Chapter 1

I ntroduction and Research M ethodology

1.1 I ntroduction

1.1.1) Taxes in the world context-

It is a matter of general belief that taxes on income and wealth are of recent

origin but there is enough evidence to show that taxes on income in some form or the

other were levied even in primitive and ancient communities. The origin of the word

"Tax" is from "Taxation" which means an estimate. These were levied either on the

sale and purchase of merchandise or livestock and were collected in a haphazard

manner from time to time.

As mentioned in his articles on ‘Study on proposed Goods and Service Tax’ by

Rajkumar S. Adukia , the first known system of taxation was in Ancient Egypt around

3000 BC - 2800 BC in the first dynasty of the Old Kingdom. Records from that time

show that the pharaoh would conduct a biennial tour of the kingdom, collecting tax

revenues from the people. Other records are granary receipts on limestone flakes and

papyrus. Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24

- the New International Version), it states "But when the crop comes in, give a fifth of

it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for

yourselves and your households and your children." Joseph was telling the people of

Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20per

cent) of the crop was the tax.

To the Athenians in Greece, war was a lifestyle, and a pricey one at that. As

such, Athenians taxed their citizens for war costs with a tax they called "eisphora."

The most historic factor of this tax was that it exempted no one, which many consider

1
the first democratic taxation system, as after the wars the money was often refunded

to the people. There is also some documentation of a tax put on foreigners (or any

individual without an Athenian mother and father), called "metoikion."1

Nearly 2000 years ago, there went out a decree from Ceaser Augustus that the

entire world should be taxed. In Greece, Germany and Roman Empires, taxes were

also levied sometime on the basis of turnover and sometimes on occupations. For

many centuries, revenue from taxes went to the Monarch. In Northern England, taxes

were levied on land and on moveable property such as the Saladin title in 1188. Later

on, these were supplemented by introduction of poll taxes, and indirect taxes known

as "Ancient Customs" which were duties on wool, leather and hides. These levies and

taxes in various forms and on various commodities and professions were imposed to

meet the needs of the Governments to meet their military and civil expenditure and

not only to ensure safety to the subjects but also to meet the common needs of the

citizens like maintenance of roads, administration of justice and such other functions

of the State. Looking at Indian scenario from ancient times, taxes are there in India.

1.1.2) Taxes in the Indian Context

As per the government’s Income tax website, I n I ndia, the system of direct

taxation as it is known today, has been in force in one form or another even from

ancient times. There are references both in Manu Smriti and Arthasastra to a variety

of tax measures. Manu, the ancient sage and law-giver stated that the king could levy

taxes, according to Sastras. The wise sage advised that taxes should be related to the

income and expenditure of the subject. He, however, cautioned the king against

excessive taxation and stated that both extremes should be avoided namely either

complete absence of taxes or exorbitant taxation. According to him, the king should

arrange the collection of taxes in such a manner that the subjects did not feel the

pinch of paying taxes. He laid down that traders and artisans should pay 1/5th of their

profits in silver and gold, while the agriculturists were to pay 1/6th, 1/8th and 1/10th of

2
their produce depending upon their circumstances. The detailed analysis given by

Manu on the subject clearly shows the existence of a well-planned taxation system,

even in ancient times. Not only this, taxes were also levied on various classes of

people like actors, dancers, singers and even dancing girls. Taxes were paid in the

shape of gold-coins, cattle, grains, raw-materials and also by rendering personal

service. 2

1.1.3) Service Tax -Pre 1994

As per the article in Service Tax Review on ‘Taxation of Services in India-Pre

legislative Historical Perspective by K.S. Ravi Shankar & B.N.Gururaj, Advocate ‘the

taxes on service is not new in the India. It is from the old ancient age, the tax on

services was levied in the different forms called Bali’, ‘Shulka’, ‘Kara’. In the Vedas

the principal taxpayers among other were workers and artisans. The noted historian

Prof. V. M. Apte, states that the main burden of taxation during the Vedic period fell

on the people, who pursued peaceful occupations such as agriculture, cattle keeping

arts, crafts, industries and trade. During the age of the Upanishads, one of the most

important branches of administration was that for the collection of taxes. The

artisans and other manual workers had to do one day’s work every month for the

king, and there were similar rules in respect of owners of ships and carts.

In Kautilya’s period (Arthasastra) it is evident that certain types of service

activities were major sources of state revenue the Superintendent of courtesans shall

be appointed who shall collect a ransom of twenty four thousand panas for a

courtesan and twelve thousand for a courtesan’s son. In addition their musical

instruments when coming from foreign land shall be charged a fee per showoff five

panas. Prostitutes who live by their beauty shall pay per month a tax double the

normal fee charged by them. Betting and gambling activity was taxed. Taxes were

collected either in cash (kara) or in kind (pratikara), e.g. free labour (Samahanika)

3
such a processing grain, processing oilseeds or sugarcane in warehouses, in lieu of

payment of tax. Various services were subject to fee as for example ferry charges.

During the age of Imperial Unity – 6th Century BC till the Satvahana Rule,

taxes included levies on artisans, fishermen, prostitutes, gambling houses, wine

houses, slaughter houses etc. Alauddin Khalji introduced new taxes and repressive

measures including a grazing tax on all milch cattle.

Taxation of services in India before the British Rule- evidence from per the

Combatore District Manual p.172, Major McLeod found the following imposts inter

alia were in full force and effect over and above the Land tax : i)Tax on watchmen;

ii)Tax by persons wearing caste marks on the forehead; iii) Tax on keepers of pack

bullocks; iv)Tax on dancing girls; v)Tax on agricultural irrigation watchmen; vi)Tax

on overseers of labour (maistris); vii)Tax on immoral persons; viii)Tax on carpenters;

ix) Tax on goldsmiths; x) Tax on blacksmiths; xi)Tax on paper makers; xii)Tax on shoe

makers; xiii)Tax on barbers; xiv) Tax on washer men; xv) Tam on iron-smelters;

xvi)Tam on drawers and distillers of fermented palm juice; xvii)Tax on boatmen;

xviii)Tax on Stone mason.

Prof. R. Sewell states that he found in the Government Office of his last

District, Bellary, and a few items of village taxation collectable during 1985 – the list

below is not the entire list in the lecture at Pp. 21-22.

a) Tax called Handertaneky for erecting marriage pandals or pavilions;

b) Tax leviable on appointment of a person to be priest of the Jangam caste;
c) Tax called puttam kaniki, or tax leviable on a person succeeding to the
office of priest;
d) Tax on ovens used by washer men.3

Salt has been taxed in India for centuries. However, in 1835 the British East India

Company raised the import taxes drastically after they began to impose rule over

4
Indian provinces. The salt tax was raised and lowered by multiple leaders and events,

and was not repealed until 1946. 3

1.1.4) Service Tax -post 1994

The Tax Reforms Committee headed by Professor Dr. Raja Chelliah in 1990

has recommended the introduction of Service Tax. Based on the above

recommendation, the present Service Tax is first introduced by the then Finance

Minister Manmohan singh in 1994 through the chapter V & V A of the Finance Act,

1994.

W hile introducing, Dr. Mamohan singh FM in his budget speech said “Over

the years, while attempts have been made to widen the base for domestic indirect

taxes, the services sector has not been subjected to taxation. Yet this sector accounts

for about 40per cent of our GDP and is showing strong growth. There is no sound

reason for exempting services from taxation, when goods are taxed and many

countries treat goods and services alike for tax purposes. The Tax Reforms Committee

has also recommended imposition of tax on services as a measure for broadening the

base of indirect taxes.” 4

After the date, in almost every budget, some services added to the net of

Taxable services. The collection of also tremendously increased from 407 Crore in

1994 to 58,000 Crore 2009-10. This has created litigations also.

The taxation history is very old. The concept of levying and collecting tax has

changed over a period of time. In earlier days taxes were not bifurcated like Income

tax , Excise duty, as there are in today’s form. In olden days It is in the form of 1/5 of

gross yield of crop (3000BC-2800 BC). It finds that after that war tax called ‘eisphora’

was levied for citizens in Greece. It was called first democratic taxation system, as

5
after wars money often refunded. W hile a tax put on foreigners (including a person

without Athenian mother and father) called ‘metoikion’.

In 2000 year ago, in Greece, Germany and Roman Empires, the taxes were also

levied sometime on the basis of turnover and sometime on occupation. In 1188, In

Northern England, taxes were levied on land and immovable property.

Later on, the poll taxes and indirect taxes were introduced, known as ‘Ancient

Customs’. The Ancient customs were the duties on the woo; leather and hides. The

purpose of all these taxes were to meet the needs of military and civil expenditure of

the Government as well as to meet common needs of the citizens like maintenance of

roads, administration of justice and such other function of state.

In the Indian context, The system the system of direct taxation as it is known

today, has been in force in one form or another even from ancient times. There are

references both in Manu Smriti and Kautilya’s Arthasastra to a variety of tax

measures. The taxes were 1/5 of the profit to artisans in silver and gold, while the

while the agriculturists were to pay 1/6th, 1/8th and 1/10th of their produce depending

upon their circumstances. Even taxes were collected from various classes of people

like actors, dancers, singers and even dancing girls in the in the shape of gold-coins,

cattle, grains, raw-materials and also by rendering personal service.

The tax on services is not new to India. It is from the old ancient age, the tax

on services was levied in the different forms called ‘Bali’, ‘Shulka’, or ‘Kara’. In

Kautilya’s period (Arthasastra) it is evident that certain types of service activities were

major source of state revenue. Sixth Century BC, till the Satvahana Rule, taxes

included levies on artisans, fishermen, prostitutes, gambling houses, wine houses,

slaughter houses etc. Alauddin Khilji introduced new taxes and repressive measures

including a grazing tax on all milch cattle. The taxation of services in India before the

6
English was there in the form of Tax on watchmen, dancing girl, Carpenters,

goldsmiths etc.

The present Service Tax is introduced in 1994, with only 3 services by the

then Finance minister, Manmohan Singh. The Service Tax was introduced on the

recommendation of the Tax Reform Committee to broaden the indirect tax base.

W hile introducing, Dr. Manmohan Singh, FM, in his budget speech said “Over the

years, while attempts have been made to widen the base for domestic indirect taxes,

the services sector has not been subjected to taxation. Yet this sector accounts for

about 40per cent of our GDP and is showing strong growth. There is no sound reason

for exempting services from taxation, when goods are taxed and many countries treat

goods and services alike for tax purposes. The Tax Reforms Committee has also

recommended imposition of tax on services as a measure for broadening the base of

indirect taxes.” 5

Then except three budgets (1995, 1999 2000), in every budget the Finance

Minister has introduced new services. It has become the important new source of

revenue year by year for the government.

1.2 Research M ethodology

1.2.1) Choice of the Topic

The Service Tax is new for all. It is based on Canadian GST. Till the date

nobody has done researcher on it. Being new and challenging levy for all the

stakeholders, attracted researchers to make the research on this topic. Being chartered

accountant, research has took the keen interest as hobby on the development of law

as it has introduced in 1994 and the researcher has passed his CA in 1996. Being

interest area of practice of the researcher is the Service Tax; researcher has selected

this subject topic.

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1.2.2) Significance of topic

The Service Tax started with 3 services and with small presence in taxation

has becoming key resources for government as alternate source of revenue. In budget

where other indirect tax collection reducing percentage wise ,the collection of Service

Tax has increasing year after year. Even the trade and industry people, have to

consider the effect of Service Tax in their decision. In the world economy as well as

national economy, the Services Sector has creating more space for its consideration as

its share in the Gross domestic product has gone up to more than 50per cent. Thus the

Services Sector and Service Tax has important in the economy. The study of which,

will contribute to the field and will be useful for all the stakeholders.

1.3 Objectives of Study

The objectives set for this study are

1 To study and analyze origin and growth of Service Tax in India.

2 To study and analyze provisions of Service Tax in India.

3 To study incidence and effects of Service Tax and it’s shifting either

forward to customer or sharing a part of the burden by service provider’s

themselves.

4 To study the levy and collection administration of Service Tax in India &

the efficiency of tax administrator in collection of Service Tax revenue.

5 To study the problem and prospects of Service Tax in India

1.4 Statements of H ypotheses

Researcher has tested following statements of hypotheses through this study.

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1. Service Tax as revenue will be major source for Govt. in the near

future though the decadal development is slow.

2. There are better prospects for Service Tax in India; however, the

prospects are not likely to be free from problems.

3. It is hardship for small tax payer as well as administrative cost for

this segment is high.

1.5 Research M ethodology

Proposed study is an exploratory research based on historical secondary data

on the theme and review of the related literature. The research is mainly based on

secondary data such as Books, Acts, reports of the Government of India official

statistics on levy and collection of Service Tax Vis-a-vis other direct and indirect taxes

of the Union Government of India, various magazines, and news papers published

articles etc. and electronic media like web sites, e-newsletters. Researcher initially

thought to collect part of the primary data from a few tax authorities, practitioners,

and tax payers who were to be interviewed for noting their expert opinion on

complications of Service Tax. However, this couldn’t be realized because these

respondents were not open and free to reveal the facts either on account of ‘official

secretes’ and unwillingness of the practicing consultants and tax payers to reveal the

true facts. As a result, this work is now entirely based on analysis of secondary data

collected through official sources.

Simple statistical tool like mean, ratios and percentages have been use to

analyse statistical data on levy and collection of Service Tax in India.

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1.6 Scope of the Study

1. The scope of this study is limited to a single indirect union tax, “Service Tax”

out of the overall Tax Structure of India, though passing references of other

taxes appear in the body of text have appeared for comparison purposes.

2. The study shall cover the entire geoGraphical area of India, wherever the

“Service Tax” is applicable.

3. The scope of this study covers a time period from implementation of this tax,

i.e. from 1994-95 till the date of completion of this work in 2009-10.

1.7 Limitations

1. The area of coverage of the topic being too large for an individual researcher,

he could not collect primary data from the respondents spread over the

country. Covering only local respondents from Maharashtra could have

presented only a partial picture that could not have been capable of being

representative of the country as a whole, the dependence on primary data was

to be given up.

2. W hile collecting primary data and information, the departmental personnel

though discussed the issues, showed inability to provide documented

information. Even professionals, on the plea of professional secrets, ethics have

expressed inability to disclose the statistics. W ith these limitations, the

research is carried out entirely on the basis of secondary data.

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1.8 Chapters Scheme

The entire thesis is organized in six chapters as detailed below:

Chapter
Number

Title

1 Introduction and Research Methodology

2 Review of Related Literature

3 Meaning and Development of Service Tax in India

4 Ratio of Direct and Indirect Taxes and Service Tax to GDP

5 Problems and Prospects of Service Tax in India

6 Summary, Findings and Suggestions

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References

1) A Study on proposed goods and Services Tax (GST) Frame work In India By
Rajkumar S Adukia- http://taxclubindia.com/simple/rajkumar.pdf

2) http://incometaxindia.gov.in

3) pp20-23, Taxation of Services in India– Pre-legislative Histrorical Prespective

By K.S. Ravi Shankar & B. N. Guruaj, Advocate STR Vol 1 Part 1st Jan 2006

4) A Study on proposed Goods and Services Tax (GST) Frame work In India By
Rajkumar S Adukia. http://taxclubindia.com/simple/rajkumar.pdf

5) Para 87 of budget speech 1994 delivered by Dr. Mamohan Singh, Finance

Minister

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Chapter 2

Review of Related Literature

2.1 I ntroduction

There is no research on the topic in Service Tax as per the knowledge of the

researcher. The reports and articles in relation to Services Sector, GDP and direct

and Indirect Taxes, Tax Administration, Service Tax articles are reviewed in this

chapter. The researcher has reviewed literatures on topics as i) Growth in Services

Sector – a study of world bank related to share, importance and effect of Services

Sector in GDP ii) Report of The Committee of Finance Ministry and State

Finance Secretaries On Service Tax – Topic related directly to Service Tax. The

Expert group has formed in 2000 by Government of India to study ‘Evolution of

Service Tax in India’ under the chairmanship of Dr. M. Govind Rao. iii) Reforms

of Tax Administration- The report of committee formulated by Finance Ministry

under chairmanship of Vijay L. Kelkar. The report suggests the various major to

improve administration in Income tax as well as collection of Income tax. iv) Tax

Administration Reform and Taxpayer Compliance in India - The research paper has

studied the relation between the Tax administration and taxpayer compliance by By

Arindam Das-Gupta, Shanto Ghosh, Dilip Mookherjee v) Tax net and the big fish –
The article is analysis the reason for decreasing the source of revenue as share of GDP and

how it can be increased. vi) Enhancing tax-to-GDP ratio, reducing fiscal deficit for

sustainable high growth By M. Sharif The article written by M . Sharif has discussed the

issue of sustaining of economic grow th and two other factors of challenge for Pakistan

government.vii) Can you plan for indirect tax?-The article refers the possibility of tax

saving planning in direct and indirect tax viii) Service tax implications : Brand

licensing vs contract manufacturing- The article discusses the issue related to CBEC

circular for particular service ix) News- Despite 61per cent Rise In Service Tax

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Collections, Huge Potential Still Untapped –The news is to seminar on ‘The

Evolution of Service Tax Challenges -Present & Future’ x) News - Service Tax -

Appeal filed by DC and the order passed by Commissioner (A) on that appeal is a

nullity : Tribunal – The news related to administration problem as well as

deficiency in training. xi) Indirect tax administration: Best international practices

The article refers the ways for improvement in tax administration to increase

collection.xii) Service Tax Administration: Need For An Independent Service Tax

Code - The articles focuses on the need of Independent act for Service Tax. xiii)

Tax Resistance- This article deals with meaning of Tax Resistance, History of Tax

resistance, Methods of Tax Resistance and Tax Evasion. xiv) Corruption in Tax

Administration by Mahesh C. Purohit – The article deals with Corruption in tax

administration. xv) Tax Administration and the Small Taxpayer: Concepts,

Concerns and Corrections By Parthasarathi Shome- This paper poses particular

relevant issues regarding the role, scope and effects of special small taxpayer

regimes. It has considered three taxes Income tax, VAT, Social security tax and

their likely affect to small business. The objective is to design tax substitutes for

them that correspond as closely to the main tax structure as possible.

2.2 Growth of Services Sector 1

In the study of Growth in Services Sector by the Development
Education Program (DEP), which is part of W orld Bank, the analysis of the three
sector of GDP, Agriculture, Industry and Services Sector is done. It has studied the
sectoral structure of world economy for the year 1995, which show the percentage
of these three sector in low income, middle income and high income countries in
the world. The low and middle income country has the income from Services
Sector 35per cent, and 52per cent. W hile for high Income, it is 66 per cent, which
show that the importance of the Services Sector in GDP.

W hile explaining ‘How can growth of the Services Sector help make
development more sustainable?’, it stated that when per capita income increases,

14
the importance of Agriculture reduces and gives the way to Industrial sector and
then to Services Sector. These are stages of development of economies. This is
explained through changes in consumer demand and the relative labour
productivity. W hen the people’s income grows the demand for food, the main
product of agriculture, reaches to it’s natural limit and demand for industrial good
increases, which lead to industrialization. Simultaneously, due to new farm
technique, making the agriculture productivity less expensive and reducing the
requirement of agriculture workers, shifting then to industrial sector. As result
industrial sector share in GDP is increases. Again the people’s income continue to
rise the people’s needs become less “material” and they begin to demand more
services—in health, education, entertainment, and many other areas. Meanwhile,
labor productivity in services does not grow as fast as it does in agriculture and
industry because most service jobs cannot be filled by machines. This makes
services more expensive relative to agricultural and industrial goods, further
increasing the share of services in GDP.

In the Services Sector Growth and Development Sustainability , it

states ‘The Services Sector produces “intangible” goods, some well known—
government, health, education—and some quite new—modern communications,
information, and business services. Producing services tends to require relatively
less natural capital and more human capital than producing agricultural or
industrial goods. As a result demand has grown for more educated workers,
prompting countries to invest more in education—an overall benefit to their
people. Another benefit of the growing Services Sector is that by using fewer
natural resources than agriculture or industry, it puts less pressure on the local,
regional, and global environment.’

2.3 Report of The Committee of Finance M inistry and State Finance

Secretaries On Service Tax 2
Government of India had constituted an Expert Group under the chairmanship
of Dr. M. Govind Rao vide Resolution dated 27.6.2000

W hile giving its report on Evolution of Service Tax in India, it stated

i) The importance of Services Sector to GDP in the world as well as in India.

ii) It has mentioned regarding the objective, purpose and growth of taxation
and its importance.
iii) The power of Government to levy the Service Tax

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iv) The Service Tax development and scope in India
The Contribution of Services Sector to GDP

It stated that the Services Sector has been growing phenomenally all over the
world. The growing importance of this sector can be gauged from the ever increasing
contribution made by the services sector to GDP, and thereby pushing back the
contribution of tradition contributors like agriculture and manufacturing sectors.
India is not an exception to this changed phenomenon. In the present day context,
services are widespread and all embracing and they encompass many activities like
management, banking, insurance, hospitality, administration, communication,
entertainment, travel, wholesale distribution, retailing, Research and Development
activities, other professional services. In today's context, the growth of an economy is
evaluated in terms of the growth and spread of the services sector. “It is interesting to
note that in India, the contribution of services sector to the GDP has grown to such
an extent that it has surpassed the share of agriculture and industry at a rapid phase,
when compared to other industrialised countries, Globally, during 1990-98 period,
the average annual growth rate of value addition in services sector has been 7.9per
cent in India, 4.6per cent in Pakistan, 3.4per cent in Brazil, 8.85 in Malaysia, 7.8per
cent in Republic of Korea. It was 1.9per cent in USA, 2.5per cent in Germany, 2.0per
cent in Japan, 1.6per cent in France and -0.1per cent in Sweden. In India, the
contribution of services sector to the country's GDP is estimated at 46per cent while
its share in some of the developed and developing countries is estimated at 71per
cent-USA, 60per cent Japan, 67per cent-UK, 33per cent-China, 41per cent -Indonesia,
50per cent-Pakistan and 56per cent-Brazil.

(i) Growth of Services Sector

The report shows that the Services Sector is growing worldwide, hence
its contribution is surpassed the contribution of Agriculture and
manufacturing sector contribution. The services are widespread and
encompass many activities like management, banking, insurance, hospitality,
administration, communication, entertainment, travel, wholesale
distribution, retailing, Research and Development activities, other
professional services. During the period 1990-98, the average growth of
Services Sector has been 7.9 per cent and the contribution of Services Sector
to the country’s GDP is estimated to 46per cent, which is less as compared to

16
developed countries, where its share is 71 per cent (USA), 60 per cent (Japan),
67per cent (UK).

ii) Objective, purpose and growth of taxation and its importance.

The tax is important source of revenue for the government. However,
its growth should be with justice. W hile collecting these taxes, collection of
Indirect tax is easier than the collection of Direct tax. As India entered the
W TO regime, there is constraint on the custom and excise duty, which
collection is reducing. The report in regards to tax stated “One of the
objectives of taxation is growth with justice. Mopping up resources for the
planned development is a big problem for the developing economies. W hile
both direct and indirect taxation sub-serve, inter alia, the purpose of raising
resources, indirect taxation is resorted to increasingly as a measure of good
economics and politics, because of the hidden incidence of indirect taxation, as
compared to direct taxes. In developed economies, consumption of goods and
services is treated and taxed alike. As already stated, indirect taxes are hidden
in the cost of goods and services, and when compared to direct taxes, it is
easier to collect indirect taxes and the cost of collection is comparable to the
cost of collection of direct taxes. Against the backdrop of constant resource
constraints, it is imperative for any government to look for various viable
alternatives. This has been accentuated further with the declining share of
customs and excise duties due to the streamlining of duty structures,
consequent upon India's entry into W TO regime.”

iii) The power of Government to levy the Service Tax

The report stated that the power to levy a tax on services is not
mentioned either in the union list or in the state list in the VII schedule of the
constitution. by virtue of Entry 97 in the Union List which gives power to the
Center for levy and collection of "any tax not mentioned in either of those
lists.

(iv) The Service Tax development and scope in India

The Service Tax was an offshoot of the recommendations made by Dr.

Raja Chelliah Committee, way back in the early 1990s. The Committee
observed that the indirect tax at the Central level should be broadly neutral in
relation to production and consumption of goods and should, in course of time

17
cover commodities and services. It is further stated that the 2001-02 Union
Budget expanded the scope of this levy to cover more services. These sporadic
efforts of the central government remain far below the revenue potential of
this sector. This is partly due to the administrative complexity and feasibility
consideration of taxing the vast range of services, which are primarily local in
nature.

2.4 Reforms of Tax Administration 3

The committee was formulated by the Finance Ministry under the chairmanship
of Vijay L. Kelkar. Out of the report Reforms of Tax Administration in direct taxes
refers to deficiencies and scope of improvement in Administration.

The report states that in practice, tax policy and tax administration mutually
affected each other which is the reason of loss of significant portion of potential tax
revenue, in India. In developing country, like India it is said that tax administration is
tax policy. This would imply that, however fine the design of the tax structure might
be in a representative developing country, it is the interpretation and implementation
of the law that counts. These elements reflect the need for adequate capacity of the
tax administration in place to implement the law. At the same time, experience
reveals that a particular tax administration mechanism could alter the original
intention of tax policy and structure. In the long run, it has to be ensured that tax
administration instruments facilitate, rather than ignore or hinder, the
implementation of tax policy goals. The tax administration, as it can’t play the role of
policeman to all taxpayer, its action must provide sufficient deterrence so as to induce
voluntary compliance.

The fundamental role of tax administration is order of priority i) To render

quality taxpayer services to encourage voluntary compliance of tax laws; and ii) To
detect and penalise non-compliance.

The functions of the tax administration comprises of various activities. (i)

Taxpayer’s education and services (ii) Collection of information (iii) Dissemination of
information (iv) Storage and retrieval of information (v) Verification
(appraisal/assessment of information) (vi) Collection of taxes (vii) Taxpayer’s
grievances redressal system and (viii) Accountability

(i) Taxpayer’s education and services- Traditionally, the role of the tax
administration has been to enforce the tax laws and provide at least minimal taxpayer

18
service. W hen the taxpayer base was expanded, it became necessary for the tax
administration also to facilitate compliance through the provision of quality taxpayer
service. Generally tax evaders in most countries, particularly developing countries,
can be classified into two categories. The first category relates to those who fail to
comply because of information asymmetry (lack of information) and the tax
administration’s failure to provide this information. The second category relates to
those who refuse to comply because of deficiencies in the taxpayer’s Information
system and supporting institutional setup. Therefore, the latter, in effect, is also
because of information asymmetry efficient for the tax administration to provide
quality taxpayer service and reduce the size of the first category. Taxpayer service
typically refers to the provision of information and material by the tax administration
to the general mass of taxpayers so as to facilitate compliance with the tax law.

Provision of quality taxpayer service is an integral part of the enforcement

strategy of any tax administration Taxpayer service typically refers to the provision of
information and material by the tax administration to the general mass of taxpayers so
as to facilitate compliance with the tax law. A cross-country survey of taxpayer
service indicates that the relatively more successful tax administrations provide
relatively high levels of taxpayer service.

In this regards the Task Force Committee has suggested following measures to
expand the present scope of the taxpayer service program; (i) the income tax
department must expand qualitatively and quantitatively, the present scope of
taxpayer service. (ii) The expenditure on taxpayer’s service must be increased from
the present level of about one percent of the total expenditure on tax administration
to at least five percent. In this regard, an important start should be made by the
establishment of taxpayer’s clinic in different parts of the country to enable taxpayers
to walk in for assistance. The Task Force feels that better treatment of existing
taxpayers has an important role in encouraging those outside the tax net to become
taxpaying citizens.(iii) The department should provide easy access to taxpayers
through Internet and e-mail and extend facilities such as tele-filing and tele refunds.
It should design special programs for retired people, low income taxpayers and other
such groups with special needs who cannot afford expensive services of tax
consultants.

(ii) Collection of information-The establishment of an effective taxpayer

information system is crucially dependent upon a unique identification numbering

19
system such that the information relating to various indicators of wealth, expenditure
and financial transactions can be collected and collated. The committee recommends
that: (i) The PAN should be extended to cover all citizens and therefore serve as a
Citizen Identification Number. This will obviate the need for the Home and Labour
Ministries to issue new numbers. (ii) Given the manifold increase in the coverage of
PAN, the responsibility for issuing should be transferred to an independent agency
outside the income tax department. However, the income tax department should have
online access to the database for tax enforcement like any other agency. (iii) The
requirement of quoting PAN may be expanded to cover most financial transactions.

For the administrative purpose the information for taxpayer for identification
can be grouped broadly in three heads: (i) Taxpayer’s Declaration (Under the system
of self-assessment, the taxpayer forms the basic source of information), (ii)
Information Returns (This is a more widely used device to collect information.
Information returns are declarations filed with a tax administration by persons
required to report details of their financial dealings with other taxpayers.)and (iii)
Field Survey (In addition to information from taxpayer.s return and other information
returns, a large volume of information also gets collected during assessment, searches
and seizures and survey operations)

In view of the extant method of collection of information and constraints in

digitizing the volume of information received by the tax administration, the Task
Force recommended that :(i) Income Tax Act should be amended to provide for
submission of annual information return. by third parties in respect of various
transactions as may be prescribed. For this purpose, a proper format of the return also
needs to be prescribed. Consequently, the flow of information will be continuous and
the discretionary power with the CIB to collect information will be eliminated. (ii)
Such annual return of information (including returns relating to tax deducted at
source) should be mandatorily required to be submitted on electronic format. (iii)
Many of the Departments involved in transactions specified in Rule 114B do not have
any mechanism for obtaining the PAN of the concerned person. It is, therefore,
necessary that the pro forma used by them for their departmental purposes, e.g., the
application form for transfer of motor license, should have the necessary column
requiring the applicant to disclose his Permanent Account Number (PAN). (iv) The
Department should set up a structure for Electronic Data Interchange (EDI) with
some of the major departments and organisations involved in the transactions

20
specified in Rule 114B, such as, Banks, Stock Exchanges, Telephone Companies,
Regional Transport Authority etc.

The Income tax assessment system in India comprises of Intimation of

tax/refund on returned income (Section 143(1)(a)); limited scrutiny. (Section 143)
introduced by the Finance Act, 2002 with effect from 1st June, 2002 to disallow
inadmissible loss, exemption, deduction, allowance, or relief claimed in the turn; and
full scrutiny. (Section 143) As there is Hugh backlog in processing in house return, it
is recommended outsourcing the data entry work and the time limit for processing
the data work. The scrutiny should be selected on scientific basis through help of risk
analysis by computer and it to be done in detailed with full investigation.

Radical improvement in tax administration calls for a transformation of

organization and methods. Modern information technology greatly facilitates such
transformation. The availability, cost, and accessibility of modern computers make
them ideal for the large-scale information processing and coordination problems
facing tax administrations.To speed up the process of modernisation, the Task Force
therefore recommends the following:(a) The Government should establish a national
Tax Information Network (TIN) on a build, operate and transfer basis. (b) TIN will
receive, on behalf of the tax administration, all TDS returns and other information
returns for digitization. The TIN will therefore serve as a gateway to the National
Computer Centre of the Income Tax Department. I t will help overcome the paucity of
technical manpower and inadequate technical infrastructure.

