India: Indian Service Tax

Liabilities, exemptions and credit issues
Last Updated: 10 January 2008
Article by Aliff Fazelbhoy and Kruti Desai

This article was originally published in The Euromoney Corporate Tax Handbook 2007. For further information, please visit

Unlike many countries which have a uniform goods and services tax (GST), India has a separate tax on sale of goods in the form of VAT or sales tax and a separate tax on provision of services in the form of service tax. Service tax was introduced in India under Chapter V of the Finance Act, 19941 (the Act) and still continues to be governed by that Act as amended from time to time by subsequent Finance Acts. There is no separate enactment governing service tax. Service tax is constantly developing in accordance with changing tax rates, the number and scope of services falling within the taxability net, new rules, circulars and notifications being framed and issued. Thus in dealing with service tax, various issues arise at every stage of the determination of service tax liability, for instance, whether a service is taxable, who is liable to pay service tax and which services are exempt. Some of these issues are discussed below.

When is a service taxable?

Although the Act does not define the term service, it provides an exhaustive list of services that are taxable services under section 65(105) of the Act and only these services are subject to the levy of service tax. All other services not included in the list of taxable services are exempt from service tax. Presently there are about 100 services which are chargeable to service tax, many of these having various sub-categories. Most services are taxable, with notable exceptions including legal services, print media, ocean transport, education and medical services. Further, in respect of each taxable service, definitions have been provided elaborating which type of services would come within the ambit of that taxable service and which services are excluded. For instance, in the case of intellectual property service provided by the holder of intellectual property right, the definition of intellectual property right clearly excludes copyright, and services in relation to copyright would therefore not be taxable. Similarly in the case of sponsorship service, sponsorship of sports events is expressly excluded from the scope of the service tax.

Some general exemptions are provided in respect of:

  1. services provided to the United Nations;
  2. services to units in and developers of Special Economic Zones;
  3. services rendered free of cost; and
  4. services prior to the effective date of the service being included as a taxable service, even if payments are realised later.

If taxable, how is the service classified?

Section 65A of the Act provides the rules for classification of services in cases of both single and multiple supplies and provides that where a taxable service is prima facie taxable under two or more categories, the basic principles of classification are as follows:

  • the category which provides the most specific description is preferred to a category providing a more general description;
  • composite services consisting of a combination of different services, which cannot be classified as above, are to be classified under the category which gives them their essential character; and
  • where the above two methods fail, the classification is to be under the category which occurs first in the statute i.e. which defines taxable service amongst those categories which merit equal consideration. Although the rate of service tax applicable to all taxable services is the same, classification becomes important for various reasons, for example the effective date of the service becoming taxable and the applicability of special notified exemptions.

How are rates and values determined?

The rate of service tax started at 5% and has been gradually increasing over the years. Currently effective from April 18, 2006, service tax is levied at the rate of 12.24% (12% base rate plus 2% education cess) on the value of taxable services. However, since service tax is chargeable on the value of the taxable service, there is no tax payable on a service provided free of cost. Though the value of service is most readily determined in financial terms, it can also be judged where the consideration is in kind or not ascertainable under section 67 of the Act. Rules have been prescribed for the determination of value of the service where the whole or part of the consideration is in kind, called the Service Tax (Determination of Value) Rules, 2006.

Who is liable to and how can you obtain registration?

Although, service tax is an indirect tax, the liability to pay is primarily placed upon the service provider. In practice, the service provider shifts this burden on the service recipient by charging the service tax amount in the invoice raised for the services provided. This liability to pay service tax is reversed towards the service recipient under the reverse charge mechanism, in case of import of service (discussed below), which makes the service recipient liable to pay service tax. The person liable to pay service tax is required to apply for registration to the service tax authorities within 30 days from the date of commencement of the business of providing the taxable service.

When can input tax credit be claimed?

In India, input tax credit is referred to as CENVAT credit and is dealt with under the CENVAT Credit Rules, 2004 (CENVAT Rules). The CENVAT Rules apply to all taxable services, irrespective of the category of taxable services. CENVAT credit is admissible to a manufacturer who produces taxable goods and to a service provider who provides a taxable output service. A service provider is eligible to claim CENVAT credit on the duty paid on inputs and capital goods, and service tax paid on input services used for providing output services. Since the objective of CENVAT credit is to prevent the cascading effect of taxation, there can be no claim of CENVAT credit in cases where the output is exempted i.e. where the service is not a taxable service, or is exempted. Detailed rules have been framed with regard to the time at which CENVAT credit can be used and the amount availed depends on whether the CENVAT credit is claimed for inputs, capital goods or input services and also in cases of composite services i.e. when a taxable service and a non-taxable service are being provided by the same service provider.

What about import service taxes?

Import of services has been made subject to the reverse charge mechanism in certain cases under section 66A of the Act read with the Taxation of Services (provided from outside India and received in India) Rules, 1994 (Import Rules). The reverse charge mechanism would apply to a taxable service if:

  • the service is provided by a person who has established a business from which the service is provided, in a country outside India; and
  • is received by a person who has his place of business, fixed establishment, permanent address or usual place of residence, in India.

The above taxable service is to be treated as if the service recipient had himself provided the service in India, and accordingly all the provisions of Chapter V of the Act are to apply. Under the Import Rules the services are categorised into three sections and are taxed if the conditions in respect of each category are fulfilled as under:

  • in respect of the services provided in relation to immovable property, the property must be situated in India;
  • in respect of performance related services, the services must be wholly or partly performed in India; and
  • in respect of other services, the services must be received by a recipient located in India for use in relation to business or commerce.

Taxability in case of export of service

There is no tax liability in case of export of service, if it meets the various conditions prescribed under the Export of Services Rules, 2005 (Export Rules) as follows:

  • the service must be delivered outside India and used outside India; and
  • the payment for the service is received by the service provider in convertible foreign exchange.

In addition to the above, category based conditions have also been laid out:

  • in respect of the services provided in relation to immovable property, the property must be situated outside India;
  • in respect of performance related services, the services must be wholly or partly performed outside India; and
  • in respect of other services provided in relation to business or commerce, the services must be received by a recipient located outside India.

The Export Rules also provide a rebate of the whole of the excise duty paid on excisable inputs, or the whole of service tax and cess paid on all taxable input services used in providing taxable service exported subject to certain conditions.


The service tax provisions are thus not as complex as they may appear to be.


  1. The Finance Acts are acts which are passed every year to amend or introduce provisions relating to the levy of both direct as well as indirect taxes.
  2. Duty paid on manufactured goods.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.