SERVICE TAX

A Brief History

A tax is a financial charge or other levy imposed on an individual or a legal entity by the state.
Based on how a taxpayer pays a tax, taxes are differentiated into direct taxes and indirect taxes. A direct tax is one paid directly to the government by the persons on whom it is imposed. Income Tax is an example of direct tax. An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. Examples of indirect tax are Sales Tax, VAT, Service Tax, Customs Duty etc.

Why Service Tax?
In India, the economy consists of three sectors viz. agricultural sector, industrial sector and the services sector. At present the share of the three sectors are 18.5%, 26.4% and 55.1% of the GDP respectively. Service sector not only occupies the most significant part of the GDP but is also the fastest growing of all. In 2006-07, the rate of growth for these sectors was 2.7%, 7.4% and 11.1%. (Source: Economic Survey 2006-07 – Ministry of Finance, Govt. of India)

In 1994, the then government headed by Prime Minister Mr. P.V.Narasimha Rao realized the significant contribution of services to the GDP and its potential growth in the future. Hence it decided to impose tax on services. Services have been taxed world over. However, the difference between many countries taxing services and India is that India has chosen a selective model of taxation whereas the other countries have adopted a comprehensive model of taxation. In the comprehensive model all the services are taxed except a few like medical services, education etc. In the selective model only a few selected services are taxed by a government notification and rest of the services are exempted.
Initially only three services viz. telecommunication, general insurance and stock-broking were taxed. The rate of taxation was 5% of the amount of service provided.


Progression of tax rate over the years

Year Rate (%) Educational Cess (%) Effective Rate (%)
1994 5 - 5
2003 8 - 8
2004 10 2 10.2
2005 12 2 12.24
2007 12 3 12.36


Service tax was introduced for the first time in the year1994 through the insertion of Chapter V in the Finance Act 1994.

Collection of Service Tax

Collection of Service Tax is administered by the Customs & Excise Department.
Following is the procedure foe collecting Service Tax:-

i. Any Service Provider providing service which is mentioned in the notification should get himself registered within 30 days from the date on which he starts providing the service. The application for registration is made in form ST-1.
ii. Registration Certificate is issued in form ST-2 within 7 days from the receipt of application.
iii. Once the certificate is issued the Service Provider is obliged to charge Service Tax. In case the Service Provider raises bill without charging the Service Tax, then he is liable to pay the Service Tax from his own pocket.
iv. The Service Tax is payable only when the bill is realized and it is chargeable when the bill is raised. The Service Tax is required to be deposited using a challan in the form TR-6.
v. The liability to pay Service Tax is dependant on whether the Service Provider is a company or non-company.
In case the Service Provider is a company then the Service Tax collected in a month is to be paid before the 5th of the next month except for March when it is to be paid before 31st.
In case the Service Provider is a not a company then the Service Tax is to be paid on a quarterly basis and the due date is 5th of the next month.
vi. The Service Provider has to also file returns for the Service Tax collected and paid by him. Filing of returns takes place twice in a year. For the period April to September, the last date of filing returns is 25th October while for the period October to March; the last date is 25th April.
The returns are filed in the form ST-3.
vii. If there is a delay in the payment of Service Tax, a fine of 13% per annum is applied.


Input Tax Credit

The concept of Input Tax Credit was introduced to avoid cascading effect of paying Service Tax on Service Tax. It applies to all services under the Service Tax net provided there is some co-relation between the Service Tax on the input service and the output service.

For e.g. suppose there is an event management firm. It is managing an event for which it charges Rs. 10 Lacs from the organizers. This firm hires the services of an interior decorator who charges Rs. 1 Lac. At the effective rate of 12.36%, the interior decorator would raise a bill of Rs. 111000. The event management firm would raise a bill of Rs. 1110000, i.e. charging the organizers Rs. 110000. But while filing returns it will claim a credit for Rs. 11000 it paid to the interior decorator. Thus it would avoid paying Service Tax on Service Tax. At the same time, the government also does not lose any tax.