INTRODUCTION

Service tax is a tax levied by Central Government of India on services provided or agreed to be
provided excluding services covered under negative list and considering the Place of Provision
of Services Rules, 2012 and collected as per Point of Taxation Rules, 2011 from the person liable
to pay service tax. Person liable to pay service tax is governed by Service Tax Rules, 1994 he
may be service provider or service receiver or any other person made so liable. It is an indirect
tax wherein the service provider collects the tax on services from service receiver and pays the
same to government of India. Few services are presently exempt in public interest via Mega
Exemption Notification 25/2012-ST as amended up to date and few services are charged service
tax at abated rate as per Notification No. 26/2012-ST as amended up to date. Presently from 1
June 2016, service tax rate has been increased to consolidated rate at 14% +0.5%+0.5%= 15% of
value of services provided or to be provided. The service tax rate now is consolidated rate as
education cess and secondary higher education cess are subsumed with 2% of "Swach Bharat
Cess(0.50%)" has been notified by the Government.

From 15 November 2015, the effective rate of service tax plus Swachh Bharat Cess, post
introduction of Swachh Bharat Cess, was 14.5%. Currently, Swachh Bharat Cess and Krishi
Kalyan Cess would also be levied on all services on which Service Tax is being levied and
therefore, the Service Tax (including Swachh Bharat Cess and Krishi Kalyan Cess) applicable
from 1 June 2016 has become 15%.
 BACKGROUND OF SERVICE TAX

Dr. Raja Chelliah Committee on tax reforms recommended the introduction of service tax.
Service tax had been first levied at a rate of five per cent flat from 1 July 1994 till 13 May 2003,
at the rate of eight percent flat w.e.f 1 plus an education cess of 2% thereon w.e.f 10 September
2004 on the services provided by service providers. The rate of service tax was increased to 12%
by Finance Act, 2006 w.e.f 18.4.2006. Finance Act, 2007 has imposed a new secondary and
higher education cess of one percent on the service tax w.e.f 11.5.2007, increasing the total
education cess to three percent and a total levy of 12.36 percent. The revenue from the service
tax to the Government of India have shown a steady rise since its inception in 1994. The tax
collections have grown substantially since 1994–95 i.e. from ₹410 crore (US$61 million) in
1994–95 to ₹132,518 crore (US$20 billion) in 2012–13. The total number of Taxable services
also increased from 3 in 1994 to 119 in 2012. However, from 1 July 2012 the concept of taxation
on services was changed from a 'Selected service approach' to a 'Negative List regime'. This
changed the taxation system of services from tax on some Selected services to tax being levied
on the every service other than services mentioned in Negative list.
 ABATEMENTS, COMPOSITIONS AND EXEMPTIONS OF
SERVICE TAX

Taxable Services eligible for abatement :-

With effect from 01.07.2012, amended with notification No. 02/2013, the following taxable
services are eligible for abatement from the gross amount in the following manner:-

1. Financial leasing services- 10% taxable

Financial leasing includes hire charges but excludes operating lease. The value of taxable service
would be 10% i.e. abatement of 90% has been granted unconditionally. Taxability is defined as
follows:

 Interest chargeable to the extent of 10%

 Principal amount not subject to tax
 Fees based income such as lease management fees, processing fees, documentation
charges and administrative fees would be fully taxable.

Distinction between financial lease and operating lease

Financial lease: A financial lease is usually a long term agreement covering the entire economic
life of assets. Whole investment is recovered by lesser plus his profit. Assets are usually
maintained by lessee. It is not cancellable contract the lease becomes the owner practically but
not legally.

Operating lease: An operating lease is for short term. Assets may be given to more than one
party on lease during the economic life of the asset. Hence cost of the assets is not recovered in
one contract of lease. Usually, lesser upkeep maintains the asset. For example, a computer or
furniture given on rent.
  Transport of goods by rail - 30% taxable
 Abatement of 70% has been granted unconditionally.
 Transport of passenger by rail – 30% taxable
 Abatement of 70% has been granted unconditionally.
 Transport of passenger by Air – 40% taxable
 Abatement of 60% , this is subject to the condition that CENVAT credit on input and
capital goods , used for providing the taxable services has not been.

