Service Tax is levied on the notified
services. It is a union levy administered by the Central Excise Department
and governed by Chapter V of Finance Act, 1994 (the Act) as amended from
time to time. The rate of service tax till 9 September, 2004 was 8 per cent
and from 10 September, 2004, it was increased to 10 per cent. Education cess
at 2 per cent is levied on service tax amount from 10 September, 2004. The
effective rate of service tax works out to 10.2 per cent. Service tax is
charged on the gross value of services and is generally payable on receipt
basis. It is an indirect tax - it is payable by the service provider but it
is ordinarily recovered from the recipient of services. The law requires
separate mention of service tax amount in the invoices.
Ordinarily, every person liable to pay service tax is required to register
itself with service tax authorities and comply with procedural requirements
like paying taxes, filing returns, etc. However, in case of non-residents,
who do not have any office in India and who are liable to pay service tax in
India, this burden is shifted to the recipient of service with effect from
16 August, 2002.
There is a basic exemption limit of INR 0.4 million which means that
service tax shall be exempted for service providers providing taxable
services up to INR 0.4 million. A mechanism for credit of input service tax
and central excise duty on specified inputs and capital goods is also in
place.
Any service for which payment was received in convertible foreign exchange
in India and which was not repatriated or sent outside India was exempt from
levy of service tax up to 28 February, 20031. But this exemption was
withdrawn with effect from 1 March, 20032, although export of services
continued to remain taxfree even after such a withdrawal. This exemption was
reinstated with effect from 20 November, 20033 as a stop-gap arrangement
till the government could satisfactorily determine "what constitutes
export of services". The government has now notified the new "Export
of Service Rules 2005" which defines as to what constitute "export
of services". These rules are effective from 15 March, 2005.
Consequently, the exemption from service tax on payments received in
convertible foreign exchange has now been removed with effect from 15 March,
2005.
When two or more services are bundled together it would be classifiable
under the category which gives essential character to the service.
Classification rules are in place from 14 May, 2003. If in case of composite
activities, one or more of the activities are liable to service tax and the
others are not liable to service tax, service tax would ordinarily be
payable only on the charges received for the services to which service tax
is applicable, provided charges for each activity can be separately
identified / determined and it is not incidental to the main service.There
are no rules for such identification / allocation and, therefore, such
allocation, if required, must be made on a reasonable basis.
Service tax is a comparatively new levy in India and very few judicial
precedents are available on the subject. The language of the law is quite
broad and generic and uses terms like "directly or indirectly" and
"in any manner" which raise a number of issues regarding scope of
specific category of service. Revenue authorities have been issuing
explanatory circulars from time to time in relation to specific issues. Yet,
there is, considerable ambiguity in the applicability of the service tax law
to various services.
Service tax is currently levied on following 80 notified categories of
services:
