What is Service Tax in India?

What is Service Tax?

To define Service Tax, it was a tax imposed on services provided in India, except those listed in the negative list or exempted categories. It applied to various industries, including hospitality, banking, telecom, and professional services. Service Tax was an indirect tax, meaning the service recipient ultimately bore the cost, while the service provider was responsible for collecting and remitting it to the government.

There were different types of Service Tax, depending on how it was levied. In some cases, the service provider collected and paid the tax, while in others, the responsibility shifted to the recipient under the Reverse Charge Mechanism. The tax was introduced to ensure businesses contribute to national revenue based on the services they offer. However, after the introduction of the Goods and Services Tax (GST) in 2017, Service Tax was merged into GST.

What is the Rate of Service Tax in India?

Before GST, the rate of Service Tax in India went through several revisions over the years. Here is a quick look at the timeline:

• Initial Rate (Pre-2014): Service Tax was initially implemented at a nominal rate of 5% and gradually increased.
• Increase to 12.36% (2014): The Service Tax rate was raised to 12.36% in the 2014 Union Budget.
• Subsumption and Increase to 14% (2015): In 2015, the government subsumed some education-related cesses into the Service Tax, effectively increasing the rate to a flat 14%.
• Introduction of Swachh Bharat Cess (2015): Later in 2015, an additional 0.5% Swachh Bharat Cess was levied on top of the Service Tax, bringing the effective rate to 14.5%.
• Krishi Kalyan Cess and Final GST Implementation (2016-2017): The 2016 Union Budget introduced another cess, Krishi Kalyan Cess, at 0.5%, bringing the effective Service Tax rate to 15%.
• Finally, in July 2017, the Goods and Services Tax (GST) regime completely replaced the Service Tax.

What is the Applicability of Service Tax?

According to the taxation system introduced in Budget 2012, all services, except those outlined in the negative list, are liable for taxation. Section 66D lists the specific services exempt from this tax.

Service Tax applies to both companies and individual service providers. While companies can pay taxes based on accrual, individuals must settle this tax in cash.

In compliance with regulations, service providers must remit taxes for services they have contracted to provide. Therefore, services agreed upon but not rendered are still subject to taxation. This includes any advance payments made to the service provider, even when the service contract is subsequently canceled.

When is Service Tax Not Applicable?

Certain services are completely exempt from Service Tax. These typically included essential services considered crucial for public well-being. Examples include:

• Basic educational services provided by non-commercial institutions
• Healthcare services provided by government hospitals or non-profit organizations
• Agricultural services provided by farmers
• Public transportation services by government or local authorities
• Exported services like the ones provided to clients outside India
• Small businesses with turnover below ₹10 lakh

What is the Payment Procedure of Service Tax?

While Service Tax is no longer applicable in India since the introduction of GST (Goods and Services Tax) in 2017, here is how the payment procedure for Service Tax used to work:

Form TR-6 Challan

TR-6 Challan is the primary method to pay Service Tax. You must download the challan form from the Central Board of Excise and Customs (CBEC) website or obtain it from designated branches of authorized banks. The challan contains details like your Service Tax registration number, tax period, and tax amount. It is then submitted to a designated branch of any authorized bank to make the payment.

Online Payment

The ACES (Automation of Central Excise and Service Tax) portal offered an online payment option. You can access the portal and use the e-payment functionality to pay Service Tax electronically through your Internet banking account.

How is Service Tax Registered?

Registering for Service Tax was a straightforward process that required people to take a few simple steps. Businesses and individuals providing taxable services had to register within 30 days of starting their service. The steps involved were:

• Visit the ACES (Automation of Central Excise and Service Tax) website at www.aces.gov.in.
• Fill out the online registration form (Form ST-1) with basic business and PAN details.
• Submit the form online. No documents were needed initially, but they had to be provided later for verification.
• The government reviewed the application and issued the Service Tax Registration Certificate (ST-2) within 2 days.

Service Tax Rules

Service Tax rules were regulations laid down by the Government of India to govern the assessment, payment, and collection of Service Tax before the introduction of the Goods and Services Tax (GST) in July 2017. Understanding these rules helps provide context on how indirect taxation has evolved in India. Here is a simplified explanation of the key Service Tax rules as they were before GST:

• Rule 1 primarily outlined the foundational Service Tax regulations that defined the purpose of the Service Tax rules and provided an overview of their application.
• Rule 2 clarified the meaning of key terms related to Service Tax, such as “act,” “assessment,” and “large taxpayer.”
• Rule 3 empowered the government to appoint officers responsible for the administration and collection of Service Tax, ensuring smooth enforcement of the law.
• Service providers were required to register with the relevant tax authorities if their taxable service turnover exceeded a certain threshold. Rule 4 outlined the process and timeline for registration.
• Rule 5 delves into the requirements for maintaining records related to Service Tax.
• Rule 6 laid out the process and deadlines for paying Service Tax. It also provided details on the penalties for late payment or non-compliance.
• Rule 7 covered the submission of tax returns for Service Tax.
• In cases of disputes or disagreements, service providers could file an appeal to the Commissioner of Central Excise. Rule 8 outlined the format and procedure for such appeals.
• If service providers were dissatisfied with the Commissioner’s decision, they could escalate their case to the Appellate Tribunal. Rule 9 specified the process for filing these appeals.

Service Tax Payment

Businesses providing taxable services had to register for Service Tax and collect tax from their clients. Payment methods included challan forms submitted at authorized banks or online payment through the ACES portal. The specific tax rate depended on the service provided, and delayed payments resulted in penalties and interest charges.

Service Tax Exemption

Service Tax exemption refers to the relief provided by the government from paying Service Tax on certain specified services. Service Tax is a form of indirect tax levied by the government on providing services, and it is governed by the Finance Act. Exemptions from Service Tax can be granted for various reasons, such as to promote specific industries, encourage investment, support social welfare objectives, or alleviate the burden on certain categories of taxpayers.

Service Tax Billing

Service Tax billing typically included invoices issued by service providers that had to comply with the prescribed format under the Service Tax Rules. This format included details such as the service provider’s name and address, the service recipient’s name and address, a unique invoice number, the date of issuance, a description of the services provided, the value of the services, and the applicable Service Tax rate.

Service Tax Penalties

Under India’s Service Tax regime, various penalties were prescribed for non-compliance with the provisions of the Finance Act, 1994, and the Service Tax Rules. Tax authorities enforced these penalties to ensure compliance with Service Tax laws and deter instances of tax evasion or negligence. For instance, if a taxpayer failed to remit the Service Tax amount to the government within the prescribed due date, they were liable to penalty payment on the outstanding tax amount.

How Do You Pay Service Taxes in India?

All eligible taxpayers, as per the income tax slabs, must make Service Tax payments online. Nevertheless, special requests for manual payments can be considered under specific circumstances.

To facilitate manual payments, individuals can access the official website of the Central Board of Indirect Taxes and Customs using their taxpayer login credentials. Individuals who directly pay Service Tax must maintain their own records. These records can be electronically maintained and should be retained for a minimum of 5 years.

Concluding Thoughts

Service Tax played a pivotal role in shaping India’s service sector by establishing a structured framework for taxation and compliance. Its evolving rules, exemptions, and tax rates reflected the government’s efforts to balance revenue collection with sectoral growth and social welfare objectives. Though it has been replaced by GST, Service Tax laid the groundwork for understanding and managing indirect taxes in the service industry. Its legacy remains significant, highlighting the importance of tax compliance and the seamless transition toward a unified indirect tax regime.

FAQ on Service Tax