Service Tax – An overview & Future Outlook

Service Tax, introduced from the financial year 1994-95 now covers as many as 41
services within its ambit. Service sector, which has an average annual growth rate of
value addition of 7.9%, contributes nearly 50% of the GDP. The Economic Survey 2001-
2002 observed that bringing more services under the tax net can offset the likely revenue
loss through lower custom tariff. Finance Act, 2001 added 15 new services to the list of
taxable services with effect from 16-7-2001 & it is expected that coming budget will add
further services under the tax net. We are moving towards a total value added tax regime
which was partially expected to come into force with effect from 1st April, 2002 replacing
the local sales tax in about 17 states. However due to failure of reconciliation between the
center & the states regarding some key issues, like amendment in Central Sales Tax
regarding vatability of Central Sales Tax against liability of local sales tax & loss of
revenue to the state exchequer due to introduction of value added tax, it could not be
introduced. However it is expected to come into force with effect from 1st April, 2003 &
by that time service tax may also be made vatable. Vatability of service tax will compel
the reduction in loss of revenue through tax evasion. To reduce the tax evasion in respect
of service tax government has already taken some significant steps like introduction of
service tax audit in the mode of Canadian system of excise audit introduced in India from
financial year 2000 & collection of data from various associations of service tax
providers like ICAI, ICSI, ICWAI, Internet Service Provider Association of India, Stock
Exchanges, Council of architecture etc. Now let us discuss about some basic concepts of
service tax regarding taxability, exemptions, payment, assessment, etc.

Taxability of service tax

Service Tax is charged at the rate of 5% of the gross amount charged from the
client/customer by the service provider in relation to the services provided subject to
exemptions, wherever applicable.

Payment of service tax

Service tax on the value of taxable services received during a calendar month should be
paid by 25th of the following month in case of all the assesses except those who are
individuals, proprietorship firms or partnership firms for whom payment is to be made by
25th of the month immediately following the quarter.

Is service tax to be paid on the basis of bills raised or payment received ?

Service tax is to be paid on the basis of payment received. However if the amount of
service tax is not paid by the client / customer but otherwise bill amount in respect of
services provided is paid by the client / customer then the service tax in respect of amount
collected is to be paid by the service provider as the liability to pay service tax is on the
service provider and not on the client / customer. Service tax is an indirect tax so it can be
recovered from the client / customer but it does not mean that liability to pay service tax
is on the client / customer. However if full payment is not received in respect of a bill and
the bill is finally settled at a lesser amount than the liability to pay service tax is only to
the extent of payment received. In such cases it is advisable that assesses should amend
the bill, either by rectifying the existing bill or by issuing a revised bill and by properly
endorsing such change in the billed amount. Otherwise a demand notice may be raised by
the department in respect of full billed amount.

Adjustment of tax liability in case of excess payment of service tax

Where an assessee has paid service tax in respect of a taxable service which is not so
provided by him either wholly or partially, for any reason, the assessee can adjust the
excess service tax co paid by him calculated on a pro rata basis against his service tax
liability for the subsequent period. However the assessee is required to file details in
respect of such suo moto adjustments done by him at the time of filing the service tax
returns. Now let us understand the meaning of adjustment on a pro rata basis.

If an individual / proprietorship firm or partnership firm has paid an amount of Rs.

15000/- in excess of service tax liability during previous half year ending period, than
adjustment can be done @ 7500/- per quartet. If assessee other than above category has
paid an amount of Rs. 15000/- in excess of service tax liability during previous half year
ending period, than adjustment can be done @ 2500/- per month in his subsequent tax
liability.

Date of payment in case of payment by cheque

It has been observed that in many cases, the assesses pay the tax by cheque on the last
date or very close to such date. In such cases, many a times, the cheque is encashed and
credited to the government account after the due date. In such cases department has been
levying interest & penalty. This was because of the Rule 79(1)(a) of the Treasury Rules
which states that until the cheque is cleared, Government cannot admit that the payment
has been received.

It has been decided by the Government of India in the case of Sahara Airlines Limited vs
Commissioner of Customs that a harmonious reading of the provisions of Rule 7 of the
Central Government Account ( Receipt & Payment ) Rules and Rules 79 & 80 of the
Treasury Rules makes it clear that if the payment is made by cheque & if the cheque is
not dishonored later, the payment shall be deemed to have been made on the date when
the cheque was handed over to the Government’s bankers.

The ratio of the above cited decision would apply mutatis – mutandis to the payment of
service tax also.

Exemptions

There is no minimum limit or basic exemption limit to small service providers on the
basis of value of taxable services rendered as yet. Following exemptions are available to
the service tax providers :-
 1) Taxable services rendered in India by an assessee to a clent in respect of overseas
projects for which payment is received in non repatriable convertible foreign
exchange are exempt from levy of service tax.
2) Serive tax is fully exempt in recpect of payments of which is received in India in
non repatriable convertible foreign exchange whether the service is received in
India or abroad.
3) In certain cases like insurance, telephone, telegraph, air travel, courier,
advertisement etc. services provided to UN, notified international organizations or
notified diplomatic missions, service tax is exempt.
4) Software engineering enjoys a complete exemption from service tax.

Returns

The service tax assessees are required to file half yearly return within 25 days from the
last day of the half year and should be accompanied by copies of tax challans as evidence
of payment of service tax. Thus returns for half year ending