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Taxation Details

You can ask for a discount on service tax

Tania Kishore Jaleel & Neha Pandey Deoras / Mumbai 20 Jul 12 | 12:11 AM

The fact that service tax has gone up by two per cent is known. Many may also know that some service providers get an abatement (reduction or discount) on the business they do. But, are you aware that a consumer has the right to claim that abatement from the service provider? Most may not be aware.

Under the service tax law, certain services get exemptions. That is, a service provider is allowed a percentage of discount on the total amount he collects for providing the service. And he should pass on the abatement just like he passes on the service tax, which he is liable to pay to the government for providing services.

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For instance, rented cabs get an abatement of 40 per cent. If your cab bill is Rs 100, without the abatement you will pay Rs 112.36 (with the service tax) and with it (post abatement) you will pay Rs 107.40 (tax calculated on Rs 60). (See table for abatement on other services)

The problem area: Not all players pass on the abatement benefit. Unfortunately, not all service providers are aware about abatement. Especially, in sectors such as hospitality where there are many unorganised small players. However, you can ask for the same.

At the same time, there are many players, say experts, who charge you on the entire bill amount and pass on the same to the government. In such cases, the player cannot be questioned as this shows that it has no intention of cheating.

Thirdly, many times service providers charge tax on the entire bill and reduce it with the discount before passing on to the government. Here too, the company is not cheating. If you are aware, you can question the service provider and ask for your share of abatement. Or, approach the consumer court.

But to be able to question the service provider you need to know the abatement rates for each service industry and on all components that attract such abatement. Those providing bundled services by way of supply of food or other articles of human consumption, along with renting of the premises, says the Service Tax website, can charge “the sum total of the gross amount charged and the fair market value of all goods and services supplied in or in relation to the supply of food or any other article of human consumption or any drink (whether or not intoxicating), after deducting- (i) the amount charged for such goods or services supplied to the service provider, if any; and (ii) the value added tax (VAT) or sales tax, if any, levied thereon: Provided that the fair market value of goods and services so supplied may be determined in accordance with the generally accepted accounting principles."

This means, service tax is charged on the bill and other components or considerations, like housekeeping, complimentary breakfast, drinks and so on. The cost of all these are added to the bill for calculating the total service tax you pay.

Service Abatement
in %
Transport of goods/passengers by rail 30 Nil
Transport of passengers by air 40 Cenvat credit on inputs and capital goods not taken 
Renting of hotels, guesthouses, clubs 60 Cenvat credit on inputs and capital goods not taken 
Renting of motor vehicles to carry passengers 40 Cenvat credit on inputs and capital goods not taken 
Construction of a complex, building  25 (i) Cenvat credit on inputs and capital goods not taken
    (ii) Land value included in the amount charged to consumer
Services by a tour operator
1) Package tour 1) 25 (i) Cenvat credit on inputs and capital goods not taken 
2) Tour operator arranges stay 2) 10 (ii) Bill issued indicates it is inclusive of charges for such a tour
3) Any services other than than 1 & 2 3) 40 (iii) Exemption not applicable if the bill only includes 
(iv) Bill indicates that gross amount is charged (for 3)
Bundled services like food and lodging 70 Cenvat credit on inputs and capital goods not taken

The same is the case with property purchase. Builders charge service tax for providing preferential locations to buyers, such as a flat in the higher floors, sea-facing flat and so on. Similarly, a flight ticket to Cochin from Mumbai for December 2012 on IndiGo (MakeMyTrip) costs Rs 4,513 (base fare = Rs 1,520). Service tax should be calculated on the base fare, amounting to Rs 187. But, the bill mentions a tax of Rs 247. This is because the tax is calculated on many other components of the fare apart from the base fare.

If a service provider does not give an abatement, ask for it, says Mumbai-based chartered accountant Atul Kumar Gupta. “It also depends on the customer’s bargaining power. Or, there should be a mutual understanding with the service provider, where you can ask the provider to not take the Cenvat credit," he says. This is what corporates or high net worth or regular customers do. “This is also largely because such clients give huge business to the providers," says Gupta.

If you are a regular at a restaurant, with a travel agent or with a cab company, you can ask for the abated rate. But for that, you need to know the abatement available on all services.

But, a service provider does not always get abatement. A services company can claim abatement only if it does not claimed the Central Value Added Tax (Cenvat) credit on input services/goods, says Santosh Dalvi, Partner, KPMG.

Cenvat is the tax on value addition on the goods manufactured according to the Central Excise & Customs Act. If the provider accepts Cenvat, customers cannot avail of abatement.

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