OVERVIEW OF SERVICE TAX
Extent, Commencement and Application
– Section 64 (of Chapter V of Finance Act, 1994)
Service tax is first introduced in India by insertion
of Chapter V of the Finance Act, 1994 and is hereinafter referred
to as “The Act”. The Act came into force from 1.7.1994.
By introducing three services to start with. Thereafter, year
after year the said Chapter of the Finance Act, 1994 is being
amended to introduce new services under the taxable category.
Today, it covers 72 kinds of services.
The law encompasses Sections 64 to 96(I) of the
Act. It has no separate code or statute.
By section 64(1), the Act extends to the whole
of India except the state of Jammu and Kashmir, and by section
64(3), the levy applies to “taxable services provided”.
Hence on a reading of section 64, the situs of taxation falls
on taxable services provided in India. Services provided outside
India or in the State of Jammu and Kashmir are not liable for
service tax. In this context, the expression “India”
includes the territorial waters of India. Indian territorial waters
extend up to twelve nautical miles from the Indian land mass.
The law is extended to designated areas in Continental Shelf and
Exclusive Economic Zone of India w.e.f. 01/03/2002 vide notification
no. 1/2002-Service Tax dated 1st March, 2002. Hence w.e.f. 01/03/2002
services provided beyond the territorial waters of India but in
the designated areas within 200 nautical miles from the baseline
would also be liable for service tax. Prior to 1st March, 2002,
services provided beyond the territorial waters of India (i.e.
beyond 12 nautical miles from Indian land mass) were not liable
to Service Tax (Circular no. 36/4/2001 dated 8th October, 2001).
Situs of taxation
Service tax is leviable on taxable services provided
in India. Thus, -.
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There must be a service
categorized as taxable service under the Act. |
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The service must be “provided”
or “rendered” in India as mentioned above. |
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The liability is generally cast on
the provider of service; however, he may recover the service
tax amount from the recipient of service. There are certain
exceptions to the Rule and recipient of service is roped
in to discharge the liability to service tax and responsible
for observing the provisions of the Act. |
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Rate of Tax
W.e.f. 10.09.2004, the rate of service tax is
10% on the value of service plus 2% education cess of service
tax amount.
The rate of service tax was 8% from 14.05.2003
to 09.09.2004 and 5% prior to that.
Scheme of The Act
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Section 65 sub-section
1 to 104a defines various terms used under the Act. |
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Sub-section 105 of Section 65 defines
various taxable services under the Act. |
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Section 65A deals with classification
of taxable services. |
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Section 66 creates the Charge of service
tax. |
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Section 67 deals with valuation aspect
of taxable services. |
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Section 68 casts liability on the person
liable to pay service tax. |
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Section 69 deals with registration. |
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Section 70 to 74 deals with procedural
aspects. |
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Section 75 deals with interest on delayed
payments. |
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Section 76 to 80 deals with penalties
or contravention of the law or failure to payment or suppression
of value of the service tax. |
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Applicability of Service Tax
The law governing service tax may affect a person
in the following different ways :
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As a service provider
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A company may be liable for service tax as a provider of
any of the 72 categories of services. |
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As a service receiver [Rule
2(d)] :
Normally, it is the service provider who is liable to pay
service tax. However, in respect of any taxable service
notified by the Central Government in the Official Gazette
the service tax thereon is required to be paid by such person
in such manner as may be prescribed at the specified rate.
Thus, the onus of paying service tax may be passed on to
a person other than the provider of service. This has been
done in the following cases where the availer of services
is liable to pay service tax : |
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Services provided by
Non-residents/person from outside India – service
receiver to pay
In case of taxable services provided by a
person who is a non resident or is from outside India
and does not have any office in India, it is the person
receiving taxable service in India, who will be liable
for paying service tax. |
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Insurance Companies to
pay service tax in respect of services provided by
insurance agents
In case of insurance auxiliary services, relating
to general insurance and life insurance provided by
an insurance agent, service tax shall be paid by the
general insurance company or the life insurance company
which has appointed the agent. |
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In relation to transport
of goods by road
Where the consignor or consignee of the goods is from
any of the following persons, the person paying freight
is liable to pay service tax : |
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any factory registered
under or governed by the Factories Act, 1948
(63 of 1948); |
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any company established
by or under the Companies Act, 1956 (1 of 1956); |
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any corporation established
by or under any law; |
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any society registered
under the Societies Registration Act, 1860 (21
of 1860) or under any law corresponding to that
Act in force in any part of India; |
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any co-operative society
established by or under any law; |
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any dealer of excisable
goods, who is registered under the Central Excise
Act, 1944 (1 of 1944) or the rules made thereunder;
or |
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any body corporate established,
or a partnership firm registered, by or under
any law; |
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any taxable service provided
by a person who is a non-resident or is from
outside India, does not have any office in India. |
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Thus, in the above three cases,
a person may be liable as an availer of services. |
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The Administration of the Act
The Act is administered by the Central Excise
Department. For this purpose, section 83 of the Act provides that
certain specified sections of the Central Excise Act, 1944 will
apply in relation to service tax as they apply in relation excise
duty.
Export of Services
At present, there is no clarity on what is construed
as export of service. The Government has issued draft rules on
export of services on 02.08.2004, which is yet to see the light
of the day.
However, the Government has clarified in Circular
no. 56/5/2003 dated 25.04.2003 that the service tax is destination
based consumption tax and is not applicable on export of services.
It has further clarified that no service tax would be leviable
on secondary services which ultimately get consumed or merged
with the services that are being exported. In case where the secondary
service gets consumed in part or in toto for providing service
in India, service tax will be leviable on secondary service provider.
