"SERVICE TAX: A MOLE HILL INTO A MOUNTAIN"
Dr. S. Tameem Sharief  Ph.D,Lecturer and Research Supervisor, P.G and Research Dept of Commerce,

1.       Service tax is an indirect tax levied on certain services provided by certain categories of person including companies, associations, firms, body of individuals.  'Services" constitutes heterogeneous spectrum of economic activities.  Service sector is occupying the centre stage of Indian Economy.  It has become an industry by itself.  In the contemporary world, development of service sector has become synonymous with the advancement of economy.

2.       Economics hold the view that there is no distinction between the consumption of goods and consumption of services as both satisfy the human needs.

3.       In the late seventies the Government of India initiated an exercise to explore alternative revenue sources due to resource constraints.  The primary sources of revenue are direct and indirect taxes.  Central Excise duty is a tax on goods produced in India whereas Customs Duty is tax on imports.  The word 'goods' has to be understood in contra distinction to the word 'services'.  Customs and Central Excise Duty constitute two major sources of indirect taxes in India.  Both are consumption specific in the sense that they do not constitute a charge on the business but on the client.  However by 1994, the Government of India found revenue receipts from customs and central excise on the decline due to World Trade Organisation commitments and due to rationalisation of duties on commodities.

4.       Service tax was introduced by the then Finance Minister Dr. Man Mohan Singh in 1994 and levied tax only on 3 items telephone, Stock broker and general insurance. The reasons for introduction of Service tax is that this sector accounted for about 40% of GDP of India and the tax reforms Committee have also recommended imposition of tax on services as a measure for broadening the base of indirect taxes.

5.      The Service tax brought into effect by Chapter V of the Finance Act, 1994 on 3 items with effect from 1.7.1994 has been extended to more than 100 items. The tax rate at the time of introduction was 5% and after enhancement, the present rate is 12% (plus education cess and secondary and higher education cess). The service tax Revenue which was only 407 Crores for the year 94.95 is budgeted @ Rs.50200 Crores for 2007-08.

6.       So far direct tax collections have recorded a 40% growth @ Rs.2,18,535 Crores till end of January, 2008. While collection of Corporate Tax went up by 37.54%, personal income tax was up by 45.45%.

7.      At present India follows a system of selective approach in the levy of Service tax by levying tax upon selective services only.  We do not levy any service tax on any of the environmental services, health and social services and recreational, cultural, sports related services.  Major services that does not attract service tax are non-commercial property rentals, postal services, legal, medical, human health, tourism, news agency, etc.

         Hence an attempt shall be made to tax all services in a uniform manner to avoid controversy and confusion.  Legally it is the service that shall be taxed, i.e. the taxable service but in actuality that does not happen.  Whereas a chartered accountant or management consultant is taxed a lawyer rendering tax advisory services or legal counselling is not taxed.  In fact both are not legal services but services rendered by qualified individuals.

         It is also paramount that services of like similar nature are consolidated as was done for telecom related services.

8.      The concept of Value Added Tax or VAT has been introduced by all the States of India and VAT is a consumption tax as it is borne by the consumer.

9.      Service tax is a VAT which in turn is destination based consumption tax in the sense that it is on commercial activities and is not a charge on the business but on the consumer.  Just as excise duty is a tax on value addition on goods, service tax is on value addition by rendition of services.  Thus 'services' falls into two categories, namely property based services and performance based services.  Property based services cover service providers such as architects, interior designers, real estate agents, construction services, Kalyan Mandaps, etc.  Performance based services are services provided by Stock Brokers, Practicing Accountants, Security Agencies, Event Managers, etc.

10.    As per recommendations of Dr. Chelliah Committee service tax was introduced in 1994-95.  After its introduction, the constitutional validity was challenged before the constitutional bench of the Hon'ble Supreme Court which took the view that the Central Government derived its authority from entry  97 List I of the seventh schedule to the constitution for levying tax on services provided.

