Service Tax: What is Service Tax?

To brush up on your knowledge, an indirect tax is levied on goods and services before they reach customers, who then pay it as a part of the market price.

What Is a Service Tax?

A service tax is levied by the government on certain types of services, such as those provided by travel agencies, restaurants, cab services, cable service providers, etc. The service provider is responsible for collecting and paying the tax to the government, contributing to revenue generation. 

The service tax was introduced as per Section 65 of the Finance Act in 1994. Until 2012, indirect taxes were levied only on specific services. Later, their scope was expanded to include services provided by air-conditioned restaurants, hotels, and inns that provide short-term accommodation.

A service must fulfil the following 3 conditions to be taxable in India. 

• The service is offered or promised to be offered by one individual/entity to another. 
• The service was provided or promised to be provided in the taxable territory of India.
• The service doesn’t belong to the negative list or is one of the special services exempt from the list. 

What Is the Rate of Service Tax?

The service tax rate is subject to change. The Finance Ministry is responsible for deciding the tax rate, and the changed rate is announced during the budget session of the parliament. 

The service tax is calculated on a cash basis for individual service providers and an accrual basis for companies. It is payable when the annual value of services provided is more than ₹10 lakh. 

The latest service tax rate in the country is 15%, including 0.5% ‘Krishi Kalyan’ cess and 0.5% ‘Swacch Bharat’ cess. The rate increased from 12.36% to 14% in 2015 and 15% in 2016. 

The tax is calculated as a percentage of the charges paid or received against a receipt for the provisioning of services, with some exemptions. Some examples of exemption are a 60% exemption on air transportation fees, a 30% exemption on chit funds, and a 70% exemption on certain services offered by travel operators. Hence, the tax is calculated only on the residual amount.  

Let’s understand the service tax calculation with an example. 

Suppose the total taxable service received is ₹10,000. Hence, the calculation of service tax is done as shown below.

Service tax rate = ₹(10,000 * 14%) + (10,000 * 0.5%) + (10,000 * 0.5%) = ₹1,500

Let’s now assume that the service qualifies for a 70% exemption. In such a case, the total payable service tax will be:

Chargeable amount= ₹(10,000 * 30%) = ₹3,000

 Service tax = ₹(3,000 * 14%) + (3,000 * 0.5%) + (3,000 * 0.5%) = ₹450

What Is The Applicability of Service Tax?

A complete list of services under the Service Tax list is available under Section 65B (44) of the Finance Act of 1984. In total, 119 services are included in the list. There is also a Negative List of services that are exempt. It is mentioned under Section 66D of the Finance Act. It also contains a list of ‘Special Services’ that are exempt from service tax. 

Returns for Service Tax

Initially, assessees falling under the category of service tax were required to file returns on a half-yearly basis. But the Central Board of Excise and Customs, vide notification number 19/2016, introduced the requirement of filing annual returns. It has introduced an online payment gateway, the Electronic Accounting System in Excise and Service Tax (EASIEST), to simplify online payment of service tax.

To pay the tax, you must visit the website of NSDL-EASIEST and select E-payment. Enter the 15-digit assessee code received from the jurisdictional Commissionerate to access your service tax details. You must make the payment through the net banking system of your bank. After the payment is done, you will receive a challan, or acknowledgement/proof of your payment.  

Service Tax Exemption

You can get service tax exemptions under the following conditions:

Turnover is under ₹10 lakh. You can claim service tax exemption if the total taxable value of the services provided was less than ₹10 lakh in the previous year. This exemption is not applied if the service value exceeds ₹10 lakh. 

CENVAT Credit: CENVAT credit is not available for ‘specified input services’, exempt from service tax. Further, CENVAT credit is also not available on capital goods received during the period of exemption.   

Service Tax Penalties

Under Sections 76, 77, and 78 of the Finance Act, 1994, the government may charge penalties for failing to meet the following conditions:

• A penalty is charged for non-payment or delay in paying service tax.
• For failing to file ST-3 returns by the due dates, which are October 25 and April 25. In such cases, you may have to pay a penalty of up to ₹2,000 depending on the period of delay.
• If you fail to appear before the Central Excise officer when called or furnish information, you may be charged a penalty of ₹5,000 or ₹200 per day, whichever is higher.
• When you are a service provider but fail to register for the service tax, a penalty is charged under Section 77 of the Finance Act, 1994. The penalty can go up to ₹5,000. 
• Failing to keep and maintain records of accounts and other documents necessary for filing service tax may attract a penalty of up to ₹5,000. 
• A penalty of up to ₹5,000 is charged for non-compliance with online service tax payment.
• You may be charged a penalty of up to ₹5,000 for issuing the wrong invoice or failing to provide supporting documents.
• A penalty is charged for reporting incorrect information about the services provided or issuing a misstatement.  

Final words 

Although the service tax has been cancelled by the GST, it is still useful to know and understand it. Keep following the Knowledge Centre, an investor education section, of Angel One, for more useful and insightful articles on the market and the Indian economy.

FAQs