HISTORICAL BACKGROUND OF SERVICE TAX IN INDIA

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THIS ARTICLE WAS WRITTEN BY SPARSH MEHRA, A STUDENT OF NUJS.

On July 1994, service tax came into India with the Recommendation of Dr. Raja Chelliah Committee. Service tax was emphasized by finance minister Dr. Manmohan Singh. According to him service tax accounts for 40% of GDP. Earlier the service tax was only apposed on the three services. In this paper, I will first explain the meaning of the service and how is it related to service tax. There is the need for service tax in legalisation economy will be discussed below. When the new service tax came into force the government manage to collect Rs. 407 crores at the end of 1st year. After this, I will discuss about the amendments in service tax and how they are impacted on the negative list of the services. With the introduction of this list under Section 66-D in the act, many services were exempt from the levy of service tax. On the other hand Section 66B would now included any service as defined by law with the exception of those mentioned in this list. The Government not only increased the coverage of this tax but also reduced the tax burden on many services which would have been taxable under the previous service tax regime. The definition to the finance act, service tax rules, trade notices and service tax orders will also be discussed in this paper. At the end I will stay the definition of service tax return, records and invoice

INTRODUCTION

The service tax came into India on 1st July 1994 with the Recommendation of Dr. Raja Chelliah Committee. That was a milestone in the Indian tax history. On July 1994, there were only three types of services under service tax was introduced.[1] This world telephone services stock brokers services and nonlife insurance services. Service tax is an indirect tax that is levied on the provision of services. Like other indirect taxes, the service provider recoups the tax from the person who is availing the service.[2] This tax is levied on all services specified by the Central government except those listed out under section 66-D[3] of the Finance Act, 1994, which are known as negative services.[4] The tax was introduced by Dr. Manmohan Singh in his speech for the 1994-95 budgets. Dr. Singh emphasized the need for a taxation regime applicable to the service sector in light of the fact that it was contributing nearly 40% to the country’s GDP.[5] Raja J. Chelliah, as head of the Tax Reforms Committee of 1991, identified the need for reforms in Excise taxes among which he highlighted the services sector, which was previously untaxed. The tax was initially levied on three services at the rate of 5%. These three sectors were; Telephones, Non-life insurance and Stock-broking.[6] Subsequently many more services have been brought within the ambit of the tax through various amendments over the years.[7]

I.                   MEANING OF SERVICE

As per dictionary the service is defined as

“A valuable action, deed, or effort performed to satisfy a need or to fulfill a demand or an action of helping or doing work for someone”.[8]

According to me, service means a system under which public needs are supplied such as transport, communication, electricity etc and are serviced regularly. From taxation point of view one can say that services in activity which is carried by one person for some consideration and measurable in money.[9] Clause 44 section 65(B) of Finance act 1994, (as introduced by the finance act 2012) define the word services as

“Service means any activity carried out by a person for another for consideration and includes a declared service, but shall not include-

(a) An activity which constitutes merely,-

(i) A transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

(ii) Such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

(iii) A transaction in money or actionable claim;

(b) A provision of service by an employee to the employer in the course of or in relation to his employment;

(c) Fees taken in any Court or tribunal established under any law for the time being in force”.[10]

Service tax is a tax which is levied by Central Government of India. The services which are provided exclude the services which are under negative list and consider the place of Provision of Services Rules, 2012.

II.               THE NEED FOR SERVICE TAX IN A RAPIDLY LIBERALIZING ECONOMY 

In the early 90’s, the Indian Economy was nearing a meltdown which prompted wholesale changes in the country’s fiscal policy.[11] Taxation was one of the prime areas which needed a substantial overhaul and it was with this objective that the first ever Taxation Reforms Committee was set up under the chairmanship of Dr. Raja J. Chelliah. Dr. Chelliah was tasked with the duty of identifying key areas in the current taxation regime with respect to the tax base, administration and improving the Centre-State relationship in fiscal matters.[12] Amongst the many reformative measures that the committee suggested, widening the tax base was of particular importance to the committee.[13] With the economy opening up, many new streams of revenue had popped up but the outdated tax regime present at that moment meant that the Government could not use these new avenues to its and the economy’s advantage.[14] With the service sector opening up and already contributing handsomely to the GDP of the country, the committee suggested the implementation of a tax on certain services rendered. Thus, initially 5 services were identified for the implementation of this new tax. This list was brought down to 3 services and henceforth Service tax came into being with a levy of 5%. Constitutionally, the authority to levy Service tax was granted by Entry no. 97 of Schedule VII which empowers the Union government to make measures on any item, specifically taxes, not covered under lists 2 and 3.[15] The Central government passed the Finance act, 1994 in pursuance and embedded the provisions for Service tax in Chapter V of the act.

