Introduction to Service Tax

Service tax is a tax on service. This is not tax on profession, trade. Calling or employment but is in respect of service rendered . If there is no service, there is no tax. As per Webster’s Concise Dictionary ‘service’ means a useful result or product of labor, which is not a tangible commodity.

Thus basically service is a value addition that can be perceived but cannot be seen, as it’s tangible. However, usage of some goods during the course of rendering the service would not mean that there is no ‘service’ .It is the predominant factor in each case, which is to be studied to arrive at a conclusion.

Service tax is a tax levied on service providers in India, except the State of Jammu and Kashmir.

Service Tax, introduced from the financial year 1994-95 now covers as many as 41 services within its ambit. Service sector, which has an average annual growth rate of value addition of 7.9%, contributes nearly 50% of the GDP. The Economic Survey 2001-2002 observed that bringing more services under the tax net can offset the likely revenue loss through lower custom tariff. Finance Act, 2001 added 15 new services to the list of taxable services with effect from 16-7-2001 & it is expected that coming budget will add further services under the tax net. We are moving towards a total value added tax regime which was partially expected to come into force with effect from 1st April, 2002 replacing the local sales tax in about 17 states.

However due to failure of reconciliation between the center & the states regarding some key issues, like amendment in Central Sales Tax regarding vat ability of Central Sales Tax against liability of local sales tax & loss of revenue to the state exchequer due to introduction of value added tax, it could not be introduced. However it is expected to come into force with effect from 1st April, 2003 & by that time service tax may also be made vat able.

Vat ability of service tax will compel the reduction in loss of revenue through tax evasion. To reduce the tax evasion in respect of service tax government has already taken some significant steps like introduction of service tax audit in the mode of Canadian system of excise audit introduced in India from financial year 2000 & collection of data from various associations of service tax providers like ICAI, ICSI, ICWAI, Internet Service Provider Association of India, Stock Exchanges, Council of architecture etc. Now let us discuss about some basic concepts of service tax regarding taxability, exemptions, payment, assessment, etc.

The services provided by goods transport operators, out door caterers and pandal shamiana contractors were brought under the tax net in the budget 1997-98, but abolished vide Notification No.49/98, 2 June,1998.

Government of India has notified imposition of service Tax on twelve new services in 1998-99 union Budget. These services listed below were notified on 7 October, 1998 and were subjected to levy of Service

Charge of Service Tax and Alternative rates of Service Tax

Section 66 is the charging section of the ACT which deals with the levy and collection of service tax. It prescribes the applicable rate of service tax which is to be levied on the value of various taxable services. For collection of service tax, it provides that the ‘prescribed manner ‘needs to be followed. Applicable rate is provided in the section itself whereas the prescribed manner for collection and payment of tax is provided in the Service Tax Rules,1994 .With effect from 18.04.2006 , the rate of service tax prescribed by section 66 is 12% of the value of taxable services referred to in section 65(105) of the Act . Section 65(105) provides that taxable service shall not only include service provided but also the “services to be provided”

  • The charge is on the services provided or to be provided
  • The services provided or to be provided must be the one which is covered in section 65(105)
  • The rate is 12%
  • The measure of tax is on ‘value of taxable services ‘provided which is defined in section 67

Education Cess :

With effect from 10.09.2004 an education cess has been levied @2%, calculated on service tax on all taxable services. Education cess collected is utilized for providing and financing universalized quality basic education.

Fully exempted taxable services are not subject to education cess. In case of a partial exemption, say by way of abatement, the cess is calculated on the net tax paid and not on the amount of tax that would have been payable, but for exemption

Secondary and Higher Education Cess:

With effect from 11.05.2007, a secondary & higher education cess@1% has been imposed on services liable to service tax. It is levied on service tax payable on such services . The secondary & higher education cess is additional to the Educational cess of 2% . Thus the effective rate of service tax works out to be 12.36% [ 12%+3%(2-1) of 12% ]

Although service tax is levied at the basic rate of 12% but in case of certain services, an alternate rate is also provided. Some of these are under

  • Specified immovable properties an optional composition tax rate of 4% of gross value has been provided
  • In case of life insurance service alternate mode of discharge of service tax liabilities has been provided and rate of service tax in this case is 1% of total premium

Exemptions :

There is no minimum limit or basic exemption limit to small service providers on the basis of value of taxable services rendered as yet. Following exemptions are available to the service tax providers :-

1) Taxable services rendered in India by an assessee to a client in respect of overseas projects for which payment is received in non repatriable convertible foreign exchange are exempt from levy of service tax.

2) Serive tax is fully exempt in respect of payments of which is received in India in non repatriable convertible foreign exchange whether the service is received in India or abroad.

3) In certain cases like insurance, telephone, telegraph, air travel, courier, advertisement etc. services provided to UN, notified international organizations or notified diplomatic missions, service tax is exempt.

4) Software engineering enjoys a complete exemption from service tax.

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