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Concept of Service Tax


"Service to mankind is service to god."

The term service means the act of helping or doing work for another or for a community etc. Thus its stands for assistance or benefit given to someone. Though ordinarily for rendering such service certain payment is made but it is not so in all the cases. The amount charged for such service is the remuneration of the person providing such service.

If we look back, tax on services is not new as we have been paying taxes on services in past also in the form of luxury tax, entertainment tax, expenditure tax, amusement tax, gambling tax, commercial tax, interest tax etc.

Need for Service Tax

In any Welfare State, it is the prime responsibility of the Government to fulfill the increasing developmental needs of the country and its people by way of public expenditure. India being a developing economy is striving to fulfill the obligations of a Welfare State within its limited resources. The Government's primary sources of revenue are direct and indirect taxes.

Central Excise Duty on the goods manufactured / produced in India and Customs Duties on imported goods constitute the two major sources of indirect taxes in India. But revenue receipts from Customs & Excise are not keeping pace with the growth in economy to WTO commitments and rationalization of commodity duties.

It is also well known that services constitute a larger proportion of the consumption of the rich rather than of the poor as the demand for services is income-elastic. Depending on the socio-economic compulsions, each country evolved a taxation system on services adopting either a comprehensive approach or a selective approach.

While most of the developed countries tax all the services with very few and limited exemptions, some of the developing countries tax select services only. Hitherto, India has adopted a selective approach to taxation of services.

Introduction of Service Tax in India

Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for the year 1994-95 introduced the new concept of Service Tax and stated that "There is no sound reason for exempting services from taxation, therefore, I propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers."

Service Tax had been levied on the recommendations made in early 1990's by the Tax Reforms Committee headed by Dr.Raja Chelliah. The Committee pointed out that the indirect taxes at the Central level should be broadly neutral in relation to production and consumption of goods and should, in course of time cover commodities and services. The Committee felt that we should move towards full-fledged Value Added Tax (VAT) system covering services and commodities.

Service tax must be a part of VAT at the central level. It was envisaged that as the central excise duties on goods would get gradually transformed into a value added tax at the manufacturing level, service tax would get woven into that system. Therefore, a tax could be levied on services that enter into the productive process. The Committee emphasized the importance of moving towards VAT, for making the system of indirect taxation broadly revenue neutral in relation to production and consumption and widening the tax base by covering exempted commodities. The Committee also recommended charging of tax on services such as advertising, insurance, share broking and telecom etc. to begin with on the pattern of advanced economies. The basic objective of Service Tax is broadening the tax base, augmentation of revenue and larger participation of citizens in the economic development of the nation.

Bringing services under taxation is not simple as the services are intangible and are provided by large groups of organized as well as unorganized service providers including retailers who are scattered across the country. Further, there are several services, which are of intermediate nature. The low level of education of service providers also poses difficulties to both-tax administration and assessees.

Authority

Service tax was introduced in India for the first time in 1994. Chapter V of the Finance Act, 1994 (32 of 1994) as amended, (Sections 64 to 96) and Chapter VA of the Finance Act, 2003 deals with imposition of Service Tax. The Authority of levy of Service Tax on specified services is contained in Section 66 of the Finance Act, 1994 as amended. At present this, section stipulates a rate of tax of 12% of the taxable value of these services and Education Cess @2% and Secondary/Higher Education Cess @1% in liable on the Service Tax levied and collected under Section 66 of the Finance Act, 1994.

Administration of Act.
Constitutional Validity

Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. Schedule VII divides this subject into three categories-

a) Union list (only Central Government has power of legislation)
b) State list (only State Government has power of legislation)
c) Concurrent list (both Central and State Government can pass legislation).

To enable parliament to formulate by law principles for determining the modalities of levying the Service Tax by the Central Govt. & collection of the proceeds there of by the Central Govt. & the State, the amendment vide constitution (95th amendment) Act, 2003 has been made.

Consequently, new article 268 A has been inserted for Service Tax levy by Union Govt., collected and appropriated by the Union Govt., and amendment of seventh schedule to the constitution, in list I-Union list after entry 92B, entry 92C has been inserted for taxes on services as well as in article 270 of the constitution the clause (1) article 268A has been included.

Formation and function of DGST

Considering the increasing workload due to the expanding coverage of service tax, it has been decided to centralize all the work and entrust the same to a separate unit supervised by a very senior official. Accordingly, the office of Director General (Service Tax) has been formed in the year 1997.

It is headed by the Director General (Service Tax).

