Introduction to Service Tax Legislation
Contributed By CA. RAJAT MOHAN on 18 November 2011
Article 265 of the Constitution of India read as:
"No tax shall be levied or collected except by authority of law"
This implies that the Government (whether
central or State) can levy tax only when it has power to levy such
tax in the Constitution. In other words, there can be no tax if the
Government does not have the power to levy such tax in the Constitution of
India.
Thus, the Government may levy a tax
on the citizens only under the authority of the Constitution of India.
Powers of the Government to make laws is divided under three lists:
(a) List – I: Also known as Union List - It contains the matters in
respect of which only the Central
Government has the power to make laws.
(b) List – II: Also known as State List - It contains the matters in
respect of which only the State Government
has the power to make laws.
(c) List – III: Also known as Concurrent List - It contains the matters
in respect of which both the Central and
the State Governments have power to make laws.
Entry 92C of the Union List read as “Taxes on services”, thereby the
Central Government has power to levy Tax on
Services (i.e. Service Tax can be imposed by the Central
Government exclusively).
II. STRUCTURE OF SERVICE TAX LAW
Service tax was introduced in year 1994.
We have to study following to become expert in Service Tax Law
(i) Statutory Provisions in the Act
Provisions of Service tax are mentioned in Chapter V of the Finance Act,
1994. There is no separate legislation for
Service Tax. As provisions of Income Tax are mentioned in Income Tax Act
1961, but provisions of service tax are mentioned in Finance Act, 1994. It is
to be noted that Service tax has no separate legislation and there is no
independent Service Tax Act.
Very Important Note: Provisions
of service tax are given in the Finance Act, 1994. Many student write
“Service tax Act” in exams, this is a gross negligence and paucity of
knowledge. Examiner is bound to deduct marks over such silly mistakes.
Please take good care of this in exams as well in practice.
(ii) Rules on service tax
(a) Services Tax Rules, 1994
(b) Service Tax (Advance Rulings) Rules, 2003
(c) CENVAT Credit Rules, 2004
(d) Export of Service Rules, 2005
(e) Service Tax (Registration of Special Category of Persons) Rules,
2005
(f) Service Tax (Determination of Value) Rules, 2006; and
(g)Taxation of Services (Provided from Outside India and Received in
India) Rules, 2006.
Rules should be read with the statutory provisions contained in the Act.
Rules are made for carrying out the
provisions of the Act. The rules can never override the Act and cannot be
in conflict with the same.
(iii) Notifications on service tax
Sections 93 and 94 of Chapter V, and section 96-I of Chapter VA of the
Finance Act, 1994 empower the Central
Government to issue notifications to exempt any service from service tax
and to make rules to implement service tax provisions. Consequently,
notifications on service tax have been issued by the Central Government
from time to time.
(iv) Circulars or Office Letters (Instructions) on service tax:
The Central Board of Excise and Customs issues departmental circulars or
instruction letters from time to time to
explain the scope of taxable services and the scheme of service
tax administration etc. The circulars clarify the provisions of the
Act and thus, bring out the real intention of the legislature. However,
the provisions of Finance Act, 1994 cannot be altered by the departmental
circulars. In other words Circulars give intention to a provision; however
these circulars can be challenged in Tribunal on the grounds of overriding
Finance Act, 1994.
(v) Orders on service tax:
Rule 3 of the Service Tax Rules, 1994, empowers the CBEC to appoint such
Central Excise Officers as it thinks fit
for exercising the powers under Chapter V of the Finance Act, 1994.
Accordingly, orders have been issued by the CBEC, from time to time, to
define jurisdiction of Central Excise
Officers for the purposes of service tax.
Orders on service tax may be issued either by the CBEC or by the Central
Government.
(vi) Trade Notices on service tax:
Trade Notices are issued by the Central Excise/Service Tax
Commissionerates. These Commissionerates
receive various instructions from the Ministry of Finance or Central
Board of Excise & Customs for effective implementation and
administration of the various provisions of service tax law. The same are
circulated among the field officers and the instructions which pertain to
trade are communicated to them in the form of trade notices.
Trade Associations are supplied with the copies of
these trade notices. Individual assessees may also apply for copies of
trade notices.
The trade notice disseminate the contents of the notifications and
circulars/letters/orders, define their
jurisdiction; identify the banks in which service tax can be deposited;
give clarifications regarding service tax matters, etc.
Some basic question answers:
Q.1. What is Service Tax and who pays this tax?
Ans. Service tax is, as the name suggests, a tax on Services. It is a tax
levied on the transaction of certain services specified by the Central
Government under the Finance Act, 1994.
It is an indirect tax (akin to Excise Duty or Sales Tax) which
means that normally, the service provider pays the tax and recovers the amount
from the recipient of taxable service.
Q.2. Under what authority service tax is levied?
Ans. Vide Entry 97 of Schedule VII of the Constitution of India, the Central
Government levies service tax through Chapter V of the Finance Act, 1994.
Entry 92C has been inserted to the 1st List in the VIIth Schedule (so as to make the enactment a subject matter of Union List.Entry 92C was introduced by 88th Constitution Amendment Act, 2003.