Refund-The failure of the tax administration to issue refunds continues to be a major

source of public grievance. This is partly due to its inability to promptly process the
returns, whose numbers have increased substantially in the last three years, and
partly due to the cumbersome process for issuing of refunds. The Committee
recommends that a) The existing cumbersome and manually-operated procedures for
issue of refunds must be replaced by a more efficient IT-based system. Under the new
system the department will prepare a separate file of all refunds daily which will be
downloaded by a payment intermediary, i.e., a designated bank. (b) The designated
bank will be authorised to issue computerised refunds as is the curr ent practice for
issuing dividend and interest warrants by companies.(c) The designated bank will be
required to transmit the information relating to the issue of refunds to the TIN, which
will also allow a taxpayer to verify the status of his/her refund claim.

21
Income tax Clearance Certificates-It is required by the person, who is not domiciled
but stayed more than 120 days and domiciled in India leaving for employment. This
system should be abolished as over time the machinery for issuing such clearances has
degenerated often leading to complaints of harassment and unethical behavior, hence
it is suggested only the person considered to be a proclaimed offender by revenue
authority should be stopped. Further in other cases it is recommended that the system
of issuing Income Tax Clearance Certificates to contractors and others should be
eliminated.

Dispute Resolution-Under the current scheme of dispute resolution, the taxpayer has
the option to either seek administrative redressal or judicial remedy. The Income tax
Act specifies the categories of orders in respect of which a judicial remedy can be
availed. There are several orders for which there is no judicial remedy and the
administrative redressal mechanism is ineffective. This results in considerable
dissatisfaction amongst taxpayers. The Task Force therefore recommends that the
Income tax Act should be amended to provide that all orders/intimation imposing any
additional burden should be made appealable

Accountability The ability of the tax administration to perform its role

effectively and efficiently is in turn determined by its ability to coordinate and adapt
over time the organizational structure and its resources. Traditionally the tax
administration has been placed within the Ministry of Finance CBDT, which is
responsible for administering the direct tax laws, should be given the requisite
autonomy so that it is made more accountable. It is suggested that the control of the
Central Government over the tax administration be exercised through a
Memorandum of Understanding (MoU) between the Central Board of Direct Taxes
and the Central Government. MoU should specify financial commitments, provide for
full financial autonomy and control over deployment of human resources , should
have exclusive power for designing the enforcement strategy. The ultimate
accountability of the tax administration is to the citizens. W ith a view to enhancing
accountability of (and transparency in) tax administration, it is important that the
CBDT publishes an annual report of its own, along the lines of the UPSC / CVC, that
is tabled in Parliament and put on its web site. The annual report must separately
provide for performance achievements of each Chief Commissioner / Commissioner.
In addition, the quarterly progress of achievement must be displayed on the web site,
so that taxpayers have an opportunity to respond. W hile defining a stricter

22
accountability structure, however, care must be taken to eschew an excessive and
regimented accountability system which over-burdens AOs with onerous and
fragmented oversight that ultimately only serves to reduce its overall effectiveness.

Human Resource Management-The absence of control over human resources

has further undermined accountability. Therefore, we recommend that the Central
Government should delegate to CBDT full authority and responsibility regarding staff
of the income tax department and its secretariat. The CBDT should, however, exercise
such delegated powers in a transparent manner within the framework of rules and
guidelines framed for this purpose. Such rules and guidelines should be framed with
the approval of the government Infrastructure. The Task Force was aghast at the
physical environment prevailing in most tax offices. W e were also told by
professionals that office space, work conditions and basic conveniences for staff, as
well as storage facilities for tax records, are grossly inadequate. Facilities for taxpayers
are even worse. The existing office layout is inimical to modernization and induction
of information technology. To institute these changes, the Task Force recommended
that (a) Based on the report of the Task Force set up by the CBDT in pursuant to our
recommendation in the Consultation Paper; the CBDT should request Chief
Commissioners to identify the shortcomings in their offices by 1st April 2003 and
send forward a proposal to CBDT. By 1st August 2003 a model Commissionerate
including the offices at the range, circle and ward levels should be established in each
zone.(c) CBDT should seek the requisite financial sanction to replicate the model
offices by either upgrading existing offices or, where necessary, by purchasing new
premises, etc. The entire exercise should be time bound so that by January 2005,
modern offices are in place in all Commissionrates. This was suggested to bring
simplicity in tax administration, improvement in functioning, changes in exiting
system to improve the performance of the Tax Administration.

2.5 Tax Administration Reform and Taxpayer Compliance in I ndia By Arindam

Das- Gupta, Shanto Ghosh, Dilip M ookherjee4

This paper evaluates effects on tax compliance of simple reforms in personnel

policy in the Indian income tax administration.

The researchers have developed the model of taxpayer, compliance decision

within the Indian setting and subsequently applied it to data from a sample of Indian
assessment unit comparing self employed taxpayer, where they found empirical

23
pattern consistent with the theoretical predictions of the model, which suggest the
simple reforms in personnel policy and organization of tax payer units would have
significant effect on the tax compliance. This research based on data from forty nine
tax units within five ranges, in three different major cities in India located
respectively in the south, west and central parts in India dealing with small
businesses and professionals, for whom tax evasion tends to be more pronounced than
for other occupations.

The researchers have found evidence consistent with the model of taxpayers
strategically self-selecting into wards or circles. This arises owing to the phenomenon
of assigning taxpayers to different assessment units on the basis of the incomes they
voluntarily disclose. It implies that variations in support staff or enforcement effort in
any given unit generates spillover effects on the workload and compliance in related
units. These effects explain why the measured revenue productivity of ward support
staff on the ward’s own revenue was negative. Once the spillover effects are
incorporated the estimated revenue productivity of ward staff exceeds 1, suggesting
the scope for expanding the scale of staff employed in these units. The estimated
productivity of staff in the circles is even higher.

W hat are the principal policy implications? One general implication is that
taxpayer incentives for voluntary compliance matter significantly, and are
substantially affected by enforcement efforts, especially in circles. The determinants
of these incentives as described above, suggest useful directions for reform. First,
consideration should be given to removing the ward/circle distinction, replacing it
with random assignment rules. This will remove the strategic under filing incentive,
with beneficial compliance effects. Second, the estimates indicate significant revenue
productivity with respect to expansion of support staff and assessing officers. Third,
revenue gains may be achieved by reallocating support staff from wards to circles,
where they appear to be more productive. Finally, penalty and prosecution effort
appears to have significant effects on compliance. It would be worthwhile to
encourage such efforts by improving the quality of information available to AOs, and
including measures of penalty effort in their performance evaluations. All of these
reforms are simple and unlikely to meet with much opposition from employees of the
tax administration. Other more sophisticated and ambitious reforms could also be
considered. These include reducing discretion of assessing officers with regard to
selection and conduct of audits, increasing competition across assessing officers, closer

24
supervision of audits, reforming performance evaluation and personnel allocation
procedures, centralized audit selection procedures based on income disclosures and
information generated by third parties. Many of these have been discussed in Das-
Gupta and Mookherjee (1998, 2000).However they are less easy to achieve in the light
of the scale and expense of the reform efforts, and opposition from tax administration
employees.

2.6 Tax net and the big fish 5

Government revenues can be increased by spending more on tax

administration, ensuring enforcement and coming down on evasion.-

The article is analysis the reason for decreasing the source of revenue as share
of GDP and how it can be increased. It is becoming critical to raise revenue for public
investment, spending for meeting social obligation with sustaining fiscal deficit. In
many developing countries revenue is under pressure and decreased in proportionate
with national income due to largely because macroeconomic, financial and trade
policies have tended to reduce revenues from taxation. These countries offering
incentive for foreign investment form of tax breaks or explicit or implicit subsidies to
attract foreign capital and to reduce the domestic tax for level playing field. In effect
tax revenue reduces. Even the shift to VAT in many countries, there was elimination
/ reduction in other indirect countries. Due to openness in capital flow, presence of
international tax havens, flexibility allowed by double taxation treaties and other
loopholes in tax systems, there was large scale tax evasion. Tax losses of developing
countries are estimated to $ 100 billion. This can be plug with coordination of
international action. For the same it require priority for International policy
agenda, but still it is not so. There are other instruments for individual country. i)
Strengthening of tax policy in terms of direct taxation as well transaction taxation so
that they do not fall disproportionately upon poor ii) By stepping up enforcement
and eliminating loopholes ,share of personal taxes can be increased iii) moving
beyond heavy reliance VAT for collection of tax. iv) As the increasing reliance on
domestic indirect tax of various kind adds income inequalities, for the same the levy
on or levying new taxes on certain types of luxury expenditure relating to both goods
and services, such as taxes on foreign travel, on consumption in luxury hotels, on
purchases made in high-end shopping malls, on imports of non-necessities, or on
purchase of luxury vehicles will be good way. One advantage of these types of taxes

25
are relatively corruption resistance. V) In developing countries certain types of taxes
on capital that can be imposed such as taxes on foreign exchange transactions (the
"Tobin tax"); taxes on all financial transactions, at a very low rate that does not affect
transactions of a productive intent; capital gains taxes; taxes on income from assets
held abroad; wealth taxes; differential taxes to promote certain types of "more
desirable" foreign direct investment. vi) Another set of options centres on trade taxes.
Such as taxes on imported luxury goods; export taxes on certain important export
commodities; a system of variable tariffs on a range of agricultural and industrial
goods, operating in a band within the WTO tariff bindings, such that international
price volatility is not immediately translated into domestic relative price volatility.

W ith such a variety of possibilities still open to developing countries, the

inability to collect more taxes must reflect political will rather than any real economic

constraints.

2.7 Enhancing tax-to-GDP ratio, reducing fiscal deficit for sustainable high growth 6

The article written by M. Sharif has discussed the issue of sustaining of economic

growth and two other factors of challenge for Pakistan government. The country is

faced the economic dilemma in achieving the high growth of more than 8per cent

GDP. If this growth rate is sustained for a decade, the author says it will help poverty

alleviation, improving per capita income, bridging provincial income inequalities and

may become an effective role player in South Asia. W hile discussing the existing

Frame work of the economy , he states that only 4 years from now the economy has

shown comparatively better growth rate of around 7 per cent of GDP.In FY05 it

registered a growth rate of 8.6per cent of GDP, while it missed the target of achieving

7per cent in FY 06 for many reasons which are beyond control like earthquake

disaster in the north and other parts of Kashmir ,even the performance of with

reference to three major Kharif crops ,cotton ,rice and maize was to some extend

disappointing.

26
The existing framework of economy based on following factors

Growth is highly dependent on domestic consumption. It has become difficult

for the government to augment supply to meet growing aggregate demand. Tight

monetary policy pursued over past around two years could have only a salutary effect

on curtailing the aggregate demand by reducing the imports. Domestic demand has

shown no signs of dampening because too much money from bank credit, wind- fall

profits from speculative business and foreign remittances is chasing too less

commodities or finished goods in the market. That is why high inflation is persisting.

Current account deficit ($3.68bn during first five months of current fiscal
year) and the trade deficit have been increasing since last financial year but the
government feel confident to be able to bear its burden because of strength of
external sector.Remittances, proceeds of privatisation, inflows from the donor
countries in particular the US and multilateral donors are unsustainable and
unreliable sources of strength for the external sector.Inadequacies in power and
infrastructure are taking a heavy toll on the economic growth. In the existing
circumstances, there are no quick solutions with the government or the private sector
to address the problems arising out of them.Apart from the factors listed above that
are really holding economic growth their hostage, there are two other important
factors that are a real challenge for the government and key to a high economic
growth that can be really sustained and self-assuring. They are: enhancing tax-to-
GDP ratio and reducing fiscal deficit. Their implementation is really linked with the
implementation of second-generation reforms that include reforms in governance
particularly implementing tax reforms, and improving the judicial and administrative
system of the country.The author further states that a high tax-to-GDP ratio is
crucial to economic growth apart from other factors such as high national savings rate
and investment-to GDP ratio. The ideal tax-to GDP ratio is between 18-20 per cent,
according to international standard for a developing economy. Contrary to it, tax-to-
GDP ratio is abysmally low; it was 9.97 per cent for the last FY.

Some of the untapped or less tapped sectors of economy or sources of revenue

that can yield substantial revenue will have to be brought into the tax net.
Conspicuous among them are agri-tax and tax on capital gains made through stocks
and real estate.

27
The share of agriculture in GDP is 23 per cent, while revenue generated from
this sector is 1per cent is very less. Even if we can think this to increase to 10per cent,
it generated Rs. 200 billion tax revenue. In capital gains tax in stocks and real estate
could yield revenue worth billions of rupees. Their contribution presently is
practically little whereas contribution by the capital gain tax on property in India is
20.0 per cent and in the US, UK and Japan, it is around 10.0 per cent of total tax
revenue. Retail trade whose share in GDP is around 19.0 per cent contributes only 3.0
per cent in the public revenue. It could be enhanced substantially provided retail
trade was documented. The other factor is Fiscal deficit. The high fiscal deficit is
considered undesirable. EU has fixed a limit of 3per cent for fiscal deficit.

2.8 Can you plan for indirect tax?7

In this article the author has compared the issue of tax planning in direct and
indirect tax. Tax planning is tool to reduce tax liability through legal means. The tax
planning is possible in direct tax i.e income tax and it is not possible in indirect tax as
there is difference in nature of taxable event.

The taxable event in income tax is the act of generation of income, which is measured
in terms of net profit. It is an accounting concept. The taxable events in the case of
indirect taxes are transaction based. In the case of Customs duty it is the act of import
or export. In the case of Excise duty it is the act of manufacture. In the case of VAT, it
is the act of adding value. In the case of Service Tax, it is the act of providing service.
These are all precise and physical concept.

The manipulation is possible in accounting to show less net profit like

providing for bad debts or other receivables. W hile in indirect taxes, taxable event are
more precise, either they are physical or easily identifiable. A tax advisor on the
indirect tax side cannot reduce the amount of indirect tax by manipulation of the
production or manufacture or import etc. He can only correctly interpret the law to
come to the proper taxable amount.

Evasion is not same as tax planning. If a manufacturer does not show his
production in the register and thereby avoid tax, it is evasion, pure and simple. It is
not tax planning. In income tax, some people argue that legal avoidance is different
from evasion.

Legal avoidance is a contradiction in terms. If it is legal, it is compliance to

law. If it is illegal, it is evasion. There is a legendary judgement known as MacDowell

28
case[1][1] in which Justice Chenappa Reddy and Justice Ranganath Misra observed
that the notion that tax avoidance is legal is wrong.

It is important to clarify that availing of an exemption is neither evasion not

tax planning. An exemption for opening a factory in a designated area such as
Uttarakhand or for using some special types of input is clearly available to the
manufacturers. If they avail of it, it is just legal and not an evasion. This cannot be
called tax planning. The word tax planning has a shady connotation. It smacks of
suitable manipulation of accounts.

The conclusion is that tax planning can be done on the direct tax side by
manipulating net profit but there is no such scope on the indirect tax side as it is
transaction based.

2.9 Service tax implications: Brand licensing vs contract manufacturing 8

This article has analysed the circular issued by the Central Board of Excise and
Customs on 27 October ,2008.
The circular has clarified issues relating to taxable services provided during the
course of production of alcoholic beverages (such as Indian Made Foreign Liquors,
Branded Country liquors and similar products) are matters of dispute for a
considerable period Before issuing this circular the a draft circular F.No.249/1/2006-
CX.9, dated November, 2006 (on applicability of Service Tax on taxable services
provided in certain cases during the course of production of alcoholic beverages) was
placed on the official website for eliciting responses from the stakeholders.

In liquor industry it is common practice to for the brand name owners, especially
foreign ones, to enter into strategic tie-ups with third party manufacturers or contract
bottling units (distillers or bottlers), for manufacture of branded liquor. The reason
that it is so is that there are stringent licensing requirements for manufacture and/or
sale of liquor in India and only distillers / bottlers who are in possession of such
licences are able to manufacture and/or sell branded liquor, regardless of who the
brand name owners are.

These arrangements are seen as a ‘win-win’ for both parties, as the brand name
owners are able to realise the benefits of sale of their branded goods in India and the
distillers/bottlers are able to utilise fully their manufacturing capacities.

29
The circular states that if the operations carried out by the licensee/bottler of
alcoholic products amounts to manufacture, no Service Tax can be chargeable. Earlier
in draft, it was considered as taxable under Business Auxiliary Service based on the
definition of manufacture in Sec 2(f) of central excise. In Business Auxiliary service,
the job work, production done on behalf of other person is taxable, if it is not
manufacture under Central Excise. This sector comes under state excise.

The circular has thereafter analysed the typical situations whereby the brand
name owners enter into arrangements with third party manufacturers for
manufacture of branded alcoholic products. It states that where the brand name
owner owns the intellectual property rights over the brand name and has licensed it
to the third party manufacturer who alone holds the licence issued by the state
government for manufacture of alcoholic beverages, the consideration received by the
brand name owner from such third party manufacturer for use of the brand name,
would be charged to Service Tax under the heading of ‘intellectual property services’ .

Pure brand name licensing arrangements of the nature described in the

Circular would clearly attract the charge of Service Tax under the heading of
Intellectual Property Services. On the other hand, contract manufacturing
arrangements again of the nature envisaged in the Circular, are not chargeable to
Service Tax.

The Circular envisages this exclusion to apply if the contractual arrangements

support the conclusion that consideration is paid by the service recipient i.e. the
brand name owner, to the service provider i.e. the contract manufacturer. It is
therefore important to ensure that the contract manufacturing arrangements are
carefully drafted in order to reflect the reality as envisaged in the Circular so that it
can be demonstrated beyond any doubt that the property, risk and reward in the
products so contractually manufactured reside with the brand name owner alone.

Thus depending on the nature of contract and the transaction, the implication
of Service Tax will seen. This also shows that the problems of new tax and confusions
of taxability among all section, which the Law makers tried to solve.

2.10 News- Despite 61per cent Rise I n Service Tax Collections, H uge Potential Still
Untapped9
This news on seminar on Service Tax – Issues and Implication organised by CII,
northern region has appeared in CII website.

30
Mr S K Mishra, Member, Central Board of Excise & Customs, was speaking on
“The Evolution of Service Tax Challenges -Present & Future” said that a huge
potential for Service Tax collection continues to remain untapped, despite a rise of 61
percent in Service Tax collections. He further said that against the target of Rs 8,000
crore for this fiscal, Rs 3,705 crore has already been collected by end October,
registering a 61per cent increse over the collections of the corresponding period last
year. In the month of October itself, Rs 810 crore was collected, marking a whopping
118per cent rise over collections in the same month last fiscal. Currently, the number
of assesses have crossed the 3 lakh mark, with over 60,000 added in the first seven
months of this fiscal. This has been possible due to the sustained efforts of the
Government in spreading awareness about Service Tax amongst various stakeholders.
Yet, despite the progress made so far, lot of potential still remained untapped.

He observed that after almost a decade of its imposition, Service Tax is still under
evolution and is expected take another decade before it reaches its logical conclusion.
He also said that the Government was in the process of devising a separate
legislation in this regard, the draft of which was yet to be discussed with the State
Governments. Referring to specific examples, Mr Mishra clarified various issues
concerning input tax credit rules and their implications for the industry. In
particular, credit could be taken for Service Tax paid by a provider on the telephone
services used at the premises. Such a facility, however, was not yet available for
residential or mobile phones, according to Mr Mishra.

This shows that rising importance of the Service Tax and potential growth.

Mr R M Khanna, Chairman, Economic Affairs & Taxation Sub-committee, CII

(NR), underlined the growing significance of Service Tax in the fiscal policy of the
Government. Today there are 58 services in the tax net. The burden of indirect
taxes, however, still falls largely on the manufacturing sector, whose contribution to
the GDP is only about half that of the Services Sector, he said. Professionals felt that it
would be in the interest of both assessees and the tax administration to have a
separate and comprehensive law on Service Taxation.

This shows that having more share in GDP, Services Sector , tax revenue is
less. There is need separate act, which is part of chapter V of Finance Act ,1994.

31
2.11 News - Service Tax - Appeal filed by DC and the order passed by
Commissioner (A) on that appeal is a nullity : Tribunal 10
“There was an order passed by the Deputy Commissioner in a Service Tax matter.

The Commissioner was not impressed by it and he, as is his understanding gained while

dealing with Central Excise matters, directed the Deputy Commissioner to file an appeal

before the Commissioner(A). The Deputy Commissioner meekly obeyed and the

Commissioner(Appeals) too under the influence of the CEA'44 passed an order in the

department's favour little remembering that the matter involved was a Service Tax one and

the provisions of review are entirely different than normal Excise and Customs matters. One

cannot help feeling sorry for the ignorance they exhibit as a departmental officer. As they say

Ignorance is bliss and these authorities are blissfully unaware of their own Act.

The appellants approached the Tribunal who wasted no time in allowing their

appeal by holding that the order passed by Commissioner (A) on an appeal by the Dy.

Commissioner is a nullity. The provisions of Section 84 of the Chapter V of the

Finance Act, 1994, were cited to emphasize that there exists a concept of revision by

the Commissioner in case he is unhappy with an order passed by a subordinate

authority. As for the assessee, if they are aggrieved with a Service Tax order of an

authority subordinate to the Commissioner, they can always file an appeal to the

Commissioner (Appeals).

Incidentally, the poor Departmental representative pleaded that the matter be

remanded so as to enable the Commissioner to pass an order in Revision, but the

Tribunal did not fall for this.

Moral of the story - NACEN should conduct more courses exclusively for the officers

posted in Review and more importantly for the adjudicating & first appellate

authorities!”

32
This news related to how due to difference in provisions in Central Excise and

Service Tax regarding review of order passed by subordinate officer (Assistant,

Deputy, Joint, Additional Commissioner )made the case to nullity in Service Tax. In

Central Excise in these types of orders Commissioner has to order for making the

Appeal to Commissioner (Appeal), while in Service Tax, Commissioner under Sec 84

has to issue revision Show Cause Notice. The training of officer is required.

2.12 I ndirect tax administration: Best international practices 11

The article focus on the how tax administration improvement can increase the
indirect tax collection. The various subject on reforms in custom dealt. The type of
organization model and model followed in India. The various areas key issue in
organizational design.

Indirect taxes constitute one of the most significant sources of revenue for the

Government of India. For efficient revenue collections, a sound administrative system

is a prerequisite. W hile tax policies and tax laws create the potential for raising tax

revenues, the actual amount of taxes flowing into the government treasury, to a large

extent, depends on the efficiency and effectiveness of the revenue administration.

Quality of indirect tax administration is both a key economic indicator and a driver.

The quality of revenue administration influences the investment climate in the

country. Foreign firms contemplating investment are not only concerned about the

formal tax system, but also with how the system works. A revenue administration

that is perceived to be arbitrary or predatory discourages investment. Further,

weakness in enforcement capacity of the revenue administration puts law abiding

firms at a competitive disadvantage, as others are allowed to get away with tax

evasion.

33
Tax Design and Tax Administration-Tax design and tax administration are critical

means to establishing an efficient revenue gathering mechanism in a country.W hile

different tax and customs administration reform projects in recent years have had

country specific variations, most have sought to (i) improve the organization and

management of revenue administration; (ii) strengthen the legal and regulatory

framework; (iii) broaden the tax base by registering potential taxpayers; (iv) facilitate

voluntary compliance; (v) improve capacity to process the massive information flows

resulting from declarations filed by taxpayers, payment transactions and

administrative actions; (vi) enhance availability of information about taxable

transactions and administrative actions; (vii) develop risk-analysis capacity to zero in

on cases involving potential violations of tax laws; (viii) strengthen investigation,

audit and enforcement capacity; (ix) improve appellate procedures; (x) enhance

analytical ability to carry out fiscal studies to assess tax burdens, collection trends,

compliance gaps and impact of tax policy changes; and (xi) reduce corruption.

Features of an ideal Indirect Tax Administration-It is in the interest of tax authorities

to communicate their vision clearly and honestly to businesses and to have a simple

and efficient communication system for tax payers. The mission statement and tax

payers charter should be clear and focused. There should be transparency and fairness

in the tax administration. Further, clear guidance and open communication between

authorities and businesses is a key requirement for an ideal tax administration.

Automation of processes and procedures are not only essential in view of the rapid

advancement of technology but it also ensures quick and smooth compliance. Further,

it also leads to reduced discretionary element in decision making of the tax officials.

Strategic risk management approach to audit is another key feature of an ideal tax

administration. Advanced administrations have found that a well designed audit

program is critical to reducing the extent of fraud and evasion. Improvements in audit

planning, collection of relevant information, methodology of conducting the audit

34
and training of auditors are the key areas of focus. A few advanced countries have laid

down specific guidelines for auditors. Enhancing audit capacity is extremely crucial,

as with the increasing sophistication of business transactions, including cross border

transactions, it is essential that revenue administration be able to match wits with

potential tax evaders.

Organizational Design Models for Indirect Tax Administration-Reforming outdated

organizational structures can lead to significant benefits, including more effective and

efficient tax administration and improved tax payer compliance. The various types of

models are 1) the type of tax model - The earliest organizational model employed by

tax administrators was based principally on type of tax criterion. This entailed the

operation of separate multifunctional departments for each tax that was largely self-

sufficient and independent of each other.2) the functional model - Under the

functional model, staff is organized principally by functional groupings. (e.g.

registration, accounting, information processing, audit, collection, appeals, etc.,) and

generally works across taxes. Compared to the tax type model, this model is perceived

to offer many advantages and aimed at improving tax administration performance

3) the taxpayer segment model - A more recent trend among a number of developed

countries has been to organize principally around segments of taxpayers (e.g. large

businesses, small/medium businesses, wage earners, etc.).

Organizational Model Followed by India for Indirect Tax Administration.India

currently follows the Type of tax model of tax administration. This model is followed

for each Central indirect tax customs, excise and Service Tax, and also followed for

the State indirect tax, i.e., VAT. W ithin the type of tax model, the geoGraphical

model is followed. The jurisdiction over the tax matters is geoGraphically distributed

to the Commissionerates, Divisions, Ranges and Circles. Most revenue administrations

are moving over to a functional organization structure, as against a structure based on

35
tax types. This involves creating specialized units for taxpayer assistance, processing

of tax returns and payments, tax audits, investigation and intelligence, appeals,

recovery of tax arrears, financial management, human resource management, fiscal

studies etc.

The key issues in organizational design relate to various areas such as

technology, costs and benefits analysis, people issues, communication and training.

Organization design must keep pace with the ever evolving technological pace. One

must of course weigh the pros and cons of organizational design changes.

Communication should be in manner that it makes the potential taxpayers awareness

of the general concepts of taxation and why they should pay their taxes. Revenue

administration can organize awareness raising campaigns involving TV skits, radio

programmes, advertising pamphlets, organising seminars and workshops etc. Last but

not the least, the tax officials must be trained in a manner that they can positively

contribute to an efficient and ideal tax administration in the country.

Tax is an economic device and with proper usage, it would benefit the country

and the people at large. But when it is misused, it would affect all people and make all

of them dishonest eventually. This would be the consequence of any ill conceived tax

laws; no matter how effective is the tax education in the country.Sustained and well

thought out efforts in implementing best practices will modernize Indian indirect tax

administration and will facilitate introduction of an All India Goods & Service Tax.

2.13 Service Tax Administration: Need For An Independent Service Tax Code. By
12
K.K.Jhavar

The article focues on the need of Independent act for Service Tax.

It states that when the government is taking active steps for simplification of

major corporate laws like Company Law and Income Tax Law it sounds strange that

36
Government is not taking any steps for simplification of Service Tax Law. The levy of

Service Tax can be traced back to recommendations made in early 1990 by the Tax

Reforms Committee headed by Professor Dr. Raja Chelliah. Based on the above

recommendation a modest beginning was made in the year 1994 by levying tax on

three services. Entry 92C of the Union list of the Seventh Schedule to the

Constitution of India enables the Union to levy ‘Taxes on Services.” Initially there

was no specific entry in the Union List for levying Service Tax. Service Tax was levied

by the Central Government by drawing power form entry 97 of the Union List. Entry

97 is a residuary entry in List – I. Despite lapse of more than 12 years no action has

been bank for enactment of a separate Service Tax Act and Rules.

Service Tax is a tax levied on the transaction of certain specified sources under

Finance Act, 1994. The Central Govt. levies Service Tax through chapter V of the

Finance Act, 1994. The taxable services are defined in Section 65 of the Finance Act,

1994 Sub-section 105 of Section 65 defines about 100 taxable services under sub-

clause (a) to (zzzw) rendering it one of the most complex sub-section with repetitive

use of english alphabet ‘z’.

Presently the statutes governing the levy of Service Tax are as follows –

(01) Finance Act, 1994 – Chapter V- Section 64 to 96.(02) Finance Act , 2004 Chapter

VI for levy of education cess - 2per cent on the Service Tax. (03) Finance Act, 2007 –

for levy of Secondary and Higher Education Cess – 1 per cent on the Service Tax

(04) Service Tax Rules, 1994 (05) CENVAT credit Rues, 2004(06) Taxation of services

(provided from outside India and Received in India) Rules, 2006 (07) Service Tax

(determination of Value) Rules, 2006 (08) Service Tax Advance Ruling Rules, 2003

(09) Export of Service Rules, 2005(10) Service Tax Registration of Special Category of

Persons) Rules, 2005 (11) Service Tax (Removal of Difficulty) Order, 2002(12)

Provisions of Central Excise Act, 1994 as applicable to ‘Service Tax’(13) Customs,

37
Excise & Service Tax Appellate Tribunal (Procedure) Rules, 1982 (14) Certain

provisions from Criminal Procedure Code, 1973 (15) Service Tax Credit Rules 2002.

(16)W orks contract (Composition Scheme for payment of Service Tax Rules, 2007.

All these need to be unified into a separate Service Tax act and Service Tax

rules. Enaction of an independent Service Tax code will on one hand facilitate smooth

administration of Service Tax regime and on the other hand the assessee will be freed

from unnecessary hassles because law will be very simple to understand. The

Government can take opportunity to introduce an independent Service Tax code

along with budget of year 2008-09.

2.14 Tax Resistance13

This article deals with meaning of Tax Resistance, Histroy of Tax resistance,
Methods of Tax Resistance and Tax Evasion.Tax resistance means refusing or resisting
paying taxes due to opposition with the institution that is collecting tax or with some
of the policies of the institution. The Resistance of Tax has come mainly from people
who are conscientious objectors and also from pacifists.

There are various arguments for Tax Resistance such as that the government is
involved in destructive, immoral, and unethical activities like capital punishment and
war and so paying taxes will fund all these activities. That the government has no
legal right to a person's money and so tax amounts to slavery or theft. Another
argument for Tax Resistance is that the government that is in power is full of
corruption for it serves only its own needs. The arguments against Tax Resistance are
that if in a democracy people only funded those decisions which they go with then
this would undermine the government. Another the arguments against Tax
Resistance are that it is too ineffective and passive to bring about a political change.