2. Goods transport agency – 25% taxable

Abatement of 75%. This is subject to the condition that input, input services and capital goods ,
used for providing the taxable services has not been taken under the provision of CENVAT
Credit Rules, 2004.

 Transport of goods by road, other than GTA and courier agency, has been fully exempt as
included in section 66D [p] of the ACT pertaining to the negative list.
 Contents of the consignment note have been defined under the explanation to Rule 4B.

What is good transport agency? S. 65B [26] provides that “Goods Transport Agency “ means
any person who provide services in relation to transport of goods by road and issue consignment
note, by whatever named called ‘Goods Transport Agency’ was identically defined in erstwhile
section 65[ 50b] of the Act.

3. Transport of goods in vessel from one port to another - 50% taxable

Abatement of 50%. This is subject to the condition that input, input services and capital goods ,
used for providing the taxable services has not been taken under the provision of CENVAT
Credit Rules ,2004

 Transportation of goods from one port to another can be through either national
waterway/ inland waterway or otherwise . As transportation of goods through inland
waterways [which includes national waterway] has been included in the negative list,
there will be no service tax on it.
4. Tour operator services

Notification no. 26/ 2012 defines Tour operator means any person engaged in the business of
planning, scheduling, organizing , arranging tours (which may include arrangement of
accommodation, sightseeing or other similar services) by any mode of transport, and includes
any person engaged in the business of operating tours.

 For Package tour – Abatement is 75% (tax payable on 25% of gross amt charged)
 Booking accommodation – Abatement is 90% (tax payable on 10% of gross amt
charged)
 Service other than mentioned above 60% (tax payable on 40% of gross amount charged)

This is subject to the condition that input, input services and capital goods , used for providing
the taxable services has not been taken under the provision of CENVAT Credit Rules ,2004.

5. Service provided in relation to chit -70% taxable

Abatement of 30%. Chit means transaction whether called chit, chit fund, chitty, kuri or by
whatever name by or under which a person enters into an agreement with a specified number of
people that every one of them shall build a certain sum of money by way of periodical
installments over a definite period and that each subscriber shall, in his turn, as determined by lot
or by auction or by tender or in such other manner as may be specified in the chit fund
agreement, be entitled to prize amount.

6. Renting of any motor vehicle designed to carry passengers – 40% taxable

Abatement of 60%. This is subject to the condition that input, input services and capital goods ,
used for providing the taxable services has not been taken under the provision of CENVAT
Credit Rules ,2004.

 Rent means the act of letting out or allowing the use of something for consideration. The
expression ‘rent a car’ is defined in the dictionary as a car rented for day, week or other
contracted time, for fixed sum or according to mileage.
  There is a distinction between providing ‘rent a cab service’ and giving vehicle on lease /
hire. If vehicle is given on lease / hire without driver, effective control over the vehicle
passes to the person taking vehicle on hire. This becomes ‘transfer of right to use goods’
and may be taxable under VAT, since it is deemed sale of goods. If the effective control
is not handed over to customer, the service will come under service tax.

Liability to pay service tax

 With abatement – Under the reverse charge mechanism, the service recipient is liable to
pay 100% of the tax so arrived at.
 Without abatement – The Service recipient will be liable to pay 40% of the service tax
so arrived at and the remaining i.e., 60% is the liability of service provider.

7. Renting of hotels, inns etc.- 60% taxable

Abatement of 40% is available. Renting of hotels, inns, guest house, clubs, campsites or other
commercial places meant for residential or lodging purpose will get the abatement of 40%. It
should be noted that abatement is available only to the specified immovable properties. This is
subject to the condition that input and capital goods, used for providing the taxable services has
not been taken under the provision of CENVAT Credit Rules 2004.

8. Supply of food or any other article at a specially arranged place – 70% taxable

Supply of food or any other article of human consumption or any drink , in the premises
(including Hotel , convention centre, club, pandal , shamiana or any other place specially
arranged for organizing function) together with renting of such premises will get the benefit of
abatement.

