Service Tax

Service Tax is a tax imposed by Government of India on services

provided in India.

The service provider collects the tax and pays the same to the
government.

It is charged on all services except the services covered in the

negative list (Section 66d of Finance Act 1994) of services & services
covered under Mega Exemption Notification.

The current rate is 14% on gross value of the service.

History of Service Tax

Dr.Raja Chelliah Committee on tax reforms recommend the

introduction of service tax.

Service tax had been first levied at a rate of five per cent flat from 15
July 1994 till 13 May 2003, at the rate of eight percent flat plus an
education cess of 2% thereon w.e.f 10 September

The rate of service tax was enhanced 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 form 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
Rs. 410 crores in 1994-95 to Rs.132518 crores 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.

Small Scale Exemption

Service tax is only liable to be paid in case the total value of the
service provided during the financial year is more than Rs. 10 Lakhs.
If the value of services provided during a financial year is less than 10
Lakhs, it is optional for the service provider to pay service tax or not.
But, in case he has received the service tax from the service
recipient, he would be required to deposit it with the govt.This
exemption is called Small Scale Exemption and it is at the discretion
of the service provider whether he wants to avail this exemption or
not.

Negative List

Budget 2012 revamped the taxation provisions for services by

introducing a new system of taxation of services in India. In the new
system all services, except those specified in the negative list, are
subject to taxation. Earlier the levy of service tax was based on
positive list – specified 119 taxable services.As per clause (34) of
section 65B of the Finance Act, 1994, the term "Negative List" means
the services which are listed in section 66D......

The negative list of services is provided in Section 66D of the

Finance Act, 1994 and the same comprises of the following
services: -
 (a) services by Government or a local authority excluding the
following services to the extent they are not covered
elsewhere-
(i) services by the Department of Posts by way of
speed post, express parcel post, life insurance and
agency services provided to a person other than
Government;
(ii) services in relation to an aircraft or a vessel,
inside or outside the precincts of a port or an
airport;
(iii) transport of goods or passengers; or
(iv) any service, other than services covered under
clauses (i) to (iii) above, provided to business
entities;
(b) services by the Reserve Bank of India;
(c) services by a foreign diplomatic mission located in India;
(d) services relating to agriculture or agricultural produce by
way of-
(i) agricultural operations directly related to production
of any agricultural produce including cultivation,
harvesting, threshing, plant protection or testing;
(ii) supply of farm labour;
(iii) processes carried out at an agricultural farm
including tending, pruning, cutting, harvesting, drying,
cleaning, trimming, sun drying, fumigating, curing,
sorting, grading, cooling or bulk packaging and such like
operations which do not alter the essential
characteristics of agricultural produce but make it only
marketable for the primary market;
(iv) renting or leasing of agro machinery or vacant land
with or without a structure incidental to its use;
 (v) loading, unloading, packing, storage or warehousing
of agricultural produce;
(vi) agricultural extension services;
(vii) services by any Agricultural Produce Marketing
Committee or Board or services provided by a
commission agent for sale or purchase of agricultural
produce;
(e) trading of goods;
(f) ***
(g) selling of space or time slots for advertisements in print
media;
(h) service by way of access to a road or a bridge on payment
of toll charges;
(i) betting, gambling or lottery; [(j) ***]
(k) transmission or distribution of electricity by an electricity
transmission or distribution utility;
[(l)***]
(m) services by way of renting of residential dwelling for use
as residence;
(n) services by way of-
(i) extending deposits, loans or advances in so far as the
consideration is represented by way of interest or
discount;
(ii) inter se sale or purchase of foreign currency amongst
banks or authorized dealers of foreign exchange or
amongst banks and such dealers;
(o) service of transportation of passengers, with or without
accompanied belongings, by-
[(i) ***]
(ii) railways in a class other than- (A) first class; or
(B) an air-conditioned coach;
 (iii) metro, monorail or tramway;
(iv) inland waterways;
(v) public transport, other than predominantly for
tourism purpose, in a vessel between places
located in India; and (vi) metered cabs or auto
rickshaws;
(p) services by way of transportation of goods-
(i) by road except the services of-
(A) a goods transportation agency; or (B) a courier
agency; [(ii)***] (iii) by inland waterways;
(q) funeral, burial
Service Tax Return, Records & Invoice

Records

According to Rule 5 of Service Tax Rules, 1994, records include

computerized data and means the record as maintained by an
assessee in accordance with the various laws in force from time to
time. Records maintained as such shall be acceptable to Central
Excise Officer.