History of Tax Resistance can be traced long back to the 1st century A.D. when in
Judaea, the Jewish Zealots resisted paying the poll tax that had been set up by the
Roman empire. The Hutterites in the 16th century refused to pay taxes for they
realized that the money they would pay as tax would be used for capital punishment
and war. In 1930, Mahatma Gandhi also took the help of Tax Resistance for India's
independence campaign.

38
Various methods of tax resistance are The various methods of Tax Resistance are: (i)
Paying tax under protest (ii) Tax avoidance (iii) Redirection (iv) Refusing to pay
specific taxes (v) Tax evasion (vi) Reducing income and expenditure

Tax Evasion entails the efforts that are made by trusts, individuals, firms, and
various other entities to avoid paying taxes by illegal and unfair means. The Evasion
of Tax usually takes place when taxpayers deliberately hide their incomes from the
tax authorities in order to reduce their liability of tax. The various methods of Tax
Evasion are:i)Smuggling ii) Customs duty evasion iii) Value added tax evasion iv)
Illegal income tax evasion. Another method of Tax Evasion is value added tax evasion
under which the producers who collect from the consumers the value added tax
evade paying taxes by showing less sales amount. Many people earn money by means
that are illegal such as theft, gambling, and drug trafficking and so they do not pay tax
von this amount and thus this is another method of Tax Evasion that is called illegal
income tax evasion. Tax Evasion results in the loss of revenue for the government and
so ideally, no one should be indulging in it and the Indian government must also take
steps in order to stop Evasion of Tax by the people.

2.15 Corruption in Tax Administration by M ahesh C. Purohit14

The article deals with very crucial issue, corruption in the tax administration.

Corruption has always been in existence, in one form or the other. As far back as the

fourth century, B.C.E., Kautiliya, a Sanskirt scholar, wrote, “Just as it is not possible

not to taste honey (or poison) placed on the surface of the tongue, even so it is not

possible for one dealing with the money of the king not to taste the money in

however small a quantity. Just as fish moving inside water cannot be known when

drinking water, even so officers appointed for carrying out works cannot be known

when appropriating money” (Kangle 1972: 91). Kautiliya points out the ways in

which employees can be involved in corruption and prescribes the modus operandi to

be adopted by the king to deal with corruption and make appointments.

The study focuses on i) the main causes of corruption in tax administration, ii)

issues related to corruption in tax administration and analyses the role of procedures

for administering custom duties, excise duties, and value added tax [VAT]), iii)

39
reviews the impact of corruption on the economy, iv) suggestion on policy measures

for combating corruption in tax administration and recommendations.

The main causes of corruption in tax administration. A variety of factors contributes

to corruption in tax administration. These include the complexity of tax laws and

procedures, the monopoly power and degree of discretion of tax officials, lack of

adequate monitoring and supervision, the commitment of political leadership, and the

overall environment in the public sector.

A survey in Bulgaria reveals that the main drivers of tax corruption are low

pay, lack of professional ethics, legal loopholes, conflicts of interest, get-richquick

ambitions, and bureaucratic red tape. Issues related to corruption in tax

administration and analyses the role of procedures for administering custom duties,

excise duties, and value added tax [VAT]),

The level of corruption in tax administration generally parallels that in the

administrative environment as a whole. Liberal economic systems offer fewer

opportunities for corruption than socialist systems. The greater the administrative

controls over the economy, the greater the problems of monitoring and

accountability, because a greater share of economic planning decisions depend on

bureaucrats.

The objectives of a tax policy can be achieved only when the policy is properly

administered. Most developing countries face various organizational and operational

constraints to effective tax administration.

The Nature of Tax Fraud in India-An empirical study based on field work conducted

in 1994–95 indicates that tax evasion in India occurs partly through collusion

between taxpayers and tax officers. Of 5,840 offences detected, 87 percent were

procedural. These offences included incomplete or insufficient documentation,

40
inappropriate use of credit on capital goods, inadmissible deduction of inputs, taking

of credit before the commencement of production, use of undeclared inputs, faulty

interpretation of notification issued by the department, use of unregistered dealer’s

invoices, extension of credit on endorsed invoices, declaration of invoices with

incorrect address, and submission of invoices that were not in the name of the unit.

“Substantial” violations accounted for 7 percent of total revenue loss. These violations

included irregular use of deemed credit, extension of credit on exempted final

products, rejected inputs sent back without reversal of credit, extension of credit on

basic customs duty, misuse of the facility of “job work,” excess credit taken, and the

use of the CENVAT credit by small-scale units that had opted out of the system.

Fraudulent violations accounted for 6 percent of total revenue lost. These violations

included extension of credit without producing the required documents, extension of

credit on invoices without physical movement, duplicate extension credit on same

invoice, extension of credit without payment of duty, and use of fraudulent

documents. These violations show a deliberate attempt on part of the taxpayer to

defraud the government.

Customs Duty -Corruption in customs administration is a major problem in many

developing countries. Case studies of Mali and Senegal, for example, indicate that

these countries have faced serious problems of customs fraud in recent years

(Stasavage and Daubree 1998). Customs administration in India has been reformed

over time. Some problems remain, however. One relates to the valuation of cargo.

Taxpayers are often harassed on the grounds that the valuation is not correct; on this

pretext, goods are detained. Importers usually compromise on the assessment in order

to free the goods from detention. The imported cargo of regular importers is allowed

to pass through a green channel, but cargo of casual traders is subjected to a full

check.

41
VAT -Most of the procedures prescribed for sales tax administration continue under

state VAT. Checkposts at the borders of each state continue to monitor the flow of

goods into the state through the main arteries of interstate trade. The use of road

permits for administering the tax also continues. Under this system, the importing

dealer receives these permits from the tax department of the importing state and

sends them to his counterpart in another state before importing the goods. Although

these checkposts play an important role, the system does not work as effectively and

smoothly as it was intended to. The procedures allow for many points of interaction

between taxpayers and officials, some of which could be eliminated.

Impact of Corruption-Corruption drastically reduces tax revenues, forcing

governments to find other avenues for financing government expenditure, including

borrowing. Future fiscal flexibility is reduced, because servicing of debt has to be

given priority over other expenditures. Corruption adversely affects investment and

growth. Corruption leads to economic was tend inefficiency, because it adversely

affects the optimal allocation of funds, productivity, and consumption. W hen public

resources meant for setting up productivity-enhancing infrastructure are diverted to

politicians’ private consumption, growth falls. The cost of corruption to the society

(in terms of both tangible and intangible costs) is extremely high. Intangible costs

include the loss of trust in democracy, in leaders, in institutions, and in fellow

citizens.Tangible costs include the impact on trade and investments, administrative

efficiency, good governance, and equality of citizens.

Combating Corruption in Tax Administration-W hich policy measures need to be

adopted to combat corruption in tax administration depends on the social

environment and the attitude about corruption held in the society—the factors that

account for the degree of corruption in a country. Some policies that could be adopted

by all developing countries plagued with corruption are described below. The ways

42
are i) rationalize the Design of Tax Laws - One of the most important policy

prescriptions for curbing corruption is establishing a rational tax system with

simplified tax laws. The number of tax rates should be as low as possible and the

number of tax exemptions as small as possible (if they cannot be eliminated

altogether). In addition, the tax system should be integrated, with different taxes

levied by all tiers of government. For taxes on commodities and services, it is

important to avoid end-use exemptions, a major source of corruption. ii) Designate

Corruption a National Crime-The problem of corruption needs to be addressed at

both the national and international level. National political leaders must make a

commitment to eradicate this menace iii) Reduce Monopoly Power.

Since the monopoly power of tax officials encourages them to indulge in

wrong doing, the first step in combating corruption has to be to curb the monopoly

power of these officials.iv) Make Civil Servants Accountable and Salaries Competitive

The system of recruitment of officers should be streamlined and a competitive

examination system introduced. Civil servants’ salaries should be high enough to

allow them to resist the temptation to use their office for private gain v) Restructure

Tax Administration Agencies- Tax administrative agencies could be restructured

functionally. The duties of various functionaries within the VAT department should

be streamlined, with an eye to minimizing personal interactions with taxpayers

vi)Severely Punish Corrupt Officials-Punitive action against corrupt officials can have

an important deterrent effect.vii) Use Information Technology to Combat

Corruption-Many countries around the world, at all income levels, are attempting to

use information technology to combat administrative corruption viii)Set Up an

Independent Anticorruption Organization

Many countries have set up anticorruption commission’s ix) Decentralize

Government -Experience and theory suggest that an organization is most vulnerable

43
to corruption when bureaucrats enjoy a monopoly over taxpayers and take actions

that are difficult to monitor. X) Establish a Code of Ethics-At the national level, every

country should have a comprehensive code of ethics that spells out appropriate and

inappropriate behavior for politicians as well as bureaucrats. XI ) Inform Taxpayers of

Their Rights-Access to accurate information should be a right that is publicized

adequately so that taxpayers are aware of it.

One of the most important policy prescriptions for curbing corruption is creating a

tax system that is rational, equitable, and simple. Reducing the monopoly and

discretionary power of tax officials is also very important. The tax structure should be

as broad as possible, in order to maximize equity. Bureaucrats should be given

competing jurisdictions, so that competition among officers will drive the level of

bribes to zero. Monitoring and auditing must be increased to prevent corruption. The

system of recruitment of officers should be streamlined, and officers should be given

intensive and repetitive training for promoting a code of conduct, with emphasis on

ethical values, such as integrity, honesty, public service, justice, transparency,

accountability, and rule of law. Salaries should be high enough that officials are able

to support themselves and their dependents without accepting bribes. An

anticorruption commission can be set up that maintains transparency in the system

and makes political leaders and officers accountable for their actions. Decentralization

can also help curb corruption. Its effectiveness depends on the design of

decentralization and the institutional arrangements governing its implementation.

2.16 Tax Administration and the Small Taxpayer: Concepts, Concerns and

Corrections By Parthasarathi Shome 15

This paper poses particular relevant issues regarding the role, scope and effects of
special small taxpayer regimes. It first elaborates on the problem, as perceived, of the

44
phenomenon of the small taxpayer and considers if the issue is exaggerated. Second, it
points towards some of the anomalies that exist when a small taxpayer is attempted to
be defined. Third, it provides a selective list of small taxpayer treatment that may be
acceptable in the short to medium term as a tax administration device.

The paper has considered three taxes, income tax, VAT and social security tax
that are likely to affect the small or micro businesses. The objective is to design tax
substitutes for them that correspond as closely to the main tax structure as possible.

The point summarized as follows –

(1) Almost all modern tax administrations in developing countries in Latin America
and Asia have moved towards establishing large taxpayer units (LTUs) since often a
small number—anywhere between 1,000 and 50,000—of large taxpayers contribute
between 80-90 percent of the tax revenue collected. This has become a practical
device in securing tax revenue in an expected manner. This strategy prescribes that
the universe of taxpayers controlled by LTUs should rapidly increase, thus expanding
the taxpayer universe ‘from the top’

(2) The stability that is generated should not eschew attention given to other
taxpayers. Special care has to be taken to ensure that expanding the universe of
taxpayers does not receive low priority, that is, expansion must be carried out also
‘from the bottom’. In an examination of the individual income tax in India, for
example, Das Gupta and Mookherjee (1998) found that the number of assessee has not
been an effective constraint on tax collection. Thus, focusing a highly significant
amount of resources on large taxpayers may represent an efficient strategy for short
term revenue mobilization but, in the medium term, it comprises an insufficient
approach.

(3) Tax administrators do tend to agree that, ideally, all taxpayers should be targeted.
Baer et al (2002), for example, point to the problem of sustainability of reforms
introduced through LTUs: “The tax administration may lack an overall reform
strategy that spells It is not unusual, however, to find that the number of taxpayers
that LTUs control does not increase impressively over time, perhaps indicating that
the short-term stability of revenue from this source may keep them from becoming a
dynamic administrative instrument. See Baer et al (2002) for country experiences. out
clearly how the modernization effort introduced through the LTU will be extended to
the rest of the tax administration (and the medium-size and small taxpayers).” (p.37)

45
Nevertheless, in general tax administrations are likely to implement a strategy to
control and expedite the flow of revenue, focused mainly on large taxpayers. In the
absence of constant alertness, a disproportionate amount of administrative resources
may, thus, be spent on LTUs.

(4) One explanation given for disproportionate resources spent on LTUs is that they
cover not only income taxes, but also the VAT, selective excises and other taxes,
geared solely towards what large taxpayers are liable to pay. The very design of LTUs
in this fashion seems to go against the framework of a pure functional classification of
tax administration that is otherwise routinely recommended by tax administration
experts. There may be some inconsistency here.

(5). In both Asia and Latin America, small taxpayers do possess significant revenue
contribution potential, not uncommonly 15 - 25 percent of the total (depending of
course on where the line is drawn between large and small which itself is a problem
as was discussed). This could imply a high degree of distortion in the allocation of
resources by separating small from large taxpayers. In turn, this would affect long
term economic growth and, therefore, long term revenue potential, adversely. This is
a point that I have found difficult to convince tax administrators about. Only when
they take note, can tax administration policy be expected to be modified accordingly.
Thus, even where appropriate tax policy is formulated, it can be successfully
implemented only with an enhancement in the awareness of tax policy concerns by
tax administrators. I can only present this issue at this workshop hoping that my view
will be considered in proper light. In terms of our present example, this leads once
again to the conclusion that the high significance of large taxpayers in revenue
collection should be taken as a temporary, shortcoming, albeit understandable, in tax
administration, rather than as a rationale for the tax administrator to continue to pour
more resources into such an activity in the long run.

(6) The revenue potential of small taxpayers has assumed additional importance with
structural changes in many economies. W ith privatization of large public sector
enterprises and utility companies in Latin America, Asia and Eastern Europe, self
employment in the small-scale services and manufacturing sectors has tended to
grow. This impact has been studied, for example, in large economies such as Brazil
and India that are undergoing fundamental structural changes. W ith it, captive
revenue sources such as large public enterprises have given way to smaller entities
with revenue potential. Tax administration cannot, therefore, afford to downplay the

46
growing pool of small tax payers in the present environment of an emerging small
business sector.

(7) Nevertheless, small taxpayers are often made subject to scaled-back taxation under
the concept of a ‘single tax’ (monotributo) which tends to collect less tax from them
than their potential. The idea of a single tax is a poor one since it increases inequity
and encourages the unwillingness of small taxpayers to graduate from the single tax.
Any loss in revenue has to be made up by those who are above the threshold, leading
to a reversal of vertical equity. Even horizontal equity suffers when a wage-earner in
a factory is subjected to a tax (typically through tax deduction at source, TDS) that is
not collected from a wage-earner in a restaurant (by the restaurant owner), or a self-
employed worker with the same income. A single tax does not reduce evasion except
by definition, since it typically requires small taxpayers to pay less tax than their
theoretical tax potential. It also exacerbates the problem of a secondary market for
VAT invoices and, thus, could actually increase tax evasion. In a like manner, a single
tax also leads to inefficiency by encouraging resource allocation towards the lower-
taxed sector. It is no surprise that tax policy experts, as cited above, in general prefer
tax simplification but not separation between large and small. And there must be a
clearly defined strategy to phase out a single tax if it is already in place.

(8). Under the circumstances, what would be the acceptable way of taxing small
taxpayers?(a) For the income tax, they should be subjected to a Minimum Alternate
Tax (MAT) based on both gross assets and turnover, whichever yields a higher tax.
The tax rate of 21MAT should be set to equivalence with the lower marginal income
tax rate under the assumption of a reasonable rate of return on capital. (b)For the
VAT, there has to be a threshold below which small taxpayers would function.

They should be allowed to opt into the general VAT system. The VAT administration
should report regularly the pace at which small taxpayers are graduating from below
the threshold.

(c)For the social security tax, small taxpayers should be given a reasonable period for
utilization of the money they withhold before transferring it to Government, as a
means to compensate them indirectly for the free withholding and transfer service
they perform for Government. (d) a single tax covering all taxes - income tax, VAT,
social security tax, or other taxes- - that small taxpayers are liable to pay, should not
be enacted.

47
(9) Tax administration has to improve its techniques of revenue calculations and
reporting of trends. To this end, it should regularly report: (a) the increase in
taxpayer register/roll below the threshold; (b) the trend in the relative allocation of
administration resources between small and large taxpayer units; and (c) an annual
calculation of the decrease in revenue loss as more taxpayers graduate above the
threshold. This third aspect is important in obliging the tax administration to make
relevant revenue yield calculations from meaningful tax administration measures.

(10) The ultimate goal has to be for the tax administration to fully reflect the original
intentions of tax policy as expressed in the tax statute. This should be achievable if the
complexity in the tax structure is reduced through a continuous process of tax
simplification. In turn, it would be the responsibility of the tax administration to fully
apply the tax law without issuing executive orders to create simplistic administrative
constructs that may facilitate its operations in the short run but would tend to divert
the tax system from its principles of efficiency and equity. These principles must
remain the tax system’s central premise if long run economic growth and, in turn,
robust revenue productivity, are not to be hampered.

48
References
1 Growth of Services Sector
Source:http://www.worldbank.org/depweb/beyond/beyondco/beg09.pdf
2 Report of the Committee of Finance Ministry, Source-
http://www .indiaservicetax.com/service/reports/stfin/evol.htm
3 Reforms of Tax Administration
Chapter3 of Tax Force committee Report headed by Kelkar, Source-
http://mof.gov.in/kelkar/chp3dt.pdf

4 Tax Administration Reform and Taxpayer Compliance in India By Arindam Das-Gupta,

Shanto Ghosh, Dilip Mookherjee
Source:people.bu.edu/dilipm/publications/DasguptaGhMookITPF.pdf

5 Tax net and the big fish Government revenues can be increased by spending more on tax
administration, ensuring enforcement and coming down on evasion.
NewsSource:http://www .hinduonnet.com/fline/fl2317/stories20060908002204800.htm

6 Enhancing tax-to-GDP ratio, reducing fiscal deficit for sustainable high growth By M. Sharif.
Source: http://www.jang.com.pk/thenews/feb2007-weekly/busrev-05-02 2007/p2.htm
7 Can you plan for indirect tax? Dated November, 10th 2008, News Source
http://www .cainindia.org/news/11_2008/can_you_plan_for_indirect_tax.html

8 Service tax implications : Brand licensing vs contract manufacturingNovember 10, 2008,

Source:http://www.cainindia.org/news/11_2008/service_tax_implications_brand_licensing_vs
_contract_manufacturing.html

9 News- Despite 61per cent Rise In Service Tax Collections, Huge Potential Still Untapped,
Source:http://www.ciionline.org/news/newsMain.asp?news_id =1111200340536PM 11 Nov,
2003

10 News - Service Tax - Appeal filed by DC and the order passed by Commissioner (A) on that
appeal is a nullity: Tribunal Source: TIOL News Service Mumbai, Mar 23, 2007

11 Indirect tax administration: Best international practices

Source:http://www.cainindia.org/news/11_2008/indirect_tax_administration
best_international_practices.html, November, 17th 2008

12 Service Tax Administration: Need For An Independent Service Tax Code. By K.K.Jhavar
Source: http://pbr.co.in/view .php?id=264
13 Tax Resistance Source: http://business.mapsofindia.com/india-tax/concepts/fraud.html

14 Corruption in Tax Administration by Mahesh C. Purohit

Source:http://siteresources.worldbank.org/INTWBIGOVANTCOR/Resources/CorruptioninTaxAdminis
tration.pdf )

15 Tax Administration and the Small Taxpayer: Concepts, Concerns and Corrections By
Parthasarathi Shome
Source: http://unpan1.un.org/intradoc/groups/public/documents/un
/unpan006398.pdf)

49
Chapter 3

M eaning and Development of Service Tax in I ndia

3.1 I ntroduction

Before the examining the data related to Servie tax and study of of problem

and prospectus of Service Tax in India, In this chapter, the researcher has tried to find

out the meaning of Servie, tax and Service Tax and Development of Service Tax in

India. The First part contains of meaning of Service in dictioneries, in various act

characterstices of Service, specification of service, and Service –goods comparision in

limited sense. The next part contains meaning of Tax in various dictionaries. Then

researcher after finding out the meaning of Service Tax, the development of Service

Tax through the angle various finance ministers in their budget speeches. There after

along with history, the right of Central Government in respect to levy Service Tax

power and constitution validity of Service Tax is examined with help of judicial

pronouncement and articles in tax magazine. Then Service Tax and it’s territory is

reviewed.

In the last chapter the global scenario of taxes on services and comparision of

W TO and Service Tax in India in limited perspective is discussed.

3.2 M eaning of Service Tax

The one of the main feature of Service Tax is that there is no separate act to

govern Service Tax. It is part of Finance Act, 1994 (Chapter V and V A). In the

provisions of Finance act, there is no definition of ‘Service’. Hence we have to check

up the meaning of Service from dictionary and other laws. The origin of Service word

in English is from Latin word servitium means ‘salvery” which formed from servus

means ‘slave’ or old French word servise.

50
3.2.1 M eaning of service –First the meaning of Service is depicted by the following

diagram presentation.

Figure 3.1 M eaning of Service

The word service has various meaning. The diagram explains various meaning

of service. i) To serve ii) Armed service ,Table service ,Military Service iii) An

activity iv) Service of process v) inspection and repair service vi)to overhaul say

accommodation vii) tune up, viii) Robert W illiam service ix) To work x) An

Employment xi) A company xii) To avail xiii) Help- to assist, aid , assistance xiv)

religious service, divine service.

3.2.2 Dictionary meaning of ‘Service’ is as follows

51
a. As per W ebster’s New W orld Dictionary 1

Service

Servise < OF < L servitium, servitude < servus, slave: see SERF6

1) the occupation or condition of a servant

2) a) employment, esp. public employment, diplomatic service" b) a branch
or department of this, including its personnel; specif., the armed forces, as
army, navy, or air force
3) a) work done for a master or feudal lord b) work done or duty performed
for another or others !repair service, public service"
4) The serving of God, as through good works, prayer, etc.
5) a) public worship b) any religious ceremony!the marriage service" c)
[sometimes pl.] a similar, but nonreligious, ceremony, as for a burial or
marriage !graveside services" d) a musical setting for a religious service
6) a) an act giving assistance or advantage to another b) the result of this;
benefit; advantage c) [pl.] friendly help; also, professional aid or attention! The
fee for his services"
7) The act or manner of serving food!a restaurant noted for its fine service"
8) a set of utensils or articles used in serving !silver tea service"
9) a system or method of providing people with the use of something, as
electric power, water, transportation, mail delivery, etc.
10) Installation, maintenance, repairs, etc., provided by a dealer or
manufacturer to purchasers of equipment
11) The act or manner of serving the ball in tennis, etc., or one's turn to serve
12) [Archaic] devotion, as of a lover to his lady
13) Animal Husbandry the act of bringing a male animal to copulate with a
female
14) Law notification of legal action, as by the serving of a writ
15) Naut. any material, as wire, used in serving (ropes, etc.)

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1 of, for, or in service; specif., a) of or relating to the armed forces b)
providing repair, maintenance, supplies, etc. c) providing services, rather
than goods
2 of, for, or used by servants, tradespeople, etc. !a service entrance"
3 a) for use during active service! a service uniform" b) serviceable; durable
!service weight stockings"
VT. - [iced, -[icing
1 to furnish with a service
2 to copulate with (a female): said of a male animal
3 to make or keep fit for service, as by inspecting, adjusting, repairing,
refueling, etc.
4 to make the periodic interest payments on (a debt)
At someone's service

i. ready to serve or cooperate with someone

ii. ready for someone's use in service
In service
1 in use; functioning: said esp. of an appliance, vehicle, etc.
2 in the armed forces
3 working as a domestic servant of service giving aid or assistance;
helpful; useful Service
n.
SERVICE TREE

b. As per dictionary reference.com 2

ser·vice

1.
a. Employment in duties or work for another, as for a government: has been
in the company's service for 15 years.
b. A government branch or department and its employees: the diplomatic
service.
2.
a. The armed forces of a nation: joined the service right after college.
b. A branch of the armed forces of a nation.

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3. The performance of work or duties for a superior or as a servant: found the
butler's service to be excellent.
4.
a. W ork done for others as an occupation or business: has done service for us
as a consultant.
b. An act or a variety of work done for others, especially for pay: offers a
superior service to that of his competitors; provides full catering services.
5. A department or branch of a hospital staff that provides specified patient care:
the anesthesiology service.
6. Installation, maintenance, or repairs provided or guaranteed by a dealer or
manufacturer: a dealer with full parts and service.
7. A facility providing the public with the use of something, such as water or
transportation.
8.
a. Assistance; help: was of great service to him during his illness.
b. An act of assistance or benefit; a favor: My friend did me a service in fixing
the door.
9.
a. Active devotion to God, as through good works or prayer.
b. A religious rite.
10.
a. The serving of food or the manner in which it is served.
b. A set of dishes or utensils: a silver tea service.
11. Sports. The act, manner, or right of serving in many court games; a serve.
12. Copulation with a female animal. Used of male animals, especially studs.
13. Law. The serving of a writ or summons.
14. The material, such as cord, used in binding or wrapping rope.
15. An answering service.

tr.v. ser·viced, ser·vic·ing, ser·vic·es

1. To make fit for use; adjust, repair, or maintain: service a car.

2. To provide services to.
3. To make interest payments on (a debt).
4.
a. To copulate with (a female animal). Used of a male animal, especially
studs.
b. Slang. To have sex with.

adj.

54
1. Of or relating to the armed forces of a country.
2. Intended for use in supplying or serving: a service elevator; the
service entrance.
3. Offering repairs or maintenance: a service guarantee; a road service
area.
4. Offering services to the public in response to need or demand: a
service industry.

Idioms: at (someone's) service -Ready to help or be of use.

Be of service -To be ready to help or be useful.

3.2.3 Legal Definations of Service

The term services cover a heterogeneous range of intangible products and

activities that are difficult to encapsulate within a simple definition. Services are also

often difficult to separate from goods with which they may be associated in varying

degrees.

1) System National Accounts, 1993

“Services are not separate entities over which ownership rights can be established.

They cannot be traded separately from their production. Services are heterogeneous

output produced to order and typically consist of changes in the condition of the

consuming units realized by the activities of the producers at the demand of the

customers. By the time their production is completed they must have been provided

to the consumers.”

2) The Monopolies and Restrictive Trade Practices Act,( MRTP) 1969

It appears that the first legislative attempt to define “service” in India was by the

definition provided for that expression in the The Monopolies and Restrictive

Trade Practices Act,( MRTP) 1969 in Section 2 (r). This definition had both

inclusive and exhaustive reach as it defined the expression to mean

“ service of any description which made available to potential users and includes

the provision of facilities in connection with banking ,insurance ,transport,

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supply of electrical or other energy , board or lodging or both ,entertainment

,amusement or the purveying of news or other information, but does not include

the rendering of any service free of charge or under a contract of the personal

service.”

3) The Foreign Exchange Management Act (FEMA), 1999

Sec. 2 (zb)-"service" means service of any description which is made available to

potential users and includes the provision of facilities in connection with

banking, financing, insurance, medical assistance, legal assistance, chit fund, real

estate, transport, processing, supply of electrical or other energy, boarding or

lodging or both, entertainment, amusement or the purveying of news or other

information, but does not include the rendering of any service free of charge or

under a contract of personal service ;

4) Under the Foreign Trade Development and Regulation Act, 1992 ( FTDRA) the

Foreign Trade Policy is framed, which in Para 9.52 defines the word “ services”

to include all tradable services covered under GATS and earning free foreign

exchange.

5) As per the Consumer Protection Act 1986,

Section 2(O)-"service" means service of any description which is made available

to potential users and includes, but not limited to, the provision of facilities in

connection with banking, financing insurance, transport, processing, supply of

electrical or other energy, board or lodging or both, housing construction,

entertainment, amusement or the purveying of news or other information, but

does not include the rendering of any service free of charge or under a contract

of personal service;

6) GATT – Final Uruguay Round – Publication of MVIRDC, W TC, Bombay ,1994 3

“Services” includes any service in any sector except services supplied in the
exercise of governmental authority. A service supplied in the exercise of

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governmental authority means any service, which is supplies neither on a
commercial basis, nor in competition with one or more service suppliers.

The different meanings of service are i) it is occupation of the person or ii) it

is employment or iii) work done for master or iv) servicing of god or v) an act of

giving assistance or vi) act of serving food or vii) method of proving people with use

of something or viii) installation maintenance, repairs provided by dealer or

manufacturer to purchaser of equipment. It is something done by one person to

another may it employment or service food. It may economic value or social value.

Social value like serving to god can not be measured in terms of money.

The research is relates to the economy value of service. In various act also the

definition of service is restricted to the same and depends on the scope of the act. In

Monopolies and Restrictive Trade Act and Consumer Protection act (both have same

definition of Service),covers all the services available to the potential user, but does

not includes any service ,which is free of charge or in the personal nature.(For e.g.

work of housewives). W hile the System of Accounts, 1993 defines the service from

the angles of its nature like service is not separate entity, they are traded with their

production only. The GATT definition is inclusive definition, covering of all services

of any sector but it excludes the service supplies in exercise of government authority

7) From W ikipedia, the free encyclopedia 4 Service (economics)-A service

is the intangible equivalent of an economic good. Service provision is often an

economic activity where the buyer does not generally, except by exclusive

contract, obtain exclusive ownership of the thing purchased. The benefits of

such a service, if priced, are held to be self-evident in the buyers willingness to

pay for it. Public services are those society pays for as a whole through taxes and

other means.

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By composing and orchestrating the appropriate level of resources, skill,

ingenuity, and experience for effecting specific benefits for service consumers, service

providers participate in an economy without the restrictions of carrying stock

(inventory) or the need to concern themselves with bulky raw materials. On the

other hand, their investment in expertise does require consistent service marketing

and upgrading in the face of competition which has equally few physical restrictions.

Many so-called services, however, require large physical structures and equipment,

and consume large amounts of resources, such as transportation services and the

military. Providers of services make up the tertiary sector of the economy.

3.2.4 The Five characteristics of service

1. I ntangibility

Services are intangible and insubstantial: they cannot be touched, gripped, handled,

looked at, smelled, tasted or heard. Thus, there is neither potential nor need for

transport, storage or stocking of services. Furthermore, a service cannot be (re)sold or

owned by somebody, neither can it be turned over from the service provider to the

service consumer nor returned from the service consumer to the service provider.

Solely, the service delivery can be commissioned to a service provider who must

generate and render the service at the distinct request of an authorized service

consumer.