SCHEME FOR LEVY, ASSESSMENT
& COLLECTIONOF SERVICE TAX

Service Tax payable by whom.

The Tax is normally payable by the service provider. However, in special circumstances, the Govt. may notify the payment not by the service provider by a person as notified. Considerations like administrative ease, cost of collection may require the shifting of the burden of payment from the service provider to service receiver or any other person.
To illustrate, the service Tax leviable on service provided by an insurance agent is not to be paid by the insurance agent himself but by the insurance company accordingly to Section 68(2) of the Finance Act, 1994.

What is Service Tax?

Service tax is an indirect levy imposed by the Union Government in terms of residuary entry No.97 in list (I) of the 7th Schedule of the constitution. The tax is applicable to services specified in the Section 64 to 96 of chapter V of the Finance Act, 1994 as amended.

The Government have also notified the procedures to be followed for levy and collection of service tax vide Service Tax Rules, 1994 as amended. At present the rate of Service Tax is 12% to be levied on the "Value of Taxable Service" and Education Cess @2% and Higher Education Cess@1% is leviable on the Service leived and collected. Generally speaking "Value of Taxable Service" means the gross amount received by the Service provider for the taxable service rendered by him.

The person who provides the Taxable service on receipt of charges is responsible for paying the service tax to the government.

Value of Taxable Service

The value of any taxable service shall be generally the gross amount charged by the Service providers for such services rendered by him (Section 67)

In other words, "Gross Amount" here indicate that no deduction shall be allowed in respect of any expenditure incurred by the service provider which has proximate connection in rendering the services by him.

In a case where the provision of Service is for a consideration not wholly or partly consisting of monthly, be such amount in money as with the addition of Service tax charged.

In a case where the provision of service is for a consideration, which is not accountable, be the amount as may be determined in prescribed manner.

Rules & Regulations

The Finance Act, 1994 (32 of 1994) as amended authorizes levy and collection of Service Tax and also provides the method of levy, the circumstances in which, the levy would arise, the procedures to be followed, and allied subjects like assessments, penalty etc.

The Finance Act, 1994 empowers the Central Govt. to frame the Rules governing the procedural aspects of Service Tax matters. The Govt. vide Notification No. 2/94 dated 28.06.1994 as amended have framed the Service Tax Rules, 1994, which came into effect on 1st day of July, 1994. Similarly, Export of Service Rules, 2005 vide Notification No. 9/2005 ST dated 03.03.2005 as amended, taxation of services, provided from outside India and received in India, Rules 2006 vide Notification No. 11/2006 dated 19.04.2006, Service Tax (Registration of Special Category of Persons) Rules, 2005 vide 17/2003 ST dated 23.07.2003 and Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007 vide Notification No. 32/2007 dated 22.05.2007 have been framed.

Salient Features

  • No Registration Fee.
  • (Rule 4(1) Deemed Registration, if registration not granted within 7 days. (Rule 4(5)
  • Penalty of Rs. 500/- for non-registration or delay in registration. (Section 75A)
  • No specific records has been prescribed. (Rule 5(1)) Tax on uniform rate @12% advalorem + Education Cess @2% and higher Education Cess @1% on Service Tax
  • No tax on export of services.
  • Payment of Tax on realization of value of taxable service. (Rule 6)
  • Payment of Tax on Quarterly basis for non-corporate assessee and monthly for corporate assessee. (Rule 6)
  • Simple interest @13% per annum on delay of payment of tax. (Section 75)
  • Hefty penalty on delay of payment of tax. (Section 76)
  • Return on Half Yearly basis for all assessee (Rule 7)
  • Facility for electronically filing of return for selective services.
  • Penalty for delay in filing of return. (Section 77)
  • Self adjustment of excess service tax paid in some cases Credit of Service Tax paid on input service.
  • Self Assessment. (Section 70)
  • Refund of Service Tax and Appeal against the rejection of refund. (Section 83)
  • Wide power to issue notice for the production of accounts, documents etc. (Section 83)
  • Penalty for concealment reduced to 25% from 100% to 200% w.e.f. 14.05.2003.


Administered by Central Excise Department. For this purpose, Section 83 of the Act provides that certain specified Sections of the Central Excise Act, 1944 will also apply in relation to Service Tax as they apply in relation to Central Excise Duty.

