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Indirect Tax : Service Tax
Introduction
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. However revenue receipts from customs ! excise
have "een declining. #n the other hand. service sector has "een growing.
Till $%%& services in our country were not taxa"le. In out country Goods
were taxed "ut in most of the developed countries the Goods and services
"oth were ta'en on the same footing as far as the tax is concerned. (o in
$%%& )r. *anmohan (ingh who was the +inance *inister at that time
introduced service tax with three services at the initial stage. The exact
wordings were,- .There is no sound reason for exempting services from
taxation when goods are taxa"le and many countries treat goods and
services ali'e for tax purpose.
Was providing services till
1994 not taxable at all?
/es exactly the providing services were not taxa"le in our country till $%%&
"ut since in most of the countries the services are taxa"le hence there was a
tal' in our country to introduce service tax.
+urther in $%%0 the Tax 1eforms committee under the chairmanship of 2ate
)r. 1aja Chelliah has also recommended introduction of service tax to
"roaden the "ase of indirect taxation.
+urther the contri"ution of the (ervice sector to the Gross domestic product
3G)45 was increasing from year to year hence there was a need to tax the
services as goods are taxed.
How many services were
covered in first year ?
#nly three services, - $. Telephones 6. 7on-life insurance and 8. (toc'
"ro'ers.
(ervice tax is relatively new concept and there are two approaches of
imposing the tax on services the first one is selective approach and the
second one is Comprehensive approach and under the Comprehensive
approach whole the services are taxed at once and if the law ma'ers want to
exempt some of the services then a negative list is also released.
Why we have adopted the
Selective approach ?
The world is divided "asically in two parts the developed countries and the
developing countries though a major part of un-developed countries is also
there "ut for taxation purpose we can divide the world as )eveloped
countries and )eveloping countries. 9oth these segments of world economy
has their own taxation policies and most of the developed countries have
adopted the comprehensive approach "ut the developing countries have
adopted the selective approach and since India is a developing country
hence we have also adopted the same.
What is the current
situation ?
1ight now we have switch over from (elective :pproach to Comprehensive
:pproach. 7egative list is effective now and the rest all the services are
taxa"le.
he service tax is
!overned in our "ountry
by #inance $ct% 1994&
Why the service tax is not
governed by Service ax
$ct&?
There is no service tax :ct in our country. The +inance :ct $%%& which was
converted from +inance 9ill $%%& was the part of 9udget of $%%& which was
presented "y )r. *anmohan (ingh in $%%& when he was the +inance
*inister of the country. #ne of the Chapter i.e. chapter 7o. ; of the +inance
:ct $%%& contained the statutory provisions as applica"le with respect to the
taxation of the services in our country. (o Chapter ; of the +inance :ct
$%%& is the :ct for taxation of services in our country.
:t the first instance only three services were covered under the net of
service tax hence on experimental "asis the provisions might have "een
introduced in one of the Chapter of +inance :ct at that time. (o please see
that there is no (ervice tax :ct in our country and +inance :ct $%%& is
wor'ing as (ervice Tax :ct and remem"er (ection <& to %< of the +inance
:ct $%%& are Governing the (ervice Tax in India.
Important to note that while referring the various sections students will have
Service Tax
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to refer the +inance :ct $%%& such as (ection <& of +inance :ct $%%& and
not the (ection <& of the (ervice Tax :ct $%%&.
Is it applicable to whole of
India ?
(ection <& of the +inance act $%%& and you will find that (ervice tax is
applica"le to whole of India except the state of =ammu and >ashmir.
In most of the $cts the
definitions are given in the
Section '& What is the
position of Service tax in
this respect?
(ince we have only section <& to (ection %< hence there is no ?uestion of
having definitions in (ection 6. The definition part of the (ervice Tax law in
our country is covered in (ection <@ of the +inance :ct $%%&.
Important to note that in India we donAt have separate (ervice tax department and the service tax in our country is governed "y
the .Central Bxcise and custom department.
(eason)* :s we donAt have the separate (ervice tax :ct. (ee in $%%& the service tax was imposed on only 8 services hence it was
given to the .Central Bxcise and Customs department "ut later also the same practice was going on. Hence the (ervice tax in our
country is governed "y the Central Bxcise and customs department. The administration of (ervice tax can "e understood with the
help of following ta"le,-
$. *I7I(T1/ #+ +I7:7CB
6. )B4:1T*B7T #+ 1B;B7CB
8. CB7T1:2 9#:1) #+ BDCI(B :7) CC(T#*(
&. CB7T1:2 BDCI(B E#7B( HB:)B) 9/ CHIB+ C#**I((I#7B1(
@.CB7T1:2 BDICB(B C#**I((I#7B1:TB( HB:)B) 9/ C#**I((I#7B1(
To coordinate the wor' "etween Central 9oard of excise and customs Central Bxcise Eones and Central Bxcise commissionerates
)irector General of (ervice tax was appointed in $%%F.
