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Taxing the staff benefits: Murky approach by CBEC.
01 August, 2012 Ahmedabad :
Taxing the staff benefits: Murky approach by  CBEC.

One machine can do the work of fifty ordinary men but No machine can do the work of one extraordinary man. The best investment any company does, is in the manpower and the people who work for it. Taxes play a vital role when company decides the cost to company (CTC). Service tax on Manpower agency has become an area of concern. Similarly service tax on the employer-employee relationship too, since the negative list based service tax is introduced. The Board has proposed a Draft Circular issued from File No 354/127/2012-TRU dated 27.07.2012. According to the said circular many activities which are in nature of employer employee relationship are brought under Service Tax. Issues like Employment agreements; amounts paid to directors on board of a company; treatment of reimbursement to employees are some of the grey areas where there is a lack of clarity. The Board circular which claims to clarify it, makes it murkier.

There are 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. 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 actual. Such recoveries will not be liable to service tax as it is merely a case of cost reimbursement.

The draft circular attempts to address another burning issue, treatment of amounts paid to Directors. 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) that 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.

Treatment of supplies made by the employer to employees is another such grey area. 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. 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. The Department is of a view that 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 department is of a view that the status of the employee would be as a service recipient rather than as a mere employee when consuming such output service. 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). The Board is of the view that 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. 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. Similarly, services of telephone and motorcar for personal use will be covered by the service tax. This approach is harsh, biased and pro revenue and such draft circulars should be immediately opposed and got modified, before they start playing havoc in the industry. Grey areas become murkier!!

Courtesy: From the desk of Monish Bhalla, Founder, www.servicetaxonline.com
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