2. Perishability - Services are perishable in two regards

i) The service relevant resources, processes and systems are assigned for service

delivery during a definite period in time. If the designated or scheduled service

consumer does not request and consume the service during this period, the

service cannot be performed for him. From the perspective of the service

provider, this is a lost business opportunity as he cannot charge any service

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delivery; potentially, he can assign the resources, processes and systems to

another service consumer who requests a service. Examples: The hair dresser

serves another client when the scheduled starting time or time slot is over. An

empty seat on a plane never can be utilized and charged after departure.

ii) W hen the service has been completely rendered to the requesting service

consumer, this particular service irreversibly vanishes as it has been consumed by

the service consumer. Example: the passenger has been transported to the

destination and cannot be transported again to this location at this point in time.

3. Inseparability

The service provider is indispensable for service delivery as he must promptly

generate and render the service to the requesting service consumer. In many cases the

service delivery is executed automatically but the service provider must preparatorily

assign resources and systems and actively keep up appropriate service delivery

readiness and capabilities. Additionally, the service consumer is inseparable from

service delivery because he is involved in it from requesting it up to consuming the

rendered benefits. Examples: The service consumer must sit in the hair dresser's shop

& chair or in the plane & seat; correspondingly, the hair dresser or the pilot must be

in the same shop or plane, respectively, for delivering the service.

4. Simultaneity

Services are rendered and consumed during the same period of time. As soon as the

service consumer has requested the service (delivery), the particular service must be

generated from scratch without any delay and friction and the service consumer

instantaneously consumes the rendered benefits for executing his upcoming activity

or task.

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5. V ariability

Each service is unique. It is one-time generated, rendered and consumed and can

never be exactly repeated as the point in time, location, circumstances, conditions,

current configurations and/or assigned resources are different for the next delivery,

even if the same service consumer requests the same service. Many services are

regarded as heterogeneous or lacking homogeneity and are typically modified for

each service consumer or each new situation (consumerised). Example: The taxi

service which transports the service consumer from his home to the opera is different

from the taxi service which transports the same service consumer from the opera to

his home - another point in time, the other direction, maybe another route, probably

another taxi driver and cab.

Each of these characteristics is retractable per se and their inevitable coincidence

complicates the consistent service conception and makes service delivery a challenge

in each and every case. Proper service marketing requires creative visualization to

effectively evoke a concrete image in the service consumer's mind. From the service

consumer's point of view, these characteristics make it difficult, or even impossible, to

evaluate or compare services prior to experiencing the service delivery.

Mass generation and delivery of services is very difficult. This can be seen as a

problem of inconsistent service quality. Both inputs and outputs to the processes

involved providing services are highly variable, as are the relationships between these

processes, making it difficult to maintain consistent service quality. For many services

there is labor intensity as services usually involve considerable human activity, rather

than a precisely determined process; exceptions include utilities. Human resource

management is important. The human factor is often the key success factor in service

economies. It is difficult to achieve economies of scale or gain dominant market share.

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There are demand fluctuations and it can be difficult to forecast demand. Demand can

vary by season, time of day, business cycle, etc. There is consumer involvement as

most service provision requires a high degree of interaction between service

consumer and service provider. There is a customer-based relationship based on

creating long-term business relationships. Accountants, attorneys, and financial

advisers maintain long-term relationships with their clients for decades. These repeat

consumers refer friends and family, helping to create a client-based relationship.

3.2.5 Service definition

The generic clear-cut, complete and concise definition of the service term reads as

follows:

A service is a set of singular and perishable benefits delivered from the accountable

service provider, mostly in close co action with his service suppliers, generated by

functions of technical systems and/or by distinct activities of individuals, respectively,

commissioned according to the needs of his service consumers by the service

customer from the accountable service provider, rendered individually to an

authorized service consumer at his/her dedicated trigger, and, finally, consumed and

utilized by the triggering service consumer for executing his/her upcoming business

or private activity. 5

3.2.6 Service specification

Any service can be clearly, completely, consistently and concisely specified by means

of the following 12 standard attributes which conform to the MECE principle

(Mutually Exclusive, Collectively Exhaustive) (1)Service Consumer Benefits

(2)Service-specific Functional Parameters (3)Service Delivery Point (4)Service

Consumer Count(5)Service Delivering Readiness Times (6)Service Support

Times(7)Service Support Languages (8)Service Fulfillment Target (9)Service

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Impairment Duration per Incident(10)Service Delivering Duration (11)Service

Delivery Unit(12)Service Delivering Price

The meaning and content of these attributes are:

1. Service Consumer Benefits describe the (set of) benefits which are trigger able,

consumable and effectively utilizable for any authorized service consumer and

which are rendered to him as soon as he trigger one service. The description of

these benefits must be phrased in the terms and wording of the intended service

consumers.

2. Service-specific Functional Parameters specify the functional parameters which

are essential and unique to the respective service and which describe the most

important dimension(s) of the services cape, the service output or the service

outcome, e.g. maximum e-mailbox capacity per registered and authorized e-mail

service consumer.

3. Service Delivery Point describes the physical location and/or logical interface

where the benefits of the service are triggered by and rendered to the authorized

service consumer. At this point and/or interface, the preparedness for service

delivery readiness can be assessed as well as the effective delivery of the service

itself can be monitored and controlled.

4. Service Consumer Count specifies the number of intended, clearly identified,

explicitly named, definitely registered and authorized service consumers which

shall be and/or are allowed and enabled to trigger and consume the commissioned

service for executing and/or supporting their business tasks or private activities.

5. Service Delivering Readiness Times specify the distinct agreed times of every day

of the week when the described service consumer benefits are trigger able for the

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authorized service consumers at the defined service delivery point consumable and

utilizable for the authorized service consumers at the respective agreed service level

all the required service contributions are aggregated to the triggered service the

specified service benefits are comprehensively rendered to any authorized triggering

service consumer without any delay or friction.

The time data are specified in 24 h format per local working day and local time,

referring to the location of the intended and/or triggering service consumers.

6. Service Support Times specify the determined and agreed times of every day of

the week when the triggering and consumption of commissioned services is supported

by the service desk team for all identified, registered and authorized service

consumers within the service customer's organizational unit or area. The service desk

is/shall be the so called the Single Point of Contact (SPoC) for any service consumer

inquiry regarding the commissioned, triggered and/or rendered services, particularly

in the event of service denial, i.e. an incident. During the defined service support

times, the service desk can be reached by phone, e-mail, web-based entries and/or fax,

respectively. The time data are specified in 24 h format per local working day and

local time, referring to the location of the intended service consumers.

7. Service Support Languages specifies the national languages which are spoken by

the service desk team(s) to the service consumers calling them.

8. Service Fulfillment Target specifies the service provider's promise of effectively and

seamlessly delivering the specified benefits to any authorized service consumer

triggering a service within the specified service times. It is expressed as the promised

minimum ratio of the counts of successful individual service deliveries related to the

counts of triggered service deliveries. The effective service fulfillment ratio can be

measured and calculated per single service consumer or per service consumer group

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and may be referred to different time periods (workday, calenderweek, work month,

etc.)

9. Service I mpairment Duration per Incident specifies the allowable maximum

elapsing time [hh:mm] between the first occurrence of a service impairment, i.e.

service quality degradation, service delivery disruption or service denial, whilst the

service consumer consumes and utilizes the requested service, the full resumption and

complete execution of the service delivery to the content of the affected service

consumer.

10. Service Delivering Duration specifies the promised and agreed maximum period

of time for effectively rendering all specified service consumer benefits to the

requesting service consumer at his currently chosen service delivery point.

11. Service Delivery Unit specifies the basic portion for rendering the defined service

consumer benefits. The service delivery unit is the reference and mapping object for

the Service Delivering Price, for all service costs as well as for charging and billing the

consumed service volume to the service customer who has commissioned the service

delivery.

12. Service Delivering Price specifies the amount of money the service customer has

to pay for the distinct service volumes his authorized service consumers have

consumed. Normally, the service delivering price comprises two portions a fixed basic

price portion for basic efforts and resources which provide accessibility and usability

of the service delivery functions, i.e. service access price a price portion covering the

service consumption based on fixed flat rate price per authorized service consumer

and delivery period without regard on the consumed service volumes, staged prices

depending on consumed service volumes,fixed price per particularly consumed

service delivering unit.

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(i) Service delivery

The delivery of a service typically involves six factors:-The accountable service

provider and his service suppliers (e.g. the people), Equipment used to provide the

service (e.g. vehicles, cash registers, technical systems, computer systems),The

physical facilities (e.g. buildings, parking, waiting rooms),The requesting service

consumer Other customers at the service delivery location

(ii) Customer contact

The service encounter is defined as all activities involved in the service delivery

process. Some service managers use the term "moment of truth" to indicate that

defining point in a specific service encounter where interactions are most intense.

Many business theorists view service provision as a performance or act (sometimes

humorously referred to as dramalurgy, perhaps in reference to dramaturgy). The

location of the service delivery is referred to as the stage and the objects that facilitate

the service process are called props. A script is a sequence of behaviors followed by all

those involved, including the client(s). Some service dramas are tightly scripted,

others are more ad lib. Role congruence occurs when each actor follows a script that

harmonizes with the roles played by the other actors.

In some service industries, especially health care, dispute resolution, and social

services, a popular concept is the idea of the caseload, which refers to the total

number of patients, clients, litigants, or claimants that a given employee is presently

responsible for. On a daily basis, in all those fields, employees must balance the needs

of any individual case against the needs of all other current cases as well as their own

personal needs.

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Under English law, if a service provider is induced to deliver services to a

dishonest client by a deception, this is an offence under the Theft Act 1978.

3.2.7 Service-Goods continuum

The dichotomy between physical goods and intangible services should not be given

too much credence. These are not discrete categories. Most business theorists see a

continuum with pure service on one terminal point and pure commodity good on the

other terminal point. Most products fall between these two extremes. For example, a

restaurant provides a physical good (the food), but also provides services in the form

of ambience, the setting and clearing of the table, etc. And although some utilities

actually deliver physical goods — like water utilities which actually deliver water —

utilities are usually treated as services.

In a narrower sense, service refers to quality of customer service: the measured

appropriateness of assistance and support provided to a customer. This particular

usage occurs frequently in retailing.

To sum up, The service has various meanings like the occupation or condition of

servant, employment, an act of giving assistant , the act of servicing food which come

under economic service while the serving the god , public worship, a religious

ceremony are the social service.

The service defines under various laws speaks of the status, use characteristic of

services. They also mainly concern with economic services. The System of National

Accounts defines

i) The form, i.e. not separate entities.

ii) The intangibility- They are not traded separately like goods

iii) Heterogeneity They are heterogeneous output as per demand of customer

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iv) The lifetime of service, by the time their production are completed, they must

be provided to the consumer.

The Monopolies and Restrictive Trade Act and Consumer Protection Act has

the same definition of service. The service is defined as i) the service of any

description, which is made available to potential user. ii) I t includes the provision of

facilities in connection with buildings, transport etc. iii) but does not includes the

provision of rendering of services free of charge.

W hile in FEMA Act it is defined for the angle of its use and its relation and

it is define as inclusive. The service means service of any description and includes (Sec

2 (zb) of The Foreign Exchange Management Act (FEMA), 1999.

Service is, in economic perspective, intangible, have economic value like

economic goods. It does not require bulky raw material, at the same time it can not be

stored. However, some services like transport require huge physical structure, set up.

The characteristics of Service can briefly be summarized as (i) Intangible -

cannot be touched, gripped, handled, looked at, smelled, tasted or heard. Thus, there

is neither potential nor need for transport, storage or stocking of services, can not be

resold. (ii) Perishable- a) If the designated or scheduled service consumer does not

request and consume the service during this period; the service cannot be performed

for him. b) W hen the service has been completely rendered to the requesting service

consumer, this particular service irreversibly vanishes as it has been consumed by the

service consumer. (iii) Inseparatable - The service provider is indispensable for service

delivery as he must promptly generate and render the service to the requesting

service consumer. The service consumer is inseparable from service delivery because

he is involved in it from requesting it up to consuming the rendered benefits. (iv)

Simultaneity- Services are rendered and consumed during the same period of time. (v)

Variable-Each service is unique. It is one-time generated, rendered and consumed and

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can never be exactly repeated as the point in time, location, circumstances,

conditions, current configurations and/or assigned resources are different for the next

delivery, even if the same service consumer requests the same service.

Service can be specified with the means of 12 standards, those are (i) Service

Consumer Benefits (ii) Service-specific Functional Parameters

(iii) Service Delivery Point (iv) Service Consumer Count(v)Service Delivering

Readiness Times (vi) Service Support Times (vii) Service Support Languages (viii)

Service Fulfillment Target (ix) Service Impairment Duration per Incident (x) Service

Delivering Duration (xi) Service Delivery Unit (xii) Service Delivering Price.

“Service” is very unique character and different from goods. After service the

meaning of Tax has to checked

3.3. M eaning of Tax

3.3.1. Evolution of the Concept The word tax is derived from the Latin word ‘taxare’
meaning ‘to estimate’. The diagramal presentation understand the meaning of tax as
follows

Figure 3.2 M eaning of Tax

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Tax mean i) levy ii) charge iii) taxation iv) revenue enhancement v) assess vi) task.

“A tax is not a voluntary payment or donation, but an enforced contribution,

exacted pursuant to legislative authority" and is any contribution imposed by

government whether under the name of toll, tribute, impost, duty, custom, excise,

subsidy, aid, supply, or other name.” (Black’s Law Dictionary)

3.3.2 M eaning of Tax from Dictionaries

1 http://dictionary.reference.com/browse/tax

Tax

Tax is a sum of money demanded by a government for its support or for

specific facilities or services, levied upon incomes, property, sales, etc. Any tax is

burdensome for tax payer, a charge on income, property, business assets, and

obligation of the taxpayer, duty, or demand levied by the government.

Tax implies a burden on; make serious demands on: to tax one's resources, to

take to task; censure; reprove; accuse: to tax one with laziness, Informal to charge:

W hat did he tax you for that?

2 http://www.thefreedictionary.com/tax

Tax (t ks)

1. A contribution for the support of a government required of persons, groups, or

businesses within the domain of that government.

2. A fee or dues levied on the members of an organization to meet its expenses.

3. A burdensome or excessive demand; a strain.

tr.v. taxed, tax·ing, tax·es

1 To place a tax on (income, property, or goods).

2 To exact a tax from.

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3 Law To assess (court costs, for example).
4 To make difficult or excessive demands upon: a boss who taxed
everyone's patience.
5 To make a charge against; accuse: He was taxed with failure to appear
on the day appointed.
[Middle English, from taxen, to tax, from Old French taxer, from Medieval
Latin tax re, from Latin, to touch, reproach, reckon, frequentative of tangere,
to touch; see tag- in Indo-European roots.]

3.3.3 Legal M eaning of Tax 6

Tax (n) a governmental assessment (charge) upon property value, transactions

(transfers and sales), licenses granting a right, and/or income. These include
Federal and state income taxes, county and city taxes on real property, state
and/or local sales tax based on a percentage of each retail transaction, duties on
imports from foreign countries, business licenses, Federal tax (and some states'
taxes) on the estates of persons who have died, taxes on large gifts, and a state
"use" tax in lieu of sales tax imposed on certain goods bought outside of the
state

In general, tax can be defined as a levy or other type of a financial

charge or fee imposed by state or central governments on legal entities or

individuals. Local authorities like local governments, provincial governments,

counties and municipal corporations also have the right to impose taxes. The

rates, rules, and regulations of taxation differ from one country to another and

they are complex in character. Tax is a principal source of revenue for a

country's government.

Services and Trade in Services

The term services covers a wide range of intangible and heterogeneous

products and activities such as transport, telecommunication and computer services,

construction, financial services, wholesale and retail distribution, hotel and catering,

insurance, real estate, health and education, professional, marketing and other

70
business support, government, community, audiovisual, recreational, and domestic

services.

Services have a significant impact on growth and efficiency across a wide range of

user industries and overall economic performance. For instance, sectors such as

transport, telecommunications and financial services are key determinants of the

conditions in which persons, merchandises, services and capital flow. Another

illustration of services’ major role is environmental services, which contribute to

sustainable development by alleviating negative impacts of economic activities.

3.4 M eaning of Service Tax

1 Infrequently asked questions published by CBEC for the Service Tax

defines the Service Tax as “It is a tax levied on the transaction of certain

specified services by the Central Government under the Finance Act,

1994. It is an indirect tax, which means that normally the service

provider pays the tax and recovers the amount from the recipient of

taxable service.” 7

2 In the explaining the Service Tax in iloveindia.com website it is written ‘

Service Tax is a form of indirect tax imposed on specified services called

"Taxable services" Service Tax cannot be levied on any service which is

not included in the list of taxable services. Over the past few years,

Service Tax been expanded to cover new services. The objective behind

levying Service Tax is to reduce the degree of intensity of taxation on

manufacturing and trade without forcing the government to compromise

on the revenue needs. The intention of the government is to gradually

increase the list of taxable services until most services fall within the

scope of Service Tax. For the purpose of levying Service Tax, the value of

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any taxable service should be the gross amount charged by the service

provider for the service rendered by him.8

To sum up, the meaning of Service Tax can be derived from various meaning

mention above- as the contribution, for support of government on economic value of

services. In India, Service Tax is having limited applicability of meaning i.e. it is the

tax on levied on taxable service is called Service Tax. Though in some countries it

called Service Tax, in other it is part of VAT (Value added tax) or GST (Goods and

Services Tax).

After discussing the meaning of service, tax and Service Tax, the researcher
has turned to various budget speeches of Finance Minister.

3.5 The Finance M inisters’ on Service Tax

After initial introduction of 3 services, in 1994, by the then Finance Minister

,Dr. Manmohan Singh every Finance minister , almost in ever y budget started

focusing on the Service Tax and introduced new services to increase the tax kitty.”

P. Chidambaram, in his budget speech 1997-98; “The services sector contributes

nearly 40per cent of the GDP. ‘Services’ are products as much as ‘manufactured

goods’. Both must bear taxes. Hence, I propose to extend the Service Tax to cover a

number of well known services like: Transportation of goods by road; Consulting

engineers; Custom house, Steamer and Clearing and Forwarding agents; Air travel

agents, tour operators and car rental agencies;· Out-door caterers, pandal contractors

and mandap keepers and Man-power recruitment agencies.

The proposals on Service Tax are estimated to yield revenue of Rs. 1,200 crore

in a full year. However, for the financial year 1997-98, I am taking credit for Rs. 900

crore. I wish to inform the House that in order to improve our national highways, I

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propose to utilise the bulk of the proceeds realised from Service Tax on transportation

of goods by road to augment the resources of the National Highway Authority.” 9

P. Chidambaram in his budget speech 1998-99; “In the last budget, a number of

services were added in the tax net. These included the service rendered on

transportation of goods by road. The House is aware that it led to wide spread

resistance and protests. As a result, this Service Tax was virtually kept in abeyance

and rightly so. I have decided to abolish the Service Tax on transportation of goods by

road. I have also decided to abolish the Service Tax payable by outdoor caterers and

pandal contractors. However, I have proposed Service Tax on some new services.

These are services provided by: Architects, Interior decorators, Management

consultants, Chartered Accountants, Cost Accountants, Company Secretaries, Private

security services, Real estate agents and real estate consultants, Market research

agencies, Credit Rating Agencies. Underwriting agencies, and Slaughter houses using

mechanised means for large animals’

W e will examine how in respect of certain segments liable to Service Tax, the

manner and mode of payment could be further simplified to improve compliance.

These new Service Taxes will yield Rs.220 crore in a full year.” 10

Yashwant Sihna, in his budget speech 2000-2001; “Service Tax is emerging as

an area of promise as well as problems. Many experts advise me that the best way to

deal with this tax is to make it applicable to all services in one go. However, some

others have suggested basic changes in the very structure of the Service Tax. I have

decided not to make any changes for the present. I am setting up an Expert Group to

go into all aspects of the matter, review the experience so far, and give me its

considered advice.” 11

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Yashwant Sihna, in his budget speech 2003-2004 “Service Tax: a proposed

Constitutional amendment “to enable levy of tax on services as a specific and

important source of revenue, an amendment to the Constitution is proposed. This

Constitutional amendment, and the consequent legislation would give the Central

Government the power to levy the tax and both the Central and the State

Governments sufficient powers to collect the proceeds.” 12

P. Chidambaram, in his budget speech 2004-05 “ I also propose that some currently

taxable services should be redefined to cover all service providers falling under the

same category, but I do not wish to burden this speech with the details. Exemptions

granted in the case of some taxable services are proposed to be removed. The

administration of Service Tax will be made more tax-payer-friendly. I propose to do

away with the mandatory verification of self assessment and the mandatory penalty

for non-registration.” 13

P. Chidambaram, in his budget speech 2005-06 “I also propose to grant relief to

small service providers. Accordingly, I propose to exempt from Service Tax those

service providers whose gross turnover does not exceed Rs.4 lakh per year. According

to my calculation, 80 per cent of the present Service Tax payers will gain from the

exemption.

I propose to include some additional services in the Service Tax net;

Introduction of services, changes in act – exemption limit penalty changes ---- .14

P. Chidambaram, in his budget speech 2006-07 “This leaves Service Tax. In 2005-06,

the services sector is estimated to contribute 54 per cent of GDP. Naturally, it should also

contribute significantly to the exchequer. Continuing in the direction followed in the last few

years, I propose to bring more services under the Service Tax net. The new services to be

covered include ATM operations, maintenance and management; registrars, share transfer

agents and bankers to an issue; sale of space or time, other than in the print media, for

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advertisements; sponsorship of events, other than sports events, by companies; international

air travel excluding economy class passengers; container services on rail, excluding the

railway freight charges; business support services; auctioneering; recovery agents; ship

management services; travel on cruise ships; and public relations management services.

I also propose to expand the coverage of certain services now subject to

Service Tax. I do not wish to burden the House with the details which are available in
the Budget papers.

The leasing and hire purchase industry has faced some difficulty owing to the
levy of Service Tax on all components of payments, including interest. I propose to
rectify the anomaly. Accordingly, interest and instalments of the principal amount
will be abated in calculating the value of the service.

It is my sense that there is a large consensus that the country should move
towards a national level Goods and Services Tax (GST) that should be shared between
the Centre and the States. I propose that we set April 1, 2010 as the date for
introducing GST. W orld over, goods and services attract the same rate of tax. That is
the foundation of a GST. People must get used to the idea of a GST. Hence, we must
progressively converge the Service Tax rate and the CENVAT rate. I propose to take
one step this year and increase the Service Tax rate from 10 per cent to 12 per cent.
Let me hasten to add that since Service Tax paid can be credited against Service Tax
payable or excise duty payable, the net impact will be very small.” 15

P. Chidambaram, in his budget speech 2007-08 “I propose to raise the exemption

limit for small service providers from Rs. 400, 000 to Rs.800, 000. Consequently,

200,000 assessees out of a total of 400,000 assessees will go out of the Service Tax net.

The revenue loss will be Rs.800 crore, but I am happy to give away this sum in the

interest of the small service provider and the consumer.

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W hile I bid goodbye to 200,000 assessees, I welcome the new assessees who

will be brought into the fold. I propose to extend Service Tax to: Services outsourced

for mining of mineral, oil or gas;• Renting of immovable property for use in commerce

or business; however, residential properties, vacant land used for agriculture and

similar purposes, land for sports, entertainment and parking purposes, and immovable

property for educational or religious purposes will be excluded; Development and

supply of content for use in telecom and advertising purposes;• Asset management

services provided by individuals; andDesign services.

State Governments levy a tax on the transfer of property in goods involved in

the execution of a works contract. The value of services in a works contract should

attract Service Tax. Hence, I propose to levy Service Tax on services involved in the

execution of a works contract. However, I also propose an optional composition

scheme under which Service Tax will be levied at only 2 per cent of the total value of

the works contract.

I propose to exempt Service Tax on services provided by Resident W elfare

Associations to their members who contribute Rs.3000 or less per month for services

rendered.

In order to encourage innovation, I propose to exempt from Service Tax all

services provided by technology business incubators. Similarly, their incubates, whose

annual business turnover does not exceed Rs.50 lakhs will be exempt from Service

Tax for the first three years. To make India a preferred destination for drug testing, I

propose to exempt clinical trial of new drugs from Service Tax. The scope of some

services that are currently taxed is being expanded or redefined. However, I shall not

burden the House with the details.

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The telecommunications industry has repeatedly requested that the

multifarious taxes, charges and fees applicable to the industry should be unified and a

single levy on revenue should be collected. The request merits consideration. Hence, I

propose to request the Department of Telecommunications to constitute a committee

to study the present structure of levies and make suitable recommendations to

Government.” 16

P. Chidambaram, in his budget speech 2008-09; “Finally, I turn to my proposals on

Service Tax. 55 per cent of the GDP is contributed by the services sector, which is a growing

sector that must contribute its legitimate share to the exchequer. I propose to bring under the

Service Tax net four services. They are:-(i) asset management service provided under ULIP, to

bring it on par w ith asset management service provided under mutual funds; (ii) services

provided by stock/commodity exchanges and clearing houses;(iii) right to use goods, in cases

where VAT is not payable; and (iv) customised software, to bring it on par with packaged

software and other IT services

I also propose to remove unwarranted doubts raised in respect of certain

services and clarify that they are liable to Service Tax. These include money changers,

persons running games of chance, and tour operators using contract carriage vehicles.

There are some miscellaneous changes but I do not wish to burden the House with

the same. Finally, I am happy to announce that the threshold limit of exemption for

small service providers will be increased from Rs.8 lakhs per year to Rs.10 lakh per

year. As a result, about 65,000 small service providers will go out of the tax net.” 17

Pranab M ukherjee, in his budget speech 2009-10; “ I now turn to my proposals on Service
Tax. It is an international practice to zero-rate exports. To achieve this objective, a scheme

was announced in 2007, granting refund of Service Tax paid on certain taxable services used

after the clearance of export goods from the factory. For some time now, the exporting

community has been expressing dissatisfaction over the difficulties faced in obtaining such

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refunds. Several procedural simplifications attempted in the past have also not yielded

satisfactory results. The solution seems to lie in placing greater trust on the claims filed by the

exporters. Keeping this in view, I propose to make the following changes in the scheme:

Services received by exporters from goods transport agents and commission

agents, where the liability to pay Service Tax is ab initio on the exporter, would be

exempted from Service Tax. Thus, there would be no need for the exporter to first

pay the tax and later claim refund.

For other services received by exporters, the exemption would be operated

through the existing refund mechanism based on self-certification of the documents

where such refund is below 0.25 per cent of fob value, and certification of documents

by a Chartered Accountant for value of refund exceeding the above limit.

The Export Promotion Councils and the Federation of Indian Export

Organizations (FIEO) provide a valuable service in augmenting our export effort. I

propose to exempt them from the levy of Service Tax on the membership and other

fees collected by them till 31st March, 2010.

In the goods transport sector, Service Tax is currently levied on transport of

goods by road, by air, through pipelines and in containers. However, goods carried by

Indian railways or those carried as coastal cargo or through inland waterways are not

charged to Service Tax. In order to provide a level playing field in the goods

transport sector, I propose to extend the levy of Service Tax to these modes of goods

transport. The new levy is not likely to impact the prices of essential commodities or

goods for mass consumption, as suitable exemptions would be provided.

As the Hon’ble Members are aware, services provided by chartered

accountants, cost accountants, and company secretaries as well as by engineering and

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management consultants are presently charged to Service Tax. Although there is a

school of thought that legal consultants do not provide any service to their client, I

hold my distinguished predecessor in high esteem and disagree! As such, I propose to

extend Service Tax on advice, consultancy or technical assistance provided in the field

of law. This tax would not be applicable in case the service provider or the service

receiver is an individual.

Vehicles with ‘Stage Carriage Permits’ and run by State undertakings are

exempted from Service Tax. However, transportation of passengers undertaken by

private enterprises in vehicles having ‘Contract Carriage Permits’ is, subjected to

Service Tax. In order to bring parity in tax treatment, I propose to exempt such

transportation also from the levy of Service Tax.

In July, 2008 goods transport agents (GTA) went on strike with several

demands. One of the demands that was accepted by the government was to exempt

certain services, such as packing, cargo handling and warehousing, provided to GTAs

en route, from Service Tax. For this purpose an exemption notification was issued. It

was also demanded by goods transport agents that the proceedings already initiated

against such service providers should be dropped. The Government has accepted this

genuine demand. Therefore, I propose to make certain legislative changes required to

fulfill this promise. Copies of notifications giving effect to the changes in customs,

central excise and Service Tax will be laid on the Table of the House in due course.” 18

Pranab M ukherjee, in his budget speech 2010-11; “The Services Sector contributes

nearly 60 per cent of the GDP. The Service Tax to GDP ratio however, is only

around 1 per cent. This sector thus, has significant potential to augment revenue. To

bridge this gap, I had the option to raise the rate of Service Tax to 12 per cent as it was

before I introduced the third stimulus package. I am not resorting to this option to

maintain the growth momentum and also to bring about a convergence in the rates of

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tax on goods and services. I, therefore, propose to retain the rate of tax on services at

10 per cent to pave the way forward for GST. I had another option - to bring all

services under Service Tax. I am not opting for this either at this stage. I propose,

however, to bring certain services, hitherto untaxed, within the purview of the

Service Tax levy. These are being notified separately.

I am also proposing certain legislative changes to plug revenue leakages, to

remove distortions and to clarify certain doubts that have arisen over a period of time.

I do not want to waste the precious time of the House elaborating the details, as they

are available in the Finance Bill and other Budget documents.

Export of services, especially in the area of Information Technology and

Business Process Outsourcing, generates substantial employment and brings in foreign

exchange. I propose to ease the process of refund of accumulated credit to exporters of

services by making necessary changes in the definition of export of services and

procedures. Accredited news agencies which provide news feed online attract Service

Tax. Acknowledging the yeoman services of such news agencies in disseminating

news, I propose to exempt such news agencies that meet certain criteria, from Service

Tax. My proposals relating to Service Tax are estimated to result in a net revenue gain

of Rs.3, 000 crore for the year.” 19

To sumup, the present Service Tax is introduced in 1994, with only 3 services

by the then Finance minister, Manmohan Singh. The Service Tax was introduced on

the recommendation of the Tax Reform Committee to broaden the indirect tax base.

Then except three budgets (1995, 1999 2000), in every budget the Finance Minister

has introduced new services. It has become the important new source of revenue year

by year for the government as is seen from the various budget speeches.

i) “The proposals on Service Tax are estimated to yield a revenue of Rs. 1,200”

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- Budget 1997-98.

ii) “To enable levy of tax on services as a specific and impor tant source of revenue,

an amendment to the Constitution is proposed. – Budget 2003-04.

The growing space of Service Tax has also created problems.

i) “These included the service rendered on transportation of goods by road. The

House is aware that it led to wide spread resistance and protests. As a result, this

Service Tax was virtually kept in abeyance and rightly so. I have decided to

abolish the Service Tax on transportation of goods by road. W e will examine

how in respect of certain segments liable to Service Tax, the manner and mode

of payment could be further simplified to improve compliance.” – Budget 1998-

99.

ii) “To enable levy of tax on services as a specific and important source of revenue,

an amendment to the Constitution is proposed. – Budget 2003-04.

iii) “Service Tax is emerging as an area of promise as well as problems.”- Budget

2000-01.