Invoice

Rule 4A prescribes that taxable services shall be provided and input

credit shall be distributed only on the basis of a bill, invoice or
challan.
The goods and service tax
The Goods and Services Tax or GST is a single, indirect tax that
integrates all indirect taxes within the Indian economy.
The GST Act was passed on 29th March 2017 in the Parliament of
India and came into effect on 1st July 2017.
The idea behind it was to replace multiple layers of taxation with one
tax (GST). It has replaced 17 indirect taxes (9 State-level taxes and 8
Central level taxes) and 23 cesses of the States and Centres that
existed earlier, including
 Central excise duty,
 Service tax,
 Value Added Tax (VAT),
 Luxury Tax, etc.
The aim behind implementing the GST Act was ‘One Nation and One
Tax’. When GST was implemented, 1300 goods and 500 services were
taken into consideration.

 GST is a destination-based consumption tax as it is charged at

every stage, wherever some value is added to the goods or
services, and the supplier of the good or service off-sets the
charge on its inputs of the previous stages.
 The charge is offset through the tax credit mechanism. Ultimately,
the last dealer passes on the added GST to the consumer of the
goods or services.
 The reason behind charging input credit at every stage of the
value chain is to avoid the cascading effect.
 Cascading effect means charging tax on tax.
 The Government of India has eliminated the cascading effect with
the expectation of reducing the prices of goods or services and
benefiting the consumers.
Cascading Effect means charging tax on tax.
For example,
A company is manufacturing Good X at the cost of ₹1,000
on which it has to pay Excise Duty @ 10% to the Central
Government and VAT @ 12% to the State Government.
 Cost = ₹1000
Excise Duty @ 10% = ₹100
VAT @ 12% (of 1100) = ₹ 132
Therefore, the dealer’s invoice for the Good X will be
₹1,232 (1,000+100+132).
Now, the manufacturer will sell the Good to the dealer at
₹1,100.
Cost of Good X for the dealer is ₹1,100 (Cost of Good X +
Excise Duty)
Suppose the dealer adds a profit margin of ₹200 on each
good. Then the VAT paid by the dealer will be 12% of
₹1,300 (1,100 + 200) = ₹156.
The invoice will be ₹ 1,456 (1,100+200+156).

It can be seen that initially, Excise Duty is charged on the Good X, on

which further VAT is levied. This is known as cascading effect, i.e.,
charging tax on tax.
GST avoids this cascading effect by charging tax only once. With GST,
the tax will be charged as a percentage of the cost of goods directly.
The three types of taxes under GST are:
 Central Goods and Services Tax (CGST): GST levied by the
Centre on the Intra-State supply of goods or services.
 State Goods and Services Tax (SGST): GST levied by the State
(including Union Territories with legislatures) on the Intra-State
supply of goods or services by the State.
 Integrated Goods and Services Tax (IGST): GST collected by the
Centre and levied on the Inter-State supply of goods or services. In
other terms, IGST is the total of CGST and SGST.

FEATURES OF GST:-

1. Single Tax Structure: The basic aim of GST is to replace multiple

taxes with a single tax and make the price of goods or services uniform
across the country. However, in doing so, some goods or services
became cheaper, while some became costly.
2. Effect on Prices: Goods and Services Tax has made luxury goods
costlier and goods manufactured for mass consumption cheaper.
3. Consumption-Based tax: The Goods and Services Tax is not
received by the state in which the goods have been manufactured, but
by the state in which the goods or services have been consumed.
4. Invoice Matching: The invoice matching mechanism will be added
to the Indian GST. It means that when details of inward supply filed in
by the buyer match the details of outward supplies filed in by the
supplier, then only Input Tax Credit of purchased goods or services will
be available to them. Besides, GST is a self-regulating mechanism, as
it keeps a check on tax evasion and tax fraud and also brings more
business to the formal economy.
5. Anti-Profiteering Measure: The recently implemented GST law
includes the feature of anti-profiteering measures. As the name
suggests, the anti-profiteering measures prevent the companies from
making excess profits. According to the rules of Anti-Profiteering, the
benefit of increased input tax credit and decreased GST tax rates
should reach the customers in the form of a reduced price of goods or
services. These provisions are efficiently managed and administered by
NAA (National Anti-Profiteering Authority).
6. Registration under GST: It is mandatory for an organization with an
aggregate turnover exceeding ₹ 40 Lakhs in a financial year to register
under GST. However, this limit is set at ₹ 20 Lakhs for the North
Eastern and hilly states (Special category states).

Input Tax Credit Under GST

Input Tax is the GST charged on the goods or services supplied to a

taxable person. Input Tax Credit means reducing or adjusting the
taxes paid by an individual or firm on the inputs from the taxes to be
paid by them on the output, i.e., the final product. In other words, it
means to claim the credit of the GST paid by an individual or a firm on
the purchase of goods or services used as a raw material for
manufacturing the finished goods or services.