Section 65[16] of the act defines taxable services and Section 66 is the charging section of the said act. Although the 92^nd Constitutional amendments introduced entry no. 92-C in Schedule VII[17] further enabling the Union and the States to collect and appropriate service tax, inserted in a new Article 268-A[18], the provisions are not yet effective the authority to levy the tax still flows from entry no. 97.[19] In the budget 1994-1995, Dr Manmohan Singh introduced service tax as per 5% which will contribute to the 40% of GDP. Dr Manmohan Singh stated that-

“This Budget is inspired by a firm conviction that India has all the material and human resources to be a front-ranking nation of the world. We are on the threshold of a new century, indeed a new millennium. There are tremendous opportunities, provided we have the wisdom and foresight to seize them. There are also immense dangers if we falter or appear indecisive”.[20]

In the budget 2002-2003, ten more services were added to the Service tax.[21] Where is in the budget of 2003-2004, seven more services and three existing services extended. Whereas, next year then more services were added and there was very introduction of three existing services. Under Finance Bill, 2005, 91 services when expanded.[22]

III.            AMENDMENTS TO SERVICE TAX AND THE IMPACT OF THE “NEGATIVE LIST OF SERVICES”

After the introduction of the tax in pursuance of a new tax regime, the Government managed to collect a very modest amount of Rs. 407 crores at the end of the first year.[23] Subsequently, for the next few years the collections did go up with a sum of Rs. 3,302 crores going to the Government.[24] But as the list of services kept expanding and the rates itself increasing, the tax collections also went up considerably, with the amount reaching approximately 61,000 crores in 2009.[25].

Although frequent amendments were made to Chapter V of the act to increase the collections, administrative issues started creeping in as in more than a few instances overlaps started occurring under service heads with doubts on whether some services were already covered under more general heads.[26] Many were of the view that the lack of comprehension in the taxation of so many numerous heads of services was affecting the potential collections even though the coverage was being widened.[27] It was with the intention of addressing this pressing issue that 2012 amendments introduced the ground breaking list of “negative services”, which in effect legislated that all services would be taxed with the exception of those mentioned in this list.[28]

The service tax regime has seen many changes since it was introduced in 1994 whether they are the inclusion of new services or changes in the administrative procedures. Over the years, changes to service tax have been brought about the following ways[29]-:

1. Changes to the Finance Act:-

The Finance Act of 1994[30] has undergone a few changes through the introduction of subsequent amending Finance Acts.[31] For example, the Finance Act of 2003[32] introduced Chapter VA to deal with advanced rulings.[33] Other prominent examples include the 2004 act introducing education cess and the 2007 act made effective the “secondary and higher education” cess through Chapter VI.[34] More recently, the Finance Act of 2015 introduced the “Swachh Bharat” cess and the 2016 act made effective the “Krishi Kalyan” cess thereby make the effective rate of service tax 15% (14%+0.5%+0.5%).[35]

2. Service Tax rules:-

The Central Government has issued such rules as the Service Tax Rules 1994, Service Tax (Determination of Value) Rules 2006 and Point of Taxation Rules, 2011 through the power invested in them via Section 94[36] of Chapter V and Section 96-I of Chapter VA of the Finance Act, 1994. These rules have been introduced to better carry out the provisions of the act. These sections along with Section 93[37] also empower the Central Government to issue notifications from time to time.[38] These notifications have a wide range of applications, from exempting certain services from taxation to issuing new rules for implementing the Service Rules.[39]

3. Trade notices:-

The Ministry of Finance (MoF) and the Central Board of Excise and Customs (CBEC), from time to time, issue instructions for effective implementation and administration of the various provisions related to service tax.[40] These instructions are forwarded to the Commisionerates of Excise and Service Tax, which then forward these instructions in the form of notices to the various field officers.[41] These notices are sent out to trade associations whereupon they receive dissemination of the applicable notifications and orders which instruct them on jurisdiction, designated banks for collection of tax and other clarifications related to the service tax procedures.[42]

4. CBEC circulars and office letters:-

 The Central Board of Excise and Customs issues departmental circulars or instructional letters that further clarify the intent of the service tax law and rules.[43] These are also meant to be read with the statutory provision and they reveal the scope of the various schemes and administrative procedures in more detail

