Service Tax for CA students - Basics, History & Administration

I. TYPES OF TAXES.

Taxes can broadly be classified into two categories:

(a) Direct Taxes: Direct Tax means a tax on property in respect of ownership, possession, or enjoyment of property. Direct taxes are those, which the taxpayer pays directly from his income/ wealth etc.

(b) Indirect Taxes: It is a tax on goods and services, the incidence of which is borne by the consumers who ultimately consume the goods and services.

II. WHY DO WE NEED TO LEVY A TAX ON SERVICES?

IMPORTANCE OF SERVICE TAX LEVY.

Every government requires money for making public expenditure. Taxation is considered as a good source for fulfilling this requirement. India, being a developing economy, has been striving to fulfill this obligation with its limited resources.

Indian Government's 2 main sources of revenue are:

1. Direct taxes, and  

2. Indirect taxes.

Indirect tax kitty constituted mainly excise and custom duties. However, revenue receipts from customs & excise have been declining due to certain World Trade Commitments and rationalization of commodity duties. On the other hand, service sector has been growing phenomenally all over the world.

Even in Indian context importance of service sector cannot be overemphasized. In 2002, the service sector accounted for 49.2% of GDP while agriculture accounted for 25% and industry 25.8% of GDP. This scenario is depicted well in figure below.

Economists believed that with the phenomenal development of the service sector, the exclusion of the service sector from indirect taxation leads not only to the loss of considerable potential revenue, but also creates twist in the allocation of resources. The distortion arises because the consumer starts making the choice between the consumption of goods and services.

With these objectives in mind, service tax was introduced in India in 1994 and today it is envisaged as the tax of the future.

III. COVERAGE: SELECTIVE VS. COMPREHENSIVE

There are 2 approaches of coverage of Service tax:

(a) Selective coverage - In this approach, selective services are subjected to service tax. Example, Service tax is levied on advertising services and public transport services. This approach is generally seen in developed countries.

(b) Comprehensive coverage - In this approach all services are made taxable and a negative list is given in case some services are to be exempted. Example, Service tax is levied on all services except advertising services and public transport services. This approach is generally seen in developing countries.

In India, service tax has been levied on specified taxable services and the responsibility of payment of the tax is cast on the service provider (barring few exceptional cases). In India Selective approach is in effect.

IV. HISTORY OF SERVICE TAX IN INDIA

The levy of service tax can be traced back to recommendations made in early 1990's by the Tax Reforms Committee headed by Professor Dr. Raja J. Chelliah. The Committee recommended imposition of tax on select services.

Based on the above recommendations (though with certain modifications), Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for the year 1994-95 introduced the new concept of service tax and stated that “There is no sound reason for exempting services from taxation, when goods are taxed and many countries treat goods and services alike for tax purposes. The Tax Reforms Committee has also recommended imposition of tax on services as a measure for broadening the base of indirect taxes. I, therefore, propose to make a modest effort in this direction by imposing a tax on services of telephones, non-life insurance and stock brokers.'' Thus, service tax was imposed on 3 services.

Successive Finance Ministers widened the service tax net in their budgets. At present, over 100 services are in the net of service tax. In the years to come, it is expected that all services would be in the service tax net except a few exempted services. During this period of seventeen years (1994-2010) not only the number of taxable services has increased from 3 to over 100, the rate of service tax, which was 5% in the year 1994, has also taken a leap to 8% in the year 2003, to 10% in the year 2004 and to 12% in 2006. In 2009, the rate of service tax has again been reduced to 10%.

V. VITAL STATISTICS OF SERVICE TAX

The service tax collections have shown a steady rise since its inception in 1994. The tax collections have grown manifolds since 1994-95. Service tax collection is primarily from metro areas and bigger towns.

There is a substantial growth in the assessee base from 403856 nos. in 2003-04 to 7,74,988 nos. in 2004-05. It indicates a growth of almost 91%, which is significantly robust ever after 1994-95. The revenue and assessee statistics from the year 1994-95 to 2004-05 is shown in the Table below:

Trends of revenue indicate that the service tax collection is growing at fast rate since its inception.

