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Service tax

Service tax is an indirect tax which is imposed by the government on certain service providers but is borne by the customers. The service tax was introduced under the Finance Act 1994. Service tax was earlier levied on a specified list of services in the country. In 2012, the scope of these services expanded and a lot of new services were added to the list of taxable services.

Service tax is applicable to individual service providers on a cash basis and to companies on an accrual basis. The service tax exemption limit for a financial year for any assessee is Rs. 10 lakhs. The change in service tax rate is after subsuming the secondary and the higher - secondary education cess. The service tax has now come under the purview of the Goods and Service Tax(GST) with effect from 1st July 2017.

The Old and New Rates

  • If any invoices have been raised after the date of rate of change that is 1st June 2015, and the services were provided before the month of June but the payment is also received after the date of rate of change, then, the rate applicable is the new rate.
  • If the invoice was issued after 1st June, but the service was provided before 1st June and the invoice was paid in May, then the service tax rate applicable is the old rate.
  • If the invoice was issued before 1st of June and the service is provided in the month of May, and the payment is done after 1st June, then the rate applicable is the old rate of service tax.
  • If the invoice was issued in the month of May and but service provided in the month of June and payment received in the month of May, then the rate applicable is the old rate.
  • If the invoice was issued after 1st June and service provided after the change of rate which is in the month of June, but the payment received in the month of May, then the rate applicable is the new rate.
  • If the invoice was issued in May, service provided in June and payment was made on the date 1st June, then the applicable rate is the new rate which is 14%.

Impact of Change in Rate

  • The change in rate of service tax has affected the payment made by a service tax provider in a financial year. The tax paid by the service tax provider has increased after the rates have changed.
  • If after the change of rate of tax, the invoice that has been issued earlier is composed of all the taxes, then the additional liability of paying tax is borne by the service provider.
  • If the terms of the contract between two parties include service tax as an item that is extra and is applicable, then the service provider can collect and pay the service tax.
  • The applicable education cess and higher secondary education cess have been abolished and are no longer applicable to the new service tax rate.
  • The Swaccha Bharat cess is also not applicable from 1st June and will be applicable once it is notified by the government.

Impact on Ongoing Contracts

  • For services provided before 1st June 2015, services that have been provided before the rate of change that is in the month of May will have to be billed. If not, the rate applicable is the new rate of service tax.
  • If any bills that are incomplete, or have been paid in part for which the services have been completed before 1st June 2015, then the applicable rate is the old rate of service tax.
  • Invoices which have been raised on advances have to be paid at the old rate of service tax.
  • Invoices which have been raised for future services to be paid in future can be paid at the old rate of service tax.
  • If invoices have been raised on 1st June for services to be provided after the date of change that is 1st June, the rate applicable is the new rate.

Exemptions for Service Tax

Almost all organizations which are service providers are liable to service tax. But there are certain exemptions to the above

  • If the revenue for a certain organization is not exceeding Rs. 10 lakhs, it is a small service provider, then it is not liable to pay service tax.
  • If the services are rendered under the CENVAT credit rules, then they are not liable to service tax.
  • The individuals and families who render services as diplomatic missionaries and their families have diplomatic immunity, such persons are not liable to service tax.
  • Goods and services for which service tax has been paid by the exporter are not liable to service tax.
  • Services which are a part of a special economic zone or are provided in a special economic zone are not liable to service tax.
  • Services which are provided to international organizations are not liable to service tax.

The change in Rate Explained with an Example

For transactions that occurred before the date of 1st June 2015, the rate of service tax applicable was 12.36%. On 1st June 2015, the rate was increased to 14%. After 15th November 2015, the Swachh Bharat Cess was applicable and the rate of tax increased from 14 to 14.5%. The Swachh Bharat Cess was 0.5%. On 1st June 2016, the rate was again increased to 15%. The government introduced another tax known as the krishi kalyan cess which is 0.5%. So, the rate of service tax is now 15%.

The rate can be broken down into 3 parts

The basic rate 14%

Swachha Bharat cess 0.5%

Krishi Kalyan cess 0.5%

Let us take an example to understand how the application of service tax takes place

If person N is providing consultancy services to a firm for a value of Rs. 1 lakh. It is assumed that N is acquired through effective management practice , it is therefore categorized as a service which is offered to the firm. With Swachha Bharat cess and Krishi Kalyan cess, the amount of fee comes to Rs. 1,15,000. The total amount of service is Rs. 1,00,00 and the taxes are RS. 15,000.

In the above case, no service tax has been charged on the invoice or the firm makes partial payment to the consultant then the tax would be proportionally calculated on the gross amount received by N for the service provided.

Point of Tax In Case of Change in Effective Rate of Tax

When the taxable service has been providedInvoice has been issuedPayment received for invoicePoint of taxation will beApplicable Rate
Before change in effective rate of taxAfter the change in rate of taxAfter change in rate of taxDate of issue of invoice or date of receipt or date of payment whichever is earlierNew rate
Before change in rate of taxAfter change in rate of taxDate of issue of invoiceOld rate
After the change in rate of taxBefore the change in rate of taxDate of receipt of paymentOld rate
After the change in effective rate of taxBefore the change in rate of taxAfter the change in rate of taxDate of receipt of paymentNew rate
Before the change in rate of taxBefore the change in rateDate of issuance of invoice or date of receipt or date of payment whichever is earlierOld rate
After the change in rate of taxBefore the change in rate of rateDate of issue of invoiceNew rate

FAQs

1. What is the applicable rate of service tax?

The tax applicable is 15% on the services rendered by the service provider.

2. Is service tax a direct tax?

No, service tax is an indirect tax that is imposed by the government.

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