SALIENT FEATURES OF SERVICE TAX

NOTES ON SERVICE TAX

Service tax is a tax levied by the government on service providers on certain service
transactions, but is actually borne by the customers. It is categorized under Indirect Tax and
came into existence under the Finance Act, 1994. The salient features of levy of service tax
are:

1. Scope: It is leviable on taxable services ‘provided’ or ‘to be provided’ by a service

provider. The services ‘to be provided’ in future are taxed only if payment in its respect is
received in advance.

Two separate persons required Payment to employees not covered: For charge of service tax,
it is necessary that the service provider and service recipient should be two separate persons
acting on ‘principal to principal basis’. Services provided by an employee to his employer are
not covered service tax and, therefore, salaries or allowances paid to them cannot be charged
to service tax.

2. Rate: It is leviable @ 12% of the value of taxable services. Education Cess @ 2% and
Secondary and Higher Education Cess @ 1 % are chargeable on the amount of service tax,
thus, making the effective rate of service tax at 12.36% of the value of taxable service.
Update: While presenting the Budget 2015, the FM had increased the Service Tax Rate from
12.36% to 14%. This new rate of Service Tax @ 14% was applicable from 1st June 2015.
Moreover from 15th Nov 2015, Swachh Bharat Cess @ 0.5% also got applicable. Budget
2016 has proposed to impose a Cess, called the Krishi Kalyan Cess, @ 0.5% on all taxable
services. The new effective service tax rate in India could henceforth be 15%.

3. Taxable services: Service tax is leviable only on the taxable services. Taxable services
mean the services taxable under section 65(105) of the Finance Act, 1994.

4. Value: For the levy of the service tax, the value shall be computed in accordance with
section 67 read with Service Tax (Determination of Value) Rules, 2006.

5. Free services not taxable : No service tax is leviable upon the services provided free of
cost.

6. Payment of service tax : The person providing the service (i.e. the service provider) has
to pay service tax in such manner and within such period as is prescribed in the Service Tax
Rules, 1994. The service tax is to be paid only on the receipt of payment towards the value of
taxable services.

7. Procedures: Provisions have been made for registration, assessment including self
assessment, rectifications, revisions, appeals and penalties on the service provider.

8. CENVAT credit: The credit of service tax and excise duty across goods and services is
allowable in accordance with the CENVAT Credit Rules, 2004. Accordingly, output service
provider (i.e. provider of any taxable service) can avail credit not only of the service tax paid
on any input service consumed for rendering any output service but also of the excise duty

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paid on any inputs and capital goods used for rendering output service. CENVAT credit so
availed can be utilized for payment of service tax on taxable output service.

9. Services provided by an unincorporated association/body to its members also

taxable [Explanation to Sec. 65] : ‘Taxable service’ includes any taxable service provided
or to be provided by any unincorporated association or body of persons to a member
thereof, for cash, deferred payment or any other valuable consideration. Hence, the
services (falling under any category of taxable service) provided or to be provided by any
unincorporated association/body to member thereof shall be liable to service tax. This
provision is an exception to the ‘principle of mutuality’.

10. Performance of statutory activities/duties, not ’service’: An activity performed by a

sovereign /public authority under provisions of law does not constitute provision of taxable
service to a person and, therefore, no service tax is leviable on such entities.

11. Import/Export of services: While import of services is chargeable to tax u/s 66A, the
export of services has been made exempt from tax. Import/export provisions are discussed
separately.

TAXABLE SERVICES IN CONTEXT OF SERVICES TAX

1 Advertising 20 Clearing & Forwarding Agent
2 Air Travel Agent 21 Clubs and Associations
3 Airport Services 22 Commercial or Industrial Construction
4 Architect 23 Commercial Training or Coachin
5 Asset management (by other than Banking 24 Company Secretary
company) 25 Construction of Complex
6 ATM Operations, Management or 26 Consulting Engineer
Maintenance 27 Convention Centre
7 Auctioneers' service, other than auction of 28 Cost Accountant
property under directions or orders of a 29 Courier
count of or auction by Central Govt. 30 Credit Card, Debit Card, Charge Card or
8 Authorised Service Station other payment card related services
9 Auxiliary to General Insurance / Life 31 Credit Rating Agency
Insurance 32 Custom House Agent
10 Banking & Other Financial Services 33 Design Services
11 Beauty Parlour 34 Development & Supply of Conten
12 Broadcasting 35 Dredging
13 Business Auxiliary Services 36 Dry Cleaning
14 Business Exhibition Service 37 Erection, Commissioning or Installation
15 Business Support Service 38 Event Management
16 Cable Operator 39 Fashion Designer
17 Cargo Handling 40 Forward Contract Services
18 Chartered Accountant 41 Franchise Service
19 Cleaning Service 42 General Insurance

