Taxation

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SERVICE TAX

1

INDEX Serial No.

TOPICS

Page No.

1

A Brief History

3

2

Why Service Tax?

3

3

Progression of tax rate over the years

4

4

Ready Reckoner - Services covered under the Service Tax

5

Collection of Service Tax

10

6

Computation of Service Tax

11

7

Input Tax Credit

11

8

Service Tax:

9

Challenges before the Service Tax Administration in India

Some Statistics and Budget Highlights

Future Growth Path and Future Course of Action ( Forms – ST 1, ST 2, ST – 3 and TR - 6 )

2

4-9

12 - 13 14 - 15

A Brief History A tax is a financial charge or other levy imposed on an individual or a legal entity by the state. Based on how a taxpayer pays a tax, taxes are differentiated into direct taxes and indirect taxes. A direct tax is one paid directly to the government by the persons on whom it is imposed. Income Tax is an example of direct tax. An indirect tax is a tax collected by an intermediary from the person who bears the ultimate economic burden of the tax. Examples of indirect tax are Sales Tax, VAT, Service Tax, Customs Duty etc.

Why Service Tax? In India, the economy consists of three sectors viz. agricultural sector, industrial sector and the services sector. At present the share of the three sectors are 18.5%, 26.4% and 55.1% of the GDP respectively. Service sector not only occupies the most significant part of the GDP but is also the fastest growing of all. In 2006-07, the rate of growth for these sectors was 2.7%, 7.4% and 11.1%. (Source: Economic Survey 2006-07 – Ministry of Finance, Govt. of India) In 1994, the then government headed by Prime Minister Mr. P.V.Narasimha Rao realized the significant contribution of services to the GDP and its potential growth in the future. Hence it decided to impose tax on services. Services have been taxed world over. However, the difference between many countries taxing services and India is that India has chosen a selective model of taxation whereas the other countries have adopted a comprehensive model of taxation. In the comprehensive model all the services are taxed except a few like medical services, education etc. In the selective model only a few selected services are taxed by a government notification and rest of the services are exempted. Initially only three services viz. telecommunication, general insurance and stockbroking were taxed. The rate of taxation was 5% of the amount of service provided.

3

Progression of tax rate over the years Year

Rate (%)

Educational Cess (%)

Effective Rate (%)

1994

5

-

5

2003

8

-

8

2004

10

2

10.2

2005

12

2

12.24

2007

12

3

12.36

Service tax was introduced for the first time in the year1994 through the insertion of Chapter V in the Finance Act 1994. For ready reference, details of the service in chronological order of their introduction are given below: SL.NO. 1994 1.

Nature of service

Date of introduction

General Insurance

1-7-1994

2.

Stock broking

1-7-1994

3.

Telephone

1-7-1994

Advertising agency

1-11-1996

5.

Courier

1-11-1996

6.

Pager

1-11-1996

7.

Custom house agent

15-6-1997

8.

Steamer agent

15-6-1997

9.

Air travel agent

15-6-1997

10.

Mandap keeper

15-6-1997

11.

Consulting Engineer

15-6-1997

12.

Manpower recruitment or supply agency

15-6-1997

1996 4.

1997

4

13. SL.NO.

Clearing & Forwarding Agent Nature of service

15-6-1997 Date of introduction

1998 14.

Architect

16-10-1998

15.

Chartered Accountant

16-10-1998

16.

Company Secretary

16-10-1998

17.

Cost & Works Accountant

16-10-1998

18.

Credit rating agency

16-10-1998

19.

Interior decorator

16-10-1998

20.

Management Consultant

16-10-1998

21.

Market research agency

16-10-1998

22.

Real estate agent

16-10-1998

23.

Security agency

16-10-1998

24.

Underwriter

16-10-1998

2000 25.

Rent-a-Cab Scheme operator

1-4-2000

26.

Tour operator

1-4-2000

Authorized service station

16-7-2001

2001 27.

(Motor car/Two-wheelers) 28.

Banking & other Financial services

16-7-2001

29.

Broadcasting

16-7-2001

30.

Computer network

16-7-2001

31.

Convention

16-7-2001 5

32.

Facsimile

16-7-2001

33.