"onstitutional
$uthority
The Government derives its power to levy taxes from the Constitution of
India. Bla"orate provisions have "een made in the Constitution of India to
regulate the power of taxation of "oth the Central Government and the state
Government. :rticle 6<@ of the Constitution of India prohi"its ar"itrary
collection of tax. It reads as ,
G7o tax shall "e levied or collected except "y authority of law.G
Thus the Government may levy a tax on the citiHens only under the authority
of the Constitution of India.
The Constitution in its (chedule ;II has enumerated the matters on which
the Central Government and the (tate Government can ma'e laws. (uch
matters are divided into three categories-
a5 2ist I I , Cnion 2ist 3It contains the matters in respect of which
only the Central Government has the power of legislation5
"5 list- II , (tate 2ist 3It contains the matters in respect of which only
the (tate Government has the power of legislation5
c5 2ist- III , Concurrent 2ist 3It contains the matters in respect of
which "oth the Central and the state Government have power of
legislation5.
Bntries J6 to %6 C of 2ist I enumerate the su"jects where the Central
Government has power to levy taxes.
Bntries &@ to <8 of 2ist II enumerate the su"jects where the (tate
Governments have the power to levy taxes.
Bntry %6C of the Cnion 2ist of the (eventh (chedule to the Constitution of
India ena"les the Cnion to levy GTaxes on (ervicesG. Initially there was no
specific entry in the Cnion 2ist for levying service tax. (ervice tax was
levied "y the Central Government "y drawing power from entry %F of the
Service Tax
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Cnion 2ist. Bntry %F is a 'residuary entry' in 2ist-I which has "een
reproduced "elow ,
G%F-:ny other matter not enumerated in 2ist II or 2ist III including any tax
not mentioned in either of those 2ists.G
The 'residuary entry' provides wide powers to the Central Government in
respect of taxation of the su"jects not mentioned in the 2ists given "y the
constitution.
however as a result of deli"erations "etween the (tates and the Centre and
as per the recommendations of the various expert committees entry %6C
was introduced in the ;II (chedule in the Cnion 2ist vide Constitution
3%6nd :mendment5 :ct 6008 with effect from 0F.0$.600&. Bntry reads as
under,
G %6C-Taxes on services.G
: new :rticle 6<J: was inserted in the Constitution which reads as follows,
G6<J: 3$5 Taxes on services shall "e levied "y the Government of India and
such tax shall "e collected and appropriated "y the Government of India and
the (tate in the manner provided in clause 365.
365 The proceeds in any financial year of any such tax levied in accordance
with the provisions of clause 3$5 shall "e-
3a5 Collected "y the Government of India and the (tatesK
3"5 :ppropriated "y the Government of India and the states
in accordance with such principles of collection and appropriation as may "e
formulated "y the 4arliament "y law.G
: conse?uential amendment to :rticle 6F0 of the Constitution was also
made to ena"le 4arliament to formulate "y law principles for determining
the modalities of levying the service tax "y the Central Government and
collection of the proceeds thereof "y the Central Government and (tate
Government. Lith this amendment in the Constitution the Central
Government has "ecome competent to enact a separate legislation on service
tax.
7ote , :lthough 4arliament has passed the Constitutional amendment
ma'ing entry %6C to Cnion 2ist this provision has not yet "een made
effective "y the 4arliament. Conse?uently service tax is presently collected
under the power of Bntry %F only.
Service ax +aw (ervice tax was introduced in the year $%%& "ut till date there is no
independent statute for levying service tax. However following sources
provide statutory provisions relating to service tax and can "e "roadly
grouped under the following categories,
#inance $ct% 1994,
The statutory provisions relating to levy of service tax o services were first
promulgated through Chapter ; of the +inance :ct $%%&. (ince then
Chapter ; of the +inance :ct $%%& is wor'ing as the :ct for the service tax
levy. 2ater in the year 608 the finance :ct 6008 inserted Chapter ;: to
deal with advance rulings. In the year 600& the provisions relating to levy
of 'education cess' on the amount of service tax were made applica"le
through Chapter ;I of the +inance 37o.65 :ct 600&.
