Service tax is a tax levied by the government on service providers on certain service transactions, but is actually borne by the customers. It is categorized under Indirect Tax and came into existence under the Finance Act, 1994. The salient features of levy of service tax are:
1. Scope: It is leviable on taxable services ‘provided’ or ‘to be provided’ by a service provider. The services ‘to be provided’ in future are taxed only if payment in its respect is received in advance.
Two separate persons required Payment to employees not covered: For charge of service tax, it is necessary that the service provider and service recipient should be two separate persons acting on ‘principal to principal basis’. Services provided by an employee to his employer are not covered service tax and, therefore, salaries or allowances paid to them cannot be charged to service tax.
2. Rate: It is leviable @ 12% of the value of taxable services. Education Cess @ 2% and Secondary and Higher Education Cess @ 1 % are chargeable on the amount of service tax, thus, making the effective rate of service tax at 12.36% of the value of taxable service.
Update: While presenting the Budget 2015, the FM had increased the Service Tax Rate from 12.36% to 14%. This new rate of Service Tax @ 14% was applicable from 1st June 2015. Moreover from 15th Nov 2015, Swachh Bharat Cess @ 0.5% also got applicable. Budget 2016 has proposed to impose a Cess, called the Krishi Kalyan Cess, @ 0.5% on all taxable services. The new effective service tax rate in India could henceforth be 15%.
3. Taxable services: Service tax is leviable only on the taxable services. Taxable services mean the services taxable under section 65(105) of the Finance Act, 1994.
4. Value: For the levy of the service tax, the value shall be computed in accordance with section 67 read with Service Tax (Determination of Value) Rules, 2006.
5. Free services not taxable : No service tax is leviable upon the services provided free of cost.
6. Payment of service tax : The person providing the service (i.e. the service provider) has to pay service tax in such manner and within such period as is prescribed in the Service Tax Rules, 1994. The service tax is to be paid only on the receipt of payment towards the value of taxable services.
7. Procedures: Provisions have been made for registration, assessment including self assessment, rectifications, revisions, appeals and penalties on the service provider.
8. CENVAT credit: The credit of service tax and excise duty across goods and services is allowable in accordance with the CENVAT Credit Rules, 2004. Accordingly, output service provider (i.e. provider of any taxable service) can avail credit not only of the service tax paid on any input service consumed for rendering any output service but also of the excise duty paid on any inputs and capital goods used for rendering output service. CENVAT credit so availed can be utilized for payment of service tax on taxable output service.
9. Services provided by an unincorporated association/body to its members also taxable
[Explanation to Sec. 65] : ‘Taxable service’ includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration. Hence, the services (falling under any category of taxable service) provided or to be provided by any unincorporated association/body to member thereof shall be liable to service tax. This provision is an exception to the ‘principle of mutuality’.
10. Performance of statutory activities/duties, not ’service’: An activity performed by a sovereign /public authority under provisions of law does not constitute provision of taxable service to a person and, therefore, no service tax is leviable on such entities.
11. Import/Export of services: While import of services is chargeable to tax u/s 66A, the export of services has been made exempt from tax. Import/export provisions are discussed separately.