TIOL-DDT 220
13 10 2005
Wednesday

IF you want to buy a dollar, the exchange rate according to RBI is a little less than Rs. 45/-. But wait! TRU wants to make it more expensive or cheap depending on whether you want to buy or sell Dollars. Now if you want to exchange a dollar, the bank or the exchanger will charge you a 10% Service Tax which will make your dollar costlier by 10.2%. In a letter addressed to the DGST with the mandatory copies to all Chief Commissioners and Commissioners, TRU wants to tax all money changers. But they are not brokers and they don’t charge a commission. They simply buy or sell foreign exchange at the rates fixed by RBI. But TRU has a different logic. The TRU letter says, “Money changers cannot go out of the purview of service tax on the plea that they are merely selling and purchasing foreign currency and not dealing or brokering in foreign exchange”. There is a strange logic behind this logic according to TRU. “Under Sale of Goods Act, Goods means every kind of moveable property but excludes money. Therefore transactions in foreign exchange do no fall under scope of sale.” And if it is not sale is it liable for Service Tax? Strangely the TRU clarification does not mention on what value the tax is to be paid. As the money changers do not charge any commission, what could be the value? Is it the gross payment?

Incidentally TRU seems to be unaware of its own clarification given in CIRCULAR NO. 62/11/2003, Dated: Aug 21, 2003 in which while observing that forex brokers included money changers, clarified that only the service of “foreign exchange broking” when provided by foreign exchange brokers has been brought under the tax net.

Why this change in opinion after two years? And as is the practice now a days, the TRU is shy of the circular and it has not been made public. They must surely be aware of the Right To Information Act which has already come into force. Please see our detailed analysis of the issue in our “Special column” today.

Service tax on advertising agency – Board proposes to widen scope of value
But now thankfully the circular is not secret

Board proposes to issue a circular regarding service tax on advertising. According to the proposed circular

• the service tax is to be levied on the total amount paid by the client to the advertising agency inclusive of the amount paid by the advertising agency to the media.

• The services provided by the media is actually received by the advertising agency and used as an input service for providing the taxable service to the client.

• Whether on not the amount paid or payable to the media by an advertising agent is separately mentioned in the invoice is not relevant

• the amount paid by the advertising agency to the media for obtaining space for display or exhibition, being in the nature of input service used in providing the taxable service, is liable to be included in the value of the taxable service

It had been the consistent view of the Board that that "sale of space" does not fall within the meaning of advertising services as always understood in the past.

Some of the Board observations are worth a recall:-

• It is further to be clarified that in relation to advertising agency, the service tax is to be computed on the gross amount charged by the advertising agency from the client for services in relation to advertisements. This would, no doubt, include the gross amount charged by the agency from the client for making or preparing the advertisement material, irrespective of the fact that the advertising agency directly undertakes the making or preparation of advertisement or gets it done through another person. However, the amount paid, excluding their own commission, by the advertising agency for space and time in getting the advertisement published in the print media (i.e. Newspapers, periodicals etc.) or the electronic media (Doordarshan, private TV Channels, AIR etc.) Will not be includible in the value of taxable service for the purpose of levy of serviced tax. The commission received by the advertising agency would, however, be includible in the value of taxable service. - F. No. 341/43/96-TRU, dated 31-10-1996

• The term canvassing may merely involve contacting potential advertisers and persuading them to give advertisement to a particular newspaper/periodical/magazine. The making and preparation of the advertisement namely, drafting of the text, preparation of layout is left either to the advertiser or to newspaper/periodical/magazine. Such a service is known as ‘space selling’. In such cases, since the agency undertakes the job of merely bringing the order for an advertisement and does not undertake any further activity, it would not fall within the definition of Advertising Agency and will not be subjected to service tax. - Circular No. 64/13/2003-S.T., dated 28-10-2003

• Similarly, in case of FCT, selling the time allotted to a 4. producer does not fall within the purview of “advertisement service” since this activity is not connected to making, preparation, display or exhibition of advertisement. This is akin to providing space in a newspaper or magazine for publishing an advertisement and has nothing to do with actual presentation of the advertisement. - Circular No. 78/08/2004-S.T., dated 23-3-2004

An expert in the field asked me,

What happens to the concept that in a works contract as indeed "photography" or "Advertising" would be if the same involves space booking, production and design layout etc (the three limbs that go into an advertising contract in its entirety) the value of materials consumed in the process of performance of the work should be excluded. See para 24.1 of the circular B/2/8/2004 dated 10-9-2004 on the "philosophy" behind such exclusion. Certainly the concept that there shall be no tax on the materials involved in the "work" in a composite rate contract should apply (See Notification No. 12/2003-S.T dt.20-6-2003)

The principle was to charge the advertising commission at a certain percentage of the value of the contract (15%) for purposes of service tax.

If full credit has be extended on the services used and materials purchased (excise duty) will this not be a revenue neutral exercise a la "sub contractor" arrangements which one does not know is alive or dead for purpose of service tax.

We will continue to learn!!!

If you have any suggestions on the draft circular, please mail them to sriramramamoorthi@yahoo.co.in before 20.10.2005. Send in your objections immediately for this will be officialised soon.

Draft Circular in F.No.341/43/2005-TRU

Customs ports appointed – What happens in Vizag?

Nagpur, Maharashtra; Vadinar, Gujarat appointed as Customs ports/airports. Port after port is being notified but nothing happens about Vizag which we had pointed out was not a port for import, but still imports take place there illegally. Even the Board’s detailed essay on Right To Information Act mentions about Unscrupulous parties do attempt to evade the duties leviable and bypass various prohibitions/restrictions in relation to imports by attempting to bring the goods into the country from places other than the notified ports/airports/Land Custom Stations. DDT’s report that Vizag is not a port authorised for import had indeed evoked some angry responses, but no attempt seems to be made to correct the lapse.

Notification No. 92 and 93/2005-Cus. (N.T.)

“Our audit system is pathetic. Our corporate governance is poor; "The Big 4 (Ernst & Young, PricewaterhouseCoopers, Deloitte and KPMG) may dominate India, but in due course, Indians will dominate the Big 4." – Finance Minister addressing a meeting in Chennai recently

Until Tomorrow with more DDT

Have a nice day.

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