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43 Health Club & Fitness Centre 74 Ship Management service

44 Intellectual Property Service 75 Site Preparation
45 Interior Decorator 76 Sound Recording
46 Internet Café 77 Sponsorship service provided to anybody
47 Internet Telephony Service corporate or firm, other than sponsorship of
48 Life Insurance sports event
49 Mailing List Compilation and Mailing 78 Steamer Agent
50 Management Consultant 79 Stock Broker
51 Management, Maintenance or Repair 80 Storage & Warehousing
Service 81 Survey & Exploration of Minerals
52 Mandap Keeper 82 Survey and Map Making
53 Manpower Recruitment or Supply 83 T.V. & radio Program Production
Agency Services
54 Market Research Agency 84 Technical Testing & Analysis Agency /
55 Mining of Mineral, Oil or Gas Technical Inspection & Certification
56 On-line Information & Database Access Agency
or Retrieval Service 85 Telecommunication Service
57 Opinion Poll Service 86 Tour Operator
58 Outdoor Caterer 87 Transport of goods by Air
59 Packaging Service 88 Transport of goods by Road
60 Pandal or Shamiyana Services 89 Transport of goods in Containers by rail
61 Photography by any person other than Government
62 Port Service railway
63 Public Relations service 90 Transport of goods other than water,
64 Rail Travel Agent through Pipeline or other conduit
65 Real Estate Agent/Consultant 91 Transport of passengers Embarking on
66 Recovery Agent international journey by air, other than
67 Registrar to an Issue economy class passengers
68 Rent - a - Cab Operator 92 Transport of persons by cruise ship
69 Renting of Immovable Property 93 Travel Agent other than Air & Rail
70 Sale of space or time for Advertisement, Travel
other than print media 94 Underwriter
71 Scientific or Technical Consultancy 95 Video Tape Production
72 Security Agency 96 Works Contract
73 Share Transfer Agent

NON-TAXABLE SERVICES IN CONTEXT OF SERVICES TAX

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SALIENT FEATURES OF SERVICE TAX

(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;
Thus, basic mail service, money order service, pension payment etc is not
liable to Service Tax)
(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) any service , other than services covered under clauses (1) to (iii) above,
provided to business entities; (Amended by Finance Act, 2015 w.e.f. from
01.04.2016 , vide Notification No. 06/2016-ST and Notification No. 15/2016-
ST)
(b) services by the Reserve Bank of India; [Please note Services provided BY RBI are
exempt (and not TO RBI)]
(c) services by a foreign diplomatic mission located in India; (Please Note- This
exemption seems to be given in view of Vienna Convention which provides for grants
immunity from local laws to the missions)
(d) services relating to agriculture or agricultural produce by way of
(i) agricultural operations directly related to production of any agricultural
produce including cultivation, harvesting, threshing, plant protection or
seed-testing; (Word Seed been Omitted wef 10.05.2013
(ii) supply of farm labour;
(iii) processes carried out at an agricultural farm including tending, pruning,
cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating,
curing, sorting, grading, cooling or bulk packaging and such like
operations which do not alter the essential characteristics of agricultural
produce but make it only marketable for the primary market; (Note
Process includes process as Such as shelling of paddy or cleaning of
wheat)
(iv) renting or leasing of agro machinery or vacant land with or without a
structure incidental to its use;
(v) loading, unloading, packing, storage or warehousing of agricultural
produce;
(vi) agricultural extension services;
(Please Note As per Section 65B (4) “agricultural extension” means
application of scientific research and knowledge to agricultural practices
through farmer education or training)
(vii) services by any Agricultural Produce Marketing Committee or Board or
services provided by a commission agent for sale or purchase of
agricultural produce;
(e) trading of goods;

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SALIENT FEATURES OF SERVICE TAX

