Saturday, September 3, 2011

Basic Aspect of Service Tax

Service tax and GST are taxes of 21st century. Service tax was imposed for first time on 3 services w.e.f. 1-7-1994 and its scope is increasing every year. Highlights of service tax are as follows –

Liability of service tax

General background

Service tax comes under powers of Entry 97 of List I of Seventh Schedule to Constitution of India. Service tax was introduced w.e.f. 1-7-1994 and its scope is being expanded every year. Service tax is not payable if service is provided in J&K or if provided outside India.

Taxable event in service tax

Service tax is imposed under section 66 of Finance Act, 1994, which is the charging section [There is no separate Service Tax Act s such]. ‘Service provided or to be provided’ is ‘taxable event’. Thus, service tax is payable when advance is received.

Taxable services

Service tax is payable under Finance Act, 1994; on about 117 taxable services as defined in section 65(105) of Finance Act, 1994.

Service requires two parties

Service requires two parties. One cannot give service to himself.

Tax only on value of services not on value of goods

Service tax cannot be levied on value of goods. Service tax and Vat are mutually exclusive.

Rate of service tax

General rate of service tax is 10.30% (including education cess and SAH education cess) w.e.f. 24-2-2009 [During period 11-5-2007 to 23-2-2009, it was 12.36%]. In some cases, abatement is available.

Education cess to be shown and paid separately

Education cess and SAHE cess should be shown separately in invoice and should be paid under separate accounting head.

Person liable to pay service tax

Liability of service provider

Service tax is payable by service provider. In few cases, tax is payable by service receiver, under reverse charge method [Section 68(2)].

Reverse charge

In case of Goods Transport Agency (GTA), Import of Service, Sponsorship service and Agent of mutual fund and insurance, service tax is payable by service receiver.

Value for purpose of service tax

Service Tax on gross amount charged

Service tax is payable on gross amount charged for taxable service provided or to be provided [section 67] (excluding material cost)..

Tax on reimbursement of expenses

Tax is payable on reimbursement of expenses which are part of service, but not on payments made by service provider as ‘pure agent’ of service receiver

Service tax not payable if amount received only as agent of service receiver

Service tax is not payable on amounts collected by service provider from service receiver which are not part of service but are paid by service provider to third parties for administrative convenience and then recovered from service receiver, even if all requirements of definition of ‘pure agent’ are not satisfied.

Value on basis of similar service or cost

If value is not ascertainable, valuation can be on basis of similar service or on basis of value which shall not be less than cost.

Gross amount charged is inclusive of service tax

Gross amount charged for taxable service is taken as inclusive of service tax and then tax should be calculated by making back calculations.

Exemption from service tax

Exemption to small service providers

Small service providers whose total value of services provided (including exempt and non-taxable services) is less than Rs 10 lakhs in previous year are not required to pay service tax in current financial year till they reach turnover of Rs 10 lakhs. Clubbing provisions can apply. Registration is required if turnover exceeds Rs 9 lakhs per annum.

No exemption if service provided under brand name of other

The exemption is not available if service is provided under brand name of other person.

No exemption when service tax is payable under reverse charge method

This exemption is not available when service tax is payable by service receiver under reverse charge method.

Abatement and simplified method of payment of taxes

In case of some services, abatement is available. In case of some services, simplified method of calculating value of service has been prescribed.

Services to SEZ and SEZ Developer

Services provided to SEZ unit or developer are exempt if wholly consumed within SEZ. In case of services consumed by SEZ outside SEZ, refund claim has to be filed.

Services provided by RBI exempt but services provided to RBI taxable

Services provided by RBI are exempt but service provided to RBI are not exempt.

Classification of service

Service to be classified

The classification of services will be determined according to terms specified in various sub-clauses of section 65(105). [section 65A(1)].