Insurance Auxiliary(Genl. Insurance)

16-7-2001

SL.NO.

Nature of service

Date of introduction

34.

Leased circuit

16-7-2001

35.

Photography

16-7-2001

36.

Port

16-7-2001

37.

Scientific & technical consultancy

16-7-2001

38.

Sound recording

16-7-2001

39.

Telegraph

16-7-2001

40.

Telex

16-7-2001

41.

Video production agency

16-7-2001

2002 42.

Beauty Treatment

16-8-2002

43.

Cable

16-8-2002

44.

Cargo handling

16-8-2002

45.

Dry cleaning

16-8-2002

46.

Event management

16-8-2002

47.

Fashion designing

16-8-2002

48.

Health and fitness

16-8-2002

49.

Insurance Auxiliary(Life Insurance)

16-8-2002

50.

Life Insurance

16-8-2002

51.

Rail travel agent

16-8-2002

52.

Storage and warehousing

16-8-2002

2003 53. Authorized service station (Light motor vehicle) 6

1-7-2003

54. Business auxiliary services

1-7-2003

55. Commercial training or coaching

1-7-2003

SL.NO.

Nature of service

Date of introduction

56. Erection, commissioning or installation

1-7-2003

57. Foreign exchange broking

1-7-2003

58. Franchise

1-7-2003

59. Internet access

1-7-2003

60. Maintenance or repair

1-7-2003

61. Other Ports

1-7-2003

62. Technical inspection & certification

1-7-2003

63. Technical testing & analysis

1-7-2003

2004 64.

Airport

10-9-2004

65.

Business exhibition

10-9-2004

66.

Commercial or Industrial construction

10-9-2004

67.

Forward contract

10-9-2004

68.

Intellectual property

10-9-2004

69.

Opinion poll

10-9-2004

70.

Outdoor caterer

10-9-2004

71.

Pandal or Shamiana Contractor

10-9-2004

72.

Programme Producer

10-9-2004

73.

Survey & exploration of mineral

10-9-2004

74.

Transport of goods by air

10-9-2004

75.

Transport of goods by road

10-9-2004

76.

Travel agent(other than by air travel Agent and rail travel agent)

2004 2005 7

10-9-

77.

Cleaning activity

16-6-2005

78.

Club or Association

16-6-2005

SL.NO.

Nature of service

Date of introduction

79.

Construction of Complex

16-6-2005

80.

Dredging

16-6-2005

81.

Mailing list compilation & Mailing

16-6-2005

82.

Packaging activity

16-6-2005

83.

Site formation and clearing, etc.

16-6-2005

84.

Survey and map- making

16-6-2005

85.

Transport of goods through pipeline or Other conduit

16-6-

2005 2006 86.

Auctioneer’s service

1-5-2006

87.

Automated Teller Machines Operations, Maintenance or Management services

1-5-

2006 88.

Business support services

1-5-2006

89.

Credit card, debit card, charge card or other Payment card related services

1-5-

2006 90.

Internet telephony service

1-5-2006

91.

Public relations management service

1-5-2006

92.

Recovery Agent’s service

1-5-2006

93.

Registrar to an Issue’s service

1-5-2006

94.

Sale of space or time for advertisement service

1-5-2006

95.

Share transfer agent’s service

1-5-2006

96.

Ship management service

1-5-2006 8

97.

Sponsorship service

1-5-2006

98.

Transport of goods in containers by rail service

1-5-2006

99.

Transport of passengers embarking in India for International journey by air service

1-5-

2006 100.

Transport of persons embarking from any port Or other port in India by cruise ship service

1-5-

2006 SL.NO.

Nature of service

Date of introduction

2007 101

Telecommunication services

28-02-2007

102

Mining services

28-02-2007

103

Renting of Immovable Property for use in the Course or furtherance of business or commerce

28-02-2007

104

Services involved in the execution of works contract

28-02-2007

105

Development and supply of content service

28-02-2007

106

Asset management including portfolio management and all forms of fund management service

28-02-2007

Design services

28-02-2007

107

9

Collection of Service Tax Collection of Service Tax is administered by the Customs & Excise Department. Following is the procedure foe collecting Service Tax:i.

