Service Tax

SERVICE TAX

 Service Tax's concept

"Service to mankind is service to goods." 

• The term service means the act of helping or doing work for another or for a community etc.

•  Thus its stands for assistance or benefit given to someone.

•  Though ordinarily for rendering such service certain payment is made but it is not so in all the cases.

•  The amount charged for such service is the remuneration of the person providing such service.

• If we look back, tax on services is not new as we have been paying taxes on services in past also in the form of luxury tax, entertainment tax, expenditure tax, amusement tax, gambling tax, commercial tax, interest tax etc.

Need for Service Tax

In any Welfare State, it is the prime responsibility of the Government to fulfill the increasing developmental needs of the country and its people by way of public expenditure. India being a developing economy is striving to fulfill the obligations of a Welfare State within its limited resources. The Government's primary sources of revenue are direct and indirect taxes.

Central Excise Duty on the goods manufactured / produced in India and Customs Duties on imported goods constitute the two major sources of indirect taxes in India. But revenue receipts from Customs & Excise are not keeping pace with the growth in economy to WTO commitments and rationalization of commodity duties.

It is also well known that services constitute a larger proportion of the consumption of the rich rather than of the poor as the demand for services is income-elastic. Depending on the socio-economic compulsions, each country evolved a taxation system on services adopting either a comprehensive approach or a selective approach.

While most of the developed countries tax all the services with very few and limited exemptions, some of the developing countries tax select services only.  India has adopted a selective approach to taxation of services.

Introduction of Service Tax in India

Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for the year 1994-95 introduced the new concept of Service Tax and stated that "There is no sound reason for exempting services from taxation, therefore, I propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers."

Service Tax had been levied on the recommendations made in early 1990's by the Tax Reforms Committee headed by Dr.Raja Chelliah. The Committee pointed out that the indirect taxes at the Central level should be broadly neutral in relation to production and consumption of goods and should, in course of time cover commodities and services. The Committee felt that we should move towards full-fledged Value Added Tax (VAT) system covering services and commodities.

Service tax must be a part of VAT at the central level. It was envisaged that as the central excise duties on goods would get gradually transformed into a value added tax at the manufacturing level, service tax would get woven into that system. Therefore, a tax could be levied on services that enter into the productive process. The Committee emphasized the importance of moving towards VAT, for making the system of indirect taxation broadly revenue neutral in relation to production and consumption and widening the tax base by covering exempted commodities. The Committee also recommended charging of tax on services such as advertising, insurance, share broking and telecom etc. to begin with on the pattern of advanced economies. The basic objective of Service Tax is broadening the tax base, augmentation of revenue and larger participation of citizens in the economic development of the nation.

Bringing services under taxation is not simple as the services are intangible and are provided by large groups of organized as well as unorganized service providers including retailers who are scattered across the country. Further, there are several services, which are of intermediate nature. The low level of education of service providers also poses difficulties to both-tax administration and assessees.

Authority

Service tax was introduced in India for the first time in 1994. Chapter V of the Finance Act, 1994 (32 of 1994) as amended, (Sections 64 to 96) and Chapter VA of the Finance Act, 2003 deals with imposition of Service Tax. The Authority of levy of Service Tax on specified services is contained in Section 66 of the Finance Act, 1994 as amended. At present this, section stipulates a rate of tax of 12% of the taxable value of these services and Education Cess @2% and Secondary/Higher Education Cess @1% in liable on the Service Tax levied and collected under Section 66 of the Finance Act, 1994.

Administration of Act.
Constitutional Validity  

Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. Schedule VII divides this subject into three categories-

a) Union list (only Central Government has power of legislation)
b) State list (only State Government has power of legislation)
c) Concurrent list (both Central and State Government can pass legislation).

To enable parliament to formulate by law principles for determining the modalities of levying the Service Tax by the Central Govt. & collection of the proceeds there of by the Central Govt. & the State, the amendment vide constitution (95th amendment) Act, 2003 has been made.

Consequently, new article 268 A has been inserted for Service Tax levy by Union Govt., collected and appropriated by the Union Govt., and amendment of seventh schedule to the constitution, in list I-Union list after entry 92B, entry 92C has been inserted for taxes on services as well as in article 270 of the constitution the clause (1) article 268A has been included.

Formation and function of DGST

Considering the increasing workload due to the expanding coverage of service tax, it has been decided to centralize all the work and entrust the same to a separate unit supervised by a very senior official. Accordingly, the office of Director General (Service Tax) has been formed in the year 1997.

It is headed by the Director General (Service Tax).

SCHEME FOR LEVY, ASSESSMENT
& COLLECTION-OF SERVICE TAX

Service Tax payable by whom.

The Tax is normally payable by the service provider. However, in special circumstances, the Govt. may notify the payment not by the service provider by a person as notified. Considerations like administrative ease, cost of collection may require the shifting of the burden of payment from the service provider to service receiver or any other person.

To illustrate,

 the service Tax leviable on service provided by an insurance agent is not to be paid by the insurance agent himself but by the insurance company accordingly to Section 68(2) of the Finance Act, 1994.

What is Service Tax?

Service tax is an indirect levy imposed by the Union Government in terms of residuary entry No.97 in list (I) of the 7th Schedule of the constitution. The tax is applicable to services specified in the Section 64 to 96 of chapter V of the Finance Act, 1994 as amended.

The Government have also notified the procedures to be followed for levy and collection of service tax vide Service Tax Rules, 1994 as amended. At present the rate of Service Tax is 12% to be levied on the "Value of Taxable Service" and Education Cess @2% and Higher Education Cess@1% is leviable on the Service leived and collected. Generally speaking "Value of Taxable Service" means the gross amount received by the Service provider for the taxable service rendered by him.