 The abatement is subject to the condition that CENVAT credit on any goods classifiable
under chapter 1 to 22 of the Central Excise Tariff Act 1985 has not been taken under the
provision of the CENVAT Credit Rules, 2004.
 The amount charged shall be the sum total of the gross amount charged and the fair
market value of all goods and services supplied in or in relation to the supply of food or
 any other article of human consumption or any drink (whether or not intoxicating) and
whether or not supplied under the same contract or any other contract, after deducting-
o the amount charged for such goods or services supplied to the service provider, if
any; and
o the value added tax or sales tax, if any, levied thereon

Note : Consideration includes free supplies to service provider.

9. Construction services – 25% taxable

Abatement of 75%. Service provided with respect to

 Construction of complex, building, civil structure and part thereof , intended for sale ,
wholly or partially
 Except those where entire consideration is received after issuance of completion
certificate by the competent authority.
 This is subject to the condition that input used for providing the taxable services has not
been taken under the provision of CENVAT Credit Rules, 2004.
 Value of land is included in the amount charged from the service recipient

Furthermore ,for the purpose of valuation, the amount charged shall be the sum total of the
amount charged for the service including the fair market value of all the goods and services
supplied by the recipient in or in relation to the services , whether or not supplied under the same
contract or any other contract , after deducting :

 The amount charged for such goods or services supplied to the service provider, if any:
and
 The value added tax or sales tax , if any, levied thereon

It is proposed in the Budget 2013, that for homes and flats with a carpet area of 2,000 sq.ft. or
more or having a value of `1 crore or more, (high-end constructions), where the component of
services is greater, the rate of abatement is to be reduced from 75 to 70 percent – meaning that on
these types of services, service tax needs to be paid on 30% of the total value.
Composition Scheme

1. Valuation of service in Restaurant or by outdoor caterer – (Rule 2C of Service Tax

(Determination of Value) Rules:

With effect from 1.7.2012, as per the new rule 2C of the Valuation Rules : Food or any other
article of human consumption or any drink (whether or not intoxicating) supplied in any manner
as part of the activity at a restaurant or as outdoor catering, then the taxable rate is as follows

 At a Restaurant - 40%(taxable percentage of total amount excluding VAT)

 Outdoor catering - 60%(taxable percentage of total amount excluding VAT)

Cenvat credit of input services and capital goods is available. Cenvat credit of excise duty on
food items (covered under Chapters 1 to 22 of CETA) is not available. Cenvat credit of other
inputs is available.

Over lapping and conflicting between Rule 2C and abatement scheme

Rule 2C applies if food is provided in restaurant or outdoors without any other services.
However, if service is provided at any other place specially arranged for organizing a function,
the abatement scheme of 70% shall apply.

2. Air Travel Agent – (Rule 6(7) of Service tax rules)

Air travel agents have an Option to pay service tax at a flat rate on the ‘basic fare’ at the rate of:

 0.6% (plus education cess) in case of domestic booking and

 1.2% (plus education cess) in case of international booking

There is no restriction on the availment of CENVAT credit.

3. Foreign Currency – sale and purchase – (Rule 6(7B) of Service Tax Rules)

Composition scheme for such transaction is available at slab rates prescribed under rule 6(7B) on
the total gross amount of currency exchanged. There is no restriction on the availment of
CENVAT credit.
4. Life Insurance – (Rule 6(7A) of Service Tax Rules)

Service tax at the rate 3% of net premium (excluding investment or savings part, if such amount
is informed to policy holder) – If not so informed, 3% in first year and 1.5% in subsequent years
is charged. There is no restriction on the availment of Cenvat Credit.

5. Lottery ticket promotion - Rule 6(7C) of Service Tax Rules

Option to pay service tax at Rs. 7,000/- or Rs. 11,000/- per Rs. 10 lakhs of tickets printed by
State lottery. Under this scheme there is no restriction on availment of Cenvat Credit.

6. Works Contract Service – (Rule 2A of Service Tax (Determination of Value) Rules)

• In case of original work, service tax has to be paid on 40% of the ‘total amount’,

• In case of maintenance, repair, reconditioning, restoration or servicing of any goods, service

tax has to be paid on 70% of the ‘total amount’,

• In case of all other works contract, service tax has to be paid on 60% of the ‘total amount’.
The above services have been discussed in detail in the article “Works contract services”.

