BASICS, HISTORY & ADMINISTRATION OF SERVICE TAX

BASICS, HISTORY & ADMINISTRATION OF

SERVICE TAX

1. TYPES OF TAXES.

Taxes can broadly be classified into two categories:

• 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.
• 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.

Direct Taxes	Indirect Taxes
Direct tax is imposed on persons.	Indirect tax is imposed on Goods and Services.
Tax is determined on the basis of taxable income/ wealth of persons.	Tax is not determined on the basis of taxable income/ wealth of persons.
Tax burden is borne by tax payer always. Burden of tax cannot be shifted to next person.	Burden of tax can be shifted to next person.
Tax collection is difficult.	Tax collection is easier.

1. 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:

• 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.
• 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.

1. 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%.

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