12.    To provide legal back-up, the Government of India introduced a new article 268A in the Constitution in the year 2003 by Constitution (Eighty Eight Amendment Act) 2003, which provides that taxes on services shall be charged by Union of India.  A new entry 92C was also introduced in the Union List for the levy of taxes on services.  Sec.65(16) of the Finance Act, 1994 provided for definition of 'taxable service'.  Sec.67 provided for valuation of taxable service based on gross receipts.  In cases where the value of taxable service could not be decided then the cost of providing the service constituted the basis of assessable value of taxable service.  Finance Act, 1998 increased the number of services to be taxed.

13.    The Hon'ble Supreme Court in the case of Jaipur Hosiery Mills P. Ltd., -Vs- State of Rajasthan reported in 26-STC-341, held that in matters of taxation, the Legislature possesses large freedom and wide discretion can be exercised and the legislation cannot be attacked for the reason that while taxes are levied on some persons while leaving out others.

14.    The Hon'ble Supreme Court in the case of Sri Krishna Das –Vs- Town Area Committee reported in 77-STC-395 held that it is for the Legislature to determine the question of need and to select the goods or services for taxation.  Courts cannot review the wisdom or advisability or expediency of a tax as the Court has no concern with the policy of legislation, so long as they do not violate the constitutional provision.  Taxes may be and often are oppressive, unjust and even unnecessary but this can constitute no reason for judicial interference.  Every tax must discriminate and only the authority that imposes it can determine how or in what directions.

15.    The levy of service tax was challenged by various professionals like chartered accountants, architects.  The contentious issue was the legislative competence of the parliament to levy service tax.  The levy was confirmed by Hon'ble Supreme Court in the case of All India Federation of Tax Practitioners reported in 9-VST-126.

16.     Procedure for payment

The Service Tax is paid every month in the specified branches of designated banks through TR6 Challans. The individual assessees are required to pay the levy only once in a quarter. In case of delay in payment of service tax interest @ 1.25% per month or part thereof  has to be paid.

17.    The Finance Act, 2001 introduced self – assessment for service tax returns which are expected to be filed half- yearly in Form ST3 or ST3A in triplicate with the concerned office accompanied by copies of TR6 challan evidencing payment of service tax by the 25^th of the month following the half year. A NIL return is to be filed even in case no service is provided during the half year.

18.    Valuation of service rendered

The value of service normally refers to the gross amount charged for the service provided, upon which tax is to be calculated. In the event of mix up of goods and services the value of goods have to be deducted to arrive at value of service. The Finance Act, 2006 has also made amendments, for valuation of consideration received in non-monetary items. In the case of imported services the actual consideration that is charged is relevant.

19.    Tax on Import / Export of services

Finance Act, 2006 introduced Sec. 66A for levy of service tax on those services which are provided outside of India and received in India. (Import of services) Government of India has introduced Export rules with effect from March 15, 2005, stating the definition for export and services which quality as exports are not liable to Service Tax.

20.    CENVAT CREDIT

The scope of CENVAT credit rules is extended to the service provider rendering the output services that are taxable, for availing credit of Central Excise duties and education cess on the inputs including capital goods in addition to the service tax and education cess paid on input services used in relation to output service. This eliminates cascading effect.

21.    As per provisions of Sec. 69 of the Act and rule 4 of the service tax rules 1994, every person providing a taxable service and liable to pay service tax is required to register with the Central Excise / Service Tax Dept. Further in a few cases liability to pay service tax has been shifted to the service receiver in term of Sec. 68(2) of the Act. This provision had been upheld by Hon'ble Supreme Court in the case of Kerala State Electricity Board Vs. CCE. Thiruvananthapuram.

22.    The exemption limit is upto  Rs.8 lakhs in a year. However a person availing this exemption shall register with the Department once he achieves a turn over of 7 lakhs in respect of all taxable services. The expression "aggregate value not exceeding the threshold  value of Rs.8 lakhs" has been defined in Notification No.6/2005-ST. Application for registration shall be made in Form ST1 within 30 days of levy of Service Tax upon such service and registration certificate shall be issued in Form ST2 within 7 days of receipt of application and if not issued without any intimation, the registration is deemed to have been granted.

23.    As per rule 6 read with Sec. 68 of the Act, the tax shall be paid on monthly basis by all service tax payers other than individuals or proprietary / partnership concerns who are required to pay service tax on a quarterly basis. Service Tax can also be electronically paid and E-payment of service tax had been made mandatory with effect from1.10.2006, for assessees who have paid a service tax of Rs.50 lacs or more in the preceding financial year.

