Understanding Service Tax in India

Service tax was a tax levied by the Central Government of India on services provided or agreed to be provided excluding services covered under negative list and considering the Place of Provision of Services Rules, 2012 and collected as per Point of Taxation Rules, 2011 from the person liable to pay service tax. Person liable to pay service tax is governed by Service Tax Rules, 1994 he may be service provider or service receiver or any other person made so liable. It is an indirect tax wherein the service provider collects the tax on services from service receiver and pays the same to government of India. Few services are presently exempt in public interest via Mega Exemption Notification 25/2012-ST as amended up to date and few services are charged service tax at abated rate as per Notification No. 26/2012-ST as amended up to date. Presently from 1 June 2016, service tax rate has been increased to consolidated rate at 14% +0.5%+0.5%= 15% of value of services provided or to be provided. The service tax rate now is consolidated rate as education cess and secondary higher education cess are subsumed with 2% of “Swach Bharat Cess (0.50%)” has been notified by the Government.

Service tax in India was introduced in 1994-95 to correct the asymmetric treatment of goods and services in the tax framework and to widen the tax net. Need to introduce service tax was felt due to the fact that service sector contributed to around half of GDP but it wasn’t taxed. The numbers of services liable for taxation were gradually raised from 3 in 1994-95 to virtually all service in budget 2012-13 except for the services enlisted in the negative list. The negative list includes the services by Government or a local authority, services by the Reserve Bank of India, Services by a foreign diplomatic mission located in India, services relating to agriculture, Service of transportation of passengers, Funeral, burial, crematorium or mortuary services etc.   

In the last eight odd years, after a modest beginning, service tax had become one of the most important sources of government revenue. Budget 2012-13 increased the service tax rate from 10 percent to 12 percent. Already, a cess is imposed on all indirect taxes including service tax to finance secondary and higher education. In 2011-12, Rs 95,000 crores are expected to mop up through service tax and for 2012-13, target is to collect as much as Rs.1.24 Lakh crores. The increase in service tax is opposed by different section of the business community.     

At present, service sector contributes more than 55 percent of GDP and its share is likely to increase in future as it is poised to grow between 8-10 percent in next decade along with the reduced share of primary sector. This offers tremendous revenue potential to the Government. It is expected that in due course, service tax would reduce the tax burden on international trade (Customs duty) and domestic manufacturing sector (Excise duty). So a planned growth of service tax would be commensurate with the goals of economic liberalization and globalization. This process requires levy of taxes on new services without substantial rise in the rate or cost of collection.The service tax promises many opportunities as well as challenges to realize the opportunities. For instance, increased revenue through service tax will help in bridging the fiscal deficit, finance the social services, reduce the burden on commodity taxes etc.  

The challenges include providing more simplified tax administration in the country which will reduce the tax evasion. Further, department should intensify the field survey operations to ensure that all taxable service assessees are brought into the tax net and service tax due from them are collected without hitch. While the basic tenet of voluntary compliance of service tax law has to be adhered to, the habitual evaders of service tax must be booked for appropriate action under the law. Effective use of Audit and Anti-evasion tools for ensuring the compliance on the part of the assessee and curbing the instances of irregularities and tax evasion are the need of hour. Greater emphasis should be laid on training the staff in Information Technology skills necessary to carry out effective, systematic and result oriented analysis of data available in the system, to achieve the target. Electronic Tax Administration (ETA) system for service tax should be effectively implemented so that service tax could be administered as a pioneer e-tax of the country. Adequate staff must be deployed along with suitable infrastructure and conveyance to implement service tax law effectively.  

In future, service tax will be integrated with commodity taxes to give rise to the Goods and Service Tax (GST). The proposed Goods and Service Tax is the part of the tax reforms that centre around evolving an efficient and harmonized consumption tax system in the country. Presently, there are parallel systems of indirect taxation at the Central and State level. The existing service tax system poses an imminent challenge to reform its synergies to eventually harmonize itself in the GST regime. Successful integration of goods and service tax would give India a world-class tax system and will bring in improved tax collection. In a way, it will boost our economy and enable us to compete at the global front.    

As a result, our system will eventually match the international standard in the sphere of indirect taxation.  It will also end the long standing distortions of differential treatments to the manufacturing and service sectors. GST would be a single comprehensive indirect tax to be levied on goods and services. It would be levied at every production and distribution chain with the eligibility to claim indirect taxes paid on procurement chain. Under the current regime, there is a fractured credit mechanism where businesses don’t get credit for all the taxes they pay. The effort to prepare for a smooth integration with the GST without any hardship to public is a big challenge, which needs to be handled at the field as well policy level. GST is the future of all indirect taxes in India for which a consensus is needed between the central and state governments. It was supposed to be implemented from 1 April 2010 but is postponed every year due to lack of consensus. The delay in the implementation is causing loss to the tune of thousands of crores every year which could have gained in by increased efficiency. The central government should come forward with some form of incentive driven plan to bring the GST regime in the country which poised to put the fiscal administration of the country at higher level.