(f) services by way of carrying out any process amounting to manufacture or production
of goods excluding alcoholic liquor for human consumption (Amended by Finance
Act, 2015 applicable from 1st June, 2015 vide Notification No.14/2015-Service Tax,
dated 19th May, 2015)
(g) selling of space for advertisements in print media;
(h) service by way of access to a road or a bridge on payment of toll charges’,
(i) betting, gambling or lottery Explanation – For the purposes of this clause, the
expression “betting, gambling or lottery” shall not include the activity specified in
Explanation 2 to clause (44) of section 65B;
(j) (Omitted vide Finance Act,2015)
(k) transmission or distribution of electricity by an electricity transmission or distribution
utility;
(l) (Deleted by Finance Bill, 2016 and incorporated in Not. No. 25/2012 w.e.f. its
enactment)
(m) services by way of renting of residential dwelling for use as residence;
(n) services by way of
(i) extending deposits, loans or advances in so far as the consideration is represented
by way of interest or discount;
(ii) inter se sale or purchase of foreign currency amongst banks or authorised dealers
of foreign exchange or amongst banks and such dealers;
(o) service of transportation of passengers78, with or without accompanied belongings,
by
(i) (Deleted by Finance Bill, 2016. W.e.f. from 01.06.2016)
(ii) railways in a class other than
(A) first class; or
(B) an air-conditioned coach;
(iii) metro, monorail or tramway;
(iv) inland waterways;
(v) public transport, other than predominantly for tourism purpose, in a
vessel, between places located in India; and
(vi) metered cabs’ or auto rickshaws;
(p) services by way of transportation of goods—
(i) by road except the services of
(A) a goods transportation agency; or
(B) a courier agency;
(ii) (Deleted by Finance Bill, 2016. However, such services by Aircraft will
be exempt under in Notification No. 25/2012-ST w.e.f. from 01.06.2016.)
(iii) by inland waterways;
(q) Funeral, burial, crematorium or mortuary services including transportation of the
deceased.

MEANINGS

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SALIENT FEATURES OF SERVICE TAX

SERVICE

Earlier the word "Service" was not defined anywhere in Chapter V of the Finance Act, 1994.
In order to ensure wide coverage of services under the ambid of service tax, the term 'Service'
has been defined under the new inserted section 65B(44) in the Finance Act, 2012, which
reads as follows-

"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."

The definition prescribes the following three essential ingredients that must be present in
order to call an activity as 'service'-
d) it must be an activity;
e) it must be performed by a person for another person;
f) the activity is performed for a consideration.

In the absence of any of these essential ingredients, the activity will be not be considered as
service. Also, the activities which are covered under the declared service category will
automatically become service.

Thereafter, the definition expressly excludes the activities from the provision of "Service".
Thus, except for the activities as mentioned in the definition of the term "Service", all other
activities shall be covered which involves the above three essential ingredients.

SERVICE TAX

Service tax is a tax levied by the government on service providers on certain service
transactions, but is actually borne by the customers. It is categorized under Indirect Tax and
came into existence under the Finance Act, 1994.

In this case, the service provider pays the tax and recovers it from the customer. Service Tax
was earlier levied on a specified list of services, but in the 2012 budget, its scope was
increased. Services provided by air-conditioned restaurants and short term accommodation
provided by hotels, inns, etc. were also included in the list of services.

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SALIENT FEATURES OF SERVICE TAX

It is charged to the individual service providers on cash basis, and to companies on accrual
basis. This tax is payable only when the value of services provided in a financial year is more
than Rs 10 lakh. This tax is not applicable in the state of Jammu & Kashmir.

DECLARED SERVICES

As per the definition of "Service" as contained under Section 65B (44) of the Finance Act, the
term service includes declared services. The phrase "Declared Service" has also been defined
under section 66E as "an activity carried out by a person for another for consideration".
Further, the section specifically mentions the following nine services as 'declared services':

a) renting of immovable property

b) construction of a complex, building, civil structure or a part thereof, including a complex

or building intended for sale to a buyer, wholly or partly, except where the entire
consideration is received after issuance of completion-certificate by the competent authority.

c) temporary transfer or permitting the use or enjoyment of any intellectual property right.

d) development, design, programming, customisation, adaptation, upgradation, enhancement,

implementation of information technology software.

e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do

an act. f) transfer of goods by way of hiring, leasing, licensing or in any such manner without
transfer of right to use such goods.

g) activities in relation to delivery of goods on hire purchase or any system of payment by

installments. h) service portion in the execution of a works contract.

i) service portion in an activity wherein goods, being food or any other article of human
consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of
the activity.