Obligations and Time Limits

Section/ Rules Obligations Frequency Time Limit Prescribed Form
68 read with Rule 6(1) Payment of Service Tax Monthly For coporate assessees 5th for the following month TR-6 Challan
68 read with Rule 6(1) Payment of Service Tax Quarterly For individuals and firms by 5th for the following month TR-6 Challan
69 read with Rule 4(1) Registration under SERVICE TAX One Time Within 30 days from the date on which tax is levied or commence the business Form ST-1
Rule 4(5) Grant of Certificate of registration One Time Within 7 days of registration application, otherwise it will be deemed to have been granted. Form ST-2
70 read with rules 7(1) & 7(2) Return of Service Tax Half Yearly Within 25 days of end of each half year. Form ST-3/ST-3A (in triplicate) alongwith copy of Form TR-6.
Rule 6(4) and 6(5) A statement giving details of the difference between the Service Tax deposited and Service Tax liability to be paid for each month, when assessee opted for provisional assessment. Monthly/ Quarterly as the case may be Not Prescribed Form ST-3A
85 read with Rule 8(1) and 8(2) Appeals by an Assessee to Commissioner, Central Excise(Appeals) If required 3 months of the receipt of the order sought to be appealed Form ST-4
86 (1) and (3) read with Rule 9(1) Appeals by an Assessee against the Order of Commissioner under Section 84 or Commissioner (Appeals) under Section 85 to the appellate tribunal if Required 3 months of the receipt of the order sought to be appealed Form ST-6
86 (2) and (3) read with Rule 9(2) Appeals by Commissioner on the direction of the Committee of Chief Commissioner/ against the Order of Commissioner under Section 84 to the appellate tribunal. if Required 3 months of the receipt of the order sought to be appealed Form ST-7
86 (2A) and (3) read with Rule 9(2A) Appeals by Asstt/Deputy Commissioner on the direction of the Committee of Chief Commissioner against the Order of Commissioner(Appeals) under Section 85 to the appellate tribunal. If required 3 months of the receipt of the order sought to be appealed Form ST-6
86 (4) read with Rule 9(3) Memorandum of cross objection by Commissioner or Deputy/ Assistant Commissioner or assessee as the case may be. When Notice of Appeal received Within 45 days of the receipt of the Notice Form ST-8

Books of Accounts & Records

Rule 5 of Service Tax Rules, 1994 as amended, provides the following:-

The records (including computerized data) as maintained by an assessee in accordance with the various laws in force from time to time shall be acceptable.
Every assessee shall furnish to the Superintendent of Central Excise at the time of filing his return for the first time a list of all accounts maintained by the assessee in relation to service tax including memoranda received his branch offices.
It is thus, noticeable that no specific records are prescribed for service tax matters.
However, Rule 9(1) of Cenvat Credit Rules prescrived the documents on the basis of which credit can be taken.

Registration

Form of Application.

The Application for registration is required to be made in Form ST-1 prescribed under the Rules to the Superintendent of Central Excise designated for this purpose under Rule 4. Following documents should be furnished alongwith Form ST-1:-
Proof of address
  • Copy of PAN
  • Copy of partnership deed, in case of Partnership firm
  • Copy of partnership deed, in case of Partnership firm
  • Copy of partnership deed, in case of Partnership firm
  • Copy of Memorandum and Articles of Association, in case of a company

Time limit to file Application for Registration.

Under Rule 4(1), as amended wef 16.10.1998, the application for registration is required to be made within 30 days from the date on which levy of service tax is brought into force in respect of the relevant services.
Thus, in respect of the services brought into service tax net w.e.f. 16.07.2001, the application must be made before 15.08.2001, If, the person liable for paying the service tax commences the business of providing a taxable service after such service has been levied, the proviso to the above sub-rule stipulates that the application for registration must be made within 30 days of the date of commencement of such service.
Thus, if a person starts providing taxable service, say from 01.01.2004, the person must apply on or before 31.01.2004.

Multiple premises of a service provider.

Sub rules (2) and (3) of rule 4 are relevant in this context. Where the taxable service is provided by an assessee from more than one premises or office, "a single application will suffice, if the assessee has a centralized billing system" "separate application for each premises/office must be made, if the assessee does not have a centralized billing system".

Multiple Services by a service provider.

If, the same assessee provides more than one taxable service, Rule 4(4) stipulates that a single application will suffice, mentioning therein all the taxable services in Col. 4 of From ST-1, all the taxable services must be entered.

Grant of Registration,

Issuance of Certificate.

Under Rule 4(5), the Superintendent of Central Excise is required to verify the application, and issue a certificate in Form ST-2 within seven days of the receipt of the application.
If the registration certificate is not granted within the said period, the registration applied for shall be deemed to have been granted.

