SERVICE TAX

(SYNOPSIS)

As per the Eighty-Eighth Amendment of the Constitution, vide the Constitution (88th amendment) Act, 2003, a scheme of taxing the services was introduced. The amendment inserted Article 268 A for levy of Service Tax by Union Govt.; to be collected and appropriated by the Union Govt., and amendment of VII schedule to the Constitution, whereby in list I (Union list) after entry 92B, entry 92C was inserted for taxes on services and article 268A was also included in clause (1) of Article 270 of the constitution.

“The basic objective of levying Service Tax was to broaden the tax base, augmentation of revenue so as to render economic development of the nation.”

There is no specific independent statute on Service Tax as yet but it derives its statutory provisions from Chapter V and VA of the Finance Act, 1994 (working as the ‘Base Act’). The said chapter grants power to the Central Government to make rules for carrying out the provisions relating to Service Tax. The Central Board of Excise and Customs (CBEC) is a body functioning under the Department of Revenue of the Ministry of Finance of India, which is responsible for the collection and administration of indirect taxes like service tax, customs duty and central excise.

As per section 66 of Finance Act, 1994, service tax is payable on ‘taxable service’. Various clauses of section 65(105) of Finance Act, 1994 define each type of ‘taxable service’. The definition is different for each class of services, e.g. as per section 65(105)(a), any service provided by stock broker to any person in connection with sale or purchase of securities listed on a recognized stock exchange will be ‘taxable service’. Service tax is payable on gross amount charged for taxable service provided or to be provided [Section 67]. Service tax is payable @ 12% plus education cess of 2%, plus SAH education cess of 1% (total 12.36%) [Section 66].

A service provider, i.e. person who is providing taxable service is liable to pay service tax. However, Central Government can grant partial or total exemption, by issuing an ‘exemption notification’ u/s 93 of Finance Act, 1994. Such exemption may be partial or total; conditional or unconditional [there are three kinds of exemptions- general, threshold and specific]. The only limitation is that exemption cannot be granted by Central Government with retrospective effect. The small service providers whose turnover of taxable services from one or more premises does not exceed Rs. Eight lakhs are exempt from service tax, this is known as the ‘threshold exemption’.

Classification of services plays an important role in levy of the service tax; the guiding principle being ‘a service should be categorized under that category which is more specific’. Section 65A of the Finance Act provides a set of statutory guidelines for the classification of services as per the criteria of services having specific description; or in case of composite services so as to ensure that no service is double taxed.

    Section 94(2) of Finance Act, 1994 empowers Central Government to make rules for – (i) credit of service tax paid on services consumed for providing a taxable service in case where the services consumed and the service provided fall in the same category [clause (ee)]; (ii) credit of service tax paid on the services consumed or duties paid or deemed to have been paid on goods used for providing taxable service [clause (eee)]; (iii) provisions for determining export of taxable services [clause (f)]; (iv) Rebate of service tax paid or payable on taxable services consumed or duties paid or deemed to have been paid on goods used for providing taxable services which are exported out of India [clause (h)].

Cenvat Credit scheme- Rule 3(1) of CENVAT Credit Rules, 2004 states that a manufacturer or producer of final products and a provider of output service shall be allowed to take credit known as CENVAT Credit. The Cenvat scheme is principally based on system of granting credit of duty paid on inputs (as per rule 2(k) (ii), all goods, except light diesel oil, high speed diesel oil, motor spirit, commonly known as petrol and motor vehicles, used for providing any output service is ‘input’) and input services (as per rule 2(l) (i) services ‘used by a provider of taxable service for providing output service’ are input services). A manufacturer or service provider gets credit of duty paid on inputs and service tax paid on input services. CENVAT credit is available of inputs, input services and capital goods used for providing taxable output services. Cenvat credit may be utilized for the payment of the following:

1. Any duty of excise paid on any final product;

2. Duty on input removed as such or after being partial processed;

3. Duty equal to Cenvat credit when capital good is removed as such;

4. Duty under central Excise Rule 16(2) relating to final product received back, repaired/removed;

5. Service tax on output services.

As per Rule 4(1), Service Tax Rules, 1994 every provider of taxable service should apply for registration in form ST-1 within 30 days from date of levy (in case of new services) and date of commencement of business of providing taxable service. Service Tax has to be paid by 5th of following month. In case the assessee is an individual or proprietary or partnership firm, tax is payable on quarterly basis. In March, tax is payable by 31st March [Rule 6]. If payment of tax is delayed, interest is payable @ 13% [Section 75]. Penalty is payable for non-registration, late payment of tax, non-submission of returns etc. Mandatory penalty is payable for suppression of facts, willful misstatement, fraud or collusion [sections 76 to 80].

Harsimran Singh (Advocate)

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