In order to understand the complete valuation and liability towards service tax, the above write
up has to be read with the articles ‘Reverse Charge Mechanism,’ ‘Negative list’ and ‘Exemptions
available under Service Tax,’ all of them are inter linked and a number of the services mentioned
in the abatement and composition scheme are also covered under reverse charge mechanism.
Apart from this, a few exemptions can be availed on fulfillment of the conditions mentioned
above
EXEMPTIONS OF SERVICE TAX

Section 93 of the Finance Act, 1994 gives power to the Central Government to grant exemption
from service tax. The section provides that if the Central Government is satisfied that it is
necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt
generally or subject to such conditions as may be notified in the notification, taxable service of
any description from the whole or any part of the service tax leviable thereon. It further provides
that if the Central Government is satisfied that it is necessary in the public interest so to do, it
may, by special order in each case exempt any taxable service of any specified description from
the payment of whole or any part of the service tax leviable thereon, under circumstances of
exceptional nature to be stated in such order.

GENERAL EXEMPTIONS:
In this article the general exemptions granted by the Central Government in service tax is
discussed. General exemptions may be of the following types:

 Exemptions available to all assessees in respect of all services;

 Exemptions available in respect of specified assessees in respect of all services;
 Threshold exemptions.

EXEMPTION AVAILABLE TO ALL ASSESSEES:

The following are the exemptions available to all service providers in respect of all the
services:

 Services provided to United Nations or an International Organization;

 Services provided to a developer of Special Economic Zone or a Unit located therein;
 Value of goods and materials sold by the service provider;
 Services provided to the foreign diplomatic mission/consular posts in India;
 Services provided to the family members of diplomatic agents/career consular offices;
 Services exported from India.
 PERSON LIABLE TO PAY SERVICE TAX

Following list provides the notified taxable services and the specified persons/class of
persons who are liable to pay service tax thereon as per Rule 2(1)(d) of Service Tax
Rules,1994:
(i) insurer or re-insurer, as the case may be, providing such service.
(a) any factory registered under or governed by the Factories Act, 1948;
(b) any company
formed or registered under the Companies Act, 1956;
(vi) in relation to sponsorship service provided to any body corporate or firm, the person
liable to pay service tax is the body corporate or firm, as the case may be, who
receives such sponsorship service.
(c) any corporation established by or under any law;
(d) any society registered under the Societies Registration Act, 1860 or under any
law corresponding to that Act in force in any part of India;
(e) any co-operative society established by or under any law;
(f) any dealer of excisable goods, who is registered under the Central Excise Act,
1944 or the rules made thereunder; or
(g) any body corporate established, or a partnership firm registered, by or under
any law,
the person liable for paying service tax is any person who pays or is liable to pay
freight either himself or through his agent for the transportation of such goods by road
in a goods carriage.
(v) in relation to business auxiliary service of distribution of mutual fund by a mutual
fund distributor or an agent, as the case be, the person liable for paying service tax
is the mutual fund or asset management company, as the case may be, receiving
such service.
 VALUATION OF SERVICE TAX

VALUATION PROVISIONS IN THE FINANCE ACT 1994

Section 67 provides for valuation of taxable services for charging service tax. The salient
features of section 67 are –

 Where the provision of service is for a consideration in money, the value shall be the
gross amount charged by the service provider for such service provided or to be provided
by him. However, the gross amount charged includes any amount received towards the
taxable service before during or after the provision of such service and not only prior to
provision of service.
 As per Section 67(2) where the gross amount chargeable by the service provider is
inclusive of service tax payable then the value of such taxable service shall be such
amount as, with the addition of such tax payable , is equal to the gross amount charged.
Thus, ‘Value of Taxable Service’ plus ‘service tax payable’ will be ‘the gross amount
charged’.
 Where the provision of service is for a consideration not wholly or partly consisting of
money, the value shall be such amount in money as, with the addition of service tax
charged, is equivalent to the consideration;
 Where the provision of service is for a consideration which is not ascertainable, the value
shall be determined as per the Service Tax (Determination of Value) Rules 2006
(Valuation Rules). The Central Government is empowered to make rules for the
determination of amount and value of taxable service under section 67, and in pursuance
of this the Service Tax (Determination of Value) Rules 2006 have been issued and have
come into force w.e.f 19.04.2006.
 VALUATION RULES

The Valuation Rules lay down the manner of determining the value of non-monetary
consideration. As per clause section 67(1)(ii), where the consideration received is not wholly or
partly consisting of money the value of taxable service shall be the equivalent money value of
such consideration. If the same is not ascertainable then the value of such consideration is
determined under section 67(iii) read with rule 3 of the Service Tax (Determination of the value)
Rules 2006 as follows:-

 On the basis of gross amount charged for similar service provided to other person in the
ordinary course of trade;
 Where value cannot be so determined, the equivalent money value of such consideration,
not less than the cost of provision of service.

