What is Service Tax? Meaning and Returns

An Overview of Service Tax

When it was first introduced in 1994, only three services – telecommunication, stock brokerage, and general insurance services were included in the list, and the list expanded over the years, including many other services. The Finance Act, 2012 amendment, Section 65B(51) defines taxable services as any service subject to service tax under Section 66B. Section 66B of the Finance Act, 1994, imposes a tax on all services except those listed in the negative list. The negative list, defined under Section 65B(34), includes services specified in Section 66D. Service tax applies to services provided or agreed to be provided between persons within the taxable territory, collected as prescribed. For taxpayers, service tax online records and filings also made it easier to track exemptions and understand compliance rules.

The negative list services that were not taxable are provided under Section 66D of the Finance Act, 1994. This list includes services like funeral, burial, crematorium or mortuary services of deceased, agricultural services, and services provided by the government, etc., that do not come under the service tax regime . As per mega exemption notification, certain services like healthcare, educational institutions, and services by charitable organisations were exempt from service tax under specific conditions.

To ensure tax compliance, the government also introduced a reverse charge mechanism under service tax, in which the responsibility of paying service tax shifted from the service provider to the service recipient for certain specified services.

 

Rate of Service Tax

The rate of service tax evolved over the years

• The rate of service tax was 5% in 1994 when it was introduced.

• The rate was revised to 8% flat from May 2003 plus the education cess of 2% thereon from September 2004.

• The rate was then increased to 12% education cess from April 2006 under the Finance Act, 2006.

• Later, the introduction of secondary and higher education cess of 1% in 2007, bringing the effective rate to 12.36%.
   

Service Tax Registration

The government digitised the service tax registration process via the ACES (Automation of Central Excise and Service Tax) website in simple steps. Here are the steps to follow for registration:

1. The user first registers online with the ACES software by selecting the applicable Central Excise or Service Tax Portal on www.aces.gov.in to become an ACES user.
2. The user then fills out the appropriate registration form to complete the process and become an Assessee.
    

Payment of Service Tax

Service tax online payment involves a few simple steps mentioned below: 

• Visit the ACES portal and log in with service tax registration credentials.

• Go to the e-payment section and enter the 15-digit assessee code allotted by the jurisdictional Commissionerate. If the entered code is valid, the following details are displayed:

✔Name and address of assessee

✔Commissionerate code

✔Service tax to be paid

The assessee has to choose the type of service tax by clicking on ‘select accounting codes for service tax’

• Choose the bank from the drop-down menu and proceed to pay online through net banking. 

• After payment is completed, an online acknowledgement with a Challan Identification Number (CIN) is given. Save the acknowledgement for future reference. 

After making service tax payments, it is important to file the returns on a semi-annual basis on the ACES portal. Non-compliance with the service tax return filing attracted penalties, interest, and legal action. It is important to maintain a record of digitally signed invoices and other records for at least five years as per the law.
 

Service Tax Return Filed in India

Service tax compliance meant both timely payments and return filing. Payments were made monthly or quarterly, depending on turnover, through the suggested GAR-7 challan. Larger businesses needed to make payments electronically, while any delay attracted interest at the notified rates. For return filing, service providers submitted Form ST-3 (or ST-3C)1 on a half-yearly basis—April to September by 25th October, and October to March by 25th April. Later, annual returns were added, and the process shifted online through the ACES portal.
 

Maintenance of Service Tax Records

Under Rule 52 of the Service Tax Rules, 1994, every assessee should maintain detailed records, including computerised data, of all accounting and financial transactions. When you file your first service tax return, you should submit a list of all records you maintain to the jurisdictional Superintendent2. These records must be kept at the registered premises for at least five years after the financial year to which they relate.

Records cover both taxable and exempt services2, procurement of inputs and services, input-service purchase, invoices, agreements, GAR-7 challans, and CENVAT credit registers, among others. Failure to maintain and produce these can affect audits, credit claims, or assessments.
 

Transition to GST (Goods and Services Tax)

The introduction of the Goods and Services Tax in July 2017 marked a significant tax reform in India’s indirect tax structure. GST is a multi-stage tax levied on the supply of goods and services, having destination-based four main tax components. It simplified tax compliance, reduced the cascading effect of taxes, and promoted the ease of doing business. With the implementation of the Goods and Services Tax (GST), service tax was subsumed under this new comprehensive taxation framework. GST integrated multiple indirect taxes , such as central excise duty, state value-added tax, service tax, entertainment tax, etc., into a single system, thus simplifying compliance.
 

Key Takeaways

1. Service tax, introduced in 1994, was an indirect tax on services (except those in the negative list) aimed at generating revenue from India’s growing service sector.
2. Initially levied on just 3 services, the list expanded over time, exempting services like healthcare, education, agriculture, and government services.
3. The rate evolved from 5% in 1994 to 12.36% by 2007, with cess additions gradually increasing the effective rate.
4. Taxpayers could register, pay, and file returns through the ACES portal, making service tax online compliance simpler.
5. Returns were filed half-yearly via Form ST-3, with penalties for delays.
6. Businesses were required to maintain detailed service tax records for at least five years.
7. On 1st July 2017, service tax was fully subsumed under the Goods and Services Tax (GST), creating a unified indirect tax framework.
    

Conclusion

To sum up, the introduction of service tax marked a pivotal moment in India’s indirect tax structure, even though it is no longer in effect after its integration with goods and services tax (GST). With the option to pay and file service tax online via the ACES portal, compliance became easier for businesses and individuals. Service tax paved the way for a broader understanding and eventual integration of many indirect taxes under the GST ambit. Understanding the structure, historical relevance, and applicability of service provides valuable insights into the evolution of the tax system in India.
 

FAQs

1. Who is responsible for paying service tax?

   The service provider is mainly responsible for paying service tax. However, in certain cases, the liability shifts to the service recipient under the reverse charge mechanism. Businesses that have a turnover above ₹9 lakh in a financial year are also expected to register for service tax under Section 69(2)3 of the Finance Act, 1994.

   
   

2. How is service tax computed?

   Service tax was calculated on the taxable value of services provided. The rate4 evolved over time: it started at 5% in 1994 and gradually increased to 12% by 2008. Additional cesses, such as the Education Cess (2%), Secondary & Higher Education Cess (1%), Swachh Bharat Cess (0.5%), and Krishi Kalyan Cess (0.5%), were added. The effective rate reached 15% before service tax was replaced by GST.

   
   

3. How is Service Tax different from GST?

   Service tax was an indirect tax levied only on services, whereas GST is a comprehensive indirect tax applicable to both goods and services. By merging5 various taxes, including service tax, GST was introduced to create a single unified tax system across India.

   
   

4. Why was the Service Tax replaced by GST?

   GST replaced service tax to simplify the tax system, eliminate the cascading effect of multiple taxes, and establish a unified structure for taxing both goods and services. GST5 simplifies compliance, enhances transparency, and promotes ease of doing business by integrating multiple indirect taxes into a single framework.
    

Source:

1. https://thelaw.institute/business-law-as-applicable-to-co-operative-i/service-tax-india-features-implications/

2. https://taxguru.in/service-tax/49667maintenance-of-records-under-service-tax.html

3. https://taxguru.in/service-tax/service-tax-rules-4567.html

4. https://thelaw.institute/business-law-as-applicable-to-co-operative-i/service-tax-india-features-implications/

5. https://taxguru.in/goods-and-service-tax/goods-service-tax-detailed-explanation-examples.html