Any Service Provider providing service which is mentioned in the notification should get himself registered within 30 days from the date on which he starts providing the service. The application for registration is made in form ST-1.

ii.

Registration Certificate is issued in form ST-2 within 7 days from the receipt of application.

iii.

Once the certificate is issued the Service Provider is obliged to charge Service Tax. In case the Service Provider raises bill without charging the Service Tax, then he is liable to pay the Service Tax from his own pocket.

iv.

The Service Tax is payable only when the bill is realized and it is chargeable when the bill is raised. The Service Tax is required to be deposited using a challan in the form TR-6.

v.

The liability to pay Service Tax is dependant on whether the Service Provider is a company or non-company. In case the Service Provider is a company then the Service Tax collected in a month is to be paid before the 5th of the next month except for March when it is to be paid before 31st. In case the Service Provider is a not a company then the Service Tax is to be paid on a quarterly basis and the due date is 5th of the next month.

10

vi.

The Service Provider has to also file returns for the Service Tax collected and paid by him. Filing of returns takes place twice in a year. For the period April to September, the last date of filing returns is 25th October while for the period October to March; the last date is 25th April. The returns are filed in the form ST-3.

vii.

If there is a delay in the payment of Service Tax, a fine of 13% per annum is applied.

Computation of Service Tax Service Tax =

Amount of bill

*

Rate of Service Tax

100 + Rate of Service Tax Thus if the bill is of Rs. 1 Lac, then the Service Tax is computed as 100000

*

12.36

= 100 + 12.36 This is equal to Rs. 11000.

Input Tax Credit The concept of Input Tax Credit was introduced to avoid cascading effect of paying Service Tax on Service Tax. It applies to all services under the Service Tax net provided there is some co-relation between the Service Tax on the input service and the output service. For e.g. suppose there is an event management firm. It is managing an event for which it charges Rs. 10 Lacs from the organizers. This firm hires the services of an 11

interior decorator who charges Rs. 1 Lac. At the effective rate of 12.36%, the interior decorator would raise a bill of Rs. 111000. The event management firm would raise a bill of Rs. 1110000, i.e. charging the organizers Rs. 110000. But while filing returns it will claim a credit for Rs. 11000 it paid to the interior decorator. Thus it would avoid paying Service Tax on Service Tax. At the same time, the government also does not lose any tax.

Service Tax: Some Statistics

12

Budget Highlights Service Tax : •

Tax to GDP ratio up 11.4 per cent in 2007-08.

• •

No change in Service Tax rate.

Service tax - Recommendations for the financial year 2007 - 08 •

* Exemption limit for small service providers to be raised from Rs400,000 to Rs800,000. * Extension of service tax to: Tax to be levied on services outsourced for mining of mineral, oil or gas and renting of immovable property for use in commerce or business (residential properties, vacant land used for agriculture and similar purposes and land for sports, entertainment and parking purposes and immovable property for educational or religious

purposes

to

be

excluded).

* Service tax extended to content supplied for use in telecom and advertising purposes, 13

asset

management

services

provided

by

individuals

and

design

services.

* Services involved in optional schemes of a works contract will be levied tax at only 2 per

cent

of

the

total

contract

value.

* Exemption to: Tax exemption to services provided by resident welfare associations to their members who contribute Rs. 3,000 or less per month; Services provided by technology business incubators to incubatees whose annual turnover does not exceed Rs. 50

lakh

(for

three

years);

and

clinical

trial

of

new

drugs.

* Department of telecommunications to constitute a committee to study the present duty structure n telecom industry. The one per cent additional " Education Cess " on all taxes over and above the existing two per cent is uncalled for. So is the increase in the rate of dividend distribution tax by 2.5 per cent to 15 per cent. Large allocations are being made for agri sector year after year. But not enough is done to ensure effective utilisation of the funds. On the positive side is the reduction in customs duty on several items including coal and steel. Introduction of MAT on IT companies has come as surprise.

