There have been many discussions concerning the applicability of service Tax on Reimbursement of expenses after an introduction of Service Tax Valuation Rules, 2006. Later in December 2012 it was held in Delhi High court that Service Tax is not applicable on reimbursement of expense. However after an introduction of the Negative list in July 2012, this issue has again been debated. This research update is an attempt to draw a radical conclusion on the same.
Service Tax on Reimbursement of Expenses
The Finance Bill 2015 has made a change in Section 67 regarding Service Tax on reimbursement expenses. In this article, the assessee can get the detailed explanation about the implication of this change in service tax value and service tax liability.
As per the Budget 2015, Explanation (a) to Section 67 is revised to specifically include ‘Any reimbursable expenditure / cost incurred and charged by the service provider- “SP”’ in the definition of the term ‘Consideration’ in order to overcome the Delhi High Court’s ruling in the case of Intercontinental Consultants & Technocrats Private Limited v/s the Union of India wherein it was held that the reimbursements will not be liable to service tax in the absence of specific provision for valuation under section 67 of the Act.
Service Tax on Reimbursement of Expenses – Union Budget 2015 Updates
I am receiving lots of queries about tax service value and taxability of service tax on my blog. Determination of service tax taxable value requires an understanding of service tax valuation rule 67.
- Valuation Rules of Service tax.
- What is out of pocket / reimbursement expenses?
- What is real agent service?
- The Decision of delhi high court with regards to reimbursement of expenses.
- Budget 2015 update about reimbursement of expenditures.
- Effect of change in Union Budget 2015 on Service Tax value.
Service Tax Valuation Rules
Changeability of service tax is determined by the negative list of services and exemptions. Once the service is not on that list, service becomes taxable. Once assessee determines that the service is taxable. The second step is to regulate the value of taxable service which is based on the invoice. We are required to examine various elements of CENVAT credit, the value of sales on which vat is levied, out of pocket expenses, the amount paid as a pure agent of another party and after that taxable value of service tax is determined.
Hotel expenses, traveling expenses, etc. which are done by the service provider in the course of providing taxable services are out of pocket or reimbursement expenses.
Delhi High Court Decision with Regards to Reimbursement of Expenses
The petitioner filed a writ petition before the High Court for quashing the show cause notice issued by the Service Tax Department for recovery of Service Tax on the amount received as reimbursement of expenses such as hotel accommodation and traveling etc. under service tax Rule 5(1), 2006. The Honorable Delhi High Court while deciding the petition held as shown in below.
- Rule 5 (1) of the Rules is ultra vires Sec 66 and Sec 67 of the Finance Act, 1994 since it travels beyond the scope of the sections above.
- The costs or expenditure incurred by the service contributor in the course of providing the taxable service can never be considered as part of the gross amount charged by the service subscriber for the services provided.
- The reimbursement of expenses for hotel accommodation, air travel tickets, etc. may also lead to double taxation.
The Delhi High Court decision was for the Assessor; the department has filed an appeal to the Supreme Court against the decision of the High Court which is pending for disposal.
Reimbursement of Expenses – Update Budget 2015
Budget 2015 has amended Sec 67 to include reimbursement of expenses in the value of taxable service.
Extract of budget 2015 regarding the above Reimbursement of Expenses change:
‘(a) consideration will include
- The amount that is payable for the taxable services on which is likely to be provided.
- Any reimbursable expenditure or cost incurred by the service provider and charged, in the course of providing or agreeing to provide a taxable service, except in such circumstances, and subject to such prescribed conditions
- Any amount kept by the lottery distributor or selling agent from gross sale amount of lottery ticket in addition to the fee or commission or the discount received, that is to say, the difference in the face value of lottery ticket and the price at which the distributor or selling agent gets such ticket.’.