Rules for classification of service

If prima facie, a taxable service is classifiable under two or more sub-clauses of section 65(105), classification shall be effected as per following rules – (a) Specific description to be preferred over a general description [section 65(2)(a)] (b) Classification should be as per essential character in case of composite services [section 65(2)(b)] (c) Service which appears earlier in list of section 65(105), if service cannot be classified on above basis [section 65(2)(c)]

Exception in case of port and airport services

Exception is made in case of port services and airport services, where, if service is rendered wholly in port or airport, the service will be classified as port/airport service irrespective of its classification as per section 65A,

Service should be predominantly taxable

Service should be predominantly a taxable service. A composite contract consisting various services cannot be vivisected.

Composite contract consisting of goods and services can be vivisected

An indivisible/composite contract of goods and services can be vivisected and service part of it subjected to service tax.

New service head means service was not earlier taxable

Introduction of new service head means the service was not taxable earlier.

Service excluded from one head

Service specifically excluded from one head cannot be classified under other head.

Cenvat Credit

Credit of tax/duty paid on input goods, input services and capital goods

Service provider can avail Cenvat credit of service tax paid on input services and excise duty paid on inputs and capital goods. The credit can be utilised for payment of service tax on output services.

Any service in relation to business is input service

Definition of input service is wide. Any service in relation to business is ‘input service’.

Duty paying document for availing Cenvat credit

Credit can be availed on basis of proper and complete specified original duty paying documents.

Cenvat credit when taxable as well as exempted services provided

If assessee is providing both taxable and exempt services and if input services are common, Cenvat credit can either be taken on proportionate basis or 6% ‘amount’ is required to be paid on value of exempted services.


Procedure for registration

Service provider should register within 30 days from date of commencement of providing taxable service. Application should be in form ST-1 [Rule 4(1)]. Income Tax PAN, address proof, evidence of constitution of firm/company, list of directors/partners are the most important document required. Registration will be deemed to have been granted if not received within seven days [Rule 4(5)].

Application for registration is to be filed electronically. The PAN based registration number is generated by system immediately. However, registration certificate is issued by Superintendent in form ST-2 after the documents are submitted.

Centralised registration

Person providing services from more than one premises or offices can apply for centralised registration, if he has centralised billing system or centralised accounting system [Rule 4(2)]

Input Service Distributor

Input Service Distributors (ISD) require registration. HO or branch or depot can register as ISD and distribute credit to centres which are providing taxable services

Procedures to be followed

Invoice by service provider

Assessee should prepare invoice in respect of his services. The Invoice should be prepared within 14 days from date of completion of taxable service or receipt of payment towards the value of taxable service, whichever is earlier. Invoice should contain prescribed details [Rule 4A]

Payment of service tax

If the assessee is an individual or proprietary firm or partnership firm, the tax is payable on quarterly basis within 5 days at the end of quarter (within 6 days in case of e-payment) except in March. Service tax is payable by other assessees by 5th of the month following the month in which payments are received toward value of taxable services (by 6th in case of e-payment) except in March [rule 6(1) of Service Tax Rules].

Payment of service tax in March

Service tax on value of taxable services received during month of March or quarter of March is required to be paid by 31st March in case of all the assessees.

Payment of service tax

Service tax payable on receipt basis

Service tax is not payable on basis of amounts charged in the bills/invoice, but only on amounts actually received during the relevant period, except in case of associated enterprises. If partial amount is received, tax will be payable on pro rata basis.

Exception in case of associated enterprises

The exception is that in case of service provided to associated enterprises, service tax is payable as soon as book entry is made in the books of service provider (when he is liable) or service receiver (when he is liable to pay service tax under reverse charge method).

Advance payment of service tax

A person liable to pay service tax can pay any amount in advance towards future service tax liability. After such payment he should inform Superintendent of Central Excise within 15 days [Rule 6(1A)]. When he adjusts the advance, he should indicate details in the subsequent return filed

GAR-7 challan and e-payment

Tax is payable by GAR-7 challan using appropriate accounting code. E-payment is compulsory to those who are paying service tax of more than Rs 10 lakhs per annum. For others, e-payment is optional.