Challenges before the Service Tax Administration in India. Service tax administration in India has before it multi-dimensional challenges. Few of them are related to the very nature and growth of service sector in the economy and others relate to procedural aspects of the service tax collection. The growth of service sector at higher rate offers opportunities as well as challenges to bring under the tax net hitherto uncovered services. This offers tremendous revenue potential to the Government. It is expected that in due course Service Tax would reduce the tax burden on international trade (Customs duty) and domestic manufacturing sector (Excise duty). So a planned growth of service tax would be commensurate with the goals of economic liberalization and globalization. This process requires levy of taxes on new services without substantial rise in the rate or cost of collection. The administration of service tax requires a separate comprehensive legislation along with distinct administrative machinery exclusively devoted to the collection of service tax. That alone would bring in greater clarity, streamlined procedures, greater 14

taxpayer assistance and a new tax culture of voluntary compliance. . The twin goal of revenue maximization introduction of the culture of voluntary tax compliance also throw up major challenge before the service tax administration in the country.

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. 15

1.

Target of Service Tax collection for f.y. 2007-08 to be exceeded

2. 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. 3.

Action plan for the f.y. 2007-08 to be implemented and monitored by various levels of supervisory officers on a monthly basis.

4. The statutory change to prosecute frequent offenders/tax evaders is needed in the Act. 5. 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. 6. 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. VAT, CST and a Roadmap towards GST: Agreement reached with State Governments to phase out CST; rate to be reduced from 4% to 3% with effect from April 1, 2007; Rs.5,495 crore provided for compensation for losses, if any, on account of VAT and also on account of CST; a roadmap for introducing a national level Goods and Services Tax (GST) with effect from April 1, 2010 to be prepared. FORM ST- 1 [Application form for registration under Section 69 of the Finance Act, 1994 (32 of 1994)] (Please tick appropriate box below)

New Registration

Amendments to information declared by the existing Registrant. Registration Number in case of existing Registrant seeking Amendment _____________ 1.

(a) Name of applicant

16

(b) Address of the applicant

2.

Details of Permanent Account Number (PAN) of the applicant (a) Whether PAN has been issued by the Income Tax Department

Yes No (b) If Yes, the PAN

(c) Name of the applicant (as appearing in PAN)

3.

(a) Constitution of applicant (Tick as applicable) (i)

Proprietorship

(ii)

Partnership

(iii) Registered Public Limited Company

(iv) Registered Private Limited Company

(v)

Registered Trust

(vi) Society/Cooperative society

(vii) Others

17

(b) Name, Address and Phone Number of Proprietor/Partner/Director (i) Name

(ii) Address

(iii) Phone Number

4.

Category of Registrant (Please tick appropriate box)

(a) Person liable to pay service tax

(i) Service provider

(ii) Service recipient

(b) Other person/class of persons (i) Input service distributor

(ii) Any provider of taxable service whose aggregate value of taxable service in a financial year exceeds three lakh rupees

5.

(a) Nature of Registration (Tick as applicable)

18

(i) Registration of a single premise

(ii) Centralized Registration for more than one premises (b) Address of Premises for which Registration is sought (i) Name of Premises / Building

(ii) Flat/Door/Block No.

(iii) Road/Street/Lane

(iv) Village / Area / Lane

(v) Block/Taluk/Sub-Division/Town

(vi) Post office

(vii)City/District

(viii)State/Union Territory

(ix) PIN

(x) Telephone Nos.:

19

(xi) Fax No.

(xii)E-mail Address

(c) In case of application for Centralized Registration, furnish address of all the premises from where taxable services are provided or intended to be provided (FORMAT AS PER 5(b) ABOVE)

(d) In case of application for Input Service Distributor, furnish address of all the premises to which credit of input services is distributed or intended to be distributed (FORMAT AS PER 5(b) ABOVE) 6.

Address of the premises or office paying service tax under centralised billing or centralised accounting under sub-rule (2) and (3A) of rule 4 of the Service Tax Rules, 1994. Address

7.

Description of taxable services provided or to be provided by applicant

S.No.

Description of service

(1)

(2)

8.