“The Services Sector contributes nearly 60 per cent of the GDP. The Service

Tax to GDP ratio however, is only around 1 per cent. This sector thus, has significant

potential to augment revenue. To bridge this gap, I had the option to raise the rate of

Service Tax to 12 per cent as it was before I introduced the third stimulus package. I

am not resorting to this option to maintain the growth momentum and also to bring

about a convergence in the rates of tax on goods and services. I, therefore, propose to

retain the rate of tax on services at 10 per cent to pave the way forward for GST. I had

another option - to bring all services under Service Tax. I am not opting for this either

at this stage. I propose, however, to bring certain services, hitherto untaxed, within

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the purview of the Service Tax levy. These are being notified separately. I am

also proposing certain legislative changes to plug revenue leakages, to remove

distortions and to clarify certain doubts that have arisen over a period of time. I do

not want to waste the precious time of the House elaborating the details, as they are

available in the Finance Bill and other Budget documents.- Budget 2010-11.

The government has formed various committees to review the Service Tax.

Kelkar Committee, M. Govind Rao committee. Even Comptroller Auditor General

every year review/audit the Service Tax revenue, administrations.

3.6 Evoluation of Service Tax.

The rule of Kautilya – the Arthashastra narrates the nature of tax levied by the

State in the words “The Gardner plucks fruits and flowers, but does not harm the

trees; The Bee sucks the honey;but does not damage the flowers; in the same way;

The king should collect his taxes; but should not cause any suffering to his subjects;

One who kills the goat can at best get one meal; One who feeds it well , can get milk

for several year.”

3.6.1 Era Of Service Tax

The present era of Service Tax started from the Finance Act 1994, with levy on

3 services initially on the above principle. The rate was 5per cent at the time of

introduction. The nos of services have reached to more 100 from 3 within less than 15

years. The introduction of new services as shown in Table 3.1 reveals that the number

of services are added to the list of taxable services in every budget that was presented

till date. Excluding in the year 1995 and 1999, every budget has minimum 3 and

maximum 15 services. However in the year 1998, 2000 and 2007, the government has

withdrawn/exempted 3, 1 and 6 services respectively. Initially, government has

levied the services in organized sector like Telephone service, General Insurance and

Stock broker.

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Table 3.1

Progress of Services coverd in Service Tax since inception to date

Sr. No. Year No of Taxable No of Taxable No. of Taxable

Services Added Services Exempted Total Services

1 1994-95 3 - 3

2 1995-96 - - 3

2 1996-97 3 - 6

3 1997-98 12 - 18

4 1998-99 12 3 27

5 1999-00 - - 27

5 2000-01 - 1 26

6 2001-02 15 - 41

7 2002-03 11 - 52

8 2003-04 10 - 62

9 2004-05 13 - 75

10 2005-06 9 - 84

11 2006-07 15 - 99

12 2007-08 7 6 100

13 2008-09 6 106

14 2009-10 11 - 117

Source: Union Budgets of the respective years.

However, later on it has spread its wing to unorganized sector like

Advertising, Courier agency also and then on professionals like Chartered

Accountant, Company Secretaries and Cost accountants. The detail of number of

services introduced every year has tabulated in Table 3.1

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The Expert Group of Taxation of Services (2001) recommended extension of

the tax to all the services with the provision of Input tax credit for both services and

goods. In 2002, the Input tax credit in intra services brought through the CENVAT

Credit Rule, 2002 and in 2004, Input tax credit for both services and goods brought

through CENVAT Credit Rule, 2004. Even the task force has suggested the negative

list approach for Service Tax. The government should publish the list of services on

which Service Tax is not applicable. Remaining all services will be taxable. However

till the date this has not been done.

3.6.2 The Rights of Central Government in respect to Levy of Service Tax

As mentioned in the article ‘Constitution of India and Service Tax’ by K S Ravi

Shankar & B.N. Gururaj published in Service Tax Journal the Constitution of India

defines he expression/words “taxation” and “tax” in Article 366(28) thus “taxation

includes the imposition of any tax or impost, whether general or local or special and

“tax” shall be construed accordingly.

The Constitution, from a rather limited perspective, the expression ‘Rule of Law’

manifests itself in the form of Article 265 first above referred to, in addition to which

there is the division of legislative powers between the Union and the States. Under

the Indian Constitution, the power to make laws, including the power to tax are

shared between the Union and the States in terms of Articles 245 to 248 read with

Seventh Schedule to the Constitution.

Article 245 of the Constitution prescribes the territorial jurisdiction of laws

enacted by Parliament and State legislatures. W hile the Parliament can made laws

which apply to the whole or any part of territory of India, State Legislatures can make

laws which apply to the whole or any part of the State. Another important facet of

Article 245 is that a law made by the Parliament does not be come invalid on the

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ground that is operates extra-territorially. The facet, it is submitted, is of special

significance in the context of Service Tax law.

Under Article 246, Parliament can make laws in respect of all matters

enumerated in List I of the Seventh Schedule, i.e. the Union Parliament can also make

laws in respect of all matters enumerated in List II I (Concurrent List) along with State

Legislatures. Parliament can also make laws for any territory in India which is not a

part of any State. As opposed to the above position, States enjoy rather limited

legislative powers. States can make laws in respect of matters listed in List II or the

State List. State can also make laws in respect of matters in the Concurrent List.

Further augmenting the legislative powers of the Parliament, Articles 248

enshrines exclusive power of Parliament to make law with respect to any matter not

enumerated in Concurrent List or the State List. On a careful scrutiny of the

concurrent list, one does not find any matter relating of taxation therein. The power

of taxation are embedded in the Union and State lists, with the residuary power of

taxation vesting in the Union Article 248(2) expressly confers this power on the

Parliament. This is of significance to taxes on services, particularly in the context of

the present day scheme of taxing services under Finance Act, 1994 and the absence of

special legislation for that purpose.

Until the enactment of the Constitution (88th Amendment) Act 2003 which

was assented to by the President on 15-1-2004, there was no entry at all in the Union

List which specially provided for taxation of services. Taxation of services drew and

still draws it sustenance from Entry No. 97 of the Union List, read with Article 248(2),

supra. Entry 97 confers power to make laws on any matter not covered by preceding

entries of List and not listed in List I I or List II I, including the power to tax. The levy

of Service Tax by the Central government is in exercise of the powers of residuary

nature under the Union list in entry 97 of the Seventh Schedule.

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Service Tax is not the first tax levied and collected by the Union under the

residuary entry. It may be appreciated that Gift tax, which was abolished only in the

year 1998, was introduced in 1958 by enacting the Gift Tax Act, 1958. The Mysore

High Court (since renamed as Karnataka High Court) declared that Parliament had no

power to legislate with respect to gift tax on land and buildings. On the matter

coming up before the Hon’ble Supreme Court it was held that the residuary powers of

Parliament under article 248 and entry 97 of the Union List could be exercised to

enact a law imposing gift-tax. See Second GTO v. D. H. Nazareth, 1970 (76) ITR (SC).

The Court held that the entries in the lists must be regarded as enumeratio simplex of

broad categories. Since they are likely to overlap occasionally, it is usual to examine

the pith and substance of legislation with a view to determining to which entry they

can be substantially related, a slight connection with another entry in another list

notwithstanding. Therefore, to find out whether a piece of legislation falls within

any entry its true nature and character must be in respect to that particular entry.

The entries must of course receive a large and liberal interpretation because the few

words of the entry are intended to confer vast and plenary powers. If, however, no

entry in any of the three lists covers it, then it must be regarded as matter not

enumerated in any of the three lists. Then, it belongs exclusively to Parliament under

entry 97 of the Union List as a topic of legislation. Applying the pith and substance

doctrine, the Apex Court held that the Gift-tax Act was not a tax imposed directly

upon lands and buildings but was a tax on the value of total gifts made during a year

above the exempted limit. There was no tax upon land or building as a unit of

taxation, but such land and building had to be valued to ascertain the amount of the

gift and what was taxed was the gift. The tax was in nature of levy n transmission of

title by gift of a property and the residuary powers of Parliament could be exercised

to enact such law.

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A precedent is also found in taxing wealth exercising the residuary powers

under entry 97 of the Seventh Schedule. The inclusion of capital value of agricultural

properties for charging tax under the W ealth Tax Act, 1957 came up for consideration

by the Apex Court in UIO v. Harbhajan Singh Dhillon, AIR 1972 SC 1061 = 1972 (83)

ITR 582 (SC). The Supreme Court held that when a Central Act or tax is challenged,

as beyond its legislative competence, it is sufficient if the subject matter is not listed

in List II . That would bring the matter within the legislative competence of the

Parliament. If a law does not fall within other lists and other entries of List I, it

would fall under entry 97. The fact that agriculture and agricultural properties were

State matters did not come in the way of upholding the charge of wealth tax. The

converse of the proposition in H. S. Dhillon’s case could also be true. That is to say,

where a matter is covered by any other entry, the residuary entry cannot be claimed

in respect of such matter.

More recently, in the case of Gujarat Ambuja Cements Ltd. V UOI, 2005 (182)

E.L.T. 33 (S.C.), the Apex Court held in para-33 that Service Tax was not a tax on

passengers and goods but on the event of service in connection with carriage of goods.

The Act (Finance Act, 1994) was in pith and substance not lying within the exclusive

power of States under Entry 56 of the State List, but fell within the residuary entry 97

of the Union List, enabling the Parliament to legislate. Also, in another case of Tamil

Nadu Kalyana Mandapam Asstt. V. UIO, 2004 (167) E.L.T. 3 (S.C.), the Supreme

Court (affirming the decision of the Madras High Court in 2001 (133) E.L.T.36)

upheld the validity of levy of Service Tax on mandap keepers and outdoor caterers,

holding that so long as the legislation is in substance on a matter assigned to a

legislature enacting the same, it must be held to be valid in it entirety even though it

may trench upon matters beyond its competence. The Court held that in pith and

substance the tax in question was services and not on sale of goods or hire purchase

activities. Relying on the decision in the case of Mafatlal Industries Limited And

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Others V/S UOI, 1997 (89) E.L.T.247 (S.C.), it was led that levy of Service Tax on a

particular kind of service could not be struck down on the ground that it does not

confirm to a common understanding of the word “service” so long as it does not

transgress any specific restriction in the Constitution. In the Mafatlal decision supra

the Court had observed. “in the matter of taxation laws, the court permits a great

latitude to the discretion of the legislature. The State is allowed to pick and choose

districts, objects, persons, methods and even rates for taxation, if it does so reasonably.

The Courts view the laws relating to economic activity with great latitude than other

matters.” These telling observations were used with effect in the above case relating

to mandap keepers.20

3.6.3 Decisions of Supreme and High court

The following decisions rendered in the context of Service Tax by courts of

law may also be referred to for a synoptic view of the issue under discussion:

1 In an appeal of All India Federation of Tax Practitioners vs. Union of India (2007-

TIOL-149-SC-ST), questions the competence of Parliament to levy Service Tax on

practicing chartered accountants and architects having regard to Entry 60 List I I

of the Seventh Schedule to the Constitution and Article 276 of the Constitution. It

is held the source of the concept of Service Tax lies in economics. It is an

economic concept. It has evolved on account of Service Industry becoming a

major contributor to the GDP of an economy, particularly knowledge-based

economy. W ith the enactment of Finance Act, 1994, the Central Government

derived its authority from the residuary Entry 97 of the Union List for levying tax

on services. The legal backup was further provided by the introduction of Article

268A in the Constitution vide Constitution (Eighty-eighth Amendment) Act, 2003

which stated that taxes on services shall be charged by the Central Government

and appropriated between the Union Government and the States. Simultaneously,

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a new Entry 92C was also introduced in the Union List for the levy of Service Tax.

As stated above, as an economic concept, there is no distinction between the

consumption of goods and consumption of services as both satisfy human needs. It

is this economic concept based on the legal principle of equivalence which now

stands incorporated in the Constitution vides Constitution (Eighty-eighth

Amendment) Act, 2003. Further, it is important to note, that Service Tax is a value

added tax which in turn is a general tax which applies to all commercial activities

involving production of goods and provision of services. Moreover, VAT is a

consumption tax as it is borne by the client.

The judgment stated “W e hold that Parliament has legislative competence to levy

Service Tax by way of impugned Finance Acts of 1994 and 1998 under Entry 97 of

List I on chartered accountants, cost accountants and architects. W e further hold

that the above position now stands fortified by the Constitution (Eighty-eighth

Amendment) Act, 2003 which has inserted Article 268A and Entry 92C which

clearly indicates that Entry 60 of List II and Entry 92C of List I operate in

different spheres. However, we make it clear that before us there is no challenge

to the Constitutional validity of the said Constitution (Eighty-eighth Amendment)

Act, 2003.”

2 In Chartered Accountants Assn. v. UOI, 2005 (179) E.L.T.129 (Guj.), it was held

that Service Tax on consulting engineers, architects and chartered accountants

was not in the nature of profession tax, but a tax on service rendered by such

professionals who had a privilege of the right to exercise the profession. The

Constitutional validity of the levy was upheld under Article 248 read with entry

97 in the Union List. The classification between similar services rendered by

qualified and non-qualified persons was not discriminatory or in violation of

Article 14. So also in Dr. V. Shanmughavel v. CCE, 2007 (131) E.L.T. 14 (Mad.),

the High Court of Madras held that Service Tax on consulting engineers was in

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the nature of a tax on services rendered by those persons and not tax on

profession. The tax was held to be not violative of Article 14 of the Constitution.

Reference of readers is also invited to the decision of the Madras High Court in

Indian Institute of Architects v. UOI, 2002 (139) E.L.T. 245 (Mad.) in which the

levy Service Tax on architects, chartered accountants and cost accountants was

held to be Constitutionally valid given the ambit of entry 97 of the Union List in

the Seventh Schedule. The Court also held that Legislature was free to select a

given service for taxation. The real effect of the taxing provision and not the

phraseology was important in construing the statute. The provisions relating to

taxing chartered accountants, in respect of services of accounting and auditing

were not arbitrary and did not violate Article 14.

3 In the case of Advertising Club, Chennai Vs. Cetral Board of Excise and Customs,

New Dehli 2001 (131) ELT 35 (Mad), constitution validity of the Service Tax

provisions was challenged on the ground that in manner of calculation of tax ,the

actual expenses were not excluded and the tax was charged on the gross amount

charged by the advertising agency from their clients while in case of other

services such expenditure was allowed and permitted to be deducted from the

gross amount charged. In this case the Division bench of the Madras High Court

held that on this ground challenge can not be made particularly relying on Article

14 of the provision with reference to the measure of tax. It was also held that it

would be the discretion of the concerned authority to decide as what are the

deductible amounts and which are the others and it could not be decided as

whether a taxing statute is constitutional or otherwise on the basis of the way the

calculations are to be made by the taxing authorities. Indeed a nature of the tax

cannot be ascertained on the basis of its measure and this proposition is well

settled. Even otherwise, the question raised regarding the calculation of the tax

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would not be apposite to decide the constitutional validity of the provisions much

less under Article 14 of the Constitution Of India .

4 The Supreme court in the case of Chhotabhai Jethabhai Patel and Co. V UOI &

others 1999 (110) ELT 118 (SC) held that “If by reason of the Article 265 every tax

has to be imposed by ‘law’ it would be appear to follow that it could only be

imposed by a law which is valid by conformity to the criteria laid down in the

relevant Articles of the Constitution. These are that the law should be (1) within

the legislative competence of the Schedule VII of the constitution ;(2)the law

should not be prohibited byany particular provision of the Constitution such as for

example of Arts, 276 (2) 286 etc. and (3) the law or the relevant por tion thereof

should not be involved under Article 13 for repugnancy to those freedoms

which are guaranteed by part III of the constitution which are relevant to the

subject matter of law.”

5 The selling of SIM card and process of activation of cellular telephones was held to

be services taxable under the Finance Act, 1994 and levy could be held to be

unconstitutional merely because the transaction also involved levy of sales tax

under the Kerala General Sales Tax Act. The emanates from the decision of the

Kerala High Court in Escotal Mobile Communications Ltd. v. UOI, 2004 (177)

E.L.T.99 (Ker.). It was also held that once the aspect theory was taken into

account, different taxes could be levied under different laws on different aspects

of the same transaction. This view now stands fortified by the decision of the

Supreme Court in the case of State of UP v. UOI, 2004 (170) E.L.T. 385 (S.C.), in

which the Apex Court rejected the contention of the Second Respondent

(Telecommunications Department) and held that through the supply of telephone

involved allotment of number, installation of instruments and appliances enabling

the subscriber to access the telephone lines, and Service Tax was levied, still the

same transaction could be subject to sales tax under the UP Trade Tax Act, 1948.

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However it should be noted that in this case, the Supreme Court did not have the

occasion to examine Constitutionality of levy of Service Tax, but was considering

the validity of an assessment of sales tax demanded from the Respondent

(Department of Telecommunications). The demand was upheld and the judgment

of the Division Bench of the Allahabad High Court was overruled.

6 In Secretary Federation of Bus Operators Assn. of TN v. UOI, 2001 (134) E.L.T.618

(Mad.), the High Court had occasion to examine the Constitutional validity of the

levy of Service Tax on tour operators and rent-a-cab-operators. Distinguishing

Service Tax under the Finance Act, 1994 from that of the tax levied under entry

56 in the Sate List (Tax on goods and passengers carried by road or on inland

water-ways), the Court held that the whole concept of Service Tax was unique

and would not be said to be a part of entry 56 in the State List even if a broad

scope is given to that entry. The incidence of Service Tax was on the service and

the carrying of passengers was a part of the exercise of rent-a-cab-operators,

where a cab was provided to a passenger. The Court distinguished the levy of

Service Tax from that of tax on profession, trade and calling and held that it could

never be said that the two are identical and the same.21

7 As in the case of Tamil Nadu Mandapam Assn. supra, the issue relating to levy of

Service Tax on outdoor caterers came up for consideration in Tamil Nadu Hotels

Assn. v. UOI, 2001 (133) E.L.T.265 (Mad.). The High Court of Madras held that

Service Tax on outdoor caterers offering the service of catering at places other

than their own were essentially providing a service and there was no arbitrariness

or discrimination in taxing them and the tax was not violative of Article 14.

8 The levy of Service Tax on security agency services was challenged before the

Madras High Court in GDA Security P. Ltd. v. UOI, 2002 (140) E.L.T. 332 (Mad).

The court observed that Service Tax had different aspect and provision of a service

was independent of the aspect of the profession. The tax on professions was levied

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on account of the professionals being allowed to carry on a given profession,

whereas Service Tax was levied in respect of the services provided by a security

agency. The Legislature was held to have a discretion in levying tax on a

particular class of persons and inclusion of security agencies under Service Taxable

categories, did not violate Article 14. The Court emphasized that the nature of a

tax could not be ascertained on the basis of the measure thereof.

9 In respect to photoFigurey studios, the Kerala High Court had occasion to deal

with a case where the Constitutionality of Service Tax was challenged on the

ground that it was profession tax and it resulted also in double taxation of both the

profession and service. The Court in Kerala Colour Lab Assn. v UOI, 2003 (1` 56)

E.L.T. 17 (Ker.) held that the tax levied under the Finance Act, 1994 was on

rendering services and not in the nature of tax on profession or employment etc.

It was also held that the tax could be levied under residuary entry 97 in the

Seventh Schedule read with Article 248. It was held that the nature of tax should

not be confused with measure of cost of film, magnetic tape and devices was an

issue that arose for considering the validity of the valuation mechanism in section

65 of the Finance Act, 1994. It was held that the method of valuation was not

discriminatory.22

Thus, it is seen from the above that many new services brought under the

Service Tax net, has challenged by respective stake holders under ‘constitutional

validity’ issue. However, every time the courts have approved the validity and the

governments’ right to collect the tax on these services.

3.6.4 Territoriality and taxation Of Service Tax

The Service Tax is applicable to the whole of India Except the state of Jammu

and Kashmir. (Section 64. ).

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In regard to Export of Services, the government has amended section 94 in the

Finance (No 2) Act, 2004 to empower central Government to make rules for

determining export of taxable services, grant exemption to, or rebate of Service Tax

paid on, taxable services which are exported out of India and rebate of Service Tax or

excise duty paid on input services and goods used for providing taxable services which

are exported our of India.

In regard to taxable services provided from outside India and received India,

Initially were charged to Service Tax under Explanation occurring at the end of sub-

clause (105) of the Finance Act, 1994. However, trade and Industry member protested

and the constitutional Validity of these provisions was also questioned. The

Government, in the Finance Act, 2006 w.e.f. 01.05.2006 has omitted the said

explanation and inserted a separate comprehensive provisions under Section 66A

(Section 66A came into force w.e.f.18.04.2006, the date of enactment of the Finance

Act, 2006) and Taxation of Services (provided from outside India and received India)

Rules, 2006 (notified w. e. f. 19.04.2006) to levy the Service Tax on services provided

from outside India and received India.

Status of J & K

As mentioned in the article ‘taxation of services in India by K.S. Ravi Shankar,

the State of Jammu and Kashmir (J&K) is excluded in some tax laws, as for example in

the earlier Gift Tax Act, 1958 (since repealed) and the Expenditure Tax Act, 1987

(which deals with levy on expenditure incurred in hotels and restaurants). The

Finance Act, 1994 under which Service Tax s levied, expressly provides in Section

64(1) that the provision of said Chapter V relating to Service Tax shall not apply to

the State of J&K. The reason for excluding J&K merits examination some length.

This is not only for appreciating the historical backdrop but also for academic reasons

as it is felt that a great many people connected with tax law including those in the

94
bureaucracy and Parliament seldom appreciate this aspect. Article 370 of the

Constitution enact that the power of Parliament to make laws for J&K shall be limited

to those matters in the Union and Concurrent Lists which, in consultation with the

Government of the State, are declared by the President to correspond to matters in

the Instrument of Accession governing the accession of the State to the Dominion of

India as the matters with respect to which the Dominion Legislature may make laws

for that State and such other matters in the said List as with the concurrence of the

Government of the State, the President may by order specify. This is, however,

intended to be a temporary provision (through it has remained in force and been

effective for more than fifty six years after India became a Republic.). I t is also

provided therein that the provisions f Articles 1 and 370 shall apply in relation to that

State and such of the other provision of the Constitution shall apply thereto subject to

such exceptions and modifications as the President may by order specify.23

3.7 Global Scenario

The tax on services in many countries, is part of Value Added Tax (VAT),

while in some it is Goods and Service Tax in some there country no tax on

services, like USA there is no tax on services. As per V.S. Datey, Concept of

VAT was first conceived by Mr. Maurice Laure, Joint Director of French Tax

Authority. Vat (termed as TVA in France) was introduced for the first time in

France on 10-4-1954.24

1) China introduced in Vat on 24 items in 1984. Later, regulations for VAT

Tax were made effective on 1-1-1994 and Vat was extended to all goods

and services. The general Vat rate is 17per cent. Vat rate is reduced to

13per cent in some cases. There is no Vat on exports.

2) Japan has system of consumption tax, which is levied @ 5per cent.

3) In Srilanka, there is Goods and Service Tax introduced in 1996.25

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4) In New Zealand, Goods and services tax (GST) is a tax on the supply of
most goods and services in New Zealand. It is generally charged at a rate

of 12.5per cent. GST is charged on virtually all goods and services supplied

in New Zealand, except for rental of residential property, financial

services such as mortgages, loans and investments, and the sale of a

business that is capable of being a going concern.26 It is introduced in

1986.27 The GST is charged on virtually all goods and services supplied in

New Zealand, except for rental of residential property, financial services

such as mortgages, loans and investments, and the sale of a business that is

capable of being a going concern. The basic exemption limit is $40000/-. If

turnover based on the value of your supplies for this month and the last

eleven months has exceeded $40,000, and turnover based on the value of

your supplies for this month and the next eleven months is expected to

exceed $40,000.28

5) In Singapore, there is Goods and Service Tax ,which is introduced in

1994.29

As mentioned in the article in Service Tax Review on Services- General

Discussion & Countries Taxing Services by K. S. Ravi Shankar & B.N.

Gururaj the position of taxes on services in various other countries is

summarized below

6) Australia has a separate Service Tax mechanism in force. Now it governed

by Goods and Service Tax.

7) Argentina and Peru also have VAT regimes including tax on services, the
former being reputed to have one of the most complex exemption criteria.

8) Brazil’s VAT regime has a tax on services such as communications,

consumer’s credit charges, electricity and transport, fuels and minerals.

96
9) Belgium has a Service Tax built into the VAT system. Old age homes,
nurseries, kindergartens and institutions whose objectives are to

supervise, support and educate people are exempt. Renting of camping

space and other space is taxed at a lower rate as compared to others.

10) Canada has a goods and services tax (GST) which was introduced in 1991,
and has an integrated VAT system since 1994, which supplies throughout

the country. It is a destination based tax, which levied on domestic

services while services exported to non-residents are not taxed. Charities,

non-profit organizations, municipal services, universities, schools and

hospitals (MUSH) were eligible to claim rebate for portion of tax paid on

inputs.

11) The European Union has a system of integrated taxation including

services. There are however differences insofar as treatment of service

providers, relief to small concerns, exemption ceilings. There is what is

known as a computerized VAT Information Exchange System or VIES in

place established in Brussels, which is meant to serve all member

countries. Fraud detection is also facilitated through this system.

12) France, which was the pioneer in introducing VAT in the year 1968, has a
system of selective Service Taxation, with an input credit system. France,

the basis for chagrining VAT on goods and services is Code General des

Imposts (General Tax Code). Insofar as services are concerned VAT is

payable craftsmen, estate agent, builders, commercial men, surveyors,

landlords of furnished accommodation, entertainment promoters,

chartered accountants, and architects. VAT is charged on provision of

services by taxable persons as part of economic activities such as

industrial, commercial agricultural or civic nature. The basis of assessment

is the price or fees payable for services. Exemption is available to exports

97
or its equivalent in services, some banking and financial transactions,

entertainment subject to local entertainment taxes, educational services,

medical services and certain real estate operations and services by non-

profit organizations. The standard rate of Vat is 20.6per cent. Minimum

rate is 2.1per cent with a reduced rate of 5.5per cent. Some recognized

services such as advertisement, cinema, television services, airport services

are taxed under separate provisions of General Code of Tax and not under

VAT.

13) Germany has a VAT system which includes taxing craftsmen, parking
facilities, gas and electricity. Italy also has a system somewhat analogous.

See analysis post.

14) Ghana has a VAT regime including Service Tax. Services which are
exempted are domestic water and electricity, medical supply, educational

service at any level rendered by an educational establishment apart from

transport services (against which exemption there was a public outcry).

15) Indonesia which has a VAT exempts all services except construction.
There is in addition what is called a ‘development’ tax on services.

Intangibles, services not from daily professional work, health, education,

financial religious, radio and broadcasting, sea and land transportation,

overseas air transport and labor suppliers are exmpted.

16) Spain has a VAT system, in which services rendered by professionals and
enterprises is taxed, provided the services are supplied for a price through

a business and not private activities. Special regime is provided for travel

agents, auctioneers and others. See discussion post.

17) Thailand levies a consumption tax in the form of VAT including services
in its fold. Exemptions are granted to educational services, publishing

medical and health care, lawyers and accountants, public entertainment,

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domestic and international transportations. Renting of immovable

property; government and religious services. All exports are zero rated.

18) UK which has a VAT system in operation since 1973 had some common
issues like India had (when tax on services was introduced). The Customs

and Excise Department had surplus officials when purchase tax was

abolished. There was feeling that the income tax department should not

be made more powerful by entrusting them with administration of the

new tax. Though it was fully recognized that the customs had hardly any

experience in taming services, various reasons such as its control over

warehouses, inventories, import verification factory visits and other

extraneous reasons weighed in its favor for its being entrusted the

responsibility of administering the levy. In UK, building, or civil

engineering work in connection with construction, alteration or

demolition of building is zero rated, but repair and maintenance taxed,

except the latter activity relating to churches.The law in UK makes no

distinction between goods or services. In the schedules of goods and

services subject to separate treatment, such as zero rating’ or reduced

rates, one finds mix of both goods and services. Tax on services is payable

on services provided by way of business. Imports of services are also liable

to VAT on services.The Standard rate of VAT in UK is 17.5per cent ad

valorem. This applies across the board to both goods and services.

19) Russia and the CIS (Commonwealth of Independent States) do have a

VAT system, but not much information is available on the modus

operandi followed by them and they are transitional economics.30

20) In Italy, VAT is payable by all undertaking carrying on business in Italy in

the field of industry, commerce, agriculture. Tax is payable on all services

provided in the EU territory. Services provided outside EU territory, to

99
third countries are considered as exports. The standard rate of VAT is

20per cent. On specified services related to food, water gas, electricity,

culture, sports a reduced rate of 10 per cent VAT applies.

3.7.1 Comparision of W TO and Indian Classification of Services

The classification of Services in W TO and in Service Tax are mentioned in

Appexdix X W e find that maximum number of services mentioned in the W TO has
been introduced in the Service Tax in India. Some of the categories are not taxable
like veterinary services services provided by midwives, nurses, physiotherapists and
para-medical personnel, research and development services, services incidental to
agriculture, hunting printing, publishing wholesale and retail trade services. Many
services in Service Tax are not having any classification in W TO. Franchise Service
Design Service, Dredging Service Business Support Service. While in the provision no
where trading is treated as service in Service Tax provision. Though some of services
are similar but the scope is different. For example in the case of taxation services in
W TO classification has broad coverage compared to chartered accountant service in
Service Tax. In chartered accountant service only qualified person having passed the
CA exam and member of ICAI is covered. In case of some service in Service Tax, the
coverage is more than the classification in W TO. For example Business Auxiliary
service covers a person, who provides service on behalf of his client including
commission agent, which more scope than commission agent classification in WTO.

