Service Tax

Need for Service Tax:

(i) Share of service in the Gross Domestic Product in India has increased from 30.5% in 1950 –
51 to 55.2% in 2009 – 10 (if construction is included, the share increases to 63.4%) which has
far exceeded agriculture and Industry.

(ii) … no distinction between consumption of goods and services—both satisfy human needs.
Hence taxing goods manufactured in industry only not good. (19% of GDP)

(iii) Collection of revenue through direct taxes—difficult—narrow base—burden felt—tend to

avoid… Indirect taxes—hidden in price...

(iv) GoI in late 70s initiated exercise to explore alternative sources of revenue… constraints of
resources.

(v) Central Excise—and customs… major sources—on steady decline—WTO commitments.

(vi) Rich consume more services than… hence rational

(vii) Kinds: Comprehensive and selective Service taxes

Definition of Service [S. 65B (44)]

As per Section 65B (44) introduced w.e.f. 1.7.2012 “Service” means any activity carried out by a
person for another for consideration, and includes a declared service, but shall not include:

(a) an activity which constitutes merely – (i) a transfer of title in goods or immovable property,
by way of sale, gift or in any other manner; (ii) such transfer, delivery or supply of goods which
is deemed to be a sale within the meaning of clause (29A) of Article 366 of the Constitution or
(iii) a transaction in money or actionable claim.

[For example, salary to partner is only share of profit by different name. It is only a transaction
in money and hence not covered under ‘service tax’. Interests, dividend or other examples of
transaction in money.]

(b) a provision of service by an employee to the employer in the course of or in relation to his
employment.

[It is to be noted that service by employee to employer is exempt. However, service provided by
employer to employee is not exempt. Thus, if employer provides some service like transport,
telephones and charges for the same, it will be subject to service tax. In case of remuneration
paid to non – whole time and independent directors (like sitting fees, profit based commission),
company is liable to pay service tax under reverse charge basis.

(c) fees taken in any court or tribunal established under any law for the time being in force.

Basic Concept of Excise Duty

Excise duty or Duty of Excise is a tax on goods produced or manufactured in India and intended
for home consumption i.e, sale in India. The Excise duty is chargeable at the time of production
or manufacturing, but for convenience it is charged at the time of removal.

It is basically an indirect tax on the manufacturer or producer which is passed on to the

ultimate consumer. The levy and collection of duty of Excise is provided under authority of the
Central Excise  Act, 1944 at the rates specified under Central Excise Tariff Act, 1985. The duty is
commonly  referred to as the Basic Excise Duty. Certain items like fibre, yarn and so on also
attract Additional Excise Duty under Additional Duties of Excise (Textiles and Textile Articles)
Act, 1975 in addition to Basic duty of Excise

The following are some of the basic terms related to Excise.

(A) - Scope and Applicability

 Excisable goods means goods specified in the schedule to the Central Excise Tariff Act, 1985 as
being subject to a duty of excise.

Sale Tax

Tax on sales by Union Sale tax on Inter State sale is levied by Union Government under Entry
and State Governments 92A of List I (Union List), while sales tax on intra-State sale (sale
within State) (now termed as Vat) is levied by State Government under
Entry 54 of List II (State List)  of Seventh Schedule to constitution of
India.
Categories of sales Sales can be broadly classified in three categories. (a) Inter-State Sale
(b) Sale during import/export (c) Intra-State (i.e. within the State) sale.
State Government can impose sales tax only on sale within the State.
State cannot discriminate State cannot discriminate between goods manufactured/produced within
between local goods and the State and goods brought from outside the State i.e. tax on local
goods from outside State goods and goods from other States must be same
Rate of CST CST is payable on inter-State sales @ 2%, if C form is obtained. No
CST if form H or I is obtained from purchaser. Otherwise, CST rate is
same as applicable for sale within the State.
Revenue of CST goes to Even if CST is levied by Union Government, the revenue goes to State
State Government Government. State from which movement of goods commences gets
revenue. CST Act is administered by State Government.
VAT
The value added tax (VAT) in India is a state level multi-point tax on value addition which is
collected at different stages of sale with a provision for set-off for tax paid at the previous stage
i.e., tax paid on inputs. It is to be levied as a proportion of the value added (i.e. sales minus
purchase). VAT system is more transparent, uniform and less prone to tax evasion VAT is a
consumption tax because it is borne ultimately by the final consumer. VAT is not a charge on
companies. It is charged as a percentage of price, which means that the actual tax burden is
visible at each stage in the production and distribution chain. 

It is collected fractionally, via a system of deductions whereby taxable persons can deduct from
their VAT liability the amount of tax they have paid to other taxable persons on purchases for
their business activities. This mechanism ensures that the tax is neutral regardless of how many
transactions are involved.

In other words, it is a multi-stage tax, levied only on value added at each stage in the chain of
production of goods and services with the provision of a set-off for the tax paid at earlier stages
in the chain. The objective is to avoid 'cascading', which can have a snowballing effect on prices.
It is assumed that due to cross-checking in a multi-staged tax, tax evasion will be checked,
resulting in higher revenues to the government.

Advantages of VAT
 To encourage and result in a better-administered system;
 To eliminate avenues of tax evasion;

 To avoid under valuation at all stages of production and distribution;

 To claim credit on tax paid on inputs at each stage of value addition;
 Do away with cascading effect resulting in non distortion of the business decisions;
 Permits easy and effective targeting of tax rates as a result of which the exports can be
zero-rated;
 Ensures better tax compliance by generating a trail of invoices that supports effective
audit and
 Enforcement strategies;
 Contribution to fiscal consolidation for the country. As a steady source of revenue, it
shall reduce the
 Debt burden in due course;
 To stop the unhealthy tax-rate war and trade diversion among the States, which had
adversely affected
 The interests of all the states in the past.