Prepayment of Service Tax

There is no prohibition on paying service tax before applying for the registration.

Introduction of Service Tax Code (STC) based on PAN.

This instructions must be noted and complied with by persons liable to pay service tax. In particular, the following points may be noted:
It is compulsory for all concerned registered under the service tax to obtain PAN whether or not they pay Income tax. STC number is introduced with effect from 01.01.2002.
FROM 01.07.2002, ONLY STC NUMBER MUST BE USED. The NIC, in consultation with Director General of Service Tax and Directorate of Systems, has developed software for allotment of new PAN based STC number. Detailed guidelines for allotment of STC number have been given in Circular No. 40/2/2002 dated 21.02.2002.

Payment of Service Tax

Where the assessee is an individual or Proprietary firm or partnership firm (i.e. non corporate assessee), the service tax on the value of taxable service received during any quarter shall be paid, on form TR-6 (Yellow Color), on or before 5th of the month immediately following the said quarter (i.e. on quarterly basis) (proviso to sub Rule (1) of Rule 6).
In case of any other assessee other than those mentioned above the service tax on the value of taxable service received during any calendar month shall be paid, on Form TR-6 (Yellow Colour), on or before 5th of the month immediately following the said calendar month in which the value of the taxable service is received (i.e. on monthly basis) (sub rule (1) of Rule 6)
It may be noted that if last day of payment of service tax happens to be a public holiday then service tax could be paid on next working day immediately following the holiday (Circular No.63/12/2003 dated 14.10.2003)
The assessee is required to deposit service tax with the bank designated by the Central Board of Excise and Customs (sub rule (2) of Rule 6). It is advisable to pay service tax separately for each taxable service i.e. separate TR-6 challan should be used for payment of service tax in respect of each taxable service where assessee is rendering more than one taxable service.
Head of account for each category of services and miscellaneous receipts are provided in the said challan itself. Tax deposited in wrong head of accounts amounts to non payment of tax in that particular category of service. Hence special care should be taken while depositing the tax.
Where the assessee deposit the service tax by cheque, the date of presentation of cheque to the bank designated by the Central Board of Excise and Customs for this purpose shall be deemed to be the date on which service tax have been paid subject to realisation of that cheque (Rule 6 (2A)) (Circular No.86/2003-Cus dated 3.10.03)
Every person who is liable to pay service tax, and has collected excess service tax, must deposit the same immediately with the Central Government (Section 11D of Central Excise Act, 1944). In the context of service tax, the said provision is applicable with effect from 16.08.2002. The same has also been clarified by the board in its Circular No.57/6/2003 dated 20.05.2003 and by the Central Government in its Circular No.59/8/2003 dated 20.06.2003.
The service tax is not generally payable on the advance amount received but payable only when service is rendered. If the service is not rendered there is no liability to pay service tax. Once the service is rendered, the service tax is required to be paid on the realisation of taxable value, even if it is part payment on the bill / Invoice/ raised for the taxable service. Further, no service tax is payable, where service is rendered free of cost.

Classification of Services

The Finance Act, 2003 with effect from 14.05.2003 has introduced a new Section 65A regarding classification of taxable services. The basic principle of classification of a taxable service, which 'primafacie' is classifiable to two or more categories (ie. Overlap) would be as follows :

Service Tax Return

Every person liable to pay service tax shall him self assess the tax due and shall furnish to the Superintendent of Central Excise, a half yearly return on Form ST-3, in triplicates, by the 25th of the month following the particular half year for the months covered in the half yearly return (Section 70 read with sub rule 1 and 2 of Rule 7).
The provisions for revising of return contained in Section 70, had been omitted with effect from 16.10.98 vide Notification No. 1/2007 –ST dated 01.03.2007. Rule 7B an assessee may submit a revised return in From ST-3, in triplicate to correct a mistake or omission, within a period of 60 days from the date of submission of the return under Rule 7.
Under Notificaiton No. 23/2004-CE(NT) dated 10.09.2004 as amended CENVAT Credit Rules, 2004 have been notified in suppression of CENVAT Credit Rules, 2002 and Service Tax Credit Rules, 2002.

Search

The Commissioner of Central Excise has any information by informer or any other source, that Service Tax evaded or the official procedure of Chapter V of the Finance Act, 1994 (as amended) is not fulfilled by the Service provider, he may authorize officer not below the rank of Assistant Commissioner to search for and seize or may himself search for and seize, such documents or books or things. (Section 82). The officer not below the rank of Commissioner is empowered to issue search warrant in Service Tax matter.

