Service Tax in India–an Introduction

Tax on services has been in vogue in India since 1994 when it was introduced for the first time. The journey of taxation of services began by selective taxation of just three services on July 1, 1994.

The three services, brought under the tax net in the year 1994-95 were:

  • Telephone
  • Stockbroker
  • General Insurance

The first year collections now appear a very modest at Rs 407 crore.

As said above, When it was introduced initially, there were three services which were liable but over the years various other services have been added to take it to 119 in 2011. This year with the negative list the number of services could be guesstimated to be in excess of 300…

Service tax is a tax which is payable on services provided by the service provider. Just like excise duty is payable on goods manufactured, in the same way service tax is payable on service provided. Service tax is payable by the provider of the service to the Government of India, but the service provider can also collect this tax from the consumer of service i.e. the recipient of service and deposit it with the Government.

One of the main reasons for the services to be taxed is that the manufacturing sector can be taxed only to a certain extent if we are to ensure the competitiveness of our industry, since ours is no longer a closed economy; all activities are to bear the burden. Services presently forming more than 57 % of the GDP are expected to reach 70% this decade, which should also bear the burden of tax.

The Negative List

Budget 2012 has ushered a new system of taxation of services; popularly known as Negative List. The new changes are a paradigm shift from the existing system where only services of specified descriptions are subjected to tax. In the new system all services, except those specified in the negative list, will be subject to taxation. For those who like to use modern-day terminology one could call it taxation of service version 2.0.

Revenue from Service Tax

The buoyancy began once again on the back of some policy initiatives and Service Tax contributed Rs 97, 444 crore during 2011-12, an increase of nearly 37% over the previous year.

service-tax-revenue

Year

Revenue (in Crores)

Growth (in %)

1994 – 95

410

0

1995 – 96

846

106

1996 – 97

1022

21

1997 – 98

1515

48

1998 – 99

1787

18

1999 – 00

2072

16

2000 – 01

2612

26

2001 – 02

3305

27

2002 – 03

4125

25

2003 – 04

7890

91

2004 – 05

14196

80

2005 – 06

23053

62

2006 – 07

37482

63

2007 – 08

51133

36

2008 – 09

60702

19

2009 – 10

58336

-4

2010 – 11

71174

22

2011 – 12

97,444

37

Goods and Service Tax – The Future

This tax would be subsumed into the Goods and Service Tax which maybe in place in the next few years. The levy of service tax was initially under the residuary powers conferred to the Union by entry 97 of List I to the Seventh Schedule to the Constitution of India. Later entry 92C was introduced specifically to cover ‘Taxes on Services’, though not put into effect till date. Unlikely with GST in the horizon.


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