100
References
1) P. 1310 of W ebster’s New W orld Dictionary College Dictionary New
Millennium Fourth Edition 2006 Print
2) http://dictionary.reference.com/search?q=service
3) http://dictionary.reference.com/browse/service
4) http://en.wikipedia.org/wiki/Service_(economics)
5) In Article Tax on Services but W hat is Service dated Dec 17, 2009 at
http://www.taxguru.in/service-tax/tax-on-services-but-what-is-service.html
6) http://www.thefreedictionary.com/tax
7) Question no. 1.1 Frequently Asked Questions published by Central Board of Central
Excise, Customs and Service Tax
8) http://www.iloveindia.com/finance/encyclopedia/service-tax.html
9) Para 146& 147 of budget speech 1997-98 delivered by P. Chidambaram Finance
Minister
10) Para 169 of budget speech 1998-99 delivered by P. Chidambaram Finance M inister
11) Para 126 of budget speech 2000-01 delivered by Yashwant Sihna, Finance M inister
12) Para 134 of budget speech 2003-04 delivered by Yashwant Sihna, Finance M inister
13) Para 150 of budget speech 2004-05 delivered by P. Chidambaram Finance M inister
14) Para 145-and 146 of budget speech 2005-06 delivered by P. Chidambaram FM
15) Para 152 to 155 of budget speech 2006-07 delivered by P. Chidambaram FM
16) Para 152 to 159 of budget speech 2007-08 delivered by P. Chidambaram FM
17) Para 155 to 159 of budget speech 2008-09 delivered by P. Chidambaram FM
18) Para 129 to 136 of budget speech 2009-10 delivered by Pranab M ukherjee FM
19) Para 176 to 184 of budget speech 2010-11 delivered by Pranab M ukherjee FM
20) Article in Service Tax Review -Constitution of India and Service Tax by K.S. Ravi
shankar & B.N. Gururaj Advocate
21) Article in Service Tax Review -Constitution of India and Service Tax by K.S. Ravi
shankar & B.N. Gururaj Advocate
22) Article in Service Tax Review -Constitution of India and Service Tax by K.S. Ravi
shankar & B.N. Gururaj Advocate
23) Article in Service Tax Review - TAXATION OF SERVICES IN INDIA – PRE-
LEGISLATIVE HISTORICAL PRESPECTIVE By K.S. Ravi Shankar Advocate
24) As per answ er to questionnaire, asked by researcher, by V.S.Datey
25) http://www.asiatradehub.com/srilanka/tax1.asp#6
26) http://www.ird.govt.nz/gst/#page
27) http://en.wikipedia.org/w iki/Goods_and_Services_Tax_per cent28New_Zealandper cent29
28) http://www.westpac.co.nz/olcontent/olcontent.nsf/Content/Tax
29) http://app.ica.gov.sg/about_ica/heritage/history_customs_excise/index.asp
30) Pp Article in Service Tax Review - “Services” - General Discussion & Countries Taxing
Services By K.S. Ravi Shankar & B. N. Guruaj Advocate
31) P. 161 of GATT – Final Uruguay Round – Publication of M VIRDC, W TC, Bombay 1994).

101
Chapter 4

Ratio of Direct and I ndirect Tax and Service Tax to GDP

4.1 I ntroduction

In this chapter, researcher has made the comparative study related to Services

Sector and Service Tax. In the first part it has examined GDP and relative share of

Services Sector in the contribution of GDP. The comparision with other two

contributors, namely Agriculture and manufacturing is also considered. How Services

Sector is important in the growth of the economy? For the same, the world statistics

has compared. Then the reasercher has examined the direct and indirect taxes and

GDP, importance of Tax to GDP ratio. The Service Tax study should consider the

position of direct and Indirect Taxes in India. The Resercher has eaxmined the

statistics of direct and indirect taxes, their major components for the period of 16

years covering finanacial year 1994-95 to 2009-10. He has considered all revenue for

the nation, and then he has considered Central tax revenue. The relative share of

Direct and indirect taxes in Total central taxes are considered for this study. Even the

three years moving average ratio is calaculated to analyse the data.

In the second part the Service Taxation, collection is examined. First the

Service Tax and GDP of India is considered. For the same sixteen years date is

considered. Then the statistics of Service Tax and Indirect tax is analysed. The

approach of levy of Service Tax is discussed in later part. Then the data of yearly

revenue, Number and growth of assessee, Rate of Service Tax, Number of category of

Services is examined. Even data of the zonewise and commissonartewise collection,

zonewise and commissonartewise number of assessee has considered for

exanmination. Then service wise data for 2009-10 is examined. In third part the

Service Tax administrative mechanism is discussed. Lastly the relation between

Service Tax and W hosale Price Index (W PI) is examined.

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4.2 GDP and Service sector

4.2.1 Share of Services in GDP

In this chapter, before entering into thrust area of the subject the researcher
has examined the data on GDP and contribution of Services Sector to GDP. The
national income i.e Gross Domestic Product (GDP) of any country consists of three
sectors. First is Agriculture Sector, Second is manufacturing and third is Services
sectors. In the initial stage of development, the major portion of GDP comes from
Agriculture. In the second stage, manufacturing sector contributes more and in the
fulfledged development stage of the economy, the major contribution comes from
Services sector. This fact has been confirmed in studies conducted by World Bank. In
1999, the GDPs of low income countries were consisted of more than 50 per cent
share from Agriculture and Industry, while for the middle income countries it is 46
per cent. The GDP of high income countries is obderved that the 32 per cent share
from first two sectors. If we consider the contribution of services sector to GDP for
the same period, it was 43 per cent, 55 per cent and 66 per cent for low income,
middle income and high income countries respectively. This position is presented
through the Graphical presentation of ‘Sectoral Structure of world economies, 1999 at
Figure 4.1

Figure 4.1

Sectoral structure of W orld economies, 1999

Ref1: http://www.worldbank.org/depweb/english/beyond/global/chapter9.html

103
The sector wise performance of 1999, The Services Sector contributes more
than 2/3 share in GDP for high income countries, while in Low Income Countries, its
contribution is 1/3. In middle income countries, the share of services is 1/2. This
position is also presented in country wise Graphical presentation in Figure 4.1and
Figure 4.2 In this, the country wise Services Sector share in GDP per cent of 1999
shows that the developed economies like USA, countries from European union is
having 60 per cent and more than 60 per cent share of this sector. W hile developing
economies like India is having nearly 50 per cent share of Services Sector in GDP and
under develop economies have less than 40 per cent share of services in GDP. The
sector wise performance of 1999, the Services Sector contributes more than 60 per
cent for counties like USA, EU, Japan in GDP, and in some part of South America it
contributes 50-59 per cent. For India the contribution of Services Sector is 40-49 per
cent.

2
Figure 4.2

The Share of Services in GDP, 1999

Ref 2 : http://www.worldbank.org/depweb/english/beyond/global/chapter9.html

The W orld Bank study shows in 2008, the Services Sector contribution further
increased. If we see the GDP of world for 2008, the Services Sector contribution is
around 65 per cent. The share of services in GDP of high income group has increased
to 70 per cent. W hile in the case of middle income group it is nearly 55 per cent and
for low income group it is nearly 50 per cent. The USA, EU, Japan is having around
70 per cent share of services in GDP. W hile India is having 50 per cent, while Nigeria
is around 20 per cent share of Services Sector. This can be derived from the Figure
prepared by W TO in their presentation of service training module.

104
From the Figure 4.3 below, it seems that the high income nation in 2008 has

Services Sector contribution in GDP is more than 70 per cent. W hile middle income

group has nearly half of GDP consist of Services Sector. W hile low income group has

Services Sector contribution is less than 50 per cent. If we compare India, It has

Services Sector contribution is little more than the average of low income group.

As mentioned in the ‘Service Tax training Module prepared by W TO ‘Services

represent more than two thirds of W orld Gross Domestic Product (GDP). The share

of services value added in GDP tends to rise significantly with the countries level of

income, standing at 71 per cent on average in high income countries (75 per cent in

the United States), against 55 per cent and 47 per cent respectively in middle and low

income countries. Even in the latter group, the production of services is generally a

core economic activity, whose contribution to GDP is above that of both industry and

agriculture. Significant differences however exist between countries within the same

income group, as for example for India and Nigeria – two low-income countries

whose respective shares of services in GDP are 49 per cent and 22 per cent.3

Over a period the Service Tax sector is growing, this can be seen in Figure

prepared on the basis of data from UNCTAD by Gisela Di Meglio (Unversity of Acala)

in article ‘ Statistical leaflet on key indicators for understanding in Global Economy,

where percentage share of services in GDP for 1970,1980,1990,2000,2006 shown in

graphical presentation (Figure 4.3)

The comparision shows the decade wise (1970 to 2006) comparison of Services

Sector percentage of world, Developed economy, Developing economy, Economy in

transition, it shows the trend that Services Sector percentage in World GDP is

increased from 50 per cent to more than 65 per cent in 2006. (Figure 4.1.4) In the case

of Developed economy it is increased from more than 55 per cent in 1970 to more

than 70 per cent in 2006. For the developing economy it is increased till 2000 to 52

105
per cent while in 2006 it is decreased by 1½ per cent. W hile this percentage for

Economy in Transition is increased from less than 40 per cent in 1970 to nearly 55per

cent in 2006. .

Figure 4.3 4

Ref 4: http://www.wto.org/english/res_e/stati s_e/services_training_pres_e.pdf

Figure 4.45

Share of Services in GDP

Ref 5: Statistical leaflet on key indicators for understanding services in global economy – Gisela Di
Meglio (University of Acala)

Per capita Income and Sector-wise per cent of Employment - The Figure 4.5,

prpepared by the World Bank isgiven below for the study of change in structure of

employment during the economic development, considers the two parameters. One

parameter is percentage of employment and the other is per capita income. When the

106
per capita income is low, the dependence on the agriculture for employment is more

or the other way when contribution of agriculture is highest then the per capita

income is lowest. W hen the percentage of employment in Services Sector is more, the

per capita income is more.

Figure 4.5 6

The changing structure of employment during economic development

I t is proved that Services Sector has important role in the development of the

economy and GDP. In the next topic with tax with GDP is discussed.

4.3 Tax / GDP Ratio

I mportance of the Tax to GDP ratio

Taxes are one of the major sources of revenue for the government. The

government levies taxes on the nationals in order to invest in resources that would

enable a country to grow at a steady rate in the long-term. Taxes are levied on goods,

services, imports, personal income, wealth and corporate income.

In the subject of economics, the Direct and Indirect tax collection has

compared with GDP for various reasons. It is indicator of the economic growth.

Generally tax to GDP ratio is one of the basic factors for economic growth. Tax is

107
major source for of the funds required for social, economic development of the

country. The government required to play a vital role in public investments from the

long-term interest of the country. Ideally tax to GDP is between 18-20 per cent,7

according to international standard for a developing economy.

List of countries and their Tax Revenue as percentage of GDP

The list of 179 countries with their percentage of Tax to GDP for 2008 is

appended in Appendix V, which is prepared by Heritage Foundation and available at

http://en.wikipedia.org/wiki/List_of_countries_by_tax_ revenue_as_percentage_of_GDP 8

The following table shows the country wise tax revenue as percentage of GDP

for 2008-09. The tax to GDP ratio is differs for country to country. The country-wise

Tax/GDP Ratio are given in Table 4.1.

Table 4.1
Global Summary of Tax/GDP Ratio

Sr. No. Total Tax to GDP Ratio (In per cent) No of country

1 0 to 10 per cent 24

2 >10 to 20 per cent 64

3 >20 to 30 per cent 41

4 >30 to 40 per cent 34

5 >40 16

Total 179

It ranges for 1.4 per cent (United Arab Emirates) to 109.7 per cent (Timor

Leste). The ratio for United States is 28.2 per cent while for India it 17.7 per cent,

which means either there is lot of scope for improvement or there are untapped areas.

108
Even Income of government is sufficient and tax revenue not required, like United

Arab Emirates, where income from oil, petrol refinery are main source for

government.

Tax rate and personal disposable income of the tax payer are directly but

inversely related with each other. A lower rate of Service Tax increases the size of

take home profit of the service and serves as an incentive to grow business. A higher

rate, on the other hand, has a negative incentive of increasing productivity and tax

avoidance. This characteristic of Service Tax has far reaching implications for tax

assessment and collection and therefore has to be borned in mind whicle changing

the exiting tax structure. After the tax to GDP study, the reasercher is comparing the

date of Direct and Indirect taxes in India.

4.4 Direct and I ndirect Taxes

In India, we have adopted federal system. Taxes are governed by Central as

well as state government. Even local bodies levy taxes like house tax, octrio etc.

Central Government levies Income tax, wealth tax, Excise, Customs, Service Tax,

Central Sales tax etc., while State government levy Sales taxes, Entertainment tax,

luxury tax etc.

For the combined study of Central and State taxes, the researcher has referred

the data available at Reserve Bank of India’s website. From combining various data

available on this site, researcher has prepared Table 4.1.1, which is in the Appendix

VI, which includes Direct and Indirect taxes collection of Centre and State along with

their per cent to GDP for the financial year 1994-95 to 2009-10.

4.4.1 Centre and State tax Collection-1994-95 to 2009-10

109
The percentage of total tax collection of Centre and State to GDP is remained

in the range of 13.13 to 17.73 with incremental growth, in the span of 16 years,

period under review of the study. The ratio of total tax to GDP was 14.4 per cent in

1994-95, which was remained in the range of 13.13 per cent to 14.82 per cent for 10

years and then in 2004-05 it was 15.41 per cent considering the base year 1999-2000.

From 2004-05 base year was changed from 1999-2000 to 2004-05 from 1999-2000. In

2005-06 it was 15.56 per cent then increased to 16.9 per cent in 2006-07and 17.7 per

cent in 2007-08 and reduced to 17.4 per cent in 2008-09 and it further reduced to

16.47 per cent, though the tax collection has increased by Rs. 92352 Crore to Rs.

969848 Crore in 2008-09 and By Rs. 56612 Crore to 1026460 in 2009-10. It shows the

increment in the GDP is more than tax revenue. Please refer Table 4.1.1 in Appendix

VI.In the total revenue, the centre’s collection of tax is more than state’s collection of

tax. If we consider the centre and state tax revenue collection the ratio is in the range

of 62 per cent to 65 per cent of Centre to 38 to 35 per cent of State for almost all

years. The proportion of centre remains higher than the state. Refer Figure 4. 6.

The overall direct revenue is increased from Rs. 26966 Crore (2.65 per cent of

GDP) to Rs.370000 Crore (5.94 per cent of GDP). The increased is by 1272 per cent.

For the similar period GDP is increased to Rs. 6231172 Crore. The increased is by

513.44 per cent. Similarly for indirect revenue it increased from Rs. 65328 Crore (6.43

per cent of GDP) to Rs.27079 Crore (4.35 per cent of GDP). The increased is by 314.95

per cent.If we compare the total direct and indirect tax revenue (Including centre and

state), the direct taxes share in total tax revenue is increasing year by year. In 1994-

95, the total direct taxes were Rs. 33868 Crore, while the total collection was

Rs.146286 Crore.

The percentage comes to 23.15 per cent, which was crossed to Rs. 150000

Crore in 2003-04. The collection of Total Direct Taxes in that year was Rs. 156146

110
which was 32.17 per cent of total tax revenue. This percentage was further increased

to 41.28 per cent in 2009-10. The total collection in that year was Rs. 1026460 Crore

and collection of Direct and Indirect were 423683 and 602777 Crore respectively.

Figure 4.6

Yearly Percentage of Central and State Taxes to total Tax revenue 10

Ref10:http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper
cent20Statisticsper cent20onper cent20Indianper cent20Economy

After looking at the combined position of Centre and States, the data for

Union Direct and indirect taxes is summarized in Table 4.3 along with their per cent

to total central tax collection.

4..4.2 Union Direct and Indirect tax collection

The total tax revenue in 1994-95 of Rs. 92,294 Crore was increased to

Rs. 6, 41,079 Crore in 2009-10. It means the 695 per cent growth in 16 years span.

(Table 4.3) W hile for the direct taxes, the growth was 1272 per cent as the collection

of direct taxes in 1994-95 of Rs. 26,966 Crore was increased to Rs. 3, 70, 000 Crore in

2009-10. However, for the growth in indirect taxes was far less at 315 per cent only

111
over the time period of 16 years from 1994-95 to 2009-10. The collection of Indirect

taxes in 1994-95 was Rs. 65, 328 Crore, which increased to Rs. 2, 71, 079 croes in

2009-10.

The relative share in collection of direct taxes has gradually increased as

compared to indirect taxes as a matter of deliberate policy of the government. The

growth in direct taxes was 4 times the growth of indirect taxes during the time span

1994-95 to 2009-10.

In 1994-95, the percentage of direct tax collection to total tax collection was

29.22 per cent (Rs.26966 Crore), while Indirect tax collection was 70.78 per cent of

total collection. This 3:7 proportion was changed every year. In which percentage of

direction tax collection it was increased. In 10 years time it changed to 43.54: 56.46 in

2004-05. The direct tax collection has exceeded indirect tax collection in 2007-08. In

this year the total tax collection was Rs I593147 Crore. Out of this direct tax

collection was Rs. 312198 Crore and the Indirect tax collection was Rs.280949 Crore.

The Direct tax percentage to total tax collection was 52.63 per cent and for Indirect

tax it was 47.37 per cent. The graphical presentation for the per cent of Direct and

Indirect tax is given in figure 4.8. Percentage wise growth of direct taxes is more than

indirect taxes. Even the direct taxes groeth rate is more than GDP growth rate.Till

2007-08 India has more collection of indirect taxes than direct taxes. Howevet in

2007-08 the direct taxes has crossed the indirect taxes collection.

112
Table 4.3

Collection of Union Direct and I ndirect Taxes (1994-95to 2009-10)11

Centre (gross)
per cent of
Year Direct tax to per cent of
Direct Tax Indirect Tax Total Total Indirect tax to
Total

1994-95 26966 65328 92294 29.22 70.78

1995-96 33563 77661 111224 30.18 69.82

1996-97 38891 89871 128762 30.2 69.8

1997-98 48274 90946 139220 34.67 65.33

1998-99 46600 97197 143797 32.41 67.59

1999-00 57959 113794 171753 33.75 66.25

2000-01 68306 120297 188603 36.22 63.78

2001-02 69197 117863 187060 36.99 63.01

2002-03 83085 133181 216266 38.42 61.58

2003-04 105090 149258 254348 41.32 58.68

2004-05 132771 172187 304958 43.54 56.46

2005-06 165201 200949 366150 45.12 54.88

2006-07 230192 243320 473512 48.61 51.39

2007-08 312198 280949 593147 52.63 47.37

2008-09 345000 282949 627949 54.94 45.06

2009-10 370000 271079 641079 57.72 42.28

Ref 11: http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper cent20Statisticsper

cent20onper cent20Indianper cent20Economy

113
Figure 4.7

Year wise Central Direct and I ndirect taxes (1994-95 to 2009-10)12

Ref12: http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper

cent20Statisticsper cent20onper cent20Indianper cent20Economy

Figure 4.8

Trend in Collection of Union Direct and I ndirect Taxes (1994-95to 2009-10) 13

Ref 13: http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper cent20Statisticsper

cent20onper cent20Indianper cent20Economy

4.4.3 Direct Taxes - Yearly Growth (1994-95 to 2009-10)

The year wise growth in Direct taxes shows that there is no consistency. Out

15 years, 6 years shows growth over previous year around 25 per cent, while 2

114
consecutive years (2006-07 and 2007-08) shows growth of 39.34 per cent and 35.63

per cent. In 2 years there was single digit growth (2001-02, 1.3 per cent and 2009-10,

7.25 per cent) in 1998-99 there was negative growth of 3.47 per cent. (Table 4.4)

Researcher has calculated three yearly average growth rates for the entire period

under study and found that the growth rate was lowest in case of Direct Taxes

collection during the years 2001-02 to 2003-04 at 13.07 per cent and highest at 33.13

per cent during the period 2005-06 to 2007-08. The three year moving average shows

25.26% yearly growth, for the entire period under the study.

Table 4.414
Yearly growth of Central Direct Taxes

Year Direct Yearly Yearly Three Yearly moving Average

Taxes Growth Growth
%
1994-95 26966
1995-96 33563 6597 24.46
1996-97 38891 5328 15.87 21.48
1997-98 48274 9383 24.13 12.17 16.22
1998-99 46600 -1674 -3.47 15.01 13.37 14.58
1999-00 57959 11359 24.38 12.92 14.15 13.67 14.1
2000-01 68306 10347 17.85 14.51 13.5 14.05 24.5 21.52
2001-02 69197 891 1.3 13.07 14.51 45.78 25.97 26.38 24.49
2002-03 83085 13888 20.07 15.95 17.77 18.09 28.67 25.59 25.83 25.26
2003-04 105090 22005 26.48 24.29 21.99 22.15 22.12 25.51 25.46
2004-05 132771 27681 26.34 25.75 26.69 26.11 25.74 25.28
2005-06 165201 32430 24.43 30.03 29.64 28.96 27.99
2006-07 230192 64991 39.34 33.13 30.55 28.89
2007-08 312198 82006 35.63 28.49 26.47
2008-09 345000 32802 10.51 17.8
2009-10 370000 25000 7.25
Ref 14: http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper
cent20Statisticsper cent20onper cent20India nper cent20Economy

For the entire period from 1994-95 to 2009-10, average annual rate of growth

in collection of direct taxes had been 25.26 per cent. Growth in collection of direct

taxes seems to be quite significant during recent years, particularly after 2007-08

115
when collection of direct taxex exceeded that of indirect taxex for the first time. The

same trend continues till the end of 2009-10.

4.4.4 Indirect Taxes – Yearly Growth (1994-95 to 2009-10)

In indirect taxes also, the growth shows inconsistency. Out 15 years, only four

years (1994-95, 1995-96, 1999-00 and 2006-07) shows double digit growth over

previous year. For four years the growth was below 5 per cent (1997-98, 1998-99,

2000-01 and 2008-09). There was negative growth in 2 years (2001-02 -1.29 per cent

and 1009-10- 1.89 per cent). For remaining 5 years, the growth was in the range of

7.43 per cent to 9.43 per cent. (Ref.Table 4.5)

Table 4.514
Yearly growth of Central I ndirect Taxes

Year Indirect Yearly Yearly Three Yearly moving Average

Tax Growth Growth
per cent
1994-95 65328
1995-96 77661 12333 13.36
1996-97 89871 12210 10.98 8.39
1997-98 90946 1075 0.83 5.43 6.48
1998-99 97197 6251 4.49 5.62 5.89 6
1999-00 113794 16597 11.54 6.61 5.64 5.49 5.49
2000-01 120297 6503 3.79 4.68 4.95 4.98 5.14 5.27
2001-02 117863 -2434 -1.29 3.56 4.34 4.94 5.2 5.43 5.6
2002-03 133181 15318 8.19 4.78 5.52 5.69 5.95 6.1 6.22 6.3
2003-04 149258 16077 7.43 8.21 7.2 7.22 7.14 7.12 7.07
2004-05 172187 22929 9.01 8.62 8.94 8.52 8.26 7.98
2005-06 200949 28762 9.43 10 9.42 9.04 8.55
2006-07 243320 42371 11.57 9.65 8.76 8.1
2007-08 280949 37629 7.95 6.62 6.13
2008-09 282949 2000 0.34 2.13
2009-10 271079 -11870 -1.89
Ref 14: http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper
cent20Statisticsper cent20onper cent20India nper cent20Economy

If we go by three yearly moving averages, it will be seen that three yearly

average growth rate was highest during the period 2004-05 to 2006-07 at 10.0 per

116
cent and lowest at 2.13 per cent during the period 2007-08 to 2009-10. For the entire

period under study, i.e. from 1994-95 to 2009-10, the average annual rate of growth

works out to 6.3 per cent. It is thus clear that the growth in the collection of indirect

taxes is just 1/3 that of collection of direct taxex. Aggregate collection of direct and

indirect taxes had been Rs. 133330.8 Crore and Rs. 156676.8 Crore respectively

during the period 1994-95 to 2009-10. The ratio of Direct and indirect taxes works

out to 1: 1.18. W eightage of indirect taxex was more.

4.4.5 M ajor components of Central Direct and Indirect Taxes

The researcher further studied the major components of Central direct and

indirect taxes.

1. Direct taxes- Major Components -The major contributors for direct tax

revenue are Personal Income tax, corporate tax and for indirect taxes are Union

Excise Duty and Customs. These both taxes are major source for Central Government

budget every year. In every Budget Session, generally presented at the end of

February, the details of Government Revenue receipts and capital receipts and

Revenue expenditure and capital expenditure are presented in Parliament. In which

the earlier years and previous year Receipt and Expenditure is disclosed. The

summary for financial year 1994-95 to 2009-10 for Direct taxes and Indirect taxes and

their major contributors is summarized in Table 4.6 Even the comparison of the major

components of direct tax is summerised in Table 4.7.

In the direct taxes, the major contributors are corporation tax and personal

income tax. The Corporation tax collection in 1994-95 was 13822 Crore, which was

75per cent of direct taxes. If we see 16 years span the percentage of corporate tax to

total direct tax was reducing till 2003-04. In this year it was 59.68 per cent of the total

direct taxes. Then in next four year it was in the range of 62 to 63 per cent (2004-05

to 2007-08). After that it stared increasing. In the year 2009-10 the corporate tax to

117
Table 4.6 15
Central Government Receipts- M ajor Component- (Rupees in crore)

Year Tax Direct of w hich Indirect of w hich

revenue tax (net) tax (net)
(net) Personal Corpora- Excise Customs
income tion tax duties duties
tax (net)

1994-95 67454 18409 3468 13822 49045 21064 26789

1995-96 81939 22287 4318 16487 59652 22176 35757

1996-97 93701 25374 4715 18567 68326 23463 42851

1997-98 95672 27172 3589 20016 68500 25516 40193

1998-99 104652 32120 5760 24529 72532 28581 40668

1999-00 128271 41436 9131 30692 86836 34944 48419

2000-01 136658 49651 23766 25177 87007 49758 34163

2001-02 133532 47703 22106 25133 85828 54469 28340

2002-03 158544 61612 27779 33893 96932 62388 31898

2003-04 186982 76590 30765 45706 110392 70245 34586

2004-05 224798 95944 35443 60289 128854 77241 41811

2005-06 270264 120692 45238 75187 149572 86642 46645

2006-07 351182 169738 62707 106701 181444 92651 62819

2007-08 439547 231509 86518 144660 209801 95992 75382

2008-09 443319 248152 86985 160797 196969 81872 69217

2009-10 465103 281087 93582 187148 187176 83392 61376

Ref 15: http://w ww.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper

cent20Statisticsper cent20onper cent20India nper cent20Economy

direct tax percentage was 70.48 per cent However if we consider the

percentage of corporate tax collection to total tax collection (Direct and Indirect tax) ,

it was 20.29 per cent in 1994-95,which was increased to 40.08 per cent in 2009-10.

Excluding in the year 1996-97, 2000-01 and 2001-02, the per cent was showing

118
growth and it was above 20 per cent. The percentage of corporation tax to total tax is

30 per cent mark in 2006-07. If we consider yearly growth in corporation income tax,

excluding in the years 2000-01and 2001-02, there was positive growth in corporation

income tax in all the years.

Table 4.7
M ajor Components of Union Direct Taxes 16

(Rupees Crore)

Year Tax Direct of w hich Personal income tax Corporation tax as

revenue tax (net) as percent of percent of
(net) PIT CT Total tax Dire.Tax Total tax Dire.Tax
1994-95 67454 18409 3468 13822 5.14 18.84 20.49 75.08

1995-96 81939 22287 4318 16487 5.27 19.37 20.12 73.98

1996-97 93701 25374 4715 18567 5.03 18.58 19.82 73.17

1997-98 95672 27172 3589 20016 3.75 13.21 20.92 73.66

1998-99 104652 32120 5760 24529 5.5 17.93 23.44 76.37

1999-00 128271 41436 9131 30692 7.12 22.04 23.93 74.07

2000-01 136658 49651 23766 25177 17.39 47.87 18.42 50.71

2001-02 133532 47703 22106 25133 16.55 46.34 18.82 52.69

2002-03 158544 61612 27779 33893 17.52 45.09 21.38 55.01

2003-04 186982 76590 30765 45706 16.45 40.17 24.44 59.68

2004-05 224798 95944 35443 60289 15.77 36.94 26.82 62.84

2005-06 270264 120692 45238 75187 16.74 37.48 27.82 62.3

2006-07 351182 169738 62707 106701 17.86 36.94 30.38 62.86

2007-08 439547 231509 86518 144660 19.68 37.37 32.91 62.49

2008-09 443319 248152 86985 160797 19.62 35.05 36.27 64.8

2009-10 465103 281087 93582 187148 20.12 33.29 40.24 66.58

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cent20onper cent20India nper cent20Economy

119
The personal tax in 1994—95 was Rs. 3468 Crore, which was 18.84 per cent of

the total direct tax collection. Excluding 1997-98, it remains more than 15 per cent. In

the year 2000-01, it was highest among all the years (47.87 per cent). If we compare

the percentage of personal income tax to total tax it remains single digit till 1998-99

in the range of 3.75 per cent to 7.12 per cent. After that it was in the range of 15.77

per cent to 20.12 per cent with ups and downs. It was highest in 2009-10 (20.12 per

cent). If we consider yearly growth in personal income tax, excluding in 1997-98,

2001-02, there was positive growth in personal income tax in all the years. The

comparison of the major components of direct tax is summarised in Table 4.7

2.Indirect Tax M ajor components

In the indirect tax, the major contributors are excise duty and customs duty.

However, their combined contribution in 1994-95 of 97.57 per cent was reduced

77.34 per cent in 2009-10. Till 2004-05, the share of Excise and customs duty in

Indirect taxes was more than 90 per cent. In this increase in collection of Service Tax

is one of the reasons. As the percentage wise (Service Tax to Indirect tax) contribution

of Service Tax was more than 10 per cent from 2004-05. The compative statestics are

in Table 4.8

The customs duty collection in 1994-95 was Rs.26789 Crore, which was 54.62

per cent of total indirect tax, was reduced to 32.79 per cent in 2009-10. However in

first three year it has increased and there after it was started reducing. First it reaches

to highest, in these 16 years, to 62.72 per cent in 1996-97. Then the contribution of

customs duty stared reducing. The amount wise it is increased to Rs.61376 cores in

2009-10. Till 1999-00, the percentage of customs duty to total indirect taxes was more

than 50. The yearly growth in customs duty shows positive growth, excluding 5

years. Those five years are 1997-98, 2000-01, 2001-02, 2008-09 and 2009-10, where it

showed negative growth. The customs to total tax percentage also started reducing

120
after first three years increase. The percentage of customs duty to total tax revenue

was 39.71 per cent (Rs. 262789 Crore) in 1994-95. This was increased to 43.64 per

cent and 45.73 per cent (Highest in these 16 years). Then it shows decreasing trend

from 1997-98. From 2003-04, the custom duties percentage to total tax revenue

reduced to below 20 per cent.

In the case of other major component of indirect tax i.e. Excise, the collection

in the year 1994-95 was Rs.21064, which was 42.95 per cent of the indirect tax

revenue. Then it reduced below 40 per cent till 1998-99. After that there excise duty

contribution to total Indirect tax revenue in increased till 2003-04. The percentage for

2003-4 was 64.36 per cent (Highest in these 16 years) then again it was started

showing reduction in percentage. It was 41.57 per cent in 2008-09. If we compare the

excise duty collection to total tax revenue, it was 31.23 per cent in 1994-95. Then it

was below 30 per cent till 1999-00 (Ranging from 25.04 to 27.31 per cent), then for

next two years it was increased. In 2001-02 it was highest contribution of 40.79 per

cent, there after it shows reducing trend. After 2005-06 it was below 30 per cent and

after 2007-08 it was below 20 per cent. The yearly growth for excise duty collection

for 1994-95 to 2009-10 is positive, except in 2008-09 it shows negative growth of

14.71 per cent over previous year. Out of this, it shows single digit growth in 8 years

and for 2 years it was more than 20 per cent. It shows highest yearly growth in 2000-

01 of 42.39 per cent. The amount wise collection of excise duty was highest of Rs.