Therefore, determining the value of non-monetary consideration under the Valuation Rules cover
the following aspects:

 Where the consideration received for provision of service is not wholly consisting of
money, the value in such cases shall be the gross amount charged by the service provider
for provision of similar service to any other person in the ordinary course of trade.

Valuation of Taxable Service :

 If the value of similar service provided by the same service provider is not available, then
the value has to be determined.
 Money value of non-money consideration received should be determined by the service
provider.
 If the consideration received is not wholly consisting of money, equivalent money value
of the consideration determined by the service provider shall be the taxable value for
charging service tax.
  If the consideration received is partly in money and partly in non-money terms, the sum
of consideration received in money and the equivalent money value of the non-money
consideration determined by the service provider shall be the taxable value for charging
service tax.

In cases where provision of service is for a consideration which is not ascertainable then the
value of taxable service shall be the amount as may be determined by the Valuation Rules. The
manner for determining this value has been prescribed under Service Tax (Determination of
Value) Rules 2006 by providing provisions in respect of the following situations:

 Determination of value of service portion involved in execution of works contract

 Determination of value of service in relation to money changing
 Determination of value of service portion involved in supply of food and any other article
of human consumption or any drinks in a restaurant or as outdoor catering

In addition to the Service Tax (Determination of Value) Rules 2006, certain sub-rules in rule 6
of the Service Tax Rules, 1994 also provide provisions for determination of value of taxable
services in specified situations.

Question

Calculate the net service tax payable under the provision of rule 2A of the Service tax
(Determination of Value) Rules, 2006 relating to determination of value of services in the
execution of a works contract from the following particulars:

(i) Gross amount for the works contract (excluding VAT) Rs. 3,00,000

(ii) Value of goods and materials sold in the execution of works contract Rs. 50,000

(iii) CENVAT credit on (ii) above Rs. 5,000

(iv) Service tax paid on input services Rs. 5,000

(v) CENVAT credit on capital goods issued in the provision Rs. 6,000 of works contract service

(vi) Service tax rate 10.30%

Make suitable assumptions and provide explanations where required.

Answer

Particulars Rs.
Gross amount charges (excluding VAT) 3,00,000
Less: Value of goods 50,000
Net amount subject to service tax 2,50,000
Service tax @ 10.30% on Rs. 2,50,000 = 25,750
Less: CENVAT credit
On input service = Rs. 5,000
On Capital Goods Rs. 6,000 x 50% = Rs. 3,000 8,000
Net service tax payable 17,750

Notes: CENVAT credit of Rs. 5,000 on value of goods sold in the execution of works contract
shall not be available.
 PLACE OF PROVISION OF SERVICE TAX

Place of provision generally -

The place of provision of a service shall be the location of the recipient of service:

Provided that in case the location of the service receiver is not available in the ordinary course of
business, the place of provision shall be the location of the provider of service.

Place of provision of performance based services.-

The place of provision of following services shall be the location where the services are actually
performed, namely:-

(a) services provided in respect of goods that are required to be made physically available by
the recipient of service to the provider of service, or to a person acting on behalf of the provider
of service in order to provide the service:

Provided that when such services are provided from a remote location by way of electronic
means the place of provision shall be the location where goods are situated at the time of
provision of service:

Provided further that this sub-rule shall not apply in the case of a service provided in respect of
goods that are temporarily imported into India for repairs, reconditioning or reengineering for re-
export, subject to conditions as may be specified in this regard.

(b) services provided to an individual, represented either as the recipient of service or a person
acting on behalf of the recipient, which require the physical presence of the receiver or the
person acting on behalf of the receiver, with the provider for the provision of the service.

