Constitutional & Legal Provisions Behind Levy of Service Tax in India
Constitutional Validity
Article 265 of the Constitution lays down that no tax shall be levied or collected except by the authority of law. Schedule VII divides this subject into three categories-
- Union list (only Central Government has power of legislation)
- State list (only State Government has power of legislation)
- Concurrent list (both Central and State Government can pass legislation).
Formation and Function of DGST
Considering the increasing workload due to the expanding coverage of service tax, it has been 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) has been formed in the year 1997. It is headed by the Director General (Service Tax). The functions and powers of Director General (Service Tax) are :
- To ensure that proper establishment and infrastructure has been created under different central excise Commission rate to monitor the collection and assessment of service tax.
- To study the staff requirement at field level for proper and effective implementation of service tax.
- To study as to how the various service taxes are being implemented in the field and to suggest measures as may be necessary to increase revenue collection or to streamline procedures :
- 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:
- 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:
- To inspect the service tax cells in the Commission rate to ensure that they are functioning effectively :
- To undertake any other functions as assigned by the Board from time to time.
- During the course of Inspection of the Central Excise Commission rates, the Inspection team of this Directorate has in variably pointed out the requirement of the staff in field level for proper and effective implementation of Service Tax. The Directorate has also suggested necessary measures to be adopted to increase service Tax revenue collection. The grey areas and evasion prone services have been brought to the notice of the Commission rate for conducting effective Surveys/Audit.
- The Directorate of Service Tax has drafted a separate act for Service Tax and the Rules therefor and has forwarded the same to the Ministry for approval vide letter F.No.V/DGST/30-Misc-56/2000 dtd. 19/02/2001. The Service Tax manual has also been prepared and forwarded to Board for approval and issue during year 2001. The correspondences received from field formations and service providers are scrutinised from law and the clarifications sought for are replied to wherever possible. In cases where the doubts/clarification sought involved policy matter, the Board has been apprised for issuing clarification/instruction.
- This Directorate has taken up the issue of forming a database regarding register of the assesse and collection of Service Tax in co-ordination with the Directorate of Systems.
- The Directorate has also recommended electronic administration in implementation of Service Tax to bring transparency in tax administration and avoid interfacing between Service providers and tax authorities. The Board has also instructed the Commission rate to feed the figures of service tax revenue collection in the system on line before 7th of every month. The Directorate of Service Tax has advised all the Central Excise Commission rates to re-consile service tax collection with the help of T.R.-6 challans and the statements of the P.A.O.
- The Directorate of Service Tax has been conducting inspection of Central Excise Commission rates. During the course of inspection, verification of Service Tax records, maintained by the Commission rate, is done. Staff of Service Tax Cell are also guided suitably in proper implementation of Service Tax and maintenance of records. A meeting with the Service Tax officers is always conducted in the Commission rate during inspection. Open-house meeting is also arranged in the Commission rate wherever it was felt necessary. Problems faced by the assese in Service Tax compliance are sorted out in the open-house meeting with the members of various service providers associations.
Existing Scheme for Levy, Assessment & Collection of Service Tax in India
Levy and Assessment
Service tax is levied on specified taxable services and the responsibility of payment of the tax is cast on the service provider. System of self-assessment of Service Tax Returns by service tax assessees has been introduced w.e.f. 01.04.2001. The jurisdictional Superintendent of Central Excise is authorized to cross verify the correctness of self assessed returns. Tax returns are expected to be filed half yearly.
Central Excise officers are authorized to conduct surveys to bring the prospective service tax assessees under the tax net. Directorate of Service Tax at Mumbai over sees the activities at the field level for technical and policy level coordination.
Legal Provisions
The provisions relating to Service Tax were brought into force with effect from 1st July 1994. It extends to whole of India except the state of Jammu & Kashmir. The services, brought under the tax net in the year 1994-95 ,are as below:
- Telephone
- Stockbroker
- General Insurance
- Advertising Agencies,
- Courier Agencies
- Radio Pager Services.
The Finance Acts of 1997 and 1998 further extended the scope of service tax to cover a larger number of services rendered by the following service providers, from the dates indicated against each of them.
- Consulting Engineers(7th July, 1997)
- Custom House Agents(15th June, 1997)
- Steamer Agents(15th June,1997)
- Clearing & Forwarding Agents(16th July, 1997)
- Air Travel Agents(1st July, 1997)
- Tour operators
- Rent-a-Cab Operators
- Manpower recruitment Agency(1st July, 1997)
- Mandap Keepers(1st July, 1997)
The Service Tax is leviable on the 'gross amount' charged by the service provider from the client, from the dates as notified and indicated above.
Government of India has notified imposition of service Tax on twelve new services in 1998-99 union Budget. These services listed below were notified on 7th October, 1998 and were subjected to levy of Service Tax w.e.f. 16th October, 1998.