Exemption to receipt in foreign currency
In absence of clear-cut provisions on export
of services, the Government came out with via media by issuing
notification 6/99 ST dated 09.04.1999 by which exemption was granted
to taxable services so long as payment received in convertible
foreign exchange and not repatriated outside India. However, notification
no. 2/2003 ST dated 01.03.2003 abruptly rescinded this notification
and exemption was not available from 1st March 2003 till 19th
November 2003. the earlier provision of exemption to the receipt
of taxable services in foreign exchange was restored by notification
no. 21/2003 ST dated 20.11.2003.
Payment only on receipt
Service tax is payable to the Government only
on the value of taxable services ‘received’ though
the service provider charges service tax in his bill raised on
his client as and when the service is provided.
No service tax on advances received
It is to be noted that in accordance with section
66 service tax is levied on the value of taxable services and
taxable service means "any service provided to a client or
customer". Hence unless service is provided the incidence
of tax does not arise. Thus, there is no liability to pay service
tax when advance is received. In such cases where an advance is
received service tax is payable only when the service is provided.
Further, Explanation to Rule 6 of Service Tax Rules clarifies
that in a case where the payment for taxable service is received
in advance Service Tax has to be paid on the value of service
attributable to the relevant month/quarter in which the taxable
service is provided. The Explanatory Memorandum to the Finance
(No. 2) Bill, 2004 and Letter D.O.F. No. 334/3/2004-TRU dated
8th July, 2004 issued by the Joint Secretary (TRU), Ministry of
Finance while elucidating the notifications states that in such
cases the service tax is payable on a pro rata basis.
Concept of deemed service non-existent
Service tax is payable only on the gross amount
“charged” by the service provider for the services
rendered by him. Thus, service tax is not payable on free services
as the concept of deeming provision for valuation of taxable services
is -existent.
No service tax on reimbursements
Frequently, a service provider incurs expenses
such as traveling, boarding and lodging etc. during the course
of rendering services to the client. Such expenses are generally
reimbursed by the client. The department in most cases by way
of issue of trade notices has clarified that service tax is not
chargeable on such reimbursements or out of pocket expenses subject
to production of documentary evidence substantiating the claim.
Services provided to UN or International
Organization exempt
All taxable services, provided by any person
to the UN or International Organization are exempt. “International
Organization” means an international organization declared
by the Central Government in pursuance of Section 3 of the United
Nations (Privileges and Immunities) Act, 1947, to which the provisions
of the Schedule to the said Act apply.
Services provided to a developer or units
of Special Economic Zone exempt
All taxable services provided to a developer
or unit (including a unit under construction) of a Special Economic
Zone (SEZ) for consumption of the services within the SEZ is exempt
subject to the following conditions:
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The developer has been
approved by the Board of Approvals (“Board”)
to develop, operate and maintain the SEZ; |
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The unit has been approved by the Development
Commissioner or Board to establish the unit in SEZ; |
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The developer or unit shall maintain
proper account of the receipt and utilization of the taxable
services. |
No service tax on sub-contracted services
in some cases
Under certain categories of services, the service
to be taxable should be provided to a client/customer. For example,
where ‘A’ renders taxable services to ‘B’
an intermediary who adds his profit margin and renders the same
service to ‘C’ who further renders it to ‘D’,
the client, in such cases an issue arises whether services provided
by A to B and further B to C is liable for service tax since ultimately
C will levy service tax on his bill on D which will also include
charges of A and B. Earlier the department in some cases by way
of issue of trade notices has exempted sub-contracted services
from the levy of service tax, subject to certain conditions, provided
the sub-contracted service is in the same category of services
i.e. services rendered by an advertising agency to another advertising
agency. However, service tax is payable if the subcontracting
is to a different service category.
However, the principle of sub-contractor has
lost significance to a great extent in view of introduction of
CENVAT Credit Rules, 2004 in which the credit of input service
tax is allowed to be set off across all the taxable categories.
But in case of the category of services recently introduced in
the service tax net, say, for the past two years, this exemption
of subcontracted services has not been specifically provided perhaps
due to the advent of input tax credit rules.
Liability to pay for new services by
Finance Act(No. 2) 2004
In relation to new categories of taxable services
introduced by Finance Act (No. 2) 2004, service tax is not leviable
on that portion of value of taxable services which is received
prior to 10.09.2004.
(Notification No. 18/2004 ST dated 10.09.2004)
Liability to pay for expanded scope of
services by Finance Act (No. 2) 2004
In relation to expanded scope in the categories
of taxable services by Finance Act (No.2) 2004, service tax is
not leviable on that portion of value of taxable service which
is received prior to 10.09.2004.
(Notification No. 25/2004 ST dated 10.09.2004)
CENVAT Credit Rules 2004
A major step is taken by the Government when
it introduced CENVAT Credit Rules, 2004 w.e.f. 10.09.2004 to provide
for extension of credit of service tax and excise duty across
goods and services wherein the service provider is eligible to
take credit on input of goods and services and also capital goods.
Under the Service Tax Credit Rules, 2002, from
14.05.2003 to 09.09.2004, service tax credit was allowed on input
services when such input service was used in relation to output
service. From 16.08.2002 till 13.05.2003, credit of input service
was allowed only when the input and output service were from the
same taxable category of service.
The Act makes the person providing the service
to pay service tax in such manner and within such period as may
be prescribed.
Provisions for advance ruling
have been introduced from 14.05.2003.