Interest for late payment of service tax

Mandatory interest for late payment of service tax is 13% [section 75]. It cannot be reduced or waived.

Returns under service tax

Half yearly return

Every person liable to pay service tax has to submit half yearly return in form ST-3 in triplicate within 25 days of the end of the half-year [Rule 7]. Late fees upto Rs 2,000 are payable if return is filed late.

Self Assessment

Assessment is basically self assessment. Provisional assessment is permissible.


Administration by excise department

The service tax is administered by excise department. Adjudication order is issued by excise officer.

Demand if tax short paid

If service tax was short paid, demand can be raised within period of one year from ‘relevant date’. If the short payment or non-payment was on account of suppression of facts or wilful mis-statement with intention to evade, demand can be raised within period of five years.

Rectification of order

Order passed by Central Excise Officer can be rectified by him within two years. Only mistake apparent from records can be rectified [section 74].

Appeal against order of demand

Both department or assessee can file appeal before Commissioner (Appeals) against order of demand of duty and penalty of officer lower than Commissioner.

Penalties and appeals

Penalty for late payment of service tax

If service tax is not paid or belatedly paid, penalty will be minimum Rs. 200 per day or @ 2% per month, whichever is higher, starting with the first day after due date till date of actual payment of outstanding amount. Penalty cannot exceed the service tax which was payable [section 76]. Penalty can be reduced if sufficient cause is shown [section 80].

No penalty if service tax and interest paid on own before SCN

No penalty can be imposed if service tax and interest is paid before show cause notice, except in case of fraud, suppression of facts etc. [Explanation 2 to section 73(3)]

Penalty for contravention of rules

There is heavy penalty for contravention of rules, not obtaining registration, not maintaining books of account, not paying tax electronically etc [section 77]. Penalty can be reduced if sufficient cause is shown [section 80]. No penalty can be imposed if service tax and interest is paid before show cause notice, except in case of fraud, suppression of facts etc. [Explanation 2 to section 73(3)]

Penalty for fraud, suppression of facts. Wilful mis-statement

If non-payment was on account of fraud, suppression of facts etc., penalty shall not be less than amount of service tax but can be upto twice the amount of service tax amount of service tax not levied or not paid or erroneously refunded. Penalty will be reduced to 25% if paid with tax and interest within 25 days of receipt of order [section 78]. Penalty can be reduced if sufficient cause is shown [section 80].

Appeals to Commissioner (Appeals)

Appeal against order of authority lower than Commissioner lies with Commissioner (Appeals), by assessee or as well as by department [section 85].

Next appeal to Tribunal

Appeal against order of Commissioner (Appeals) or Commissioner lies with Appellate Tribunal (Customs, Excise and Service Tax Appellate Tribunal) [Section 86]. Further appeal lies with High Court and Supreme Court. Appeals can be filed both by assessee and department.

Export of Service

No tax on export of service

No service tax is payable if taxable service is exported as per Export of Service Rules.

Refund if tax paid on exported service

No tax is payable on export of service. If paid, it is refundable. Rebate/refund of service tax paid on input services is obtained if taxable service is exported

Conditions to treat a service as ‘export’

Common condition in respect of all taxable services, for treating the service as export of service is that payment for such service is received by the service provider in convertible foreign exchange. In addition, there are some conditions based on the category of service (e.g. immovable property outside India, service performed outside India, recipient is located outside India).

Import of service

Tax payable by recipient under reverse charge

In case of import of service, tax is payable by recipient of services under method of ‘reverse charge’. Tax should be paid by cash i.e. GAR-7 challan and then Cenvat credit can be availed of the tax so paid, as it is his input service.

Tax only if service is received in India

Tax is payable only when service is received in India. Services provided and used outside India cannot be taxed in India.

Conditions to treat a service as ‘import’

To determine the issue whether a provision of service is ‘import of service’, services have been classified in three categories. Criteria for each category has been specified e.g. immovable property India, service performed in India, recipient is located in India


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