Service tax is a indirect tax imposed on specific services (taxable services) provided by a service provider (company, individual, firm, and so on).
Service tax was first brought into force with effect from 1st July, 1994. All service providers in India, except those in the state of Jammu and Kashmir, are required to pay a service tax in India.
Initially only three services were brought under service tax and the tax rate was 5%. Gradually more services came under the ambit of service tax.
The rates currently applicable are listed below:
● Service tax - 14%
● Swachh Bharat Cess - 0.5%
● Krishi Kalyan Cess - 0.5%
Initially, service tax was chargeable on the basis of realisation, that is, receipt of the consideration for the services provided/to be provided (in case of advance receipts). With effect from 1 April 2011, the Point of Taxation Rule was introduced for the collection of service tax.
Point of taxation refers to the point of time when a service shall be deemed as provided.
According to this rule, the point of taxation shall be either of the following dates, whichever is earlier:
● Date of issue of the invoice
● Date of receipt of payment
The liability of paying tax to the Government is on the service provider, that is, the person providing the service, and in some cases, the liability is on the service receiver.
Example: Royal Agency provided advertising services of Rs. 1,00,000 to SysImage. On the service amount of Rs.1,00,000, Royal Agency is liable to pay the tax of Rs. 12,360 @ 12.36% (12% of Service Tax, 2% of Education Cess, 1% of Secondary Education Cess).
Service tax is applicable on taxable services:
1. Provided and taxable in the hands of service provider.
2. Received and taxable in the hands of service receiver: Generally it is the service provider who is liable to collect Service Tax from his customer/client and pay the same to the Government. But Section 68(2) empowers the Government to notify the services with regard to which the service receiver would be held liable to pay Service Tax to the Government.
For the services mentioned below, the service receiver is liable to pay Service Tax (as per Notification 36/2004 ST dated 31.12.2004 as amended from time to time):
● Goods Transport Agency service
● Business auxiliary service of distribution of mutual fund by a mutual fund distributor or agent
● Sponsorship service provided to any body corporate/firm
● Taxable services received by any person in India from abroad
● Insurance auxiliary service by an insurance agent
With effect from 1 July, 2012, a negative list-based system of tax on services was introduced:
● Negative list is a list of services that are not subject to service tax.
● All services other than those featuring in the negative list fall under the purview of taxable services.
The definition of taxable service is different for each class of services, for example, in case of a stock broker agency, any service provided to an investor by buying or selling securities listed on a recognised stock exchange will be a taxable service.