Name, Designation and Address of the Authorized Signatory /Signatories:

Relevant clause of section 65 of the Finance Act, 1994, to be indicated, if possible (3)

DECLARATION I, ___________________________________________hereby declare that the information given in this application form is true, correct and complete in every respect and that I am authorized to sign on behalf of the Registrant. (a) For new Registration: I would like to receive the Registration Certificate by mail / by hand/ E-MAIL (b) For amendments to information pertaining to existing Registrant:

20

Date from which amendments are made: _______________ (Original existing Registration Certificate is required to be enclosed) (Signature of the applicant/authorized person with stamp) Date: Place: ACKNOWLEDGEMENT (To be given in the event Registration Certificate is not issued at the time of receipt of application for Registration) I hereby acknowledge the receipt of your Application Form (a) For new Registration (As desired, the New Registration Certificate will be sent by E-MAIL/ mail/handed over to you in person on______________) (b) For amendments to information in existing Registration receipt of original existing Registration Certificate)

(I hereby acknowledge

Signature of the Officer of (with Name & Official Seal)

Central

Excise

Date: FORM ST-2 [Certificate of registration under Section 69 of The Finance Act, 1994 (32 of 1994)] Shri/Ms. ………………………………………………. (name with complete address of premises ) having undertaken to comply with the conditions prescribed in Chapter V of the Finance Act, 1994 read with the Service Tax Rules, 1994, and any orders issued thereunder is hereby certified to have been registered with the Central Excise Department. The Service Tax Code and other details are mentioned hereunder. 1.

PAN No.

2.

Service Tax Code (Registration Number)

3.

Taxable Services

4.

Address of business premises:

21

(i)

Name of Premises / Building

(ii) Flat/Door/Block No.

(iii) Road/Street/Lane

(iv) Village / Area / Lane

(v) Block/Taluk/Sub-Division/Town

(vi) Post office

(vii)City/District

(viii)State/Union Territory

(ix) PIN

Telephone Nos: X

(x) E-mail Address

5. PREMISES CODE

[SL.NOS.2,3,4 TO BE REPEATED FOR EVERY PREMISES BEING GRANTED A REGISTRATION UNDER THIS CERTIFICATE. PREMISES CODE IS GIVEN BY THE

22

DEPARTMENT BASED ON THE COMMISSIONERATE+DIVISION+ RANGE+ SL NO]

Note: 1. In case the registrant starts providing any other taxable service (other than those mentioned above), he shall intimate the department. 2.

In case the registrant starts billing from other premises (other than those mentioned above), he shall intimate the department.

3.

These intimations and any other information which registrant wishes to bring to the notice of the department can be submitted on-line by the registrant after logging on to web-site.

4.

This registration certificate is not transferable.

5.

List of Accounting Codes is enclosed. These may invariably be furnished in the challan at the time of making payment of service tax.

Place: …………….

Name and signature of the Central Excise

Date: …………….

Officer with official seal

CC: (by e-mail) To(1) The Pay and Accounts Officer (Commissionerate Name)

(2) The Superintendent of Central Excise (Where premises are located). FORM ST-3 (Return under Section 70 of the Finance Act, 1994) FINANCIAL YEAR____________

For the period:

(Please tick appropriate box)

[April-September] [October-March]

23

1.

Name of the assessee

2.

Registration Numbers of premises for which return is being filed

3.

Category of taxable services for which return is being filed: (Mention all the taxable services provided/received) (1)________________________________ (2)________________________________ (3)________________________________

4. Payment of Service Tax Category of Service: __________________________________________________ (A) Payment details Apr/Oct

(1) Amount received towards taxable service(s) provided Amount

(2)

May/Nov

(3)

June/Dec

(4)

July/Jan

(5)

24

Aug/Feb

(6)

Sept/Mar

(7)

Total of column (2) to (7) (8)

received in advance towards taxable service(s) to be provided Amount Billedgross Amount billed for exempted services other than export Amount billed for exported services, without payment of tax Amount billed for services on which tax is to be paid Abatement claimedValue Notification number of Abatement Notification number of exemption Provisional Assessment order no. Service tax payable Education cess payable Service tax paid in cash Challan Number Challan date Service tax paid through cenvat

25

credit Education cess paid in cash Education cess paid through education cess credit (To be repeated for every category of service provided /received, and for every registered premises separately)

(B) Details of other payments

(1) Arrear of service tax

AmountCash (2)

Challan Number (3)

26

Date (4)

Amount-Credit (5)

Source Document No (6)

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