5. Service tax orders:-

The CBEC is empowered to appoint Central Excise officers under Rule 3 of the Service Tax Rules, 1994. These officers are appointed to exercise powers under Chapter V of the Act. Orders are circulated from time to time defining the jurisdiction of these officers.[44]

IV.              INTRODUCTION OF THE NEGATIVE LIST OF SERVICES AND ITS IMPACT ON THE REGIME:

In a ground breaking move, the Ministry of Finance decided to introduce the negative list of services through the Finance Act of 2012.[45] With the introduction of this list under Section 66-D in the act, many services were exempt from the levy of service tax. On the other hand Section 66B would now included any service as defined by law with the exception of those mentioned in this list. With this move, the Government not only increased the coverage of this tax but also reduced the tax burden on many services which would have been taxable under the previous service tax regime. In the initial list of 17 services, section 66D exempted most Government or local authority services.

Many services in both the public and private sector have been exempted. A few examples would be; educational services, trade of goods, advertising in print, gambling & lottery, services relating to the transport of passengers, funeral services and many others which were previously taxable. The CBEC then introduced a bigger list of negative services via notification no. 25/2012, 39 in total. This move was prompted with a view of securing public interest as most of the services are related to medical, vocational training and charitable services. Services that deal with the construction of public infrastructure have also been exempted via the notification as have many insurance services for the less privileged members of the society. Moreover, sub-brokerage services were exempted as well as certain mutual fund services.

This revolutionary step by the Government was seen as a very progressive move. Although the collection of service tax was at an all time high, the Union took this decision to ensure that the rapid expansion of the economy would not be deterred by an unnatural tax burden, with Small enterprises benefiting the most, and neither would the growing demand for public welfare suffer.

On the other hand, there have been concerns voiced that with such an expansion in the negative list so soon after its introduction, certain vested interests might be unnaturally represented[46]. Caution has been suggested with any further expansion of this list, with its numbers slowly reaching those that are present in the list of taxable services.

V.                SERVICE TAX RETURN, RECORDS AND INVOICE

1.     Service Tax Return

Every person should be liable to pay the service tax. The person who pays the service tax has to pay the tax and will have to submit half yearly return.[47] Half yearly return has to be submitted by every assesser on every 25th of the month. It should be followed by half a year and the first half should be from 1st April to 30th September and 2nd half should be from 1st October to 31st March.[48]

When the return is furnished after the date which is prescribed for the submission of such return the person who is liable to furnish to set return of the penalty for the period of the delay of 15 days as the take this time for the submission of such return and be on 15 days but not later than 30 days and we on 30 days for the days from the date is prescribed for the submission of substituted. The total amount of penalty of Return should not be exceeding by Rs. 20000.[49]

2.     RECORDS

According to the rule 5 of Service Tax Rules, 1994,[50] records includes all the computerised data and this data is stored as a record and is maintained under various laws which comes in to choose from time to time.[51] It is the duty of every assessee to furnish the superintendent of the central excise. All the reports which are collected shall be preserved for at least a period of 5 years immediately after the financial reasons are ended.[52] Further there are specific records that has to be maintained for the purpose of service tax. The assessee should maintain all the records at the service tax registered premises. Register premises are the premises where assessee has to provide taxation services. It is the duty of assessee that he has to ensure that there is the list of all the records maintained by him and the records of all the transaction should be written.[53]

3.     INVOICE

Under rule 4A,[54] the taxable services and the improved credit must be distributed only on the basis of a bill, challan or invoice.[55] Such bill must include documents which are used by the service providers for banking services and the consignment note which is not issued by the goods of transport agencies.[56] Under rule 4B, issuance is provided to a customer. The bill, invoice or the challan must be provided by every person to the taxable Services within 30 days. Whereas if there is a case of Banking and other financial service providers that the time is extended up to 45 days.[57] The services like construction services, telephone services, renting services provides more than 3 months of time. Under this provision for continuous supply of service, it is the duty of every person to provide taxable which shall issue invoice, bill or challan.[58]

Under Union budget 2015, an opinion was created so that the records in the electronic form and maintain and authenticate the same digital signature. Procedures were stated by the board.[59]

[1] Service tax had been first levied at a rate of five per cent flat from 1 July 1994 till 13 May 2003, at the rate of eight percent flat w.e.f 1 plus an education cess of 2% thereon w.e.f 10 September 2004 on the services provided by service providers. The rate of service tax was increased to 12% by Finance Act, 2006 w.e.f 18.4.2006. Finance Act, 2007 has imposed a new secondary and higher education cess of one percent on the service tax w.e.f 11.5.2007, increasing the total education cess to three percent and a total levy of 12.36 percent.