The person who provides the Taxable service on receipt of charges is responsible for paying the service tax to the government.

Value of Taxable Service

The value of any taxable service shall be generally the gross amount charged by the Service providers for such services rendered by him (Section 67)

In other words, "Gross Amount" here indicate that no deduction shall be allowed in respect of any expenditure incurred by the service provider which has proximate connection in rendering the services by him.

In a case where the provision of Service is for a consideration not wholly or partly consisting of monthly, be such amount in money as with the addition of Service tax charged.

In a case where the provision of service is for a consideration, which is not accountable, be the amount as may be determined in prescribed manner.

Rules & Regulations

The Finance Act, 1994 (32 of 1994) as amended authorizes levy and collection of Service Tax and also provides the method of levy, the circumstances in which, the levy would arise, the procedures to be followed, and allied subjects like assessments, penalty etc.

The Finance Act, 1994 empowers the Central Govt. to frame the Rules governing the procedural aspects of Service Tax matters. The Govt. vide Notification No. 2/94 dated 28.06.1994 as amended have framed the Service Tax Rules, 1994, which came into effect on 1st day of July, 1994. Similarly, Export of Service Rules, 2005 vide Notification No. 9/2005 ST dated 03.03.2005 as amended, taxation of services, provided from outside India and received in India, Rules 2006 vide Notification No. 11/2006 dated 19.04.2006, Service Tax (Registration of Special Category of Persons) Rules, 2005 vide 17/2003 ST dated 23.07.2003 and Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 vide Notification No. 32/2007 dated 22.05.2007 have been framed.

Salient Features

• No Registration Fee.
• (Rule 4(1) Deemed Registration, if registration not granted within 7 days. (Rule 4(5)
• Penalty of Rs. 500/- for non-registration or delay in registration. (Section 75A)
• No specific records has been prescribed. (Rule 5(1)) Tax on uniform rate @12% advalorem + Education Cess @2% and higher Education Cess @1% on Service Tax
• No tax on export of services.
• Payment of Tax on realization of value of taxable service. (Rule 6)
• Payment of Tax on Quarterly basis for non-corporate assessee and monthly for corporate assessee. (Rule 6)
• Simple interest @13% per annum on delay of payment of tax. (Section 75)
• Hefty penalty on delay of payment of tax. (Section 76)
• Return on Half Yearly basis for all assessee (Rule 7)
• Facility for electronically filing of return for selective services.
• Penalty for delay in filing of return. (Section 77)
• Self adjustment of excess service tax paid in some cases Credit of Service Tax paid on input service.
• Self Assessment. (Section 70)
• Refund of Service Tax and Appeal against the rejection of refund. (Section 83)
• Wide power to issue notice for the production of accounts, documents etc. (Section 83)
• Penalty for concealment reduced to 25% from 100% to 200% w.e.f. 14.05.2003.
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   Administered by Central Excise Department. For this purpose, Section 83 of the Act provides that certain specified Sections of the Central Excise Act, 1944 will also apply in relation to Service Tax as they apply in relation to Central Excise Duty.

• Obligations and Time Limits
  
  

  Section/ Rules	Obligations	Frequency	Time Limit	Prescribed Form
  68 read with Rule 6(1)	Payment of Service Tax	Monthly	For coporate assessees 5th for the following month	TR-6 Challan
  68 read with Rule 6(1)	Payment of Service Tax	Quarterly	For individuals and firms by 5th for the following month	TR-6 Challan
  69 read with Rule 4(1)	Registration under SERVICE TAX	One Time	Within 30 days from the date on which tax is levied or commence the business	Form ST-1
  Rule 4(5)	Grant of Certificate of registration	One Time	Within 7 days of registration application, otherwise it will be deemed to have been granted.	Form ST-2
  70 read with rules 7(1) & 7(2)	Return of Service Tax	Half Yearly	Within 25 days of end of each half year.	Form ST-3/ST-3A (in triplicate) alongwith copy of Form TR-6.
  Rule 6(4) and 6(5)	A statement giving details of the difference between the Service Tax deposited and Service Tax liability to be paid for each month, when assessee opted for provisional assessment.	Monthly/ Quarterly as the case may be	Not Prescribed	Form ST-3A
  85 read with Rule 8(1) and 8(2)	Appeals by an Assessee to Commissioner, Central Excise(Appeals)	If required	3 months of the receipt of the order sought to be appealed	Form ST-4
  86 (1) and (3) read with Rule 9(1)	Appeals by an Assessee against the Order of Commissioner under Section 84 or Commissioner (Appeals) under Section 85 to the appellate tribunal	if Required	3 months of the receipt of the order sought to be appealed	Form ST-6
  86 (2) and (3) read with Rule 9(2)	Appeals by Commissioner on the direction of the Committee of Chief Commissioner/ against the Order of Commissioner under Section 84 to the appellate tribunal.	if Required	3 months of the receipt of the order sought to be appealed	Form ST-7
  86 (2A) and (3) read with Rule 9(2A)	Appeals by Asstt/Deputy Commissioner on the direction of the Committee of Chief Commissioner against the Order of Commissioner(Appeals) under Section 85 to the appellate tribunal.	If required	3 months of the receipt of the order sought to be appealed	Form ST-6
  86 (4) read with Rule 9(3)	Memorandum of cross objection by Commissioner or Deputy/ Assistant Commissioner or assessee as the case may be.		When Notice of Appeal received	Within 45 days of the receipt of the Notice	Form ST-8