Service tax

01. Introduction -
Prior to July, 1994 only the manufacturing sector was subject to indirect tax in the form of
Central Excise, placing a disproportionate burden on this sector. Considering that service
element constitutes significant part of the GDP, Service Tax was imposed in 1994 for the first
time on telephone services,, services relating to non-life insurance and services provided by
Stock Brokers. The number of new services was brought under tax net over period of time and
presently 100 services are subject to service tax (list of taxable services at annexure ‘A’). Service
Tax is applicable to the whole of India except the State of Jammu and Kashmir. It also extends to
the designated areas in the Continental Shelf and Exclusive Economic Zone of India.
02. The legal provisions for the levy and collection of Service Tax were introduced through
Finance Bill 1994. Thus, the law relating to Service Tax is still governed by Chapter V of the
Finance Act, 1994 (Sections 64 to 96I). Initially the service tax rate was 5% of the gross value
of service. This was enhanced to 8% in 2003 Budget (with extension of credit facility acrossed
the services). In 2004 Budget the rate were further enhanced to 10% (+ a cess of 2% thereon
introduced from September 2004) with extension of credit across goods and services. The rate
was enhanced to the present rate of 12% in 2006 Budget.
03. Sub – section (105) of section (2) defines individual activities that fall under taxable
service. Thus unlike excise & customs, there is no separate tariff for service tax.

04. Authority for levy (Charging section)

The authority for levy of Service Tax on specified services is contained in Section 66 of the
Finance Act, 1994. At present, this section stipulates a rate of tax of 12 per cent of the value of a
taxable service. In addition education cess @ 2% and secondary and higher education cess @1%
of amount of service tax is also leviable.

05. Person liable to pay service tax

The tax is normally payable by the service provider. However law empowers the Government to
notify a person other than the service provider to pay the service tax.. In some of the cases
liability of payment of service tax has been shifted to the service provider. 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. Similarly in case a service provider is from outside India, the liability to pay
service tax has been shifted to the person receiving service in India. In case of Goods Transport
Agencies the liability to pay tax is on the consignor or consignee (who so ever pays the freight
charges) if they fall under special category, as enumerate under notification No. 24/2005-ST
dated 7.06.2005. In all other cases the Goods Transport Agency is required to pay service tax.

06. Taxable Value

“Value of taxable service” as defined under Section 67 of the aforesaid Act means the gross
amount charged by the service provider for the taxable service rendered by him. Provisions have
been made in 2006 Budget (by amending section 67) to provide, manner of determination of
value of taxable service in cases where the consideration received in other than money terms or
when the consideration received is not ascertainable. Valuation rules have also been made for
this purpose .

07. Presumption that incidence is passed on

Service Tax is collected from the service provider. However, being an indirect tax, its incidence
is normally passed on by the service provider to his client. Under the law, therefore, every person
who has paid Service Tax is deemed to have passed on its full incidence to the buyer of the
service. This is because section 12B of the Central Excise Act has been made applicable to
Service Tax, which requires that a any amount (which represents service tax) if is collected, is
required to be deposited in government exchequer.

08. Exemption
A threshold limit of Rs 8 lakh has been provided vide notification No. 6/2005-ST. Full
exemption is admissible for services provided to United Nations or an International Organisation
(as defined) vide notification No. 16/2002 – ST dated 2.8.2002. Notification No. 17/2002 – ST
dated 21.11.2002 provides full exemption to taxable service provided to a developer or units in a
Special Economic Zone (SEZ) subject to specified terms and conditions. In addition to these
there are certain service specific exemptions.

9. Registration
The taxpayer has to submit an application in form ST-1 for registering himself with the
jurisdictional Superintendent of Central Excise. This application is to be made within 30 days
from the date a particular Service Tax is levied or within 30 days from the date of
commencement of business, whichever is later. There is no registration fee. Where a taxpayer
provides more than one taxable service, he may make a single application stating therein all the
services provided by him. The Superintendent grants a certificate of registration in form ST-2
within 7 days failing which it will be deemed as if the taxpayer has been registered. If a taxpayer
has the system of centralized billing or centralised accounting, he may apply for a single
registration for the office from where the centralised billing is done or where centralised
accounts are maintained and not a separate one for each office.

10. Assessment and payment of service tax

Self assessment is to be done by the taxpayer and return filed with the jurisdictional
Superintendent of Central Excise (Section 70 of the Finance Act, 1994).
The tax is to be paid for a particular period only on the value received for the taxable service
provided and not on the amount billed to the client. In the case of corporate taxpayers, Service
Tax on the value of taxable service received during a calendar month has to be paid by the 5th of
the month immediately following that month. Non-corporate taxpayers have to pay the tax on a
quarterly basis i.e by the 5th of the calendar month immediately following the last month of the
quarter. Thus, payment of service tax is due from non-corporate taxpayers by the 5 th of April,
July, October and January respectively in each financial year. The tax is required to be paid under
TR6 challan (yellow colour) in the specified branches of designated banks.
If the Service Tax is deposited by cheque, the date of presentation of cheque to the designated
bank is deemed to be the date of payment. However, if the cheque is not honoured, it would
amount to non-payment of Service Tax and would attract necessary penal consequences. There
is a simple interest on delayed payment of tax under Section 75 of the Finance Act, 1994. In
addition, penalty under Section 76 is also attracted on failure to pay the tax.