[2] CA Jaikishan Manghani, Service Tax in India: Brief History and Meaning of ‘Service’ Service Tax in India: (2015), http://taxguru.in/service-tax/service-tax-india-history-meaning-service.html (last visited Mar 16, 2017).

[3] The negative list shall comprise of the following services, namely:–

(a) services by Government or a local authority excluding the following services to the extent they are not covered elsewhere –

(i) services by the Department of Posts by way of speed post, express parcel post, life insurance and agency services provided to a person other than Government;
(ii) services in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport;
(iii) transport of goods or passengers; or

(iv) support services, other than services covered under clauses (i) to (iii) above, provided to business entities;
(b) services by the Reserve Bank of India;……………

[4] Id.

[5] Budget 1994-95 Speech of Shri Manmohan Singh, Minister of Finance, available at       http://indiabudget.nic.in/bspeech/bs199495.pdf, pg. 18, (last visited Mar 16, 2017).

[6] Supra note 1.

[7] Service Tax in India, Service Tax in India (2015), http://trak.in/india-tax/service-tax-india/ (last visited Mar 16, 2017).

[8] Definition of ‘Service Tax’, http://economictimes.indiatimes.com/definition/Service-tax (last visited Mar 16, 2017).

[9] Service Tax Meaning and Example, http://www.cakart.in/blog/service-tax-meaning-example/ (last visited Mar 16, 2017).

[10] Clause 44 section 65(B) of Finance act 1994.

[11] J. K. Mittal , Law, Practice & Procedure of Service Tax (8 ed.).

[12] History of Service Tax Rates, History of Service Tax Rates (2016), http://www.simpletaxindia.in/history-of-service-tax-rates/.

[13] Id.

[14] Shikha Katoch, An Overview Of Service Tax In India.

[15] A brief history of Service Tax in India, http://www.gstgurukul.com/2016/10/23/a-brief-history-of-service-tax-in-india/.

[16] Section 65 & 65 A substituted for section 65 ((w.e.f. 14.05.2003) by s. 159 of the Finance Act, 2003 (32 of 2003).

[17] Section 65 not applicable w.e.f.1-7-2012 vide Notification No.20/2012-ST, dated 5-6-2012.

[18] Service tax levied by Union and collected and appropriated by the Union and the States. – (1) Taxes on services shall be levied by the Government of India and such tax shall be collected and appropriated by the Government of India and the States in the manner provided in clause (2).

(2) The proceeds in any financial year of any such tax levied in accordance with the provisions of clause (1) shall be—

(a) Collected by the Government of India and the States;

(b) Appropriated by the Government of India and the States, in accordance with such principles of collection and appropriation as may be formulated by Parliament by law.

[19] Basic concepts of service tax, available at,

http://www.icaiknowledgegateway.org/littledms/folder1/chapter-2-basic-concepts-of-service-tax, pg 2, (last visited on 17^th Mar, 2017).

[20] Puja Mehra, The birth of Service Tax (1994-95)The birth of Service Tax (1994-95), A brief history of Service Tax in India, http://www.gstgurukul.com/2016/10/23/a-brief-history-of-service-tax-in-india/. (last visited Mar 17, 2017).

[21] Id.

[22] Supra note 13.

[23] Supra note 13.

[24] Latest Amendments, http://www.servicetaxonline.com/latest_amendments.php.

[25] Rohini Aggarwal, Service Tax Law & Practice, EG-1, 13^th Edition, 2015

[26] All amendments of service tax and their date wise applicability, http://www.caclubindia.com/articles/all-amendments-of-service-tax-and-their-date-wise-applicability-26345.asp (last visited Mar 19, 2017).

[27] Supra note 26.

[28] R. Mohan Lavi, 12 Service Tax.

[29] Supra note 2.

[30] The Finance Act is an important Act in India and the Central Government, through this Act, gives effect to financial proposals at the beginning of every Financial Year. The Act applies to all the States and Union Territories of India unless specified otherwise.

[31] Service Tax,      http://www.cbec.gov.in/resources//htdocs-servicetax/st-act-ason24oct2013.pdf;jsessionid=F9EB909B68C108830ECE13FE13D848E2.