(ules on service tax (ection %& of Chapter ; and section %<-$ of Chapter ;: of the +inance :ct
$%%& grants power to the Central Government for ma'ing rules for effective
carrying out the provisions of these Chapters Csing these powers the
Central Government has issued (ervices Tax $%%& (ervice Tax 3:dvance
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1ulings5 1ules 6008 (ervice Tax 31egistration of (pecial Category of
4ersons5 1ules 600@ (ervice Tax 3)etermination of ;alue5 1ules 600<
4oint of Taxation 1ules 60$$ and 4lace of 4rovision of (ervice 1ules
60$6.
1ules should "e read with the statutory provisions contained in the :ct.
1ules are made for carrying out the provisions of the :ct and the rules
cannot override the provisions contained in the :ct i.e. in short the rules can
never override the :ct and in case of conflict :ct will prevail.
,otifications on service
tax
(ections %8 and %& of Chapter ; and section %<-$ of Chapter ;: of the
+inance :ct $%%& empower the Central Government to issue notifications
to exempt any service from service tax and to ma'e rules to implement
service tax provisions. :ccordingly notification son service tax have "een
issued "y the Central Government from time to time. These notifications
usually declare date of enforcea"ility of service tax provisions provide
rules relating to service tax ma'e amendments therein provide or withdraw
exemptions from service tax or deal with any other matter which the Central
Government may thin' would facilitate the governance of service tax
matters
"irculars or -ffice
+etters .Instructions/
on service tax
The Central 9oard of Bxcise and Customs 3C9BC5 issues departmental
circulars or instruction letters from time to time to explain the scope of
taxa"le services and the scheme of service tax administration etc. These
circulars/instructions have to "e read with the statutory provisions and
notifications on service tax.
The circulars clarify the provisions of the :ct and thus "ring out the real
intention of the legislature. However the provisions of any :ct of the
4arliament cannot "e altered or contradicted or changed "y the departmental
circulars.
-rders on service tax #rders on service tax may "e issued either "y the C9BC or "y the Central
Government. 1ule 8 of the (ervice Tax 1ules $%%& empowers the C9BC to
appoint such Central Bxcise #fficers as it thin's fit for exercising the
powers under Chapter ; of the +inance :ct $%%&. :ccordingly orders have
"een issued "y the C9BC from time to time to define jurisdiction of
Central Bxcise #fficers for the purposes of service tax.
rade ,otices on
service tax
Trade 7otices are issued "y the Central Bxcise/(ervice Tax Commission
rates. These Commission rates receive various instructions from the
*inistry of +inance or provisions of service tax law. The same are
circulated among the field officers and the instructions which pertain to
trade are communicated to them in the form of trade notices. Trade
:ssociations are supplied with the copies of these trade notices.
Individual assesses may also apply for copies of trade notices. The trade
notice disseminate the contents of the notifications and
circulars/letters/orders define their jurisdictionK identify the "an's in which
service tax can "e depositedK give clarifications regarding service tax
matters etc.
(ole of a
"hartered
$ccountant
$dvisory services Lith the comprehensive coverage of service tax a great deal of professional
acumen would "e re?uired to interpret and understand the law and advise the
applica"ility of service tax ?uaan activity or service. : Chartered
:ccountant would "e a"le to fill void.
0rocedural compliance
The service tax law envisages registration payment of tax filing returns and
assessments involving interface with the excise department. : chartered
accountant with his experience and expertise would "e the "est person to
assist the assessee in all the a"ove functions and ensure compliance.
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0ersonal representation
:s per the service tax law read with the Central Bxcise :ct and 1ules a
chartered accountant is allowed to appear "efore the assessment authority
Commissioner 3:ppeals5 3first appeal5 and Tri"unal 3second appeal5. Here
too with his experience and expertise a chartered accountant would "e well
positioned to represent his clients. Lhen the matter goes up to the High
Court or (upreme Court the chartered accountant can assist/advise the
advocates.
"ertification and audit Lith the widening of tax there will "e a phenomenal growth in the num"er
of service tax assessees. In the ensuing years the department would have to
evolve a mechanism where there is management "y exception i.e. generally
accept all the returns as correct and pic' and choose those returns which
need detailed scrutiny. Cn this mechanism chartered accountant could "e of
great assistance. (ervice tax returns and financial statements could "e
certified "y the chartered accountant from the perspective of service tax
similar to an audit under && :9 of the Income-tax :ct.
-nerous tas1 to 1eep
pace
The service tax li'e excise is administered more "y way of trade notices
issued "y various Commission rates. : chartered accountant will have to
'eep himself a"reast of the latest notifications and trade notices in addition
to the changes in law so as to meet the client expectations. Thus in order to
render good value added services in the area of service tax a chartered
accountant has an onerous tas' to 'eep pace with the latest in the legal front.
Service Tax