Service Tax (Brief)

Service tax

Service tax is, as the name suggests, a tax on Services. It is a tax levied on the transaction of certain services specified by the Central Government under the Finance Act, 1994.

 It is an indirect tax (akin to Excise Duty or Sales Tax) which means that normally, the service provider pays the tax and recovers the amount from the recipient of taxable service.

Who is liable to pay service tax?

Normally, the person who provides the taxable service on receipt of service charges is responsible for paying the Service Tax to the Government.

However, in the following situations, the receiver of the Services is responsible for the payment of Service tax:

(i) Where taxable services are provided by Foreign Service providers with no establishment in India, the recipient of such services in India is liable to pay Service Tax.

(ii) For the services in relation to Insurance Auxiliary Service by an Insurance Agent, the Service Tax is to be paid by the Insurance Company

(iii) For the taxable services provided by a Goods Transport Agency for transport of goods by road, the person who pays or is liable to pay freight is liable to pay Service Tax, if the consignor or consignee falls under any of the seven categories viz.

1. a factory
2. a company
3. a corporation
4. a society
5. a co-operative society
6. a registered dealer of excisable goods
7. a body corporate or a partnership firm.

(iv) For the taxable services provided by Mutual Fund Distributors in relation to distribution of Mutual Fund the Service Tax is to be paid by the Mutual Fund or the Asset Management Company receiving such service.

At present, the effective rate of Service Tax is 12.36% on the value of the taxable service. The above effective rate comprises of Service Tax @12% payable on the “gross value of taxable service”, Education Cess @ 2% on the service tax amount, and Secondary and Higher Education Cess @ 1% on the service tax amount.