OVERVIEW OF SERVICE TAX

The provisions relating to Service Tax were brought into force with effect from July 1, 1994 vide chapter V of
the Finance Act, 1994. It extends to the whole of India except the State of Jammu and Kashmir. Entry 97 of
List-I of Schedule VII of the Constitution of India extends the constitutional rights to the Central Government to
levy service tax. The Government of India, through the Department of Revenue administers the levy and
collection of service tax in India. The service tax being an indirect tax, its administrative control is vested with
the Central Board of Excise & Customs (CBEC).

There is no Service Tax Act. Finance Act, 1994 is amended from time to time to make provisions
relating to service tax.

From 15 November 2015, the effective rate of service tax plus Swachh Bharat Cess, post introduction of
Swachh Bharat Cess, was 14.5%. Currently, Swachh Bharat Cess and Krishi Kalyan Cess would also be levied
on all services on which Service Tax is being levied and therefore, the Service Tax (including Swachh Bharat
Cess and Krishi Kalyan Cess) applicable from 1 June 2016 has become 15%.

3 services were made taxable in July 1994. About 117 services covered till 2011

Till 1-7-2012, service tax was based on positive list i.e. service listed in section 65(105) of Finance
Act, 1994 were taxed. Disputes were occurring due to broad and vague wordings in definitions of
various services. Now tax is payable on all services excluding those in negative list w.e.f. 1-7-2012.

Analysis of Charging section 66B of Finance Act, 1994

¨ Service tax at the rate of 12% on the value of all services, other than those services specified in
the negative list

¨ Service provided or agreed to be provided

¨ In the taxable territory (Broadly, India plus 200 nautical miles inside the sea minus Jammu and
Kashmir is ‘taxable territory’).

¨ By one person to another (Two persons required. One cannot provide service to oneself.
Exception is that services by branch in India and branch of same entity outside India will be two
different persons).

¨ And collected in such manner as may be prescribed (i.e. by making Rules)

¨ ‘Agreed to be provided’ is to cover situations where advance is received prior to provision of

service. In that case, service tax is payable on receipt of advance (This is not so in case of State Vat or
Excise) — In fact it can be argued that if agreement was executed before imposition of service tax,
then no service tax is payable at all

Service Tax had been levied on the recommendations made in early 1990’s by the Tax Reforms Committee
headed by Dr. Raja Chelliah. The Committee pointed out that the indirect taxes at the Central level should be
broadly neutral in relation to production and consumption of goods and should, in course of time, cover both
commodities and services. The Committee recommended charging of tax on services such as advertising,
insurance, share brokering and telecom etc. on the same pattern as developed economies do. The committee
envisaged that the basic objective of Service Tax Regime in India should be broadening of the tax base,
augmentation of revenue and larger participation of citizens in the economic development of the nation.
1. Meaning of 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 ambit 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."2

The definition prescribes the following three essential ingredients that must be present in order to call
an activity as 'service'-

a) it must be an activity;

b) it must be performed by a person for another person;

c) 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.

2. Meaning of 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.

3. Negative List

Negative list of services means that all services, excluding those specified in negative list will be
subject to service tax. However, in addition to items included in negative list, there will be
exemptions, abatements and composition schemes as issued by the CBEC from time to time.

The Mega Exemption Notification issued by the CBEC and the issuance of guidance paper on the new
approach to service tax has mentioned 38 services on which service tax shall be exempt. All the other
services, i.e. which are not mentioned in the negative list, will attract service tax liability.

Some of the services covered in the negative list category are as follows:

i) Health care services by a clinical establishment, an authorised medical practitioner or para-medics

ii) Services provided by an individual as an advocate or a partnership firm of advocates by way of

legal services to ;

a) an advocate or partnership firm of advocates providing legal services

b) any person other than a business entity;

c) a business entity with a turnover up to rupees ten lakh in the preceding financial year

iii) Services provided to a recognised sports body bya) an individual as a player, referee, umpire,
coach or team manager for participation in a sporting event organized by a recognized sports body;

b) another recognised sports body

iv) auxiliary educational services and renting of immovable property by educational institutions in
respect of education

v) Services by way of training or coaching in recreational activities relating to arts, culture or sports

vi) Temporary transfer or permitting the use or enjoyment of a copyright covered under section 13 of
the Indian Copyright Act, 1957 relating to original literary, dramatic, musical, artistic works or
cinematograph films
vii) Services provided in relation to serving of food or beverages by a restaurant, eating joint or a
mess, other than those having

(viii) the facility of airconditioning or central air-heating in any part of the establishment, at any time
during the year,

and (ix) a licence to serve alcoholic beverages

Therefore, with the exception of 38 services as specifically provided by the CBEC under negative list,
all other services will come under the 12%3 service tax bracket.

‘Activity’ has not been defined in the Act. In terms of the common understanding of the word activity would
include an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a
facility etc. It is a term with very wide connotation. Activity could be active or passive and would also include
forbearance to act. Agreeing to an obligation to refrain from an act or to tolerate an act or a situation has been
specifically listed as a declared service under section 66E of the Act. 2.2 Consideration

The phrase ‘consideration’ has not been defined in the Act. What is, therefore, the meaning of ‘consideration’?
As per Explanation (a) to section 67 of the Act “consideration” includes any amount that is payable for the
taxable services provided or to be provided.

Who is a ‘person’? Is it only a natural person or includes an artificial or a juridical person? ‘Person’ is
not restricted to natural person. ‘Person’ has been defined Section 65 B of the Act. The following
shall be considered as persons for the purposes of the Act:

• an individual

• a Hindu undivided family

• a company

• a society

• a limited liability partnership

• a firm

• an association or body of individuals, whether incorporated or not

• Government

• a local authority, or

• Every artificial juridical person, not falling within any of the preceding sub-clauses.