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Introduction to service tax in India

Posted @ July 8, 2012, 10:49 pm under (Service Tax Updates)

INTRODUCTION TO SERVICE TAX IN INDIA

Taxes in India are levied by the Central Government and the state governments. Some minor taxes are also levied by the local authorities such the Municipality or the Local Council. Service Tax is a Tax levied by the Central Government of India. 

Compliance of Service Tax Rules has always been a big challenge before organizations. One of the main reasons for confusion over service tax compliance has been the fact that law changes every year by way of clarifications being given and introduction of new services for the purpose of charging service tax apart from making changes to the existing categories to expand the scope of levy.

Finance Act 2012 announced paradigm shift in the way services are proposed to be taxed in future. All services brought under service tax net except specifically exempted or covered under the “Negative List of Services”. In some situations service receiver was made responsible for deposit of service tax against services received by them.  

1.1. What is Service Tax and who pays this tax?

Service Tax is a form of indirect tax imposed on services. Service tax now levied on all service except specifically exempt or covered under negative list of services.

Over the past few years, service tax been expanded to cover most of the services. For the purpose of levying service tax, the value of any taxable service should be the gross amount charged by the service provider for the service rendered by him.

Service Tax was first brought into force with effect from 1 July 1994. All service providers in India, except those in the state of Jammu and Kashmir, are required to pay a Service Tax in India.

Initially only three services were brought under the net of service tax and the tax rate was 5%. Gradually most of the services came under the ambit of Service Tax. The rate of tax was increased from 5% to 8% w.e.f. 14 May 2003. From 10 September 2004 the rate of Service Tax was enhanced to 10% from 8%. Besides this 2% education cess on the amount of Service Tax was also introduced. In the year 2006-2007, service tax was increased from 10% to 12%. On February 24, 2009 in order to give relief to the industry reeling under the impact of economic recession, the rate of Service Tax was reduced from 12 per cent to 10 per cent and from 1st April 2012 it has again increased to 12%.  

 

 

 

1.2 ABATEMENT IN CASE OF SOME SERVICES

Even though maximum service tax is charged @ 12.36% (including 3% Cess) law provides abatement in certain cases.

Abatement is a fixed % age of value of services that is allowed to be deducted from it for calculation of service tax. In other words it is the amount liable to be reduced from value of taxable service as per finance act and rules therein. This abatement can be claimed by the service provider if he has not claimed the cenvat credit on input services/goods. Suppose a person has provided a service of Rs 100 and abatement on that service is 30 % than he can pay tax only on 70 % amount. For example in case of tour operator Service tax is applicable on following percentage of services after abatements are allowed:

Sl. No.

Description of taxable service

Percentage

(1)

(2)

(3)

 

Renting of any motor vehicle designed to carry passengers

40

 

(i) Services provided or to be provided to any person, by a tour operator in relation to a package tour

25

 

(ii) Services provided or to be provided to any person, by a tour operator in relation to a tour, if the tour operator is providing services solely of arranging or booking accommodation for any person in relation to a tour

10

 

(iii) Services, other than services specified in (i) and (ii) above, provided or to be provided to any person, by a tour operator in relation to a tour

40

 

1.3 Who is liable to pay service tax?

Normally, the ‘person’ who provides the taxable service on receipt of service charges is responsible for paying the Service Tax to the Government. However, in few situations the receiver of the Services is also made responsible for the payment of Service tax for example where taxable services are provided by Foreign Service providers with no establishment in India, the recipient of such services in India is liable to pay Service Tax. In the following situations, the receiver of the Services is made responsible for the payment of Service tax:

Sl.No.

Description of a service

Percentage of  service tax payable by the person providing service

Percentage of service tax payable by the person receiving the service

1

services  provided or agreed to be provided  by an insurance agent to any person carrying on insurance business

Nil

100%

2

services  provided or agreed to be provided  by a goods transport agency in respect of transportation  of goods by road

Nil

100%

3

services  provided or agreed to be provided  by way of sponsorship

Nil

100%

4

services  provided or agreed to be provided  by an arbitral tribunal

Nil

100%

5

services  provided or agreed to be provided  by individual advocate

Nil

100%

6

services  provided or agreed to be provided  by way of support service by Government or local authority

Nil

100%

7

(a)   in respect of  services  provided or agreed to be provided  by way of renting or hiring any motor vehicle designed to carry passenger on abated value.

(b)   in respect of  services  provided or agreed to be provided  by way of renting or hiring any motor vehicle designed to carry passenger on non abated value.