24.    In terms of the provisions of rules 4A and 4B, every taxable service provider is required to issue an invoice within 14 days from either the date of completion of provision of service or receipt of any service charges whichever is earlier, furnishing particulars of service provider and receiver. The amount of education cess, secondary and higher education cess should be separately shown. As regards banks the invoices need not indicate particulars of service receiver. The service tax return shall be filed in Form ST3 and can be filed electronically. Delay in filing returns attract late fees as per rule 7C being Rs.500 upto 15 days, Rs.1000 for delays between 15 to 30 days and Rs.1000/- plus Rs.100/- per day beyond 30 days till the filing of the return, not exceeding of Rs.2,000/- Rule 7B permits filing of revised return within 60 days of filing the original return for rectification. Normally self assessment is made by tax payer upon his liability but when such self assessment cannot be made, the assessee can opt for assessment on provisional basis. Delay in payment of service tax attracts interest at the rate of 13% as per Notification No.26/2004-ST/10.4.04 and in terms of Sec. 75 of the Act. Sec. 76 of the Act provides for levy of penalty which shall not be less than Rs.200/- per day of failure to file the return or 2% of tax due upon the return whichever is higher. Any amount collected of service tax, though not warranted shall be deposited with Government of India. Failure will attract interest @ 13% as per Sec. 73B (Notification No.8/2006-ST/19.4.2006).

25.    Modifications have been suggested by various sources on the following.

26.    Service Tax Rate

The rate of tax may be fixed at 10% removing the addition of 2.5% two education cesses primary and secondary education cess.  This will add to better tax compliance.

27.    Threshold Exemption

The exemption limit should be made as 15 lakhs so that small-scale service providers would be benefited.

28.    Reimbursement of Expenses

The tax on reimbursement of expenses shall be scrapped and valuation rules are changed to exclude reimbursement expenses.  In fact in a decision of CESTAT, Chennai in the case of Malabar Management Services –Vs- Commissioner of Service Tax Chennai, it was held that Sec.67 of Finance Act does not include reimbursement amounts received.

29.    Cenvat Credit Rules

There is overlapping of provisions meant for exports in CENVAT and Export of Service Rules.  This shall be looked into and redrafted.

30.    Export and import of services

The definitions ought to be redefined and simplified.

31.    Goods and Services Tax

An integrated Goods and Services Tax (GST) is proposed to be introduced from 1.4.2010.  If it is to be placed before empowered committee of State Finance Ministers, it can never see the light of the day.  GST is the greatest and most needed tax reform, and the same shall be implemented if necessary by an ordinance of President.

32.    Whether income tax is deductible at source?

The Central Board of Direct Taxes has sent a letter expressing the opinion that tax has to be deducted at source even in respect of service tax payable to the Government.  This view ma not be correct as Sec.190 of Income Tax Act, 1961 has specified that TDS has to be made only in respect of any income. Whereas service tax payable to Government cannot be considered as income and TDS cannot be deducted. This view was upheld by Hon'ble Supreme Court in the case of transmission Corporation of AP Ltd., (1999)2391TR587 (SC). Hence the directive letter of CBDT requires reconsideration. 

33.    Where a single service provider, provides multiplicity of services and when all the services are not taxable, payment of tax and assessment will be difficult and fraught with complications. A single contract may cover both goods and services and tax is levied both under VAT and Service Tax Act upon the consideration. In fact CESTAT Chennai had held in the case of Pepsico Bottle Holdings P.Ltd., Vs. Commissioner Central Excise, Pondicherry where Sales Tax was collected on rental / leasing charges, service tax cannot be levied. Similar view was held by CESTAT, Kolkatta in the case of ASL Motors P. Ltd., Vs. CCE & CES Patna and CESTAT, Mumbai in the case of BPL Mobile Communications Ltd., Hence proper amendment on this kind of services shall be provided. The valuation rules shall be made clear as regards services availed by inter-group companies.  

34.    The particulars of service tax revenue over the years are furnished as follows:

Thus it can be rightly claimed once a molehill service tax has grown into a mountain now.

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