Indian economy was recognized in the world as an agricultural economy, which has turned out to universal service hub since last decade. Services contribute approximately 50% of the GDP of our country. As per General Agreement on Trade & Tariffs (GATT), the tariffs of excise and customs have been consistently scaled down and are expected to deepen further in future, thereby resulting into shortfall in government’s kitty. This has forced government to look forward for the new source of revenue to fill up the shortfall.

It was in the year 1994, based on the recommendations made by Chelliah Committee on Tax Reforms, the service tax was first introduced initially to extend its levy on three services with expected revenue of Rs. 400 crores approximately. Since then the net has widened and more and more services have been brought under the net and presently the levy of service tax is extended to more than 70 taxable services. The total revenue collected from service tax was more than Rs. 8,000 crores during Financial Year 2003-04 surpassing the budget estimates and the target for collection of service tax is set at Rs. 14,150 crores for the Financial Year 2004-05.

In advanced countries of the world, services are taxed through most popular mechanism known as VAT, which is combined levy of tax on goods and services both. We are also moving towards the universal mechanism of VAT and to start with, CENVAT Credit Rules, 2004 were notified on 10th September, 2004 thereby credit of service tax and excise is made available across the goods and services with certain conditions.

Service tax is union levy with a selective approach whereby it is applicable only to selected category of services notified from time to time and not to all the services. There is no separate statute for service tax instead it is governed by Chapter V and Chapter VA (Sections 64 to 96(I)) of The Finance Act, 1994 which is amended from time to time and Service Tax Rules, 1994, Service Tax (Advance Ruling) Rules, 2003 and CENVAT Credit Rules, 2004.

The Act extends to the whole of India (including the designated areas in the Continental Shelf and Exclusive Economic Zone of India) except the State of Jammu & Kashmir. The Excise Department of the Central Government administers the Act.

The Government/CBEC (Central Board of Excise & Customs) has been issuing various notifications, trade notices, circulars and orders granting exemptions, abatements and giving clarifications on various issues. For meanings of various terms, definitions of services and service providers etc, the Act refers to various other laws such as Architects Act, 1972, Motor Vehicles Act, 1988, Banking Regulation Act, 1949 etc, etc.

Current rate of service tax is 10% ad valorem. In addition, 2% education cess is also leviable on service tax, making effective levy of 10.2%. Service tax rate was 5% from 1st July, 1994 to 13th May, 2003 and was 8% from 14th May, 2003 to 9th September, 2004.

Considering the growth in collection of service tax in last whole decade, service tax has turned out to be government’s best performing levy with a tremendous potential considering economic scenario in India and world over. It is expected that the rate of service tax may be scaled up to 16% in future with its integration with VAT. SERVICE TAX THEREFORE CAN BE TERMED AS THE TAX OF FUTURE.

Some Basic Concepts

• While charge of service tax is on provision of service, tax is payable only when the value of taxable service is received. [Section 68 & Rule 6(1)].

• Where payment for taxable service is received in advance, tax is to be paid on value of service attributable to relevant month/quarter [Explanation to Rule 6(1)].

• Service tax is not payable on services provided free of charge. (Circular No. 62/11/2003-ST dated 21st August, 2003)

• Vide various trade notices, CBEC has clarified that no service tax is payable on reimbursement/out of pocket expenses incurred on behalf of the service recipient, subject to documentary evidence in respect of certain services such as Consulting Engineer’s Services (Trade Notice No. 7/97-ST dated 4th July,1997, Mumbai Commissionerate-I), Custom House Agent’s Services (Trade Notice No.
  5/97-ST dated 12th June,1997, Mumbai Commissionerate-I) etc.

Levy & Payment of Service Tax

The liability for service tax arises when a taxable service is provided however the event of payment of tax is delayed up to the point of service provider receiving consideration. Service tax is destination based and therefore it is leviable where the taxable event occurs; i.e., where the services are rendered. It has a territorial nexus with the recipient of the service. The services provided in India by non-resident or from outside India is therefore liable for service tax.

Classification of Taxable Services

Section 65A provides for classification of taxable services based on definition of taxable services under various clauses of sub-section 65(105). When for any reason a taxable service is prima facie classifiable under two or more sub-clauses, classification shall be based on following principles:

1. Most specific description to be preferred to a general description.

2. For composite service — the service category that gives essential character.

3. When both the above test fail—the service category under sub-clause that occurs first, among sub-clauses which equally merit consideration.

Valuation of Taxable Service

Section 67 provides a universal mechanism for valuation of taxable service for charging service tax. The value of taxable service shall be the gross amount charged by the service provider for such service rendered by him. The section further provides for specific inclusions and exclusions from the valuation of taxable services as stated below:

Inclusions

1. The commission or brokerage charged by a stock broker including commission/brokerage paid to sub-broker;

2. Amount adjusted by telegraph authority out of any deposit for telephone, pager, facsimile, telegraph, telex or leased circuit;

3. Premium charged by the insurer from the policy holder;

4. Commission received by air travel agent from airline;

5. Commission, fee or other sum received by actuary, intermediary, insurance intermediary or insurance agent from insurer;

6. Reimbursement received by the authorized service station from manufacturer for carrying out service of motor car, light motor vehicle or two wheeled motor vehicle manufactured by such manufacturer; and