11. Return
A half-yearly return has to be filed by every taxpayer in form ST-3 or ST-3A (i.e. for periods
April to September and October to March) by the 25th of the month following the half year.
Form ST 3 A is applicable to cases of provisional assessment and is in the nature of a
Memorandum for provisional deposit. Section 77 provides for a penalty for failure to furnish
returns.
12. Service tax short paid, not paid, short levied or not levied
For any wilful omission or incorrect supply of facts involving short payment of tax, the
department can initiate recovery proceedings extending up-to a retrospective period of 5 years.
In the remaining cases of short payment, dues can be recovered within the normal time of one
year. In case the taxpayer has paid Service Tax but the taxable service is not so provided by him
either wholly or partially for any reason, he may adjust the excess Service Tax so paid by him
(calculated on a pro-rata basis) against his tax liability for the subsequent period, provided the
taxpayer has refunded the value of taxable service and the Service Tax thereon to the client.
Section 73 (1A) has been provided for conclusion of adjudication proceedings in respect of a
person who has voluntarily deposited the service tax demanded along with interest and penalty
equal to 25 per cent. of the service tax specified in the demand notice .
Provision has been made for voluntary payment by an assessee of any amount collected in excess
of the service tax leviable but not deposited with the Central Government or recovery of such
excess amount. It may be noted that any amount collected as service tax, whether or not legally
required to be paid, is to be deposited with the Government under this Section. This section has
been made applicable not only to a person liable to pay service tax but also to any person, even if
he is not an assessee;
Section 73 A has been inserted to provide for payment or recovery of any amount representing
service tax, that has been collected by a person but not deposited with the Central Government.
Section 73 B enables the Central Government to collect interest on the amount referred to in
section 73A;
Section 73 C provides for provisional attachment of property by the Central Excise Officer
during the pendency of any proceedings under section 73 or section 73A;
Section 73 D provides for publishing the name of any person and particulars of any proceedings
in relation to such person, in public interest..
The section 76 provides for imposition of penalty for failure to pay service tax by the due date.
The penalty for delayed payment has also been linked to the amount due;
13. Credit of service tax and excise duty paid on input goods and services
The Cenvat Credit Rules, 2004 provides for allowing credit of service tax paid on input service
and excise duty (or CVD) paid on input goods and capital goods used in relation to providing a
taxable output service.
No Cenvat credit is admissible on inputs (services and goods) received and consumed in relation
to rendering of such output service which is either exempt from whole of Service Tax leviable
thereon or is not a taxable service. Also, no credit is admissible on capital goods used exclusively
for providing exempt/non taxable service. In this regard the person availing credit is required to
maintain separate records in respect of input goods and services meant for consumption in
relation to rendering of output services which are chargeable to Service Tax and those
meant for consumption in relation to rendering of output services which are exempted services or
non-taxable services as the case may be. However, if the service provider opts not to comply
with the provision stated in preceding para, he shall be allowed to utilize Service Tax credit for
payment of Service Tax on any output service only to the extent of an amount not exceeding 20%
of the amount of Service Tax payable on such output service.
Other significant features of the CENVAT credit are that refund or rebate of credit is admissible
in case of export of services provided drawback is not availed; on input services credit is
admissible only on or after the day which payment is made of the value of input service and the
service tax paid or payable as indicated in the bill; credit of education cess is admissible for
payment of education cess on output service; Cenvat credit is admissible on capital goods even if
they are procured on lease, hire and purchase, or loan agreement from a financing company;
person availing credit is required to maintain adequate record of receipt, disposal and inventory
of input service and goods; assessee is required to furnish the information to the jurisdictional
superintendent in the manner as may be specified by the Board regarding the credit availed and
utilized by him; and irregular availment of credit attracts confiscation and penalty.
14. Link to websites:
www.cbec.gov.in, and www.servicetax.gov.in
15. List of taxable services
 Taxable services
Advertising agency International air travel
Airport Services Internet Café
Air Transport of Goods service Internet telephony
Air Travel Agent Life Insurance
Architect Mailing list compilation and mailing
Assets management Man Power Recruitment and Supply agency
Auction service Management Consultant
Authorised automobile repair and maintenance Management, maintenance or repair
Automated teller machine operation , Mandap Keeper
management, maintenance

Banking and other financial services Market Research agency

Beauty parlour Mining of mineral, oil or gas
Broadcasting On-line information and database access and/ or retrieval

Business auxiliary Opinion Poll Service

Business Exhibition Service Outdoor Catering Service
Business support service Packaging service
Cable Operators Pandal and Shamiana
Cargo handling Photography
Chartered Accountant Port services ( major ports) in ‘zn’ above
Cleaning service Port services (other than major ports)
Clearing and Forwarding Public relation management
Clubs and associations service Rail travel agent
Commercial coaching or training Real Estate Agent/Consultant
Company Secretary Recovery agents
Construction of commercial complex Registrar service to an issue
Consulting Engineer Rent- a- Cab operator
Containerized rail transport Renting of immovable property
Convention services Residential complex construction
Cost Accountant Sale of space for advertisement
Courier Scientific and technical consultancy
Credit Rating agency Security Agency

Credit/debit/charged card Share transfer agent

Custom House Agent Ship Cruise tour
Design services Ship management
Development and supply of content for Site preparation
telecom, advertising and online information and
database retrievable

Dredging Sound recording

Dry cleaning Sponsorship