Although the Government has amended the Constitution and inserted entry No.92C the List 1 of Schedule VII but no separate Act has been passed yet and service tax is still being governed by entry 97 i.e. residuary entry.
The
taxable services are defined in Section 65 of the Finance Act, 1994. Section 66
is the charging section of the said Act.
Q.3. WHAT IS THE NEED OF INTRODUCTION OF SERVICE TAX?
Ans.Need for Taxation of
Services: It is the prime responsibility
of the
Government to fulfill
the increasing development
needs of the
country and its people, by way of public expenditure. The Government’s primary sources of revenue
are direct and indirect taxes. Central
Excise Duty on the goods manufactured and produced in India and Customs Duties
on imported goods constitute the two major sources of indirect taxes in
India. Due to WTO commitments and
rationalization of commodity duties. Therefore the revenue receipts from
customs and excise duties are low.
The largest component of GDP in the country comes from the service
sector,
Ø To introduce value added tax in
indirect taxation as a whole
Ø To widen the taxation
base.
Ø To merge tax on goods
&services for eliminating levels and for bringing about single levels
called Goods & Service tax throughout country.
Q.4. EVALUATION OF SERVICE TAX IN INDIA?
Ans.Service Tax in India: Based on these recommendations, 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 as under:
“There is no sound reason for exempting services from taxation, where
goods are taxed and
many countries treat goods and services alike for tax purposes. I,
therefore, propose to make
a modest effort in this direction by imposing a tax on services of
TELEPHONE, NONLIFE INSURANCE, AND STOCK BROKERS”.
Ø Therefore, the service tax was levied under Chapter V of the Finance
Act, 1994.
Ø It was introduced for the first time on 3 services with a nominal rate
of 5% advalorem.
Ø Subsequent Finance Acts have added more services to be taxes for
Service Tax purposes.
Ø As such, today more than 119 services are chargeable to Service Tax.
Q.5. WHAT IS THE CONSTITUTIONAL BACK GROUND OF INDIA?
Ans.Constitutional Background: According to Article 265 of the constitution
India, no tax of any nature can be levied or collected by Central or State
Governments expect by the Authority of Law. According to Article 246, law can
be enacted by Parliament or the State Legislature, if such power is given by
the Constitution of India.
List – I – Union list – Parliament has the exclusive right to make in
respect of that entry.
List – II – State list – Any state has exclusive power to make law for
such state or any part thereof with respect to such entry.
List – III – Concurrent list – The parliament or the legislature of a
state has power to make loss with respect to any matter enumerated in List III.
Ø there are various matters enumerated in each list. Each matter in the
list is known as an entry.
Ø Entry 97 of the Union list is the residuary entry and empowers the
Central Government to levy tax on any matters not enumerated in List II (State
List) or List III (Concurrent List).
Ø In 1994 the Service Tax was levied by the Central Government under the
powers granted under the said Entry 97 of List I.
Ø Entry 92C has been inserted to the 1st List in the VIIth Schedule (so
as to make the enactment a subject matter of Union List.
Ø Although the Government has amended the Constitution and inserted
entry No.92C the List 1 of Schedule VII but no separate Act has been passed yet
and service tax is still being governed by entry 97 i.e. residuary entry.
Q.6. EXPLAIN AS TO HOW AND WHEN
THE AMENDMENTS MADE IN FINANCE BILL, IN RESPECT OF SERVICE TAX MATTER COME INTO FORCE?
Ans.Amendments in the Finance Bill: Amendments made in the Finance Bill in respect
of Service tax matters become effective from the date when the relevant Finance
Bill gets the assent of the President and it becomes and Act. Further, new services which are introduce shall become taxable when these services
are notified or from the date mentioned in such Notification.
The law relating to service tax extends to whole of India except the State
of Jammu and Kashmir and it is applicable
to taxable services provided on or after
the commencement of Chapter V of the Finance Act. 1994.
Q.7. EXPLAIN BRIEFLY THE APPROACHES OF LEVY OF SERVICE TAX?
Ans. Selective or comprehensive coverage of service tax:
The levy of a service
tax can be based on either of the following 2 approaches:
1. Comprehensive coverage/approach
2. Selective coverage/approach
1. Comprehensive coverage/approach: The comprehensive approach contemplates
taxation of all services and a negative list is given in case some services are
to be exempted.
2. Selective coverage/approach: In the case of selective approach, only selective
are subject to service tax. In this case, the legislator attempts to specify and list the services
that would be taxable and the scope of coverage of each service. There is no residuary category for taxing
all services.
Q.8. BRIEFLY EXPLAIN THE NATURE OF SERVICE TAX?
Ans. Nature of Service Tax: Service tax is a tax on services. Service tax is not
a tax on profession / trade but is a tax on the service provided in exercise of
the profession/ trade. It is leviable only if there is provision of service.
Q.9. What is ‘service’?
Ans. Meaning of service has not been define under law hence we have to check dictionary meaning. ‘Service’ means a useful result/product of labour, which
is intangible i.e. which cannot be seen through eyes. Thus, service is a value
addition that can be felt only but cannot be seen.
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