- Architects
- Interior Decorators
- Management Consultants
- Practicing Chartered Accountants
- Practicing Company Secretaries
- Practicing Cost Accountants
- Real Estates Agents/Consultants
- Credit Rating Agencies
- Private Security Agencies
- Market Research Agencies
- Underwriters Agencies
- Scientific and technical consultancy services
- Photography
- Convention
- Telegraph
- Telex
- Facsimile (fax)
- Online information and database access or retrieval
- Video-tape production
- Sound recording
- Broadcasting
- Insurance auxiliary activity
- Banking and other financial services
- Port
- Authorized Service Stations
- Leased circuits Services
- Auxiliary Services to Life Insurance
- Cargo Handling
- Storage and Warehousing Services
- Event Management
- Cable Operators
- Beauty Parlours
- Health and Fitness Centres
- Fashion Designer
- Rail Travel Agents.
- Dry Cleaning Services.
It is expected that in view of more & more services brought under the Service Tax net, the service tax revenue would now form a major part in Govt. Revenue earnings.
In the Budget 2003-04 seven more services along with extension to three existing services have been added to the tax net which are listed below. The levy of service tax on these services is effective from 1st July, 2003.
- Commercial vocational institute, coaching centres and private tutorials
- Technical testing and analysis (excluding health & diagnostic testing) technical inspection and certification service.
- Maintenance & repair services
- Commission and Installation Services
- Business auxiliary services, namely business promotion and Support services (excluding on information technology services)
- Internet café
- Franchise Services
In the Budget 2004-05, 10 more services have been introduced in the service tax net along with reintroduction of three existing services as follows:
- Transport of goods by road (earlier Goods Transport Operators service re- introduced).
- Out door Caterer’s service (re-introduced)
- Pandal or Shamiana service (re-introduced)
- Airport Services
- Transport of Goods by Air Services
- Business Exhibition Services
- Construction Services in relation to Commercial or Industrial BuildingConstruction Services in relation to Commercial or Industrial Building
- Intellectual Property Services
- Opinion Poll Services
- TV or Radio Programme Services
- Survey and Exploration of Minerals Services
- Travel Agent’s Services other than Rail and Air travel agents
- Forward Contract Services
- Transport of goods through pipe line or other conduit Services.
- Site preparation & clearance Services
- Dredging Services
- Survey & Map making Services
- Cleaning Services
- Membership of Clubs & Associations
- Packaging Services
- Mailing list compilation & Mailing Services
- Construction Services in relation to Residential Complexes
Administrative Mechanism
Service Tax is administered by the Central Excise Commissionerates working under the Central Board of Excise & Customs, Department of Revenue, Ministry of Finance, Government of India. The unique feature of Service Tax is reliance on collection of tax, primarily through voluntary compliance.
Government has from the very beginning adopted a flexible approach concerning Service Tax administration so that the assessees and the general public gain faith and trust in the tax measure so that voluntary tax compliance, one of the avowed objectives of the Citizens Charter, is achieved. Substantive and procedural liberalization measures, adopted over the years for this purpose, are clear manifestations of the above approach. Following are some of the measures adopted in that direction:
- Under Section 67 of the Finance Act, 1994, Service Tax is levied on the gross or aggregate amount charged by the service provider on the receiver. However, in terms of Rule 6 of Service Tax Rules, 1994, the tax is permitted to be paid on the value received. This has been done to ensure that providers of professional services are not inconvenienced, as in many cases, the entire amount charged/billed may not be received by the service provider and calling upon him to pay the tax on the billed amount in advance would have the effect of asking him to pay from his own pocket. It would also make the levy a direct tax, which is against the very scheme of Service Tax.
- Corporate assessees are given the liberty to pay tax on the value of taxable service, provided by them in a month, by the 25th of the following month to enable them to finalize the accounts. Further, the individual assessees are required to pay the levy only once in a quarter.
- The process of registration of assessees has been considerably simplified.
- No separate accounts have been prescribed for the purposes of Service Tax. It has been provided that accounts being maintained by the assessees under any other law in force would be sufficient. This has placed the Department at considerable inconvenience to itself, so as to minimize difficulties for the assessees.
- The Finance Act’2001 has introduced self assessment for service tax returns; thereby sparing the assessees from the rigours of routine scrutiny and assessment.
- Frequency of filing the returns is minimized. Filing of Statutory return has been made half yearly and by the 25th of the month following the half-year. This is in replacement of the monthly/quarterly returns prescribed earlier.
- Penal provisions do exist in respect of Service Tax also. Failure to obtain registrations, failure to pay the tax, failure to furnish the prescribed returns, suppression of the correct value of the taxable services and failure to comply with notice do attract penal provisions as prescribed. But, it is specifically provided that no penalty is imposable on the assessee for any of the above failures, if the assessee proves that there was reasonable cause for the failure. This provision has been inserted to take care of the genuine difficulties of the new assessees.
- Government's liberal attitude is more evident in the case of prosecutions. Hardly will there be any tax statute with revenue implications, where prosecutions of the offenders are not provided. In the case of the Service Tax also it was thought of and sections 87 to 93 of the Finance Act, 1994, did provide for prosecution of offenders. However, these provisions were subsequently withdrawn as a noble gesture towards the assessees.
- Service Tax Credit Rules, 2002, have been replaced by the CENVAT Credit Rules, 2004, introduced by the Finance Act, 2004, where under CENVAT credit has been extended across the sectors i.e. goods and services.
Service Tax Revenue(All India From 1994-95 to 2003-04)
4.1 The Service Tax collections have shown a steady rise since its inception in 1994. The tax collections have grown manifolds since 1994-95 i.e Rs. 410 crores in 1994-95 to Rs. 14196 crores in 2004-05.
Service Tax revenue collection target for the year 2004-05 was fixed at Rs. 14150 crores, however on the basis of figures obtained from the Pr. C.C.A., the actual service tax revenue collection stands at Rs. 14196.19 crores. It indicates a growth of 79.93% against the actual realization Rs. 7889.97 crores during the last f.y. 2003-04.
There is a substantial growth in the assesse 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 in comparison with 74% growth rate of previous year.
Electronic Tax Administration
The Directorate has formulated a proposal for online web-based Electronic Tax Administration system for service tax. This system envisages the facility for online registration, payment of tax, filing of returns, assessment etc. for better tax administration and reducing the officer-assessee interface. M/s. CMC Ltd conducted a system feasibility study for implementation of this proposal. Their report indicates that such a system is not only feasible but could also be implemented at a relatively low cost. A detailed proposal is under preparation. It is anticipated that with the implementation of this system, service tax could be administered as the first e-tax in the country, which could work as a model for other tax administrations.
As decided by the Board, the programme for computerization of Service Tax administration is being worked out by the Directorate of Systems (South Zonal Branch) and Directorate of Service Tax.
Directorate of Systems has worked out the framework for computerization of service tax administration, with the help of NIC. They have introduced software programmes for Allotment of Service Tax Payer Code Number (SAPS) and Service Tax Revenue Monitoring System (STREMS) which are used for registration of assesses and filing of ST-3 returns.
Consequent to the above, the Central Board of Excise and Customs vide Circular No. ST 52/2003 dtd. 1.3.2003 ( in F.No. 137/9/2003-CX4 has allowed E-filing of Service tax Returns-ST-3 from the month of April 2003. Initially, this facility has been extended to only select class or group of service tax providers for services falling under following categories – viz.
- Telegraph Services (TGH)
- Telephone Services (TSU)
- Life Insurance Services (LIS)
- Insurance Auxiliary Services (IAX)
- General Insurance Business (GIB)
- Stock Brokers (STB)
- Advertising Agencies (ADV)
- Courier Services (COU)
- Banking & Financial (BFN)
- Custom House Agent (CHA)
Future Growth Path for Service Tax in India
Service tax is envisaged as the tax of the future. Well synchronized taxation on manufacturing, trade (domestic & international) and service without giving rise to cascading effect of taxation would be an ideal worth pursuing in the immediate future. This would bring in VAT in its truest sense.
Continued growth in GDP accompanied by higher rate of growth in service sector promises new & wider avenues of taxation to the Government. If the tax on services reduces the degree of intensity of taxation on manufacturing and trade without forcing the Government to compromise on the revenue needs, then one of the basic objectives of taxing the service sector would be achieved.
Voluntary tax compliance on the part of taxpayers demands prudent accounting practices and transparency in the conduct of their business. Marginal rates of taxation would be conducive in this process. Many new services may be brought under the tax net in future. The inclusion of all value added services in the tax net would yield larger amount of revenue and make the existing tax structure more elastic.
Advanced economies of Western Europe, North America and Far East have share of service sector in their GDP ranging from 60% to 80%. The growth in absolute quantum of GDP and proportion of Service-sector in GDP holds promise for larger revenue generation without increasing the existing level of taxation
Future Course of Action
The following items of works have to be attended to urgently to improve the administration of Service Tax in the country.
- Target of Rs. 17,500 crores Service Tax collection for f.y. 2005-06 to be exceeded
- Intensify the field survey operations to ensure that all taxable service assessees are brought into the tax net and Service Tax due from them are collected without hitch.
- Action plan for the f.y. 2005-06 to be implemented and monitored by various levels of supervisory officers on a monthly basis.
- While the basic tenet of voluntary compliance of Service Tax law has to be adhered to, recalcitrant/ habitual evaders of Service Tax have to be booked for appropriate action under the law. There could be no leniency in this regard.
- The statutory change to prosecute frequent offenders/tax evaders is needed in the Act.
- Facilitate the implementation of the recommendations of Expert Group set up by the Government, so that steps for early rationalization and enlargement of the scope of service levy in the country is hastened.
- Design and implement an Electronic Tax Administration (ETA) system for service tax so that service tax could be administered as first e-tax of the country. Directorate General of Systems have developed software for electronic filing of ST-3 returns for 10 major services from April, 2003. All the Chief Commissioners have been requested to arrange meetings of service providers and service tax staff to inculcate the awareness about E-filing of returns/E-Tax Administration.
- Concentrate on liquidation of Service Tax arrears and issue necessary clarifications to the field officers so that arrears linked up with disputed interpretations of the provisions of the law could be easily resolved.
- Attend to all major court cases relating to Service Tax law for early decision.
- Deploy adequate staff to attend to the service tax work and provide infrastructure and conveyance to implement service tax law effectively.