Nil

 

 

 

 

60%

100 %

 

 

 

 

40%

8.

services  provided or agreed to be provided  by way of supply of manpower for any purpose

25%

75 %

9.

services  provided or agreed to be provided  by way of works contract

50%

50%

10

any taxable services  provided or agreed to be provided  by any person who is located in a non-taxable territory and received by any person located in the taxable territory(IMPORT OF SERVICES)

Nil

100%



 

 

1.4 CONCEPT OF CLASSIFICATION

 

The service provider should ensure that he classifies the service properly as this would enable him to ascertain his liability correctly. Correct classification is critical as the exemptions under service tax barring the general exemptions are based on specified categories and if the classification is wrong, the service provider may either end up paying more than required or even face a liability. For the purposes of classification, the category which gives the most specific description of the service should be adopted.

 

1.5 PAYMENT OF SERVICE TAX       

       

The service provider providing taxable services shall be required to pay service tax by the 5th of the month following the month in which the sums are received towards such taxable service. However, in respect of the amounts received in the month of March, the payment would have to be made by the 31st of March and not by 5th of April. 

 

1.6 PAYMENT OF INTEREST

 

Where there is short payment or delay in payment of service tax. The present notified rate is 18% p.a. simple interest and this should be paid along with the tax. The interest shall be for the period of default. Interest is mandatory in nature as far as the service tax is concerned.

 

1.7 POINT OF TAXATION RULES

 

Point of taxation means the point in time when a service shall be deemed to have been provided. According to Rule 3 of Service Tax Rules provision of service shall be the earliest of the following dates:

(i) date on which service is provided (or to be provided).

(ii) date of invoice.

(iii) date of payment received.


In other words, a taxable service, to be provided at a future date, shall also be taxable before its actual execution.



1.8 FILING OF RETURNS

 

It is provided that an assessee whose service tax liability was Rs. 25 lakhs or more in the previous year and in case of a newly registered service provider other than individual or firms, will have to file return “Monthly”.

And in other cases i.e. Individuals and partnership firm or proprietary firms having paid service tax of less than Rs. 25 lakhs in previous year, will have to file return ‘Quarterly.’

 

Penalty for Late Filing of Service Tax Return

Day wise default criteria

Penalty Amount (Rs.)

< 15 days

500 Rs. per day

> 15 days but < 30 days

1000 Rs. per day

> 30 days

1000 Rs. fix plus Rs. 100 per day or Rs. 20,000/- maximum

 

The same provisions apply for NIL returns 

 

 

 

1.9 PROCEDURE WITH REGARD TO INVOICING

 

Under Service Tax the assessee is expected to ensure following points before raising a invoice:

The invoicing requirement is governed by Rule 4A of Service Tax Rules 1994.

 

·         The invoice is to be issued within 14 days of completion of taxable service or receipt of amount whichever is earlier.

·         The invoice / bill / challan should be signed by such service provider or a person authorised by him.

·         The invoice shall be serially numbered and should contain the following information -

Ø  The name, address and registration number of the service provider.

Ø  The name and address of the service receiver

Ø  Date of raising of invoice

Ø  Details of the customer’s/client’s work order/purchase order

Ø  Description, classification and value of taxable service provided.

Ø  The amount of ST and Education cess/SHE Cess charged on such service tax

Ø  Break up of the amount charged towards the service

 

Illustrative format for the service invoice is given below –

 

(Tax Invoice/Invoice U/R 4A of Service Tax Rules 1994)

(Name and address of the service provider)

 

ST Registration number

 

 

Invoice Number

Date

 

(Name and address of the service receiver)

 

PO Ref

Date

 

 

 

Particulars

Amount in Rs

 

Amount in Rs

 

Description of service provided (Classification wise)

Gross amount

 

 

 

Exemption being claimed (details)

 

 

 

Amount to be subjected to service tax

 

 

 

Service tax at 12%

 

 

 

Education cess 2%

 

 

 

Secondary and Higher Education cess 1%

 

 

 

Total service tax

(In words)

 

 

Others

 

 

Total bill amount

 

 

 

1.10 FREQUENT ERRORS COMMITTED IN SERVICE TAX

 

The assessee is generally seen committing following mistakes during compliance of service tax rules:

 

1.    Classifying the services under wrong category results in inaccurate computation of service tax liability due to different rates applicable to each type of service.

5.    Generating invoice not as per 4A of Service Tax Rules 1994.

6.    Deposit of Challan under wrong category resulting in excess payment under one category and short payment under another category. It is pertinent to note that Inter adjustment of wrongly deposited service tax is not allowed under service tax rules.

7.    Short payment or excess payment of service tax due to improper accounting of the service tax amounts.  

8.    Delay in payment of service tax liability.

9.    Delay in filing of service tax returns.

10.  Failing to pay tax u/s 68(2) on services received in India from abroad when the same constitutes an import of service.

11.  Excluding the expenses reimbursed by the service receiver from the purview of service tax where the same is not incurred by the service provider as a pure agent of the service receiver.

12.  Non segregation of the education cess and Secondary Higher Education cess amounts from the basic portion of service tax invoices.

 

 


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