VI. ADMINISTRATION OF SERVICE TAX

The Department of Revenue of the Ministry of Finance exercises control in respect of matters relating to all the direct and indirect taxes through two statutory Boards, namely:

(a) Central Board of Direct Taxes (CBDT); and

(b) Central Board of Excise and Customs (CBEC).

Matters relating to the levy and collection of all the direct taxes (income tax, wealth tax etc.) are looked after by CBDT, whereas those relating to levy and collection of indirect taxes (customs duties, central excise duties etc.) fall within the purview of CBEC.

As per Rule 3 of Service Tax Rules, 1994, CBEC may appoint Central Excise Officers as it thinks fit for exercising the powers under Chapter V of Finance Act, 1994.

Thereby CBEC has given powers to manage and administer service tax assessees to officers of Central Excise.

India is divided into several ‘Zones’. Each zone is headed by a Chief Commissioner of Central Excise. ‘Zone’ is further divided into Commissionerate. Each Commissionerate is headed by a Commissioner of Central Excise.

Chief Commissioner of a Zone exercises supervision and control over the working of the Commissionerates in the Zone and is mainly responsible for monitoring revenue collection, disposal of pendencies, redressal of grievances of trade, etc. He also ensures coordination among the Commissionerates within the Zone.

Director General (Service Tax):

Considering the increasing workload due to the expanding coverage of service tax, it was decided to centralise all the work and entrust the same to a separate unit supervised by a very senior official. Accordingly, the office of Director General (Service Tax) was formed in the year 1997. It is headed by the Director General (Service Tax). The functions and powers of Director General (Service Tax) are as follows:

(1) To ensure that proper establishment and infrastructure has been created under different Central Excise Commissionerates to monitor the collection and assessment of service tax.

(2) To study the staff requirement at field level for proper and effective implementation of service tax.

(3) To study as to how the service tax is being implemented in the field and to suggest measures as may be necessary to increase revenue collection or to streamline procedures.

(4) To undertake study of law and procedures in relation to service tax with a view to simplify the service tax collection and assessment and make suggestions thereon.

(5) To form a data base regarding the collection of service tax from the date of its inception in 1994 and to monitor the revenue collection from service tax.

(6) To inspect the service tax cells in the Commissionerate to ensure that they are functioning effectively.

(7) To undertake any other functions as assigned by the Board from time to time.

The Directorate of Service Tax coordinates between the CBEC and Central Excise Commissionerates. It also monitors the collection and the assessment of service tax. It compiles the service tax revenue reports received from various Central Excise Commissionerates and monitors the performances of the Commissionerates. It scrutinizes the correspondences received from field formations and service providers and replies to the clarifications sought for, wherever possible. In cases where the doubts/clarification sought involves policy matter, the Directorate apprises the Board for issuing clarification/instruction.

VII. ROLE OF A CHARTERED ACCOUNTANT

A chartered accountant plays a major role in nation building. He is of great importance in successful implementation of service tax law and procedures in the country.

1. With the selective coverage of service tax on certain specified services a great deal of professional acumen is required to interpret and understand the law and advise the applicability of service tax qua an activity or service.

2. Registration, payment of tax, filing returns and assessments involving interface with the excise department. A chartered accountant with his experience and expertise is the best person to assist the assessees in all these compliance

3. A chartered accountant is allowed to appear before the assessment authority, Commissioner (Appeals) and Tribunal.

4. In the ensuing years, the department would have to evolve a mechanism where it may choose certain returns on test basis which require detailed scrutiny. In this mechanism, a chartered accountant could be of great assistance. Service tax returns and financial statements could be certified by the Chartered Accountant from the perspective of service tax similar to an audit under section 44AB of the Income-tax Act.

5. Service tax law is very detailed with several rules, notifications, circulars amendments issued on a regular basis. Clients require opinion of a professional to know the impact of service tax on these transactions. Chartered Accountants are one of the most trusted names in tax consultancy arena.