What is Service Tax in India?

What is Service Tax?

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Service tax was introduced in India in 1994 under the Finance Act 1994. The objective of the service tax was to create a revenue stream from the expanding services sector, which constituted a significant part of the country's GDP.

 

Service tax definition: It is an indirect tax levied by the Government on services provided by service providers. The end consumer bears the tax, but the service provider collects and deposits it with the government. Small service providers with an annual turnover of less than ₹10 lakhs are exempt from service tax. If the value of services provided in a financial year is less than ₹10 lakh, the service provider can choose whether to pay service tax.

   

An Overview of Service Tax

 

When it was first introduced in 1994, only three services – telecommunication, stock brokerage, and general insurance services were included in the list, and the list expanded over the years, including many other services⁶.  The Finance Act, 2012 amendment, Section 65B(51) defines taxable services as any service subject to service tax under Section 66B⁸. Section 66B of the Finance Act, 1994, imposes a tax on all services except those listed in the negative list⁸. The negative list, defined under Section 65B(34), includes services specified in Section 66D⁸. Service tax applies to services provided or agreed to be provided between persons within the taxable territory, collected as prescribed⁸.

 

The negative list services that were not taxable are provided under Section 66D of the Finance Act, 1994. This list includes services like funeral, burial, crematorium or mortuary services of deased, agricultural services, and services provided by the government, etc., that do not come under the service tax regime ³. As per mega exemption notification ¹¹, certain services like healthcare, educational institutions, and services by charitable organisations were exempt from service tax under specific conditions ⁴.

 

To ensure tax compliance, the government also introduced a reverse charge mechanism⁹ under service tax, in which the responsibility of paying service tax shifted from the service provider to the service recipient for certain specified services.

 

Rate of Service Tax

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The rate of service tax evolved over the years

• The rate of service tax was 5% in 1994 when it was introduced.
• The rate was revised to 8% flat from May 2003 plus the education cess of 2% thereon from September 2004.
• The rate was then increased to 12% education cess from April 2006 under the Finance Act, 2006.
• Later, the introduction of secondary and higher education cess of 1% in 2007, bringing the effective rate to 12.36%.

 

Service Tax Registration

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The government digitised the service tax registration process via the ACES (Automation of Central Excise and Service Tax) website in simple steps. Here are the steps to follow for registration:

 

1. The user first registers online with the ACES software by selecting the applicable Central Excise or Service Tax Portal on www.aces.gov.in to become an ACES user.

2. The user then fills out the appropriate registration form to complete the process and become an Assessee

 

Payment of Service Tax

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Service tax online payment involves a few simple steps mentioned below:

 

• Visit the ACES portal and log in with service tax registration credentials.
• Go to the e-payment section and enter the 15-digit assessee code allotted by the jurisdictional Commissionerate. If the entered code is valid, the following details are displayed:

✔Name and address of assessee

✔Commissionerate code

✔Service tax to be paid

The assessee has to choose the type of service tax by clicking on ‘select accounting codes for service tax’

• Choose the bank from the drop-down menu and proceed to pay online through net banking. 
• After payment is completed, an online acknowledgement with a Challan Identification Number (CIN) is given. Save the acknowledgement for future reference. 

 

After making service tax payments, it is important to file the returns on a semi-annual basis on the ACES portal. Non-compliance with the service tax return filing attracted penalties, interest, and legal action. It is important to maintain a record of digitally signed invoices and other records for at least five years as per the law.

 

Transition to GST (Goods and Services Tax)

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The introduction of the Goods and Services Tax in July 2017 marked a significant tax reform in India’s indirect tax structure. GST is a multi-stage tax levied on the supply of goods and services, having destination-based four main tax components. It simplified tax compliance, reduced the cascading effect of taxes, and promoted the ease of doing business. With the implementation of the Goods and Services Tax (GST), service tax was subsumed under this new comprehensive taxation framework. GST integrated multiple indirect taxes , such as central excise duty, state value-added tax, service tax, entertainment tax, etc., into a single system, thus simplifying compliance.

 

Conclusion

 

To sum up, the introduction of service tax marked a pivotal moment in India’s indirect tax structure, even though it is no longer in effect after its integration with goods and services tax (GST). Service tax paved the way for a broader understanding and eventual integration of many indirect taxes under the GST ambit. Understanding the structure, historical relevance, and applicability of service provides valuable insights into the evolution of the tax system in India.

 

Source

1. https://www.cbic.gov.in/entities/cbic-content-mst/ODc%3D
2. https://www.nacin.gov.in/KnowledgeServiceTax.html
3. https://dor.gov.in/files/orders_circulars_documents/DOR.pdf
4. https://iiaonline.in/notification/ST25-2012.pdf
5. https://cag.gov.in/uploads/download_audit_report/2019/Chapter_1_Implementation_of_GST_of_Report_No_11_of_2019_Compliance_Audit_of_Union_Government_Department_of_Revenue_Indirect_Taxes_Goods_and_Services_Tax.pdf
6. https://dor.gov.in/files/orders_circulars_documents/DOR.pdf
7. https://taxsummaries.pwc.com/india/corporate/other-taxes#:~:text=Goods%20and%20services%20tax%20(GST,supply%20of%20goods%20and%20services.
8. https://www.sureshtaxation.com/Image/03_Taxable_services_under_Service_Tax.pdf
9. http://www.ada.org.in/file_upload/1371886100REVERSE%20CHARGE%20ST.pdf
10. https://cbic-gst.gov.in/aces/registration-faqs.html#:~:text=a.,form%20and%20becomes%20an%20Assessee.
11. https://haryanatax.gov.in/HEX/DownloadPDF?formName=/GST_Helpdesk/MEGA_NOTIFICATION.pdf
12. https://www.cbic.gov.in/entities/cbic-content-mst/NjU2MA%3D%3D