[32] The Finance Act 2003 is an Act of the Parliament of the United Kingdom prescribing changes to Excise Duties, Value Added Tax, Income Tax, Corporation Tax, and Capital Gains Tax. It enacts the 2003 Budget speech made by Chancellor of the Exchequer Gordon Brown to the Parliament of the United Kingdom.

[33] Supra note 30.

[34] Mr. M. Govindarajan, Recovery Of Service Tax Under Section 87 Of Finance Act,1994 Recovery Of Service Tax Under Section 87 Of Finance Act,              1994, https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=6314 (last visited Mar 29, 2017).

[35] CENVAT Credit will be available on Krishi Kalyan Cess. CENVAT (central value added tax) credit, whose rules will be revised according the change in service tax, will be available to service providers on the cess they are pay.

[36] Power to make rules. – (1) The Central Government may, by notification in the Official Gazette, make rules for carrying out the provisions of this Chapter. 7(2) In particular, and without prejudice to the generality of the foregoing power, such rules may provide for all or any of the following matters, namely: – (a) collection and recovery of service tax under sections 66 and 68……..

[37] Power to grant exemption from service tax. – (1) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by notification in the Official Gazette, exempt generally or subject to such conditions as may be specified in the notification, taxable service of any specified description from the whole or any part of the service tax leviable thereon. (2) If the Central Government is satisfied that it is necessary in the public interest so to do, it may, by special order in each case, exempt any taxable service of any specified description from the payment of whole or any part of the service tax leviable thereon, under circumstances of exceptional nature to be stated in such order.

[38] Changes in Service Tax Rules, 1994 Vide Notification No. 5/2015-ST dated 01-03-2015,             (2015), htp://taxguru.in/service-tax/service-tax-rules-1994-vide-notification-52015st-dated-01032015.html.

[39] Pooja Singh, Service Tax on Construction

Actvities,http://manupatra.com/roundup/368/Articles/Service%20Tax.pdf.

[40] Supra note 35.

[41] Supra note 36.

[42] Service Tax Circulars, Instructions, Public Notices, Trade Notices etc.,                https://www.taxmanagementindia.com/visitor/circulars.asp?Law=2.

[43] Central Board Of Excise And Customs, http://economictimes.indiatimes.com/topic/Central-Board-of-Excise-and-Customs (last visited Mar 29, 2017).

[44] Id.

[45] Supra note 33.

[46] The downside to the negative list of service tax, available at

http://www.thehindubusinessline.com/opinion/the-downside-to-service-tax-negative-list/article3606348.ece,last visited on 7^th February, 2017.

[47] What Service Tax in India, What Service Tax in India, https://www.icicibank.com/knowledge-base/tax/service-tax.page? (last visited Mar 29, 2017).

[48] FREQUENTLY ASKED QUESTIONS ON SERVICE TAX, http://www.servicetaxindia.co.in/faq.htm.

[49] Id.

[50] CA Brijesh Chandra Verma, Intimation Under Rule 5(2)Intimation Under Rule 5(2) (2008), https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=87.

[51] Maintenance of Records under Service Tax, http://www.caclubindia.com/articles/maintenance-of-records-under-service-tax-13143.asp.

[52] Indian Service Tax – Books of Accounts and Records to be maintained, http://www.saralaccounts.com/resources/st-book-records.php.

[53] Id.

[54](1) Every person providing taxable service shall , not later than fourteen days from the date of completion of such taxable service or receipt of any payment towards the value of such taxable service, whichever is earlier, issue an invoice, a bill or, as the case may be, a challan signed by such person or a person authorized by him in respect of such taxable service provided or to be provided and such invoice, bill or, as the case may be, challan shall be serially numbered and shall contain the following,(…………)

[55] Rule 4A. Taxable service to be provided or credit to be distributed on invoice, bill or challan, http://allindiantaxes.com/strule4a.php.

[56] Dr. Sanjiv Agarwal, INVOICES UNDER SERVICE TAXINVOICES UNDER SERVICE TAX (2014), https://www.taxmanagementindia.com/visitor/detail_article.asp?ArticleID=5911.

[57] SERVICE TAX INVOICE PARTICULARS & TIME PERIOD,             (2015), http://www.simpletaxindia.net/2012/09/issue-of-invoice-bill-in-service-tax.html#axzz4cfFPdy2u.

[58] Issue of Invoice under Service Tax, Issue of Invoice under Service Tax, Provisions related to Issue of Invoice under Service Tax – See more at: http://taxguru.in/service-tax/provisions-related-issue-invoice-service-tax.html#sthash.7bzAshed.dpuf (last visited Mar 29, 2017).

[59] Id.