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Classification of Services under Service Tax




Classification of taxable services was relevant under pre-negative list era (before 01-Jul-12) as a) services were taxable selectively, b) services of different nature were brought into tax net at different points of time. Classification was further significant as certain services presumed to be covered earlier were specifically brought under service tax at a later stage. For eg. commercial construction services were taxed w.e.f. 10-09-04 whereas works contract services were specifically brought into tax net w.e.f. 01-6-07, with resulting interpretation that they were not taxed earlier.


Sec 65A of the Finance Act, provided for provisions of classification of a service falling under various sub clauses and stated that a) a sub-clause providing more specific description will be preferred over the one providing general description and b) composite services will be classified on the basis of services which gives them their essential character.


Present Law


With the introduction of negative list regime w.e.f. 01-Jul-12, Sec 65A lost its relevance and was replaced by different section Sec 66F. Though under negative list regime service specific descriptions are done away with, there remains a need to provide for classification provisions as differential treatment is provided to certain nature of services (be it an exemption notification or an inclusion in negative list).


The Provisions


Broad principles for interpretation u/s 66F are stated below:


  1. Sec 66F (1) “Unless otherwise specified, reference to a service (herein referred to as main service) shall not include reference to a service which is used for providing main service.”

    To clarify, services related to feasibility study for construction of road will not be treated as same as construction of road service. Though construction of road is exempted from service tax, consultancy related to construction of road will be taxable. Another example can be of toll charges which are out of purview of tax by virtue of negative list entry, however services provided by a collection agency for collection at toll plaza is not at par with the negative list entry and hence taxable.
  2. Sec 66F (2) “Where a service is capable of differential treatment for any purpose based on its description, the most specific description shall be preferred over a more general description.”

    The provision essentially provides for coverage under a specific entry on the basis of description of services under which it is covered most appropriately. For example mandap keeper service is taxable @ 14.00% (full rate) and outdoor catering is taxable @ 8.40% (taxable portion 60%). However when both the services [Mandap Keeper and Outdoor Catering] are provided as one package, the specific valuation provisions provided in rules will be applicable and the effective rate on the package will be 9.80% (70% taxable).
  3. Bundling provisions:
  • Sec 66F (3)(a) “If various elements of such service are naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which gives such bundle its essential character”.

    Eg. Provision of hotel room with complimentary breakfast and pick and drop facility. Though it comprises of services of a) room rent, b) provision of food  and c) rent-a-cab, the essential character is that of hotel accommodation and bouquet will be taxed accordingly. Another example can be of provision of food on board in air, which covers transport of passenger and catering services; essential character being air transport.

  • Sec 66F (3)(b) “If various elements of such service are not naturally bundled in the ordinary course of business, it shall be treated as provision of the single service which results in highest liability of service tax.”

    Premises given on rent for use as office-cum residence essentially cover two services namely a) renting for use as a residential accommodation and b) for commercial purposes. While use as residence is not taxable, the other one is covered under tax net. As such bundling of different services is not a natural one, highest tax rate of the service(s) of the services forming the bundle will be applicable and as a result whole amount of rent will be taxed.


4.   Guiding factors for determining natural bundling of services:


Board has provided for certain guiding factors for determining bundling of services in education guide dated 20-Jun-2012 as follows:


  • View of service receivers: The perception of consumer or service receiver to treat package services as one.
  • View of Service providers: Treatment of service providers in a particular business line providing similar bundle of services, eg. Bundling of catering on board and transport by airlines.
  • Nature of Service: If nature of services is such that one of the services is the main service and the other services combined with such service are in the nature of incidental or ancillary services which help in better enjoyment of a main service. For eg. complimentary breakfast with room accommodation.

    There cannot be a thumb rule to determine ordinary bundling of services and each case has to be tested independently for classification.