95992 Crore in 2007-08.

The graphical presentation for per cent of Direct and Indirect taxes is given in

Figure 4.8 The direct taxes growth in percentage wise is more than indirect taxes.

Even the direct taxes growth rate is more than GDP growth rate. Till 2007-08 India

has more collection of Indirect taxes than Direct Taxes. However In 2007-08 the

direct taxes has crossed the indirect taxes collection.

121
Table 4.8
M ajor Components of Union indirect taxes 17

Excise duties (net) as Customs duties as

of which
per cent of per cent of
Year Total tax Indirect
Revenue Tax
Excise Cust-
(Net) (Net) Total Indirect Total Indirect
duties oms
Taxes Taxex Taxes Taxex
(net) duties

1994-95 67454 49045 21064 26789 31.23 42.95 39.71 54.62

1995-96 81939 59652 22176 35757 27.06 37.18 43.64 59.94

1996-97 93701 68326 23463 42851 25.04 34.34 45.73 62.72

1997-98 95672 68500 25516 40193 26.67 37.25 42.01 58.68

1998-99 104652 72532 28581 40668 27.31 39.4 38.86 56.07

1999-00 128271 86836 34944 48419 27.24 40.24 37.75 55.76

2000-01 136658 87007 49758 34163 36.41 57.19 25 39.26

2001-02 133532 85828 54469 28340 40.79 63.46 21.22 33.02

2002-03 158544 96932 62388 31898 39.35 64.36 20.12 32.91

2003-04 186982 110392 70245 34586 37.57 63.63 18.5 31.33

2004-05 224798 128854 77241 41811 34.36 59.94 18.6 32.45

2005-06 270264 149572 86642 46645 32.06 57.93 17.26 31.19

2006-07 351182 181444 92651 62819 26.38 51.06 17.89 34.62

2007-08 439547 209801 95992 75382 21.84 45.75 17.15 35.93

2008-09 443319 196969 81872 69217 18.47 41.57 15.61 35.14

2009-10 465103 187176 83392 61376 17.93 44.55 13.2 32.79

Ref 17: http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper cent20Statisti csper

cent20onper cent20Indianper cent20Economy

122
To sum up

The study shows the following facts

The Services Sector's contribution is very important in GDP. It helps economy

GDP to grow at faster stage. The study reveals that as economy evolves from early

state to developing and then developed, the agriculture contribution in GDP starts

reducing. In the developing stage, through contribution from manufacturing sector is

more, in the developed economy it reduces and the share of Services Sector becomes

is highest contributors. The most developed economy has today more than 2/3rdshare

from Services Sector

Tax revenue to GDP ratio shows out 179 countries , 105 countries have the tax

GDP ratio in between 10 per cent to 30 per cent .while 24 countries have tax to GDP

ratio below 10 per cent . For India, in 2008 tax GDP ratio was 17.7 per cent.

The study of India for 16 years 1994-95 to 2009-10 of GDP direct & indirect

taxes &their main contributors done for this research.The ratio in 1994-95 was only

14.4 per cent which was in the range of 13.13 per cent to 14.82 per cent for 10 years

and started growing .In this the contribution of centre Taxes revenue is remain in

between 62 per cent-65 per cent

Further analysis of central direct and indirect taxes reveals that the direct taxes

contribution in total taxes has grown over a period of time. In earlier years, the

contribution of direct taxes was lesser than that of indirect tax , however from 2007-

08 , the contribution of direct taxes was more than that of indirect taxes the increase

of direct taxes is 1272 per cent in 2009-10 over revenue on 1994-95 while it was

only315 per cent for indirect taxes for same period .

123
The major contributors in direct taxes are personal tax and corporate tax. The

corporation tax remains the major contributor in direct taxes which was ranging from

62 per cent to 75 per cent. In 2009-10 it was 70.48 per cent the contribution of

corporate tax to total tax has increased from 20.29 per cent in 1994-95 to 40.8 per cent

in 2009-10.

In the indirect taxes, the major contributors are excise duty and custom duty,

which have contributed 97.57 per cent revenue of indirect tax in 1994-95. Till 2004-

05 it was remain more than 90 per cent. In 2009-10 it was reduced to 77.34 per cent.

In this the custom duty contribution has reduced from 54.62 per cent in1994-95 to

32.79 per cent in 2009-10. The share at custom revenue to total tax revenue was

39.71per cent in 1994-95. After 2003-04 customs share to total tax revenue was below

20 per cent. The contribution of excise to total indirect tax in 1994-95 was 42.95 per

cent which was increased to 64.36 per cent in 2003-04. However then its share to

total indirect tax stared reducing and after 2006-07 it was below 50 per cent.

In India now the direct taxes are contributing more revenue than indirect

taxes. In Indirect taxes, the share of customs duty and excise duty also decrease

around 20 per cent point in 16 years. The share of customs excise to indirect taxes

from 97.57 per cent in 1994-95 reduced to 77.34 per cent 2009-10.

4.5 Analysis of Service Tax collection

This section analyses Service Tax as one of the components of Indirect

taxes in India and its ratio with GDP, total tax revenue and indirect taxes.

4.5.1 Service Tax and GDP

W e have reviewed the share of services in GDP, in earlier chapter. The study

of Australian government shows the following reasons for the increasing share of

services in GDP.

124
i) Consumer demand

There has been a secular shift in consumer demand toward services. This shift

was recently examined in McLachlan et al (2002) and DISR (2001). Briefly, the main

explanation is that the income elasticity of consumer demand for many services is

above unity and exceeds the average income elasticity of demand for manufactures

and food/beverages. Service items with high-income elasticities include housing,

tourism, recreational activities, medical services, banking and insurance. In addition,

marketing and advertising tend to be more intensive with non-essential goods. These

demand factors led to a more rapid growth in national expenditure on services than

on manufactures or food and beverages.

ii) Statistical transfer of activities from manufacturing to services

The statistical allocation of value-added into industries is based on the industry

classification of reporting establishments. Large manufacturing establishments often
undertake activities such as transport, warehousing, wholesale trade, accountancy,
computer work, cleaning, maintenance and engineering design that under a different
organisational arrangement could be undertaken by outside contractors. Anecdotal
and statistical evidence suggests that in the last two decades many large
manufacturing establishments have followed increased specialisation and outsourced
non-core activities to external contractors in order to improve efficiency. Such
outsourcing results in value-added being reclassified from the manufacturing sector to
services. To a lesser extent, similar transfer of activities also occurred in agriculture
and mining.

iii) The productivity price effect

In recent years productivity improvement in the ‘goods' producing sectors

(agriculture, mining and manufacturing) tended to exceed productivity improvements

125
in most services.2 In competitive markets productivity improvements are translated
into lower prices. Due to uneven productivity gains, the relative prices of
manufactures and farm produce tended to decrease compared with those of many
services. These changing price relativities led to a slower increase in the value of
manufacturing and agricultural output in current price terms than the rise in the
current price value of services. The Services Sector growth in economy creates more
dominance of this sector in GDP. Similar situation is in India.

4.5.2 Ratio of Service Tax to GDP in India

The Statistics for Sixteen years of GDP and Service Tax revenue related to the
financial year 1994-95 to 2009-10, along with the percentage of Service Tax to GDP is
summarized in Table 4.9. The Figures of Service Tax collection (Figure 4.2.1) and
Percentage of Service Tax collection to GDP (Figure 4.2.2) are prepared. If we the
trend of Service Tax to GDP, in the first year of Service Tax (1994-95), the ratio with
GDP was very marginal. The collection of Service Tax was 417 Crore, while GDP (at
market Price) was Rs.1015764 Crore. In the case of Service Tax, the Service Tax to
GDP ratio has increased from 0.04 per cent 1994-95 to 1.17 per cent 2008-09.
However, it was reduced to.93 per cent in 2009-10. The reasons in increase of share of
service in GDP are increase in No of Taxable Service, Increase in rate of Service Tax
from 5 per cent to 10 per cent and growth in the Services Sector. The per cent of
Service Tax to GDP has steadily increased and it reaches half per cent 2006-07. Then
within two years it crossed to 1 per cent. Table 4.9 clearly shows that the ratio of
Service Tax to GDP was continuously on rise from 1994-95 to 2008-09 from 0.07 per
cent to 1.17 per cent. Thereafter, in 2009-10, it dropped to 0.93 per cent.

Still considering the standered tax to GDP ratio of eighteen percent there
seems to be very good scope for improving the Service Tax revenue, which is just one
percent of GDP as the Services Sector contributes more than fifty percent in GDP.

126
Table 4.9
Ratio of Service Tax to GDP (1994-95to 2009-10) 18
(Figires in Rs. Crore)

per cent of Service Tax to

Year GDP at M arket Price Service Tax
GDP

1995-96 1191813 862 0.07

1996-97 1378617 1059 0.08

1997-98 1527158 1586 0.1

1998-99 1751199 1957 0.11

1999-00 1952036 2072 0.11

2000-01 2102314 2612 0.12

2001-02 2278952 3200 0.14

2002-03 2454561 4123 0.17

2003-04 2754620 7750 0.28

2004-05 3149407 14150 0.45

2004-05 3239224 14150 0.44

2005-06 3706473 23000 0.62

2006-07 4283979 37200 0.87

2007-08 4947857 50603 1.02

2008-09 5574448 65000 1.17

2009-10 6231172 58000 0.93

Ref 18:http://www.archive.dcita.gov.au/2001/01/productivity_drivers_of_the_information_economy/productivity_g
rowth_in_service_industries2/2._broad_trends_in_service_industries/2.2_reasons_for_the_increasing_share_of_se
rvices_in_gdp

127
4.5.3 Service Tax and Indirect tax

The Service Tax contribution in Indirect taxes, remain below 10 per cent for

11 years i.e. till 2004-05. However within next three years it has increased more than

20 per cent. I t was in between 10 per cent to 20 per cent range till 2007-08. Today the

share of Service Tax in Indirect Tax is one fifth or twenty per cent. However

comparing the share of services in Indirect taxes, there is scope for improvement.

This can be seen in Table prepared of Yearly per cent of Service Tax collection to total

Indirect taxes collection in Table 4.10 When the collection of other components of

indirect taxes is not increasing as others, the Service Tax is considered as one of

component for increasing the revenue.

Table 4.10 shows trends in collection of indirect taxes in aggregate and that of Service

Tax as one of the components of indirect taxes. This tax constituted just 0.62 per cent

of total indirect taxes collection in the country when introduced in the year 1994-95.

Its share went on gradually increasing upto 2.72 per cent in 2001-02 but thereafter,

the collection of Service Tax continued to increase at a galloping rate till it reached to

22.97 per cent of the total indirect tax revenue. There was, however, a slight decline

in the year 2009-10 with 21.4 percent share in total indirect taxes. This has been

possible on account of two reasons: (1) by increase in the coverage of services in the

tax net and (2) by upward revision in the tax rate schedule for various services.

128
Figure 4.9

Yearly Service tax collection19

Ref19: http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per cent20ofper

cent20Statisticsper cent20onper cent20Indianper cent20Economy

Figure 4.10
Ratio of Service tax to GDP for 16 Years20

Ref20:
http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per cent20ofper cent20Statisticsper
cent20onper cent20Indianper cent20Economy

129
Table 4.10
21
Service Tax and indirect Taxes collection

Year Total Indirect Taxes Service Tax Service Tax as Per cent
of Total Indirect taxes

1994-1995 65328 407 0.62

1995-1996 77661 862 1.11

1996-1997 89871 1059 1.18

1997-1998 90946 1586 1.74

1998-1999 96884 1957 1.73

1999-2000 113439 2072 1.83

2000-2001 119830 2612 2.18

2001-2002 117863 3200 2.72

2002-2003 133181 4123 3.10

2003-2004 149266 7750 5.19

2004-2005 172197 14150 8.22

2005-2006 200064 23000 11.50

2006-2007 231469 37200 16.07

2007-2008 279621 50603 18.10

2008-2009 282949 65000 22.97

2009-2010 271079 58000 21.40

Ref 21: http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per cent20ofper cent20Statisticsper

cent20onper cent20Indianper cent20Economy

4.5.4 Approaches to Levy of Service Tax

The levy of Service Tax can be based on either of the following 2 approaches:

(1) Comprehensive coverage approach (2) Selective coverage approach

(1) Comprehensive coverage / approach:

130
The comprehensive approach contemplates taxation of all services and a

negative list is given, in case some services are to be exempted.

(2) Selective coverage / approach:

In case of selective approach, only selective services are subject to Service

Tax. In this case, the legislature attempts to specify and list the services

that would be taxable and the scope of coverage of each service. There is

no residual category for inclusion of other services.

4.5.5 Year-wise addition of Services in Service Tax Net

In India, we have Selective coverage approach for levy of Service Tax. Starting

with 3 services initially in 1994, we have more than 100 services in 15 years time

span. The list of Services and their date of introduction are in Appendix IV.

There was addition of new services under the Service Tax net in almost every budget.

Only in the year 1995, 1999, 2000 there was no addition to the list of services subject

to Service Tax. The highest number of 15 services was added to the list of taxable

services in 2001 and 2006. The increase of number of services in the tax net is also one

of the reasons for growth in tax revenue. The Table 4.11 shows the number of

addition of services in every year.Out of services shown in table 4.11, in the year

1998, 2000, 2007, 1, 3, and 6 services respectively are exempted /withdrawn from

Service Tax.

131
Table 4.11
Number of Services added to the list of services in Service Tax net 22

Sr. No. Year No of Taxable No of Taxable No. of Taxable

Services Added Services Exempted Total Services

1 1994-95 3 - 3

2 1995-96 - - 3

2 1996-97 3 - 6

3 1997-98 12 - 18

4 1998-99 12 3 27

5 1999-00 - - 27

5 2000-01 - 1 26

6 2001-02 15 - 41

7 2002-03 11 - 52

8 2003-04 10 - 62

9 2004-05 13 - 75

10 2005-06 9 - 84

11 2006-07 15 - 99

12 2007-08 7 6 100

13 2008-09 6 106

14 2009-10 11 - 117

Ref 22: http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per cent20ofper cent20Statisticsper

cent20onper cent20Indianper cent20Economy

4.5.6 Rate of Service Tax-

The rate of service for all categories of services is one. However, considering

the nature of services, government has allowed the concession in the form of

abatement (for example Mandap keeper service, Tour operator service)or prescribe

composition scheme (W orks Contract Service) or based on the nature prescribed

132
alternate method of calculation and levy of Service Tax (In case of Air Travel Agent

Service or Advertisement Service)

The rate of Service Tax in 1994, when Service Tax introduced was 5 per cent,

which was increased to 8 per cent and then 10 per cent. The rate is increased by 62.5

percent in 2003. Immediately in next year (2004) it is incrased by 12.5 percent. This

includes the introduction of Education Cess of two percent on Service Tax

amount.This has been further incrased by 20 percent to 12.24 percent in 2006. In

2007, the rate is incrased due to introduction of SHE (Secoundary and Higher

Secoundary) cess of 1 per cent on Service Tax amount. The period and rate of Service

Tax is summerised below in Table 4.12.

Table 4.12
Rates of Service Tax 23

Sr. No. Date (Effective From ) Rate Percent

growth

1 01-07-1994 TO 13-05-2003 5 per cent -

2 14-05-2003 to 09-09-2004 8 per cent 62.5

3 10-09-2004 to 17-04-2006 10.2 per cent 1 12.5

4 18-04-2006 to 11-05-2007 12.24 per cent 2 20.0

5 12-05-2007 to 23-02-2009 12.36 per cent 3 0.98

6 24-02-2009 onwards 10.3 per cent 4 -7.3

Ref 23: PP-9 Law, Practice & Procedure of Service Tax by Advocate J.K.Mittal,Publoshed by CCH,18th edition.Note
1Includes 2per cent Education Cess 2 Includes 2per cent Education Cess 3Includes 2per cent Education Cess and
1per cent Secoundary and Higher Secondary Cess 4 Includes 2per cent Education Cess and 1per cent Secoundary
and Higher Secondary Cess

133
Factors of Growth in Service Tax-

There are mainly three factors in growth of Service Tax-

1 Growth in Services Sector -As it is mentioned earlier as the economy

develops the share of the Services Sector in GDP is increased, is the basic

reason to improve the collection. (Refer the Services Sector and GDP in

earlier chapter.

2 Increase in Service category-As mentioned above the category of services has

increased by the finance minister almost in every budget. The Table 4.11

shows the no. of services introduced in the every budget. The no of services

are increased to 114 in 2009-10 from 3 in 1994-95.

3 Increase in Rate of Service Tax- Initially the rate of Service Tax was 5 per

cent which was increased to 8 per cent in 2003. Immediately in next

financial year it increased to 10 per cent. The rate again increased to 12 per

cent in 2006. However in 2009 it was reduced to 10 per cent.

According to Sukumar Mukhopadhyaya, there is a further potential for growth

in Service Tax Revenue- the reasons as to why the services sector should now

be harnessed for higher collection of revenue are as follows:

(i) As the share of industry in GDP decreases while that of services

expands, the tax base shrinks, aggregate buoyancy of excise tax revenue

declines and the excise tax/GDP ratio falls.

(ii) Secondly the failure to tax services leads to distortion in consumer

choices and encourages spending on services at the expense of goods

and savings.

(iii) Thirdly untaxed services mean that the traders are unable to claim VAT

on their service input. This causes cascading, which in turn leads to

distortion of choice and encourages business to develop in-house

services, creating further distortion.

134
(iv) Finally, as most of the services that are likely to become taxable are

positively co-related to the expenditure of high-income households,

subjecting them to taxation will improve equity and bring in

progressiveness in the total tax structure.24

Growth Potential in Service Tax

The potential of Service Tax is tremendous. In 15 years since its inception, the

collection has grown by 158.70 times. In 1994-95, the collection was 407 Crore,

which is increased by Rs. 64593 Crore to Rs. 65000 in 2008-09. If we compare the

yearly growth of Service Tax it more than 20 per cent in these 16 years, except in

1999-00 where growth if 5.88 per cent and in 2009-10 it was first time negative

growth. The highest growth was very first year (1995-96) was 111.79 per cent. Service

Tax is the tax, where the collection achieved budget targets. (Except 1/2 year)

The addition in number of services is also reflected in the size of revenue. For

example, in 2004-05, 13 services are introduced, with a growth rate of 82.58 per cent

in Service Tax revenue. Similary, the change in tax rate has also helped to increase the

revenue collection. For example, in the year 2003-04, when the rate of tax increased

from 8.0 to 10.2 per cent w.e.f. 10.09.2004, the yearly growth was 87.97 per cent.

W hen the rate was again reduced to 10.3 per cent from 12.36 per cent from

24.02.2009, the yearly growth for 2009-10 was negative by 10.77 per cent. This has

been summarized in Table 4.13

By using three yearly moving average, we find that the highest three yearly

average growth in tax collection was recorded during the period from 2003-04 to

2005-06 at 77.7 per cent and the lowest during the period 2007-08 to 2009-10 at 17.9

per cent. W hen we arrive at the aggregate average rate of growth for the entire period

from 1994-95 to 2009-10, we will find that the average growth rate of revenue

collection at 45.77 per cent.

135
Table 4.13

Yearly growth of Service Tax25 (Rs. Crore)

Year Service Yearly Three Yearly Moving Average Number Rate Of

Tax Growth of Taxable Service Tax
in % Services in percent
1994-95 3
407 5
1995-96 3
862 111.79 5
1996-97 6
1059 22.85 61.47 5
1997-98 18
1586 49.76 32 39.94 5
1998-99 27
1957 23.39 26.34 25.59 28.83 5
1999-00 27
2072 5.88 18.44 20.98 22.46 25.09 5
2000-01 26
2612 26.06 18.15 20.8 23.97 26.27 28.56 5
2001-02 41
3200 22.51 25.8 30.13 32.39 34.33 35.68 36.83 5
2002-03 52
4123 28.84 46.44 46.23 46.63 46.43 46.25 46 45.77 8
2003-04 62
7750 87.97 66.46 63.53 60.27 58 56.09 54.48 10.20
2004-05 75
14150 82.58 77.7 71.04 67.09 63.85 61.1 10.20
2005-06 84
23000 62.54 68.95 66.7 64.19 61.46 10.20
2006-07 99
37200 61.74 53.44 54.82 53.11 12.24
2007-08 100
50603 36.03 42.07 37.8 12.36
2008-09 106
65000 28.45 17.9 12.36
2009-10 117
58000 -10.77 10.30
Ref : Data Source -http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per cent20ofper
25

cent20Statisticsper cent20onper cent20Indianper cent20Economy

Note the Service made taxable in between the year, even the change in rate of Service Tax made
effective in between year.

136
Figure 4.11
Service tax per cent Growth over previous year 26

Source: http://www.servicetax.gov.inSource: http://www.servicetax.gov.in

4.5.7 Growth in Assessees-

As the number of services increased the number of assessees also has

increased. The three yearly moving average shows 47.08 percent average yearly
growth in number of assesees.The number of Service Tax assesees, like the Service
Tax collection, has grown up by 331.55 times during the period under study. In the
first year i.e. 1994-95, number of assesses was 3, 943, which were increased to 13, 07,
286 in 2009-10. In the 5th year of its inception the number of assesses crossed the 1
lakh mark. The percentage growth over previous year shows that the highest growth
of 228.93 per cent was in 1997-98. In consecutive 3 years from 1996-97 to 1998-99,
the growth percentage was more than 125 per cent. Out of remaining 12 years , in 5
years growth percentage was below 10 per cent (Single digit),while in 4 years growth
percentage was between 10 To 25 per cent and remaining 3 year growth percentage
was between 50 to 100 per cent. The information of year wise growth for 1994-95 to
2009-10 is summarized in Table 4.14. The Graphical presentation for 1994-95 to
2009-10 for No. of assessee is prepared in Figure 4.11.

137
Table 4.14
Year -wise growth in Service Tax Assessees 27

Financial No. Of Percentage

Year Assessee growth
over Three Yearly Moving Averages
previous
year

1994-95 3943 Base Year

1995-96 4866 23.41
1996-97 13982 187.34 146.56
1997-98 45991 228.93 183.32 151.08
1998-99 107479 133.7 123.36 118.57 111.51
1999-00 115495 7.45 49.02 64.87 72.14 75.8
2000-01 122326 5.91 22.23 32.97 43.75 51.24 56.51
2001-02 187577 53.34 27.65 33.41 37.82 42.5 46.38 49.51
2002-03 232048 23.71 50.36 47.07 45.93 45.4 45.64 46.26 47.03
2003-04 403856 74.04 63.21 57.31 52.46 49.03 46.75 45.31
2004-05 774988 91.89 58.37 53 48.69 45.81 43.53
2005-06 846155 9.18 37.41 35.75 36.28 35.76
2006-07 940641 11.17 11.48 20.08 22.31
2007-08 1073075 14.08 11.34 11.09
2008-09 1204570 8.78 10.46
2009-10 1307286 8.53
Sourec: http://www.servicetax.gov.in

Figure 4.12

Year wise growth in Service tax Assessee28

Source: http://www.servicetax.gov.in

138
4.5.8 Zone wise Service Tax position

The Central Excise, Customs department, which administer Service Tax has 24

zones in India. The Zone wise Service Tax and assessee are compared. In this, the

researcher have considered only two latest years, those are 2008-09 and 2009-10.

The data regarding the collection of Service Tax revenue and No of assessees is

considered. The zone also includes LTU (Large taxpayer unit).The Zone-wise

revenue and assessee for two years are summarized in Table 4.1.2 in Annexure

VII. The graphical presentation of zone wise revenue is prepared in Figure 4.13

and zone wise assessee in Figure 4.14.

Zone-wise Revenue- It reveals that in zone wise revenue, the highest revenue of

in all the zones is of Mumbai zone for both the years, which is Rs. 20205.11 Crore

(31.72 per cent) for the financial year 2008-09 and Rs. 18440.84 Crore (33.15 per cent)

for the financial year 2009-10 (nearly 1/3 of the India’ s total revenue), followed by

Dehli. (Rs. 10178.93 Crore, 17.02 per cent-2008-09 and Rs. 907.12 Crore , (16.7 per

cent-2009-10) The lowest revenue for the year is of Shillong followed by Mumbai II

zone .It is Rs. 279.92Crore (0.52 per cent) for 2008-09 and Rs. 299.39 Crore (0.46 per

cent) for 2009-10. For Mumbai II, it was Rs. 350.13 Crore (0.54 per cent) for 2008-09

and Rs.315.80 Crore (0.57 per cent) for 2009-10.

4.5.9 Revenue/Assesee

From the Table 4.1.2 in Annexure VII, the no. of assessee and revenue is

compared, It finds that nearly 50 per cent revenue come from nearly 27 per cent

assessee from Mumbai and Dehli. (For the same Mumbai I and Mumbai II fig are

added.) For 2009-10, the total revenue for Mumbai and Dehli was Rs. 28651.71 Crore,

which is 49.28 per cent of the total revenue of Service Tax. This revenue came from

139
350029 assessees, which were 26.78 per cent of total assessees (No of total assessee-

1307286). For 2008-09 the revenue is Rs. 30734.17 Crore, which is 50.42 per cent,

comes from 1204570 (26.41 per cent) assessees.

The revenue per assesses for 2008-09 for all India was Rs. 5.06 lakh/assessee,

while in 2009-10, it is 4.45 Lakh /assessee. The highest per assessee revenue, for 2008-

09, is from LTU zone of Rs. 355.81 Lakh/ assessee. This has been increased by 75 per

cent to 620.71 laces / assessee in 2009-10, which is contrary of all India per assessee

revenue for 2009-10. The all India ratio is decreased. After the LTU zone the per

assessee revenue of Mumbai -I zone is higher. For 2008-09, it was Rs. 11.33

Lakh/assessee, while it was reduced to Rs. 9.77 Lakh /assessee in 2099-10. After

Mumbai I zone, the Mumbai II Zone per assessee revenue is higher (Rs.9.19

lac/assessee for 2008-09and Rs. 7.22 lac/assessee for 2008-09) and then the Dehli

Zone’s (Rs.7.03 Lakh/assessee for 2008-09 and Rs. 6.31 lac/assessee for 2008-09) per

assessee revenue is higher. The lowest per assessee revenue is for Coimbatore, which

is Rs. 1.51 lac/assessee and Rs1.19 Lakh per assessee for 2008-09and 2009-10

respectively. The per assessee revenue of 18 zones out of 24 zones in both years is

below of the all India ratio of Rs. 5.06 Lakh/assessee (2008-09) and 4.45 Lakh /assessee

(2009-10).

If we consider state wise revenue and no of assessee, the Maharastra State is

having 4 zone (Mumbai I, Mumabi II, Pune and Nagpur) highest revenue as well as

highest assessee base. The revenue of Maharastra State was Rs. 23710.36 Crore (38.9

per cent) in 2008-09 and Rs. 21665.69` Crore (37.27 per cent) in 2009-10. The assesses

in Maharastra were 304569 (25.29 per cent) in 2008-09 and 328633 (25.13 per cent) in

2009-10)

140
Figure 4.13 29
Zonewise Percent of Revenue in 2009-10

RRef 29: http://www.servicetax.gov.in

Figure 4.14 30

Z onewise Percent of Assesees in 2009-10

Ref 30: http://www .servicetax.gov.in

141
4.5.10 Commisionerate wise Revenue and Asseseess

There are 77 commisionerates of Central Excise and Customs in 24 zones at all

India level. The details commisionarate wise revenue and no. of assessee for two years
(2008-9 and 2009-10) is shown in Table 4.1.3. (Appendix VIII) the statistics of
commissionerate revenue per assessee is prepared in Table 4.1.4. (Appendix IX) Out
of these , it seems LTU Kolkatta seems to be not operative from Service Tax angle as
there is nil data. The average revenue per commisionerate (Considering 77
commisionerate) comes to Rs. 791.67 Crore in 2008-09 and 754.90 Crore in 2009-10.
Out of 77 commisionerate only 6 commisionerate has the revenue more than average
however in 2009-10, 9 commisionerate has surpass the average revenue of Rs. 754.90
Crore. The highest revenue in 200910 was of Mumbai- Service Tax commisionerate
followed by Dehli commisionerate. The lowest revenue for the same year was of
Siliguri commissionerate. (Rs. 37.26Crore in 2008-09 and Rs. 40.71 Crore in 2009-10)
followed by Vapi commisionerate (Rs. 45.36Crore in 2008-09 and Rs. 44.86 Crore in
2009-10) In case of revenue per assessee in 2008-09 total 16 comissionerate has more
ratio than all India ratio of 5.06 Lakh/ assessee, while in 2009-10 only 14
comissionerate has more ratio than all India ratio of 4.45 Lakh/ assessee.

Total contribution of the Top Ten Commissionerates was Rs.43021.91 Crore

during 2009-10, which is 73.75 per cent of the total all India Service Tax revenue

receipts, thus indicating that the Services Sector is presently concentrated in bigger

cities. However, there is an ample scope and potential for larger Service Tax

collection at other locations.

4.5.11 Service-wise Revenue Analysis for 2009-10

1) Service wise-The statistics of Service wise revenue for 2009-10 is shown in

Table 4.15 and its graphical presentation is prepared in Figure 4.15. The data shows

that Out 114 Services, top 10 services together contributed a share of Rs. 28004.92

Crore, which was 48.01per cent of the total revenue of Rs.58336.36 Crore.

The Banking & other Services with a contribution of Rs.4063.58 Crore was the

No.1 contributor to the overall receipts. The second contributor is

Telecommunication Service with revenue Rs. 4031.04

142
For two years 2008-09 and 2009-10, the summary of the positive trends in

service wise where collection is more than 1000 Crore is shown in Table 4 .16. It

shows that information technology software for use in course or furtherance of

business or commerce service shows highest growth of 76.13 per cent over previous

year, earning the revenue of Rs.152953 Crore in 2009-10 from Rs. 86841 Crore in

2008-09. The other services are work contract service mining of mineral , oil , gas

security agency , stock broker and business support service , which have growth more

than 20per cent. Some of the other salient features, which emerge upon the service-wise
revenue analysis of the total Service Tax revenue of Rs.58336.36 Crore (as reported by Pr.

C.C.A., New Delhi) are: Out of 20 Services yielding revenue above Rs.1000 cr, 8 services have

shown substantial growth as compared to the previous year’s revenue.

