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 www.euromoneyyearbooks.com/handbooks

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.

Conclusion

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

Notes:

  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 Mondaq.com.

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

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions