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BASIC CONCEPTS OF SERVICE TAX
Service tax in India
The Tax Reforms Committee headed by Dr. Raja J. Chelliah recommended imposition of “Service Tax” on selected services.
On these recommendations, Dr. Manmohan Singh, the then Union Finance Minister, in his Budget speech for year 1994-95 introduced the new concept to tax services.
Initially service tax was imposed on 3 services.
- Telephone facility
- Stock Brokers
- Non-Life Insurance
With the introduction of the Finance Act, 2012, India has embraced the new system of taxation of services by way of the introduction of negative list. Hence, with effect from July 1, 2012, there is comprehensive taxation of the entire service sector.
Constitutional Background
Article 265 of the Constitution of India prohibits collection or levy of tax by Central or State Government except by authority of law.
As per Article 246, law can be enacted by Parliament or State Legislature, if such power is given by Constitution of India.
The Constitution, in its Schedule VII, has enumerated the matters on which CG and SG can make laws.
Such matters are divided into three categories--
a) List – I: Union List (matters in respect of which only CG has the power of legislation)
b) List – II: State List (matters in respect of which only SG has the power of legislation)
c) List – III: Concurrent List (matters in respect of which both CG and SG have power of legislation).
There are various matters enumerated in each list. Each matter in the list is known as an entry.
Entry 92C of the Union List of the Seventh Schedule to the Constitution of India enables the CG to levy “Taxes on Services”.
Initially there was no specific entry in the Union List for levying service tax.
Service tax was levied by the CG by drawing power from entry 97. Entry 97 is a 'residuary entry' in List I, which empowers CG to levy tax on any matter not enumerated in List II or List III.
However, as a result of deliberations between the States and the Centre and as per the recommendations of the various expert committees, entry 92C was introduced in the VII Schedule in the Union List .
A new Article 268A was inserted in the Constitution which reads as follows:
"268A (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 State 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 the Parliament by law."
In addition to Article 268A, Entry 92C has been inserted to the List I in Schedule VII.
Note: Although Parliament has passed the Constitutional amendment making entry 92C to Union List, this provision has not yet been made effective by the Parliament. Consequently, service tax is presently collected under the powers of Entry 97 only.
Service Tax Law
Service tax was introduced in the year 1994 but till date, there is NO independent statute for levying service tax.
However, following sources provide statutory provisions relating to service tax and can be broadly grouped under the following categories:
1. Finance Act, 1994
Statutory provisions relating to levy of service tax on services were first promulgated through Chapter V of the Finance Act, 1994. Since then, Chapter V of the Finance Act, 1994 is working as the Act for the service tax levy.
Later, in the year 2003, the Finance Act 2003 inserted Chapter VA to deal with advance rulings.
In the year 2004, the provisions relating to levy of 'education cess' on the amount of service tax were made applicable through Chapter VI of the Finance (No.2) Act, 2004.
2. Rules on service tax
Section 94 of Chapter V and section 96-I of Chapter VA of the Finance Act, 1994 grants power to the CG for making rules for effective carrying out the provisions of these Chapters.
Using these powers, the CG has issued
- Services Tax Rules 1994
- Service Tax (Advance Rulings) Rules, 2003
- Service Tax (Registration of Special Category of Persons) Rules, 2005
- Service Tax (Determination of Value) Rules, 2006
- Point of Taxation Rules, 2011
- Place of Provision of Service Rules, 2012
Rules should be read with the statutory provisions contained in the Act.
Rules are made for carrying out the provisions of the Act and the rules cannot override the provisions contained in the Act.
3. 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 CG to issue notifications to exempt any service from service tax and to make rules to implement service tax provisions.
Accordingly, notifications on service tax have been issued by the CG from time to time.
These notifications usually
- declare date of enforceability of service tax provisions
- provide rules relating to service tax
- make amendments therein
- provide or withdraw exemptions from service tax
- deal with any other matter which the CG may think would facilitate the governance of service tax matters.
4. Circulars or Office Letters (Instructions) on service tax
The Central Board of Excise and Customs (CBEC) 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.
These circulars/instructions have to be read with the statutory provisions and notifications on service tax.
The circulars clarify the provisions of the Act and thus, bring out the real intention of the legislature.
However, the provisions of any Act of the Parliament cannot be altered or contradicted or changed by the departmental circulars.
5. Orders on service tax
Orders on service tax may be issued either by the CBEC or by the CG.
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.
6. 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 CBEC 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 assesses 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.
Selective vs. comprehensive coverage
In comprehensive approach all services are made taxable and a negative list is provided to exempt some of the services.
In selective approach, selective services are subjected to service tax.
While most of developed countries, tax is levied on all the services with very few and limited exemptions.
Administration of service tax
Ministry of Finance
Department of Revenue
Central Board of Excise and Customs
Chairman/ Board Members
Chief Commissioner
Commissioner
Additional Commissioner
Joint Commissioner
Deputy Commissioner
Assistant Commissioner
Superintendent
Inspector
Sub-Inspector
Tax Assistant
Constable
Role of a Chartered Accountant
The nature of professional services could be: (Key – A Crop)
- Advisory Services
- Certification and Audit
- Representation Services
- Onerous task to keep pace
- Procedural Compliance
1. Advisory services
With the comprehensive coverage of service tax, a great deal of professional expertise would be required to interpret and understand the law and advise the applicability of service tax. A chartered accountant is most competent provide advise in this field.
2. Certification and audit
Since the scope of Service Tax is increasing day by day, in coming years the department would have to evolve a mechanism where there is management by exception i.e. generally accept all the returns as correct and pick and choose those returns which need 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.
3. Representation Services
A chartered accountant is allowed to appear before the assessment authority, Commissioner (Appeals) (first appeal) and Tribunal (second appeal). Here too with his experience and expertise a chartered accountant would be well positioned to represent his clients. When the matter goes up to the High Court or Supreme Court, the chartered accountant can assist/ advise the advocates.
4. Onerous task to keep pace
The service tax like excise is administered more by way of trade notices issued by various Commissionerates. A chartered accountant will have to keep himself abreast of the latest notifications and trade notices in addition to the changes in law so as to meet the client expectations. Thus, in order to render good value added services in the area of service tax a chartered accountant has an onerous task to keep pace with the latest in the legal front.
5. Procedural compliance
The service tax law envisages registration, payment of tax, filing returns and assessments involving interface with the excise department. A chartered accountant with his experience and expertise would be the best person to assist the assessee in all the above functions and ensure compliance.
Thanks
Rohit Jain
frohit@live.in
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