7. Commission or amount received by rail travel agent from Railways or customer.

Exclusions

1. Initial deposit paid for telephone connection, pager, facsimile, telegraph, telex or for leased circuit;

2. Cost of unexposed photography film, unrecorded magnetic tape or storage devices sold;

3. Cost of parts or accessories or consumable such as lubricants, coolants etc. sold during service or repair of motor cars, light motor vehicle or two wheeled motor vehicles;

4. Airfare collected by air travel agent;

5. Rail fare collected by rail travel agent;

6. Actual fare for travel by other modes of transport (road, water) collected by other travel agent;

7. Cost of parts or material sold during maintenance or repair service;

8. Cost or parts or material sold during erection, commissioning or installation service; and

9. Interest on loans.

Deduction of value of goods and materials sold during the course of providing service:

• Value of goods and material sold to the recipient of service, subject to documentary proof. However w.e.f 10th September, 2004 the same shall be exempted subject to following conditions:

  1. Service provider has not availed credit under CENVAT Credit Rules, 2004 for such input or capital goods sold; or

  2. In case such credit is availed by service provider, the amount equal to such credit is paid before sale of such goods or material.
     (Notification No. 12/2003 dated 20-6-2003 as amended by Notification No. 12/2004 dated 10-9-2004)

Issue of Bill for Service Tax

W.e.f. 10th September, 2004, Rule 4A(1) was inserted which requires every taxable service provider to issue a serially numbered invoice, a bill or a challan signed by such person or a person authorized by him containing details such as name, address and registration number of service provider, name and address of service recipient, description, classification and value of taxable service provided and service tax. (Notification No.11/2004-ST dated 10th September, 2004). Further a proviso to the said rule was inserted vide Notification No.30/2004-ST dated 22nd September, 2004 so as to exempt those service provider providing Banking & Financial Services from requirement of stating serial number of bill/invoice/challan and address of the service recipient.

W.e.f. 10th September, 2004, Rule 4A(2) was inserted which requires every input service distributor to issue a serially numbered invoice, a bill or a challan signed by such person or a person authorized by him containing details such as name, address and registration number of input service provider, serial number and date of invoice/bill/challan issued by input service provider, name, address and registration number of input service distributor, name and address of recipient of credit distributed, amount of credit distributed (Notification No.11/2004-ST dated 10th September, 2004). Further a proviso to the said rule was inserted vide Notification No.30/2004-ST dated 22nd September, 2004 so as to exempt those input service distributor which is an office of service provider providing Banking & Financial Services from requirement of stating serial number of bill/invoice/challan of the service recipient.

Section 69 does not speak about the input service distributor to obtain registration. This means input service distributor is not mandatorily liable to obtain registration. However Rule 4A(2) requires the input service distributor to mention his registration number on the bill/challan or invoice issued for distributing the service tax credit. This technically results into the fact that input service distributor has to obtain service tax registration number.

Composite Billing for Service Charges & Tax

Section 67 is amended which prescribes mechanism of computation of service tax where the bill is inclusive of service tax. The section provides that in case total amount charged by service provider is inclusive of service tax, the value of taxable service shall be arrived at as follows:

Value of taxable services = 100 X Total amount charged
                                     100+R

where R is rate of tax including education cess.

Rule 4A mandatorily requires service provider to issue a bill containing certain details one of which is service tax. So also section 83 of the Act makes applicable certain sections of the Central Excise Act, 1944 so far as they may be in relation to service tax as they apply in relation to duty of excise. Section 12A of the Central Excise Act, 1944 requires the amount of duty/levy to be indicated prominently on the invoice/bill/challan. This contradicts with the mechanism provided by section 67 for computation of service tax where the bill is inclusive of service tax as section 12A of The Central Excise Act, 1944 which is being made application to service tax vide section 83 of the Act does not permit issue of composite bill for service charges and service tax.

Service Tax on Non Residents

W.e.f. 16th August, 2002, Rule 2(d)(iv) provides for registration to be obtained by the person receiving taxable service in India when the service provider is a non resident or is from outside India and who does not have any office in India. The transfer of liability for registration and payment of tax from provider of service to the recipient of the service, although contrary to the Supreme Court judgment in Laghu Udyog Bharti & Other vs. Union of India but it is similar to the provisions of TDS under the Income-tax
Act, 1961 in case of payments to non residents.

Exports of Services

The service tax extends to whole of India except State of Jammu & Kashmir and includes the specified designated area in the Continental Shelf and Exclusive Economic Zone of India. Circular No. 56/5/2003 dated 25th April, 2003 clarified that the service tax is destination based consumption tax and is not leviable on export of service. Any service rendered beyond territorial jurisdiction of India does not attract service tax. Notification No. 21/2003-ST dated 20th November, 2003 exempts from service tax those services consideration of which is received in convertible foreign exchange and the foreign exchange is not repatriated or sent outside India.

The Government has issued draft rules in regards to export of services, which will come into the force from the date they are notified. The draft rules defines what constitutes export of services. For this purpose, the services are grouped in three broad categories.

The service shall be treated as export of service if

1. It relates to immovable property and the said immovable property is situated outside India. For example, Architect’s Services, Interior Decorator’s Service, Real Estate Agent’s Service, Construction Service etc.

2. Recipient of service is located outside India. For example, Telephone, General Insurance, Advertising, Franchise Service, Business Auxiliary Service, Broadcasting Service etc.

The service is physically performed (partly or wholly) outside India. For example, Stock Brokers, Custom House Agents, Fashion Designers, Survey & Exploration of Minerals, Cargo Handling Services, Commercial Training & Coaching, Commissioning & Installation Service etc.

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