Penal Provisions

Penal provisions do exist in respect of Service Tax also.Failure to obtain registrations, failure to pay the tax, failure to furnish the prescribed returns, suppression of the correct value of the taxable services and failure to comply with notice do attract penal provisions as prescribed.
But, it is specifically provided that no penalty is imposable on the assessee for any of the above failures, if the assessee proves that there was reasonable cause for the failure.
This provision has been inserted to take care of the genuine difficulties of the new assesses.
  • Penalty for failure to pay service tax, (Section 76)
  • Penalty for failure to furnish prescribed return, (Section 77)
  • Penalty for suppressing value of taxable service , (Section 78)
  • Penalty for failure to comply with notice, (Section 79)
  • Penalty not to be imposed in certain cases (Section 80)

Audit

Definition of Auditor

Service Tax is an indirect tax administrated by Central Excise Department.
Accordingly, an 'Auditor' means a Central Excise officer entrusted with the duty of conducting audit.

Role of Auditor

The Auditor is required to carry out his duties with utmost sincerity, integrity and diligence.
The Auditor has to aim at detection of non compliance, procedural irregularities and leakage of revenue due to deliberate action or ignorance.
The Auditor also should keep practical difficulties faced by taxpayer. Therefore, if any purely technical infractions, without any revenue implications are noticed, the Auditor should exercise sense of proportion and should GUIDE THE TAXPAYER in correcting the procedures, especially, as many of the assessees may have come under the tax net recently.
The Audit process should be transparent, and findings are discussed with assessee, an opportunity is given to him to give his view-point before an objection is finalized and recovery measures are initiated. The Auditor should take consider the view point of the assessee regarding all points of dispute before taking any definitive stand. Whenever in doubt, the Auditor should contact his supervisor or DC/AC to ensure the view taken by him is consistent with established law and procedure.

Dealing with Public

The Govt.'s objective is to collect correct amount of tax levied under the Service Tax in a cost effective, responsive, fair and transparent manner, and also to maintain public confidence in the integrity of the tax system.
The course of Audit should not be fault finding mission, it should be participative and a fact finding mission with the objective of guiding the assessee, while watching against any leakage of revenue. The Auditor should maintain a good professional relationship with the assessee.
The Auditor should recognize the rights of the assessee,
RIGHT to impartial and uniform application of law,
RIGHT to be treated with courtesy and fairness,
RIGHT to information permitted by law, and
RIGHT to confidentiality of information disclosed only for Department audit.

Advantages of Audit to Assessee

They will be better equipped to comply with the Service Tax Law and Procedures. The preparation of ST-3 Return, and self-assessment of Service Tax will be better focused and complete. The scrutiny of business accounts and reports/returns submitted to various agencies, in the course of audit will help them in removing any deficiencies in their accounting, documentation and internal controls. The disputes and proceedings against them would be minimized or even eliminated.

Auditor's Authority

All taxable services in India are required to be Audited. Section 65(121) of the Finance Act, 1994, and Rule 2(2) of Service Tax Rules, 1994 lays down that al words and expression used but not defined in Service Tax Rules but defined in the Central Excise Act, 1944 and the rules made there under shall have the meanings assied to them in that Act and Rules.
Accordingly, the definition of 'Central Excise Officer' as contained in Section2(b) of the Central Excise Act, 1944 will also to the Central Excise officers conducting Service Tax Audit. Thus, a Central Excise Officer assigned the duties of Audit in Service Tax.
Service Tax Act and Rules framed there under do not prescribe any specific records to be maintained by the assessee, However, Rule 5(2) of Service Tax Rules, 1994 requires every assessees to furnish to the Superintendent, at the time of filing his first return, A LIST OF ALL ACCOUNTS maintained by the assessee in relation to Service Tax including memoranda received from his branch offices. Rule 9 of CENVAT Credit Rules, 2004 provided for documents on which service Tax Credit can be taken.

In view of the above,

All records & documents pertaining to the business of rendering taxable services including those relating to a availment of credit in terms of Clause (ee) and (eee) of Section 94(2) of the Finance Act, 1994 (as amended) including computerized accounts can be appropriately examined by the officers conducting audit.

Message

The role of the Central Excise Department is both of a regulator as well as a facilitator. We are trying to balance the two with utmost sincerity and devotion. In the larger public interest, we, as the proud citizen of India, should wakeup to the call and contribute the very best for our economy to compete with other nations. The collection and payment of service tax should, therefore, be seen as an act of service to the nation rather than a burden.

More information will be available atwww.servicetax.gov.in
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