Place of provision of services relating to immovable property.-

The place of provision of services provided directly in relation to an immovable property,

including services provided in this regard by experts and estate agents, provision of hotel
accommodation by a hotel, inn, guest house, club or campsite, by whatever, name called, grant
of rights to use immovable property, services for carrying out or co-ordination of construction
work, including architects or interior decorators, shall be the place where the immovable
property is located or intended to be located.
Place of provision of services relating to events.-

The place of provision of services provided by way of admission to, or organization of, a
cultural, artistic, sporting, scientific, educational, or entertainment event, or a celebration,
conference, fair, exhibition, or similar events, and of services ancillary to such admission, shall
be the place where the event is actually held.

Place of provision of services provided at more than one location.-

Where any service referred to in rules 4, 5, or 6 is provided at more than one location, including
a location in the taxable territory, its place of provision shall be the location in the taxable
territory where the greatest proportion of the service is provided.

Place of provision of services where provider and recipient are located in taxable
territory.-

Place of provision of a service, where the location of the provider of service as well as that of the
recipient of service is in the taxable territory, shall be the location of the recipient of service.

Place of provision of specified services.-

The place of provision of following services shall be the location of the service provider:-

(a) Services provided by a banking company, or a financial institution, or a non-banking

financial company, to account holders;

(b) Online information and database access or retrieval services;

(c) Intermediary services;

(d) Service consisting of hiring of means of transport, upto a period of one month

Place of provision of goods transportation services.-

The place of provision of services of transportation of goods, other than by way of mail or
courier, shall be the place of destination of the goods:

Provided that the place of provision of services of goods transportation agency shall be the
location of the person liable to pay tax.

Place of provision of passenger transportation service.-

The place of provision in respect of a passenger transportation service shall be the place where
the passenger embarks on the conveyance for a continuous journey.
Place of provision of services provided on board a conveyance.-

Place of provision of services provided on board a conveyance during the course of a passenger
transport operation, including services intended to be wholly or substantially consumed while on
board, shall be the first scheduled point of departure of that conveyance for the journey.
 REGISTRATION REGARDING SERVICE TAX

As per Service Tax Law it is mandatory for the following categories of persons obtain
registration :-

 Every person liable to pay service tax under Reverse Charge

 An input service distributor
 Ever provider of taxable service whose aggregate value of taxable service exceeds 9
lakhs in a financial year.

Every person mentioned above will have to get themselves registered under the service tax law
within 30 days from the date of commencement of such service or business.

Whereas in case of service provider whose aggregate value of taxable service not exceeded 9
lakhs in a financial year not need to obtain registration, where in case he has obtained
registration he is liable to payment of service tax only if the value of taxable services exceeds 10
lakhs rupees
 CONCLUSION

Service tax is rightly referred to as Tax of the future. Well synchronized taxation on
manufacturing, trade and service without giving rise to cascading effect of taxation would be an
ideal worth pursuing in the immediate future. This would bring in VAT in its truest sense.
Continued growth in GDP accompanied by higher rate of growth in service sector promises new
and wider avenues of taxation to the Government. If the tax on services reduces the degree of
intensity of taxation on manufacturing and trade without forcing the Government to compromise
on the revenue needs, then one of the basic objectives of taxing the service sector would be
achieved.

Voluntary tax compliance on the part of taxpayers demands prudent accounting practices and
transparency in the conduct of their business. Marginal rates of taxation would be conducive in
this process. Many new services may be brought under the tax net in future. The inclusion of all
value added services in the tax net would yield larger amount of revenue and make the existing
tax structure more elastic.

Advanced economies of Western Europe, North America and Far East have share of service
sector in their GDP ranging from 60% to 80%. The growth in absolute quantum of GDP and
proportion of Service-sector in GDP holds promise for larger revenue generation without
increasing the existing level of taxation. However, the progress so far has been slow. Moreover,
the law in this regard is not perfect and a separate legislation is keenly awaited.
 BIBLIOGRAPHY

 J. K. Mittal - Law, Practice & Procedure of Service Tax, 8th Edition published by Bharat

Law House, New Delhi.

 R. Mohan Lavi – Service Tax, 12th Edition published by Bharat Law House, New Delhi.

 http://www.servicetax.gov.in

 http://www.indiataxes.com

 http://indiabudget.nic.in

 http://www.laws4india.com

 http://www.servicetax.com/cenvat1.htm

 http://www.fisme.org.in