A person/firm providing a service that comes under the service tax category has to pay service tax. Service tax is to be shown separately in the invoice and is payable based on the payment realized and not on the total amount shown in the invoice. Similarly, when you buy a service that falls under service tax category, you avail service tax credit based on the payment made. So, you pay service tax on the services that you sell and get credit on the service tax payable when you buy a service.
While you pay service tax on sale of services that come under the service tax category, you can adjust service tax credit availed on purchase of services (Buyer). This deduction is called adjusting credit against service tax. The difference between the service tax that you have to pay for selling services and the service tax credit on purchases that can be adjusted is the payable service tax.
Service tax (sales) that is adjustable against service tax credit (purchases) is also called availing input credit. Let us look at an example.
Service tax is calculated on the assessable value. The assessable value is the service charge value minus abatement and expenses.
The government has given a deduction on the value to be considered for service tax on a few categories of services. For example, some categories of services include material value. A caterer has to procure materials to prepare food products and sell services. Service tax is charged on the total amount for the service and does not include the rate of the materials procured. Hence a deduction is provided. This deduction from the service charges to be considered for service tax is called abatement. Abatement is either a percentage of the service charges.
Example:
a. Charge on Service Rs. 10, 000/-
b. If an abatement of 30% is applied, then abatement Rs. 3, 000/-
c. Here, the assessable value is (a-b) Rs. 7, 000/-
Therefore, service tax @ 10 % on Rs.7, 000/- Rs. 700/-
Expenses can be deducted from the total service charge to get the taxable amount. Expenses are allowed only for those services which are provided by the assessee as a Pure Agent.