Service tax amendment includes reimbursements

Section 67 of the Finance Act states that where a service is provided for a “consideration” in money, the value of taxable services for charging service tax will be the “gross amount charged” by the service provider to the service recipient. The Finance Bill, 2015, seeks to amend the definition of “consideration” in the explanation to section 67 to include “any reimbursable expenditure or cost” incurred and charged by the service provider in the course of provision of service, i.e. all the expenses the provider incurs for rendering the service must be included when calculating service tax.

With this amendment, the Ministry of Finance (MoF) has sought to make clear that reimbursable expenses were “always” intended to form part of taxable service valuation despite contrary court decisions. In the most prominent case, involving Intercontinental Consultants and Technocrats, Delhi High Court held that valuation rules which provided for inclusion of reimbursable expenses in gross amount for charging service tax were ultra vires of section 67.

Background

When the issue of including reimbursable expenses such as travel, meals and lodging within “gross amount” for discharge of service tax arose in the late 1990s, some service tax commissionerates clarified that such expenses would not form part of “gross amount” for payment of service tax provided that documentary evidence substantiating them was adduced. However, there was no uniformity in approach nor was there any clarification by the Central Board of Excise and Customs (CBEC) on the issue. The introduction of the Service Tax (Determination of Value) Rules in 2006, for the first time, sought to grant statutory recognition to inclusion of reimbursable expenses in gross amount for payment of service tax.

Kumar Visalaksh is an associate partner and Rahul Khurana is an associate manager at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.