PERSON LIABLE TO PAY SERVICE TAX

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SALIENT FEATURES OF SERVICE TAX

Rule 2(d) of Service Tax Rules, 1994 ('Rule' for short) defines the term 'person liable for
paying service tax' as-

(i) in relation to telecommunication service the Director General of Posts and Telegraphs
referred to in Sec. 3(6) of the Indian Telegraph Act, 1885; or the Chairman-cum-Managing
Director, Mahanagar Telephone Nigam Limited, Delhi, a company registered under the
Companies Act, 1956; or any other person who has been granted a licence by the Central
Government under the first proviso to Sec. 4(1) of the Indian Telegraph Act, 1885;

(ii) in relation to general insurance business, the insurer or re-insurer, as the case may be,
providing such services;

(iii) in relation to insurance auxiliary service by an insurance agent, any person carrying on
the general insurance business or the life insurance business, as the case may be, in India;

(iv) in relation to any taxable service provided or to be provided by any person from a
country other than India and received by any person in India under Sec. 66A of the Act, the
recipient of such service;

(v) in relation to taxable service provided by a goods transport agency, where the consignor
or the consignee of goods is-
(a) Any factory registered under or governed by the Factories Act, 1948;
(b) Any company formed and registered under the Companies Act, 1956;
(c) Any corporation established by or under any law;
(d) Any society registered under the Societies Registration Act, 1860 or under any law
corresponding to that Act in force in any part of time;
(e) Any co-operative society established by or under any law;
(f) Any dealer of excisable goods, who is registered under the Central Excise Act, 1944
or the rules made there under; or
(g) Any body corporate established, or a partnership firm registered by or under any law;
(h) Any person who pays or is liable to pay freight either himself or through his agent for
the transportation of such goods by road in a goods carriage;

(vi) in relation to business auxiliary service of distribution of mutual fund by a mutual fund
distributor or an agent, as the case may be, the mutual fund or asset management company, as
the case may be, receiving such service;

(vii) in relation to sponsorship service provided to anybody corporate or firm located in India,
the body corporate or, as the case may be the firm who receives such sponsorship service;

PENALTIES FOR FAILURE TO PAY SERVICE TAX

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SALIENT FEATURES OF SERVICE TAX

Penalty is generally levied on the assessee for intentional violation of provision of the Act or
Rules made there under. It is penal in nature and charged to the assessee in addition to the
Interest and Service Tax.

If assessee proves there was a reasonable cause for failure in payment of service tax no
penalty should be imposed on him [Section 80, Finance Act 1994]

Section 76: Penalty for Failure to Pay Service Tax:

(1) Where service tax has not been levied or paid, or has been short-levied or short-paid, or
erroneously refunded, for any reason, other than the reason of fraud or collusion or wilful
mis-statement or suppression of facts or contravention of any of the provisions of this
Chapter or of the rules made there under with the intent to evade payment of service tax, the
person who has been served notice under sub-section (1) of section 73 shall, in addition to the
service tax and interest specified in the notice, be also liable to pay a penalty not exceeding
ten per cent. of the amount of such service tax :

Provided that where service tax and interest is paid within a period of thirty days of —

i) the date of service of notice under sub-section (1) of section 73, no penalty shall be payable
and proceedings in respect of such service tax and interest shall be deemed to be concluded;

ii) the date of receipt of the order of the Central Excise Officer determining the amount of
service tax under sub-section (2) of section 73, the penalty payable shall be twenty-five per
cent of the penalty imposed in that order, only if such reduced penalty is also paid within
such period.

2) Where the amount of penalty is increased by the Commissioner (Appeals), the Appellate
Tribunal or the court, as the case may be, over the above the amount as determined under
sub-section (2) of section 73, the time within which the reduced penalty is payable under
clause (ii) of the proviso to sub-section (1) in relation to such increased amount of penalty
shall be counted from the date of the order of the Commissioner (Appeals), the Appellate
Tribunal or the court.

With this view an important case of M/s Jayraj enterprises v. CST where the said enterprise
was in the business of providing “Manpower recruitment and supply agency services” which
they were the sub-contractor under an impression that being a sub-contractor they don’t have
to pay the service tax and the same service tax will be payable by the contractor. Even though
their business came under the ambit of taxable services which is being provided under the
65(105) (k) they neither registered their business under the service tax registration neither
they paid taxes from the very inception of the commencement of the business. The court held
that they are entitled to pay the service tax along with the interest and fine using the maxim of
ignorantia juris non excusat which mean the ignorance of law is not an excuse and using the
judgment of M/s. Sew Construction Ltd. Vs. CCE, Raipur the CESTAT held there is no
provision under the finance act 1994 that exclude the sub-contractors from the said act. And
the enterprise will be held liable to pay the penalty amount along with cumulative service tax
till date from the inception of the commencement of the business.

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SALIENT FEATURES OF SERVICE TAX

Section 77 of finance act 2004 will is applicable till date and subsequently has been
converted into a general provision is a person who fails to file a service tax return which is
required to be furnished every half yearly will be liable to pay a penalty which may exceed to
Rs. 1000/-

Imposition of interest: In terms of the section 75 of the finance act 1994 failure to pay the
service tax to the central government will attract a simple interest of 15% p.a. but this was
brought down to 13%. So as per this principle the person who have not paid the service tax
that he was entitled to pay than court can impose a simple interest on the amount that was
unpaid for certain tenure.

