Provision of service by an employee to the employer under service tax
- Services that are provided by the employee to the employer in the course of employment are outside the ambit of services.
- Services provided outside the ambit of employment for a consideration would be a service.
For example, if an employee provides his services on contract basis to an associate company of the employer, then this would be treated as provision of service.
- Services provided on contract basis i.e. principal-to-principal basis are not services provided in the course of employment.
- Amounts paid by the employer to the employee for premature termination of a contract of employment are treatable as amounts paid in relation to services provided by the employee to the employer in the course of employment. Hence, amounts so paid would not be chargeable to service tax.
- However any amount paid for not joining a competing business would be liable to be taxed being paid for providing the service of forbearance to act.
- If services provided by casual worker to employer who gives wages on daily basis to the worker then these services provided by the worker will be in the course of employment.
- If casual worker are employed by a contractor like a building contractor or a security services agency, who deploys them for execution of a contract or for provision of security services to client then services provided by the workers to the contractor are services in the course of employment and hence not taxable.
- However services provided by the contractor to his clients by such workers would not be services provided by the workers to the client in the course of employment. So the consideration received by the contractor would be taxable if other conditions of taxability are present.
Explanations to the definition of ‘service’
Explanation 1 clarifies that ‘service’ does not cover functions or duties performed by Members of Parliament, State Legislatures, Panchayat, Municipalities or any other local authority, any person who holds any post in pursuance of the provisions of the Constitution or any person as a Chairperson or a Member or a Director in a body established by the Central or State Governments or local authority and who is not deemed as an employee.
Explanation 2 clarifies that transaction in money does not include any activity in relation to money by way of its use or conversion by cash or by any other mode, from one form, currency or denomination to another form, currency or denomination for which a separate consideration is charged.
Explanation 3 creates two exceptions, by way of a deeming provision, to the general rule that only services provided by a person to another are taxable. As per these deeming provisions establishment of a person located in taxable territory and establishment of such person located in non-taxable territory are deemed to be establishments of distinct persons. Further an unincorporated association or body of persons and members thereof are also deemed as separate persons.
Explanation 4 explains that a branch or an agency of a person through which the person carries out business is also an establishment of such person.