_CA Group -CA. VINAY MITTAL] Service Tax Valuation - Rule 2A/2C - What is Gross amount and what is Total amount?
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Service Tax Valuation - Rule 2A/2C - What is Gross amount and what is Total amount? Published: August 16, 2012
Service Tax Valuation - Rule 2A/2C - What is Gross amount and what is Total amount?
IN DDT (Daily Dose of Taxation) 1920 - 13.08.2012, we raised a question about the Gross Amount and Total Amount in Service Tax Valuation. We sent the query to four experts in the field and this is what we got.
Expert 1: There are two phrases used:1. Gross amount2. Total amount.
Abatement is on the Total amount and as per the explanation,"total amount" means the sum total of the "gross amount" charged and something. This something is the fair market value of all goods and services supplied under the same contract or under a separate contract. To understand the "deduction" allowed under the explanation, imagine an outdoor caterer charging some gross amount for the catering service including food. In addition, he asks someone else to supply ice creams under the same contract or under a different contract. The outdoor caterer pays Re 1 per cup towards the service charges to the ice cream supplier in addition to the cost-to-cost reimbursement for ice cream.
Now, as per the explanation,
The total amount for abatement is the gross amount plus the cost of ice creams supplied, after deducting Re 1 (amount charged for supply of ice creams - this we need to deduct because this will be included in the total amount charged by the outdoor caterer from the client)
Expert 2: Please see para 8.2.5 of education guide.xxxxxx Thus, by this proposition, the department seeks to overcome the undervaluation of goods and services, if any, on the same supplied by the service receiver to the service provider for providing the service.
To put it more illustratively, say if a service receiver provides cement to the service provider for a construction service and say the actual value of the cement is say 100 but the service receiver chooses to sell it to the service provider for 50, thereby undervaluing the cement for consequent undervaluation of the same in the construction service.
Now, by this ingenious proposition, Dept. would evaluate 100 for such cement at the hands of the service provider (being fair price) and shall deduct 50 from the same as the same is invoiced by the service receiver, which would have otherwise formed part of the value at the hands of the service provider!
Expert 3: The purpose of the Explanation could be to plug instances where the actual amount charged is less than the fair market value of the goods and services. In other words, if the fair market value of goods and services is less than the price at which these are charged, service tax would get levied on a higher value….
I've tried to analyse this, as under….
| Case-1 | Case-2 | Case-3 | |
| Amount charged per meal (a) | 500 | 500 | 500 |
| VAT charged (b) | 50 | 50 | 50 |
| Fair market value of goods supplied (c ) | 300 | 300 | 300 |
| Fair market value of services supplied (d) | 100 | 200 | 300 |
| Profit/Loss | 100 | 0 | -100 |
| Gross amount charged (a+b) | 550 | 550 | 550 |
| FMV of goods and services (c+d) | 400 | 500 | 600 |
| Amount charged for goods and services | 400 | 500 | 500 |
| Total amount | 500 | 500 | 600 |
| Service portion @ 40% | 200 | 200 | 240 |
I would wonder as to how the hotelier / service provider can implement the valuation methodology prescribed by Rule 2A.
Interesting question would be..how to determine the fair market value of the services. Is this by a comparison between similar hotels, etc. which could be very complex.
Expert 4: I think the formula is not wrong. The logic behind the working, as I understand, is this - The formula seeks to arrive at the value of the service portion by prescribing an abatement from the "TOTAL AMOUNT" and which amount is calculated as mentioned in the Explanation by taking the SUM TOTAL of -
+ the gross amount charged by the service provider ;
+ fair market value of goods and services.
One may think that this would double the value and rightly so because the formula wants to take the average of the amount being charged by the service provider from his client and the value that is normally charged in the market.
However, instead of dividing this amount by the factor of '2', the same is presumably incorporated in the abatement factor.
I remember doing the titration experiments in chemistry where we used to find the exact amount of acid needed to neutralize an alkali using the phenolphthalein indicator. We repeat the experiment a couple of times and then take the mean reading.
A somewhat similar attempt is made in this formula to arrive at the closest 'value of service'.
And obviously because the fair market value would be inclusive of the VAT/ST, the same is instructed to be deducted.
I presume we have a mathematician in the TRU churning out these formulae.
Service Tax Valuation - Rule 2A - Where is this Explanation? Can TRU help?
PARA 8.2.2 of the Education Guide released by CBEC states,
Important - As per the Explanation (II) to clause (ii) of rule 2A of the said Rules 'total amount' referred to in the second column of the table above would be the sum total of gross amount charged for the works contract and the fair market value of all goods and services supplied in or in relation to the execution of works contract, under the same contract or any other contract, less (i) the amount charged for such goods or services provided by the service receiver; and(ii) the value added tax or sales tax, if any, levied to the extent they form part of the gross amount or the total amount, as the case may be.
Will TRU do some research and find out where this Explanation (II) to clause (ii) of rule 2A exists. DDT could not find it. Will TRU help?
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