But where the fault was on the government side because of the work load or any other reason
the interest cannot be charged on. This was held in G.M. telecom BSNL v. CCE,
Chandigarh.

FILING OF SERVICE TAX RETURNS

Every person liable to pay service tax has to submit half yearly return in form ST-3 within 25
days of the end of the half-year, as per rule 7 of Service Tax Rules, 1994, read with section
70(1) of Finance Act, 1994. Similarly, Input Service Distributor (ISD) is also required to file
half yearly return, even if he is not liable to pay service tax.

Automation of Central Excise and Service Tax (ACES): – In continuation of its efforts for
trade facilitation, Central Board of Excise and Customs (CBEC) had rolled-out a new
centralized, web-based and workflow-based software application called Automation of
Central Excise and Service Tax (ACES) in the year 2009. ACES has automated the major
processes of Central Excise and Service Tax – registration, returns, accounting, refunds,
dispute resolution, audit, provisional assessment, exports, claims, intimations and
permissions. The ACES application has interface for Central Excise Assessees, Service Tax
Assessees, Central Excise Departmental Officers and Service Tax Departmental Officers.

Registration in ACES: – To transact business online under ACES, all users have to first
register with ACES. To register under ACES, the assessee needs to log onto the system,
through internet at http://www.aces.gov.in. Registration in ACES is a onetime affair.

Steps for preparing and filing returns: – E-filing of return is mandatory w.e.f. 1st October,
2011 in respect of all assessees as per Rule 7(3) of Service Tax Rules, 1994. The assesses can
electronically file statutory returns of Central Excise and Service Tax either online or through
off-line return utilities which can be filled-in-off-line and uploaded to the system through the
internet. Few steps for filing of returns are mentioned below:

• Returns can be prepared and filed online by selecting the ‘’File Return’’ option under
RET module after logging into the ACES.

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SALIENT FEATURES OF SERVICE TAX

• Returns can also be prepared and filed off-line. The Assessee needs to download the
Offline return preparation utility available at http://www.aces.gov.in (Under
Download) and prepare the return offline using this utility.
• Selects RET from the main menu and uploads the return.
• Returns uploaded through this procedure are validated by the ACES before
acceptance into the system which may take up to one business day.
• The status will appear as “uploaded” meaning under process by ACES, “Filed”
meaning successfully accepted by the system or “Rejected” meaning the ACES has
rejected the return due to validation error. The rejected returns can be resubmitted
after corrections.
• On the successful submission of a return, an acknowledgment with a number in the
format ‘’registration number_Type of return_Month and Year of the return’’ will be
shown.
• The Service Tax revised returns can be filed once as per rules up to 90 days from the
date of filing the initial return.
• There is no provision for submission of revised return after 90 days. In such cases, if
assessee finds that he has made some mistake, he should pay the amount by GAR-7
challan with Interest and inform department suitably.

Responsibility of the Assessee: – It is the legal responsibility of the assessees, who are
required to file returns, to file it within the due date as prescribed under law. It may, however,
be noted that merely uploading the returns will not be considered as returns having been filed
with the department. A return will be considered as filed, when the same is successfully
accepted by the application as “Filed” and the relevant date for determining the date of filing
of return will be the date of uploading of such successfully “filed” returns. In case a return is
“rejected” by the application, the date of uploading of the rejected return will not be
considered as the date of filing, rather the date of uploading of the successfully “filed”, return
(after the assessee carries out necessary corrections and uploads it again) will be considered
as the actual date of filing.
Even if there was no business during the period, assessee will have to file ‘NIL’ return as
long as registration certificate is valid.

Late fee and penalty for filing late return: – Section 70(1) of Finance Act, 1994, as
amended w.e.f. 08.04.2011 provides that in cases where returns are filed after due date, late
fees not exceeding Rs.20,000/- is payable for delayed filing of return, as may be prescribed.
The late fee payable is as follows – (a) Delay up to 15 days – Rs.500/- (b) Beyond 15 days
and up to 30 days – Rs.1000/- (c) Delay beyond 30 days – Rs,1000 plus Rs.100 per day of
delay beyond 30 days, from 31st day onwards. This Rs.100 per day continues till limit of
Rs.20,000 is reached.
If return of Service Tax is not filed within prescribed period, penalty is leviable u/s 77(2)
which can be up to Rs.10000/-. If late fee is paid, penalty will not be imposed.

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