India: Indian Indirect Tax Laws - A Brief Guide

Last Updated: 13 January 2016
Article by Shammi Kapoor, Vishal Kumar and Purva Juneja

Service Tax

1. Taxation of Service

Service tax was introduced for the first time in 1994 through insertion of Chapter V in the Finance Act, 1994 (the "Finance Act") as a mean to broaden the indirect tax base. It may be noted that there is no separate enactment for service tax till date and it continues to be governed by the provisions of Chapter V of the Finance Act (ss 64 to 100) and the rules incorporated under the Service Tax Rules, 1994.

The Finance Act provides for methods of levying service tax, the circumstances in which the levy would arise, the procedures to be followed and allied matters such as registration, self-assessment, penalty, etc. Initially, the levy of service tax was confined only to three services. Since then, year after year, the scope of service tax gradually increased and extended to over 120 services. The Finance Act, which provides for levy of service tax has been substantially amended by the Finance Act, 2012, w.e.f., 1.07.2012. There has in fact been a paradigm shift in the law relating to levy of service tax, pursuant to the aforesaid amendments. Generally speaking, service tax is now leviable on all services except those mentioned in the negative list and exemption notification.

The relevant statutes governing the levy of service tax are as follows:

  1. Finance Act, 1994 – Chapter V (ss 64 to 100): This chapter extends to the whole of India except the State of Jammu and Kashmir
  2. Service Tax Rules, 1994
  3. Point of Taxation Rules, 2011
  4. Service Tax (Determination of Value) Rules, 2006
  5. Service Tax (Advance Rulings) Rules, 2003
  6. Place of Provision of Services Rules, 2012
  7. CENVAT Credit Rules, 2004

2. Important provisions governing levy of service tax are discussed in the succeeding paragraphs

Levy of service tax

  • Service tax is levied on all services except those mentioned in the negative list and exemption notification.
  • Presently, the service tax is levied at the rate of 14% on the value of taxable services.

Taxable services

Section 66B of the Finance Act is the charging section. The terms "taxable service" is defined to mean any service on which service tax is leviable under s 66B of the Act. Hitherto, the liability to pay service tax was on realisation of the value of taxable service. However, with the introduction of Point of Taxation Rules, 2011, w.e.f. 01.06.2011, the liability to pay service tax has been shifted to invoice method, ie, on raising of invoice.

Persons liable to pay service tax

Liability to pay service tax is cast on the service provider. However, in some cases, recipients of services have been made liable (on partial/ reverse charge method) to pay service tax under the Finance Act.

Exemption to small service providers

Service tax is exempted up to Rs 10,00,000 (Indian Rupees One Million), being the aggregate value of all taxable services provided by a service provider during a financial year. The aggregate taxable value means the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year, but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under s 66 B of the Finance Act or under any other notification. However, the above exemption is not admissible to:

  1. taxable services provided by a person under a brand name or trade name, whether registered or not, of another person; or
  2. such value of taxable services in respect of which service tax shall be paid by the recipient of services (on reverse charge method) under the Finance Act.

3. General exemptions

Other than the threshold exemption to small service providers, certain relevant exemptions from payment of whole of the amount of service tax are provided by way of Notifications, as under:

  • Services provided to the United Nations or specified international organizations.
  • Services provided to a developer of Special Economic Zone or a unit in Special Economic Zone. However, under the present provisions (vide Notification No. 12/2013 dated 01.07.2013), specified service received by SEZ unit/ Developer is ab initio exempt when used exclusively used for the authorized operations. For this purpose, the SEZ unit/Developer would need to seek an approval from the Approval Committee, of the list of services as are required for the authorized operations. In relation to the specified services that are not exclusively used for authorized operations, the SEZ unit/ Developer shall be liable to first pay service tax and subsequently claim refund thereof.
  • Exemption to taxable service provided to Foreign Diplomatic Missions or Consular Post for official use and also for personal use or for the use of their family members.
  • Certain specified taxable services received by an exporter of goods and used for export of goods (vide Notification No. 41/2012-ST dated 29.06.2012).

4. Compliance under Service Tax

  • Registration to be obtained from jurisdictional Central Excise authorities.
  • Every person who has provided taxable service of value exceeding Rs 9,00,000 (Indian Rupees Nine Hundred Thousand), in the preceding financial year, is required to register with the concerned superintendent of Central Excise in Form ST-1. In case a recipient of service is liable to deposit service tax (under reverse charge method), he is also required to obtain registration.

5. Provision for centralized registration

  • Service provider located in one or more premises having centralized accounting or centralized billing system, may register such premises or office from where such centralized billing or centralized accounting systems are located and thus, hold centralized registration. The Commissioner of Central Excise in whose jurisdiction centralized account or billing office of the assessees exists, is empowered to grant centralized registration.
  • Payment of tax is on monthly/quarterly basis, depending upon the category of the assessee.
  • Filing of half-yearly service tax returns in Form ST-3. Return for half year ending on 30th day of September and 31st day of March is required to be filed by the 25th day of October and 25th day of April, respectively.
  • Assessment of service tax is on self-assessment basis.

6. CENVAT Credit

  • Credit under central excise and service tax has been extended across goods and services. The CENVAT Credit Rules, 2004 provide inter alia for availment of the credit of (i) the service tax paid on input services; (ii) central excise duties paid on inputs/capital goods; and (iii) additional customs duty leviable under s3 of the Customs Tariff Act, equivalent to the duties of excise. Such credit amount can be utilized towards payment of service tax by an assessee on their output services.
  • Such credit can also be availed by a manufacturer and utilised for discharging their liability towards service tax and/or central excise duties.

7. Export and import of services

The Export of Service Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (Import of Service Rules) have been superseded by the Place of Provision of Services Rules, 2012 (PoP Rules). Presently, the PoP Rules govern where a service is provided/deemed to be provided and accordingly determine whether a service qualifies as export/ import of service.

8. Advance ruling

  • Advance ruling means the determination, by the Authority, of a question of law or fact specified in the application regarding the liability to pay service tax in relation to a service proposed to be provided by the applicant.
  • Authority for Advance Rulings for Central Excise, Customs and Service Tax is meant to provide binding ruling on the important issues such that intending applicants will have a clear-cut indication of their duty/ tax liability in advance.

Questions on which an advance ruling can be sought

Advance rulings, concerning service tax matters, can be sought in respect of:

  1. Classification of any service as a taxable service under Chapter V of the Finance Act;
  2. Valuation of taxable services for charging service tax:
  3. Principles to be adopted for the purposes of determination of the value of the taxable service under the Finance Act;
  4. Applicability of notifications issued under the Finance Act;
  5. Admissibility of credit of duty or tax in terms of the rules made in this regard; and
  6. Determination of the liability to pay service tax on a taxable service under the Finance Act.

Persons eligible to apply for an advance ruling

  1. A non-resident setting up a joint venture in India in collaboration with a non-resident or a resident;
  2. A resident setting up a joint venture in India in collaboration with a non-resident;
  3. A wholly owned subsidiary Indian company, of which the holding company is a foreign company, who or which proposes to undertake any business activity in India;
  4. A joint venture in India;
  5. A resident falling within any such class or category of persons, as the Central Government may, by notification in the official Gazette, specify in this behalf, and which or who, as the case may be, makes application for advance ruling under sub-s (1) of s 96C of the Finance Act.

9. Administration

The service tax law is administered by the Central Excise Commissionerates functioning under the Central Board of Excise & Customs (CBEC), Department of Revenue, Ministry of Finance, Government of India.

To read this article in full, please click here.

© 2015, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).

The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.

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