The suppliers at every stage of the supply chain have the permission to
avail of any GST credit paid by them on the purchase of goods or
services. This availed credit can be set off against the GST payable by
them on the supply of goods or services to be made later. In this way,
the ultimate consumer has to bear the GST charged by the last supplier
of the supply chain. Therefore, the tax will be charged on the value
added to the good or service only, which avoids the cascading effect,
i.e., double taxation.

For example, if a manufacturer has paid taxes on Input A, B and C of

₹ 90, ₹ 130 and ₹ 150, respectively, and ₹ 600 on the final output, then
he can claim the amount paid on input, i.e., purchase of raw material.
Therefore, the manufacturer can claim (90+130+150) ₹ 370 and will
have to deposit only ₹ 230 (600-370) as tax.

Key Features of GST

1. GST Rates: The States and Centres have mutually decided upon the
GST rates levied on goods or services through CGST, SGST, and
IGST under the aegis of the GST Council. The four tax slabs under
GST are 5% (for consumer durables), 12% (general rate), 18% (general
rate), and 28%(luxurious goods). However, the rate of GST for exports
and supplies to the Special Economic Zones (SEZs) is 0%.
2. Applicability of GST: The Goods and Services Tax applies to the
whole country (India).
3. Consumption-Based Tax: Earlier, the taxes were based on the
principle of origin-based taxation. However, the Goods and Services
Tax is a destination-based consumption tax, which means that the
taxes will be received by the states in which the goods or services have
been consumed. As the tax is received by the consumer State, the
losses faced by Producer States are compensated by the Centre.
4. Applicable on Supply of Goods and Services: Earlier, the taxes
were charged on the basis of ‘tax on the manufacture or sale of goods
or on the provision of services; however, the Goods and Services Tax
is charged on the basis of Supply of Goods and Services.
5. GST on Imports: The imports of goods and services come under
IGST and is treated as Inter-State Supplies. IGST is charged on the
imports of goods and services in addition to the applicable customs
duties.
6. Payment of GST: The taxpayers can make payment of GST through
different modes, like Internet Banking, NEFT (National Electronic Funds
Transfer)/RTGS (Real Time Gross Settlement), and debit/credit cards.

Benefits of GST
1. Reduction in overall tax burden: It is expected that the tax burden
on industries and trades will be reduced, which will result in an increase
in consumption and a decrease in the price of goods and services. The
ultimate result of this change is expected to be an increase in the
production level and development of the industries.
2. No hidden taxes: As GST is replacing all indirect taxes with one tax,
there are no chances of a hidden tax within the invoice of the goods
and services. For example, if a commodity costs ₹500, it means that
the overall cost of the commodity is ₹500 without any hidden taxes.
3. Development of a harmonised national market for goods and
services: Harmony in tax rates, laws and procedures simplifies its
compliance. The common interface of the GST portal brings synergy
and efficiency to the filing of taxes. Earlier, service tax and VAT had
their own returns and compliances, which was time-consuming.
However, GST merges both compliances and lowers the number of
returns, ultimately reducing the time spent on these compliances.
4. Higher disposable income in hand: Disposable income is the
money at hand left with the consumer after making all expenses. As
GST has reduced the tax burden on the taxpayers, it will increase their
disposable income.
5. Customers have a wider choice: Earlier due to cascading effect,
the customer used to have less disposable income at hand to spend on
goods and services. But, the reduction in prices of goods and services,
and tax burden has increased the disposable income of the consumers
giving them a wide choice while purchasing goods and services.
6. Increased economic activity: Reduction in prices of goods and
services, increase in disposable income of consumers, and decrease in
the price of goods and services is leading the consumers in performing
economic activities.
7. More employment opportunities: With the implementation of GST,
the manufacturing of goods has become simplified, resulting in an
increase in the number of manufacturers and industries. More
industries will bring employment opportunities to the country, benefiting
the citizens of India.

GST Council
The Goods and Service Tax Council is a constitutional body that
advises the Indian Parliament. It provides recommendations to the
Union and State governments about issues related to Goods and
Services Tax. To provide these recommendations, it collects extensive
data from the market on changes in demand for goods and services.

The Goods and Services Tax Council (GST Council) comprises:

 According to the Article 279A of the amended Constitution, the GST

Council comprises the following members:
Chairperson: Finance Minister
Vice Chairperson: He/she is chosen amongst the Ministers of State
Government.
 Members: The members of the GST Council are MoS (Finance) and
all Ministers of Finance/Taxation of every state.
 Voting takes place when at least half of the members are
assembled.
 The Centre has one-third weightage, whereas the States have two-
thirds of the total votes cast at the meeting.
 The decision is taken by a 75% majority.
 The Council shall make recommendations on anything related to the
GST, including rules and rates, etc.