Our company is into manufacturing. We engage contractors for doing various types of work in our factory premises such as repairs, additions, alterations, etc. These contractors are neither registered under service tax (since their turnover is less than R9 lakh) nor are they paying any service tax. Under the negative list of taxation, are we required to pay tax under reverse charge even if the contractors do not pay any service tax? If yes, then what is the mechanism for computation of tax payable by us?
Under the negative list regime a body corporate receiving works contract services from an individual, Hindu undivided family, partnership, association of person or body of individuals is required to part pay service tax under the reverse charge mechanism. The service recipient is required to discharge 50% of the amount of tax payable on such services.
It has been clarified under the Guidance Paper issued by the Central Board of Excise & Customs that even where the service provider avails of the turnover-based exemption (since his turnover is less than R10 lakh), the service provider is required to discharge the prescribed portion of tax under the reverse charge mechanism.
The service recipient has the option of choosing any of the valuation methods for the purpose of computing the service tax payable by him.
Refund of SAD
We are a partnership firm trading in various goods. Some goods are imported and sold locally. Typically, we claim a refund of the special additional duty of customs paid for all imported goods. However, recently the customs authorities have rejected some of our claims on the grounds that value added tax was exempt on the products sold locally. Is the rejection of refund claims correct? Please advise.
Special additional duty is levied @4% at the time of import. In case the imported goods are subsequently sold, the importer is eligible to claim a refund of the special additional duty (SAD) upon submission of prescribed documents evidencing the sale of goods, including documents evidencing payment of appropriate value added tax on the sale of goods. The customs legislation is silent on the issue whether an importer can claim a refund of SAD in case the goods are exempt from value added tax in the state where the goods are sold. However, given that exemption from SAD (by way of a refund) is allowed on the sale of goods, it can be argued that this exemption should be available even if the goods which are subsequently sold are exempt from value added tax. This is because, the exemption is granted on the sale of goods and not on the sale of goods on which the value of the tax has been paid. In one case, the Customs Excise Service Tax Appellate Tribunal has held that SAD is charged in lieu of the local sales tax/value added tax. Therefore, in case the VAT itself was exempt on the identified goods, the question of a levy of SAD would not arise. Accordingly, in case the importer has paid SAD at the time of import, he is also eligible to claim a refund of the same (upon submission of documents), irrespective of whether value added tax is payable or not.
The replies do not constitute professional advice. Neither Ernst & Young nor FE is liable for any action taken on the basis of these replies. Readers may mail their queries to fesmes@gmail.com
