Service Tax Structure in India

By: Vardah Saghir

 Centre collects all the direct taxes (income tax, corporate taxes etc) along with the Indirect taxes like Service Tax, Excise duty and Customs duty. The States collect indirect taxes like VAT on goods, CST and Local Taxes. Earlier instead of VAT, States had sales taxes on various goods. Each state has adopted its own structure of VAT with different duties and structure.

 It is a tax which is payable on services provided by the service provider. Just like excise duty is payable on goods which are manufactured, similarly service tax is payable on services provided. This tax came into effect in 1994.

Introduction
Service tax is levied on specified services and the responsibility of payment of the tax is cast on the service provider. Earlier service tax was payable only on a specified list of services but from 1 July 2012, all services except those in the Negative List are liable for service tax. All services would be subject to service tax unless specified in the Negative List or are specifically exempted from the levy of service tax.

Service
Any activity carried out by a person for another for consideration and includes a declared service.

 Service Tax is administered by the Central Excise & Service tax Commissionerates and the Service Tax Commissionerates working under the Central Board of Excise & Customs, Department of Revenue, Ministry of Finance, Government of India.

 It is charged on cash basis for individual service providers and for companies it is being charged on accrual basis i.e. companies liability to deposit tax arises as soon as services are provided irrespective of the collection of funds. Quarterly in case of individual or partnership and monthly in all other cases.

 The current service tax rate is 12%. Education Cess of 2% and Senior and Higher Education Cess of 1% are also liable to be payable on the above service tax rate. Effective Service Tax Rate is 12.36%

 If a CA provides services in the capacity of auditor to ABC Ltd and the audit fee is Rs 100000 then the service tax chargeable will be 12.36% on Rs 100000 i.e 12360. Hence the total billing to be done by CA to ABC Ltd will be Rs 112360. The segregation has to be done on the invoice.

 Under Section 67 of the Finance Act, 1994, Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver.

Negative List in Service Tax

Section 66D of the Finance Act 1994 sets out the various services that are not liable to be taxed in the sense that they do not fall under the charging Section 66B. Section 66B of the Act levies a tax on all services other than those specified in the Negative List.

Negative List
Services by the Department of Posts by way speed post, parcel,etc. Services by RBI Services by a foreign diplomatic mission located in India. Services relating to agriculture. Lottery, Betting and gambling Transmission or distribution by an electricity transmission or distribution utility. Pre-school education and upto higher secondary school. Services by way of renting residential dwelling for use as residence. Service of transportation of passenger.

Collections
The Service Tax collections have shown a steady rise since its inception in 1994. The tax collections have grown manifolds since 1994-95 i.efrom Rs. 410 crores in 1994-95 to Rs.71174.58 crores in 201011. The target for the year 2010-11 was Rs.69400 Crores and the actual realisation was Rs.71174.58 Crores, showing increase of Rs.1774.58Crores (2.56%) . The total number of taxable services have also increased from 3 in 1994 to 119 as on 1st May, 2011.

Challenges before the Service Tax Administration in India

The growth of service sector at a high rate offers opportunities as well as challenges to bring under the tax net hitherto uncovered services. This offers tremendous revenue potential to the Government.

Goods and Services Tax (GST)

The proposed Goods and Service Tax is a part of the tax reforms that centre around evolving an efficient and harmonized consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the Central and State level. The existing Service Tax System poses an imminent challenge, to reform its synergies, to eventually harmonize itself in the GST regime, as and when it is rolled out. Successful integration of goods and service tax, would give India a world-class tax system and will bring in improved tax collection.

 With a GST in place, all these indirect taxes should be merged into one tax. Ideally, these taxes will be collected by the Centre which will then be transferred to the States via a rule/formula. This will require changes in the constitution as Centre can only tax goods at production stage and on Services. The States can only tax sale of goods. Hence, States cannot tax services and Centre cannot tax salesof goods.

 It would satisfy the ideal condition of one country- one tax. Such a tax will not only reduce the cascading burden of a large number of indirect taxes on the final consumer but would also benefit the producer by way of cost reduction, increased productivity and increase in overall demand for the goods. As a result, it would lead to an increase in GDP, tax GDP ratio and result in revenue surplus.

 In a way, it will boost our economy and enable us to compete at the global front. As a result, our system will eventually match the international standard in the sphere of indirect taxation.