Table 4.15
Service Tax Revenue from the top 10 services for 2009- 1033

Services Service Tax 2009-10 Percentage to total Service Tax

Sr. No

1 Banking & other Financial Service 4063.58 6.97

2 Telecommunication Services 4031.04 6.91

3 Business Aux.Service 3642.56 6.24

4 Insurance 3125.49 5.36

5 GTO / GTA 2628.62 4.51

6 Renting of Immovable properties 2015.05 3.45

7 Maint.& Repairs 2217.2 3.8

8 Cons. EngineerIns. 2077.76 3.56

9 Manpower Recruitment Agency 2077 3.56

Aux. Services 2126.22 3.64

11 Other Services 30331.44 51.99

Ref 33: http://www .servicetax.gov.in

143
Figure 4.15
Top Ten services based on revenue collection during 2009-10 34

Ref 34: http://www .servicetax.gov.in

2) M onth wise Service Tax collection for 2009-10- The month wise collection for

2009-10 is summarized in Table 4.17. The Graphical presentation is prepared in

Figure 4.15. This shows that there is highest collection in the month of March

2010 (11146.42 Crore) followed by October 2009 (5766.23 Crore). The lowest

collection was in April 2009 (2265.47 Crore) Out of 11 there is an positive

growth over previous month ,while in 4 moths there is negative growth over

previous month.

144
Table 4.16
Positive Trends in services registering tax collection above 1000 Crore. 35

(Rs. Crore)
Revenue For Actual per cent
Sr.No. Service
Increase/D Increase/
2009-10 2008-09 ecrease Decrease

Information technology software for use

1 in course or furtherance, of business or 1529.53 868.41 661.2 76.13
commerce

2 W ork Contract 1845.89 1305.97 539.92 41.34

3 M ining of M ineral,oil or gas 1059.15 822.69 236.49 28.74

4 Sercurity Agency 1046.55 830.91 215.64 25.95

5 Stock Broker 1000.32 795.26 205.06 25.79

6 Business Support Service 1935.29 1603.23 332.06 20.71

7 Banking & other 4063.58 3914.32 149.26 3.81

8 Insurance Auxiliary Services 2126.22 2086.96 39.26 1.88

Ref 35: http://www .servicetax.gov.in

Figure 4.16

M onth wise Service tax collection in 2009- 1037

Ref 37:
http://w ww.servicetax.gov.in

145
Table 4.17 36

M onthwise Collection of Service Tax for 2009-10

Service Tax Percent growth over

previous month
M onth (Rs. in Crore)

Apr-09 2265.47

M ay-09 3696.5 0.63

Jun-09 3573.32 -0.03

Jul-09 5150.85 0.44

Aug-09 4214.3 -0.18

Sep-09 4289.45 0.02

Oct-09 5766.23 0.34

Nov-09 3973.96 -0.31

Dec-09 4057.83 0.02

Jan-10 5704.93 0.41

Feb-10 4497.1 -0.21

M ar-10 11146.42 1.48

Ref 36: http://www.servicetax.gov.in

4.5.12 Service Tax Administrative M echanism.

The details of administration of Service Tax as mentioned in Government

website is as follow

Service Tax is administered by the Central Excise & Service Tax

Commissionerates and the Service Tax Commissionerates working under the Central

Board of Excise & Customs, Department of Revenue, Ministry of Finance,

146
Government of India. LTUs are also collecting Service Tax in respect of the Large Tax

Paying units registered with them. The unique feature of Service Tax is reliance on

collection of tax, primarily through voluntary compliance. Government has from the

very beginning adopted a flexible approach concerning Service Tax administration so

that the assessees and the general public gain faith and trust in the tax measure so that

voluntary tax compliance, one of the avowed objectives of the Citizens Charter, is

achieved. Substantive and procedural liberalization measur es, adopted over the years

for this purpose, are clear manifestations of the above approach. Following are some

of the measures adopted in that direction:

(i) Under Section 67 of the Finance Act, 1994, Service Tax is levied on the gross

or aggregate amount charged by the service provider on the receiver.

However, in terms of Rule 6 of Service Tax Rules, 1994, the tax is permitted to

be paid on the value received. This has been done to ensure that providers of

professional services are not inconvenienced, as in many cases, the entire

amount charged/billed may not be received by the service provider and calling

upon him to pay the tax on the billed amount in advance would have the

effect of asking him to pay from his own pocket. It would also make the levy a

direct tax, which is against the very scheme of Service Tax.

(ii) Corporate assessees are given the liberty to pay tax on the value of taxable

service, provided by them in a month, by the 6 th of the following month if tax

is deposited electronically and 5th of the following month if tax is deposited in

any other manner. Further, in case the assessee is individual or proprietary

firm or partnership firm, tax payment is required to be made only once in a

quarter i.e by 6 th of the following quarter if tax is deposited electronically and

5th of the following quarter if tax is deposited in any other manner.

(iii) The process of registration of assessees has been considerably simplified.

147
(iv) No separate accounts have been prescribed for the purposes of Service Tax. It

has been provided that accounts being maintained by the assessees under any

other law in force would be sufficient. This has placed the Department at

considerable inconvenience to itself, so as to minimize difficulties for the

assessees.

(v) The Finance Act, 2001 has introduced self assessment for Service Tax

returns; thereby sparing the assessees from the rigours of routine scrutiny and

assessment.

(vi) Frequency of filing the returns in the form of ST 3 or ST3A as the case may be

is minimized. Filing of Statutory return has been made half yearly and by the

25th of the month following the half-year ending on 31st arch and 30th

September. This is in replacement of the monthly/quarterly returns prescribed

earlier.

(vii) Penal provisions do exist in respect of Service Tax also. Failure to obtain

registrations, failure to pay the tax, failure to furnish the prescribed returns,

suppression of the correct value of the taxable services and failure to comply

with notice do attract penal provisions as prescribed. But, it is specifically

provided that no penalty is imposable on the assessee for any of the above

failures, if the assessee proves that there was reasonable cause for the failure.

This provision has been inserted to take care of the genuine difficulties of the

new assessees.

(viii) Service Tax Credit Rules, 2002, have been replaced by the CENVAT Credit

Rules, 2004, introduced by the Finance Act, 2004, where under CENVAT

credit has been extended across the sectors i.e. goods and services.38

148
The basic difficulties faced in administration are i) the Superintendent and

staffs below that level monitoring the Service Tax are transferred from the Service

Tax unit usually in 2 years to any other unit. ii) Basically, these people are accustamed

to excise rules and regulations, which rarely change. There is different work-culture

in Service Tax as compared to Excise. iii) Again, for them, it is new learning in Service

Tax as there are lot of differences in provisons of Service Tax and Central Excise such

as the tax due, penalties etc. The Service Tax due on Receipt Basis while Excise due on

bill basis. The tax amount due, only when the service provider receives value of his

service. However, in Excise, the tax due is based on raising of invoice.

The administration of Service Tax needs lot of improvement. As mentioned in

one of speech Ca. Shemalani Bharat that Functioning is not at all proper as both the

Acts operate in different field. Further, it is very difficult to persuade or change the

mindset of officers who have worked under central excise – inspector raj.39

The other reaction from Ca. Luthia Rajiv is that ‘the mind set of the tax

personnel is required to be changed. They should behave as tax payer friendly, which

I feel is dream come true, but certainly impossible seems to be considering the present

approach.’ The service provider and consultant hate meeting the staff and officers of

the tax administration. W hile giving suggestion for improvement he wrote the

department people does not have proper knowledge on the subject, may be due to

lack of training. They carry the mind set of excise law, which is totally different from

Service Tax. The provisions are interpreted in draconian way & the tax payers are

harassed.40

4.5.13 Service Tax and W holesale Price Index (Inflation Index)

The table of yearly Service tax collection and W holesale Price Index (Inflation

Index) from 1994-95 to 2009-10 and their yearly growth is summarized in Table 4.18.

149
The data reveals that there is similarity in growth of both in Service tax collection

and W PI in 1995-96, when the service tax collection increased by 111per cent and

the W PI inflation index growth was 8.09 per cent. In 1999-00 the per cent growth

over previous year for service tax collection is 5.28 per cent and for W PI is 3.88 per

cent. Thus it shows that the Service tax is one the reason in contribution of Inflation.

Table 4.18 41
Annual Service tax collection and W PI Inflation and their growth rates
Year Service Tax W PI Index S. tax Yearly W IP Yearly
collection Growth Growth
1994-1995 407 111.2 Base Year Base Year
1995-1996 862 120.2 111.79 8.09
1996-1997 1059 125.6 22.85 4.49
1997-1998 1586 131.3 49.76 4.54
1998-1999 1957 138.9 23.39 5.79
1999-2000 2072 143.8 5.88 3.53
2000-2001 2612 152.8 26.06 6.26
2001-2002 3200 160.7 22.51 5.17
2002-2003 4123 164.7 28.84 2.49
2003-2004 7750 173.4 87.97 5.28
2004-2005 14150 184.9 82.58 6.63
2005-2006 23000 193.7 62.54 4.76
2006-2007 37200 203.0 61.74 4.8
2007-2008 50603 212.8 36.03 4.83
2008-2009 65000 232.2 28.45 9.12
2009-2010 58000 237.1 -10.77 2.11
Ref 41: http://www .servicetax.gov.in

The Graphical presentation of yearly growth percentage for both service tax

collection and W PI inflation index is prepared in Figure 4.17. The data reveals that

there is similarity in growth of both in Service tax collection and W PI in 1995-96,

when the service tax collection increased by 111per cent and the W PI inflation index

growth was 8.09per cent. In 1999-00 the per cent growth over previous year for

service tax collection is 5.28 per cent and for W PI is 3.88 per cent. Thus it shows that

the Service tax is one the reason in contribution of Inflation.

150
The study of service tax collection and W PI shows that there is correlation in their

growth. The Service tax is one of the reasons for increase in Inflation.

Figure 4.17

Yearly growth of service tax collection and W PI index in 1994-95 to 2009-1042

Ref 42: http://www.servicetax.gov.in and http://w ww.global-rates.com/economic-indicators/inflation/consumer-

prices/cpi/india.aspx

Carl Pearson’s Coefficient of correlation

Researcher has worked out coefficient of correlation between Service tax

collection and W PI for the period 1994-95 to 2009-10 using Carl Pearson coefficient

of correlation formula. The basic working is in Table 4.19

R=

R=

= 0.9151

151
Since the value of coefficient of correlation is closer to 1, a stonger correlation

between the service tax collection and W PI is found.This proves that either the rising

tax collection adds to the rate of inflation that is reflected in a corresponding rise in

W PI or a rising W PI might be adding to the growth of service tax collection. The

cause effect relationship however shall provide a topic for further research.

Table 4.19

Correlation between Service tax collection and W PI

S. T. W PI
(X-X) (Y-Y)
Year collection Inflation (X-X) (Y-Y) xy
Square Square
(X) (Y)
1994-1995 407 111.20 -16691.8 -56.69 278616605 3214.18 946321.44
1995-1996 862 120.20 -16236.8 -47.69 263634080 2274.69 774394.48
1996-1997 1059 125.60 -16039.8 -42.29 257275585 1788.76 678383.82
1997-1998 1586 131.30 -15512.8 -36.59 240647352 1339.10 567671.98
1998-1999 1957 138.90 -15141.8 -28.99 229274486 840.64 439017.93
1999-2000 2072 143.80 -15026.8 -24.09 225805094 580.51 362052.26
2000-2001 2612 152.80 -14486.8 -15.09 209867736 227.82 218660.33
2001-2002 3200 160.70 -13898.8 -7.19 193176989 51.75 99984.58
2002-2003 4123 164.70 -12975.8 -3.19 168371710 10.20 41441.50
2003-2004 7750 173.40 -9348.81 5.51 87400295 30.32 -51476.90
2004-2005 14150 184.90 -2948.81 17.01 8695495 289.21 -50148.24
2005-2006 23000 193.70 5901.19 25.81 34824014 665.96 152287.52
2006-2007 37200 203.00 20101.19 35.11 404057739 1232.45 705677.31
2007-2008 50603 212.80 33504.19 44.91 1122530580 2016.57 1504547.42
2008-2009 65000 232.20 47901.19 64.31 2294523764 4135.29 3080345.74
2009-2010 58000 237.10 40901.19 69.21 1672907139 4789.51 2830617.81
273581 2686.3 0 0.00 7691608662 23486.97 12299779

Inflation Illustrated

The service tax has added fuel to the ongoing rate of inflation. As for the end

consumer the is extra cost (10.3 percent) The analysis in chapter 4 shows the relation

of W holesale Price Index (W PI) and Service yearly growth per cent (Please refer

Table 4.18). W holesale price index increased by 8.09 per cent when the collection of

152
service tax was increased by 111.79 per cent in financial year 1995-96. W hile the

collection in of service tax 2002-03 increased by 28.84 percent, the W PI increased by

2.49 per cent only.

Increase in inflation

As the government finds the service tax as alternate source of revenue, it started

increasing the number of services and scope of services. The rate of service tax is also

increased by double to 10per cent from 5 per cent. This is increased the cost. As

discussed in earlier chapter the Service tax is one of the reason to increase inflation.

The following example shows that how the cost of consumer increases due to service

tax. The CENVAT scheme is there to take the set of Input service. However it is

available only those who pay either excise duty on the goods manufactured by them

and/or pay the tax on the service provided by them. Even there is restriction to avail

the CENVAT credit. If the assessees provide non taxable service and/or manufacture

the non excisable goods along with taxable service and/or dutiable product. In this

situation the portion of non-cenvatable service tax becomes the cost for the business

or profession, which ultimately increases the product/ service price. This is

additional burden for the ultimate consumer for the product or service.

W here the consumer is ultimate user of service and the CENVAT mechanism does

not work for him, the cost for him, increases by the service tax amount. For e.g.

Residential telephone bill, personal income tax consultancy bill from Chartered

accountant, Cost of new flat. The following illustration shows that the cost of flat

increased by 3.4per cent apart from internal construction cost increased due to

Contractor service tax.

Inflation Illustrated

153
The service tax has added fuel to the ongoing rate of inflation. As for the end

consumer the is extra cost (10.3 percent) The analysis in chapter 4 shows the relation

of W holesale Price Index (W PI) and Service yearly growth per cent (Please refer

Table 4.18). W holesale price index increased by 8.09 per cent when the collection of

service tax was increased by 111.79 per cent in financial year 1995-96. W hile the

collection in of service tax 2002-03 increased by 28.84 percent, the W PI increased by

2.49 per cent only.

Items Pre Service tax Post Service Tax

M aterial @ approx 60per cent of Cost of construction 13,29,827 13,27,827

Services Tax on Labour Paid to the contactor 91315 91315

Cost of Construction 23,07,692 23,07,692

Developer's margin @30per cent 6,92,308 6,92,308

Sale Price 30,00,000 30,00,000

New Services Tax payable by developer @10.3per cent

on 33per cent* of sale price 1,01,970

Total Sale Prices 30,00,000 31,01,970

* Under abatement Scheme Issued in March 2006, the developer/contractor is entitled to

claim abatement to the extent of 67per cent of value of services rendered by him in effect
paying services tax only on 33per cent of value.

Extra Burden on customer will be approx 3.4per cent of total sale price

To sumup, the reasons for increasing in the share of Services in GDP are i)
Consumer Demand ii) Statistical transfer of activities from manufacturing to services
iii) The productivity price effect, as per Australian government study. In India the
share of services is increasing. Hence the government sees the Service tax as alternate
source of tax revenue. The statistics for 16 year shows that service tax collection

154
increased from marginal .04 per cent of GDP to 1 per cent in 2007-08. There is scope
increment if one compare with standard tax to GDP ratio of 18 to 20 per cent. The
comparison of Service tax with Indirect tax shows that the share of Service tax in total
Indirect taxes collection has to more than 1/5th (20 per cent). This shows that
importance of service tax is increasing. W e have selective approach for taxation of
services. Today we have more than 100 services under the net of tax. Excluding 3
budget, every budget there was addition of new services. The rate of Service tax is 10
per cent (plus Education and SHE Cess). Initially it was 5 per cent, which was
gradually increased to 12 per cent and then reduced present rate of 10 per cent on
24.02.2009.

Factors in Increasing Service tax collection

The service tax collection compared with GDP is having increasing trend in the
ratio. Though the ratio has reached to 1 per cent, it shows that there is scope in
increase in service tax collection to GDP. Even excise ratio to GDP is around 20 per
cent. W hile the contribution of Service sector to GDP is more than manufacturing
sector. The service tax collection is growing over period; hence the contribution of
service tax in indirect tax is grown to more than 20 per cent, in 2008-09 & 2009-10
from 0.62 per cent in 1994-95. Even though we have selective coverage / approach in
India, service tax is growing at faster space.

The rate of service tax was initially in 1994-95 was 5 per cent which was
increased to 8 per cent in 2003 and later on 10 per cent in 2004. In 2006 it was
increased 12 per cent and again reduced to 10 per cent in 2009.

The main three factor of increasing in tax collections are:- (i)Growth in service
sector,(ii) Increase in service category and (iii)Increase in service tax rate .

The growth of service tax collection in 15 years is 158.70 times. From Rs. 407
Crore to 65000 Crore in 2008-09. Even if year wise growth in service tax collection is
considered, the growth is above 20 per cent, except 2 years out of 16 years span of

155
1994-95 to 2009-10. W hen the rate is changed from 5 to 8 per cent the growth in
collection of Service tax over previous year was 28.84 per cent, while in 2003-04.
W hen the rate is changed to 10 per cent and 8 services added in the service tax net,
the growth in collection of Service tax over previous year was 87.97 per cent. W hen it
changed to 10 to 12 per cent in 2006-07 the growth in collection of Service tax
collection, over previous year was 61.74 per cent

The number of assessee in service tax has also increased by 331.54 times in 16
years span. In 1994-95 the assessee were 3943 while they are 1307286 in 2009-10. The
yearly growth in per cent of number of assessee is double digit in 7 years, while in 5
years it is single digit out of 15 years under study.

The zone wise revenue data for 2008-09 & 2009-10 shows that Mumbai –I zone
has highest contribution in total tax revenue with more than 30 per cent share, while
shillong contributes lowest with 0.52 per cent & 0.46 per cent (2008-09 & 2009-10
respectively) .Nearly 50 per cent revenue comes from 27 per cent assessee of Mumbai
and Delhi .

The data shows that the revenue per assessee for all India in 2008-09 for was Rs. 5.06
Lakh per assessee, while in 2009-10 it was Rs. 4.45 Lakh per assessee. The highest per
assessee revenue was Rs. 355.81 Lakh /assessee from LTU zone (large tax prayer unit)
which is increased to Rs. 620.71 Lakh / assessee in 2009-10. Among the remaining
zones, Mumbai – 1 zone was highest with Rs.11.33 Lakh/assessee in 2008-09 which
was reduced to Rs. 9.77 Lakh/assessee in 2009-10. Out of 24 zones, 18 zones have per
assessee revenue, below the all India ratio in both the years.

The data of service wise revenue for 2009-10 shows that 10 services contributes
48.01 per cent of total revenue , the revenue from banking & financial services is
highest of Rs. 4063.58 followed by telecommunication service.

156
Service tax Administration- Though the objectives of Service tax administration is
good. It aims to assessee friendly culture. But reality shows that it needs to improve a
lot. The mentality of field staff has to be improved.

Service Tax and W holesale Price Index (Inflation Index)-The comparison of growth
in Service tax collection and W holesale Price Index shows that there is similarity in
growth trend in the both percentage of Service tax collection and W PI. This
indicates that the one of the factor in Inflation is Service tax.

Researcher has worked out coefficient of correlation between Service

tax collection and W PI for the period 1994-95 to 2009-10 using Carl Pearson

coefficient of correlation formula

R=

R=

= 0.9151

Since the value of coefficient of correlation is closer to 1, a stonger correlation

between the service tax collection and W PI is found.This proves that either the rising

tax collection adds to the rate of inflation that is reflected in a corresponding rise in

W PI or a rising W PI might be adding to the growth of ser vice tax collection. The

cause effect relationship however shall provide a topic for further research.

157
References
1) Fig no 9.1 of chapter 9 http://www .worldbank.org/depweb/english/beyond/global/chapter9.html

2) Map 9.1 of chapter 9 http://www.worldbank.org/depweb/english/beyond/global/chapter9.html

3) Service tax training module –

http://www.wto.org/english/res_e/statis_e/services_training_pres_e.pdf

4) http://www.wto.org/english/res_e/statis_e/services_training_pres_e.pdf

5) Statistical leaflet on key indicators for understanding services in global economy – Gisela Di
Meglio (University of Acala)

6) Fig 9.2 from chapter 9 , http://www.worldbank.org/depweb/english/beyond/global/chapter9.html

7) Enhancing tax-to-GDP ratio, reducing fiscal deficit for sustainable high growth By M. Sharif

8) http://en.wikipedia.org/wiki/List_of_countries_by_tax_revenue_as_percentage_of_ GDP

9) http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookpercent20ofper
cent20Statisticsper cent20onper cent20Indianper cent20Economy

The data is combined from various excel data from the above web site

10) http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper

cent20Statisticsper cent20onper cent20Indianper cent20Economy

The Figure is prepared from data available at above RBI website.

11) http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper

cent20Statisticsper cent20onper cent20Indianper cent20Economy - The data is combined from
various excel data from the above web site.

12) http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper

cent20Statisticsper cent20onper cent20Indianper cent20Economy- The Figure is prepared from
data available at above RBI website.

13) http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper

cent20Statisticsper cent20onper cent20Indianper cent20Economy- The Figure is prepared from
data available at above RBI website.

14) http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper

cent20Statisticsper cent20onper cent20India nper cent20Economy
15) http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper
cent20Statisticsper cent20onper cent20India in per cent20Economy

16) http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper

cent20Statisticsper cent20onper cent20India in per cent20Economy- The data is combined from
various excel data from the above web site

158
17) http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookper cent20ofper
cent20Statistics per cent20onper cent20Indianper cent20Economy -The data is combined from various
excel data from the above web site
18)http://www.archive.dcita.gov.au/2001/01/productivity_drivers_of_the_information_economy/produ
ctivity_growth_in_service_industries2/2._broad_trends_in_service_industries/2.2_reasons_for_the_inc
reasing_share_of_services_in_gdp

19) Data Source -http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook

per cent20ofper cent20Statisticsper cent20onper cent20Indianper cent20Economy
The data is combined from various excel data from the above web site
20) Data Source -http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per
cent20ofper cent20Statisticsper cent20onper cent20Indianper cent20Economy
21) Data Source -http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per
cent20ofper cent20Statisticsper cent20onper cent20Indianper cent20Economy
22) PP- 15 Law, Practice & Procedure of Service Tax by Advocate J.K.Mittal, Published by CCH,18th
edition.
23) Ref 23: PP-9 Law, Practice & Procedure of Service Tax by Advocate J.K.Mittal, Published by CCH,
18th edition

23)B- Article The expanding universe of Service Tax by Sukumar Mukhopadhyay (15.09.2002)

24) Data Source -http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per

cent20ofper cent20Statisticsper cent20onper cent20Indianper cent20Economy
25) Data Source -http://www .rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook per
cent20ofper cent20Statisticsper cent20onper cent20Indianper cent20Economy
26) Source http://www.servicetax.gov.in
27) Source http://www.servicetax.gov.in
28) Source http://www.servicetax.gov.in
29) The source of data for the Figure http://www.servicetax.gov.in
30) The source of data for the Figure http://www.servicetax.gov.in
31) Source http://www.servicetax.gov.in
32) Data Source http://www.servicetax.gov.in’
33) Source http://www.servicetax.gov.in
34) The source of data for the Figure http://www.servicetax.gov.in
35) Source http://www.servicetax.gov.in
36) Source Annual Performance Data http/www .service tax .gov.in
37) The source of data for the Figure http://www.servicetax.gov.in
38) http://www.servicetax.gov.in/

39) Answer to Questionnaire by Ca. Shemalani Bharat, Mumbai

40) Answer to Questionnaire by Ca. Rajiv Luthia, Mumbai
41) Source Annual Performance Data http/www .service tax .gov.in and http://www.global-
rates.com/economic-indicators/inflation/consumer-prices/cpi/india.aspx
42) The source for data for Figure Source Annual Performance Data http/www.service tax .gov.in and
http://www .global-rates.com/economic-indicators/inflation/consumer-prices/cpi/india.aspx

159
Chapter 5

Problems & Prospects of Service Tax

5.1 I ntroduction
The Finance minister, Yashwant Sihna in his budget speech 2001-01 mentioned

“Service tax is emerging as an area of promise as well as problems.” This and analysis

in earlier chapters shows that the service tax, in India has lot of prospectus in term of

growth, but it is not free from problems. In this chapter the researcher is dealing with

some of the problems.

The problems dealt in this chapter are i) Classification of Service- There are

100 plus categories are introduced in the service tax. A particular services provided by

the service provider, falls under which category? , is the real question. Though the

rate of service tax is same for all services, but their date of introductions are different

and exemptions are different for different categories of Service and overlapping of

services is issues for classification. ii) Valuation of Service - The service tax is on the

value of service provided. Like other taxation, valuation play vital role in service tax

and also has created the problem. The issues related to reimbursable expenses,

provision of service with material with specific services. The problems of Service tax

provisions and other law VAT, excise duty are dealt as representative basis iii) Service

Tax vs. Value Added Tax – This has been dealt as how some time the provision and

administration makes the complex situation for assessee and administration is shown,

iv) Service tax and Central Excise- Though both are administered by same

department, some time provisions make contradict each other. The example is more

on particular issue specific. v) Exemption from Service tax – This is issue has included

in the hypothesis of the researcher. The issue related to basic exemption for service

tax is discussed, vi) Differential treatment for different Service (Definitions)-This

problem is related to the definition of service category in the service tax. vii)

160
Administration problem Basic difference- The liability of payment if different in

Central excise and service tax. The liability in service tax is on receipt basis. W hen

the service provider receives payment, he has to pay the tax. However, this is not the

case in Central Excise. How it created the problem some time? is discussed.

vii) After above, out of the total services, the researcher has selected 3 services

and their specific problems. (Not each and every) Those are 1) Goods Transport

Service 2) Business Auxiliary service (BAS) 3) Authorized Service Station

The problems related to Service tax return and Tax payment challan is discussed

- viii) The service tax return form (ST-3) and tax challans (TR-6/GAR7)- The practical

difficulty in the service tax return and tax challan is reviewed.

5.2 Classification of Service s

W hen the services were initially introduced, whether particular service is

taxable or not?, was becoming more and more complicated, due to different

interpretation by trade and tax administrating authority in category of service. Even it

is added more fuel to fire, when different interpretation within trade, central excise,

customs and service tax department.

In the Service tax Classification issue has aroused not due to rate of tax but due

to the different date of introduction of service under the net of service tax. The rate of

service tax is same for all services. Only the date of liability of tax is different. Even

there are exemption which is applicable for particular service and not other service.

Even the Central Government started to introduce the new services, which

were made taxable by the department in existing category. For e.g. i) Technical

Testing and Analysis service, which department tried to cover under Business

Auxiliary Service. ii) The use of Intellectual Property Rights such as royalty,

Technical Know-how was covered by the department under consulting engineering

service.

161
Initially there was no provision regarding the Classification. The Central

Board of Excise and Customs had issued Circular No. ST-51/13/2002

[F.No.178/1/2002-CX.4],dated 7-1-2002A5.1 where it is clarified that the Central Excise

officer has to decide on merit between the two category ,which is more specific

category and tax accordingly. This was the first attempt, which was not proper as the

decision could differ from person to person.

As the complications were increased to settle the classification issue Central

Government has introduced the separate section 65A A5.2 from 14.05.2003. Section 65A

explains the classification of taxable service.

It is clarified that under the said section when a particular service falls under

more than one service category, under which category particular service is to taxed is

tested through following acid test The acid test is

1) The category which provides most specific description shall preferred than

which provides general description. (Sub clause 2a of Section 65A)

2) In composite services , the service which gives more them more essential

character

3) If it is not possible as per 1 or 2 then it is to be classified under the category,

which is introduced first.

It is observed in many services that the particular activity the department tried

to tax under the service which was in the service tax net and later on again the

government has brought different category of service for the same type of activity.

For e.g. Consulting engineering service and Intellectual property service/work

contract for turnkey project., BAS and Technical testing and analysis service,

Commercial Construction service and W ork contract Service. Even the researcher has

discussed his own experience in Chapter 6.

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Due to this litigation under service tax has increased. The famous decisions related to

Classification of Service

5.2.1 Cases

CCE, Ludhiana Vs. M /s Lal Path Lab (I ) Pvt. Ltd. {2007-TI OL 533-P&H –ST}

In the said case, the activity undertaken by the assessee was that of a collection

centre. The assessee used to draw/collect samples, process the samples to the extent

required and forward (through courier service etc.) the samples to the test

laboratories. The test charges were collected by the assessee at the rates stipulated by

the test laboratories. However, the department raised a demand of service tax on the

ground that the aforesaid activity undertaken by the assessee would be liable to

service tax under taxable head of “Business Auxiliary” service. The contention of the

assessee that the activity undertaken by them was covered under the excluded

category of “Technical Testing and Analysis Service” was rejected by the

Adjudicating authority. However, accepting the contention of the assessee, the

Hon’ble Tribunal held as under:

I t is well settled that once there is a specific entry for an item in the tax code,

the same cannot be taken out of that specific entry and taxed under any other entry.

In the present case, revenue is seeking to discard the specific entry and to bring the

appellants’ services under a very general entry, only because under the specific entry

no tax is payable. This approach is contrary to the scheme of the legislation. W hat is

specifically kept out of a levy by the legislature cannot be subjected to tax by the

revenue administration under another entry. There is also no substance in the

learned SDR’s contention that since through definition, testing in relation to human

beings or animal is excluded from the levy, those tests and analysis are liable to be

taxed under some other general heading. Legislature has specifically recognised

technical testing and analysis as a separate service for the purpose of levy. As to how

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the technical test and analysis are to be taxed under that heading is also for the

legislature to decide.

In the present case, through definition, the legislature has excluded “testing or

analysis of human beings or animal” outside the levy. The definition clearly states the

legislative intention not to impose any tax on such excluded technical testing and

analysis. If the legislature had any intention to tax the testing or analysis in relation

to human beings or animal at a different rate than other technical test and analysis

service, the legislature would have separately specified the levy. In the present case,

clearly the intention of the legislature is not to impose any levy at all on testing or

analysis of human beings or animals. Therefore, the contention of the learned SDR to

the contrary is not a legally correct view. 1

It is pertinent to mention here that the aforesaid decision of the Tribunal was

challenged by the Department before the Hon’ble Punjab and Haryana High Court.

However, vide decision reported at 2007 (8) STR 337, the Hon’ble Punjab and

Haryana High Court rejected the appeal of the Revenue and held as under:

“Having heard the learned Counsel and closely perusing the order

passed by the Tribunal, we are of the considered view that this appeal is liable to be

dismissed because in pith and substance, the activity of the assessee-respondent is

confined to a collection centre with facilities and trained employees for drawal of

blood samples and to carry out essential processing (serum separation) of blood and

forwarding the samples to the principal lab at Delhi through courier. The collection

centers are also responsible for disposal of waste arising in the process. The case of

the assessee-respondent appears to be covered by the exception postulated by sub-

Section (106) of Section 65, which defines the expression ‘technical testing and

analyses. The provision is reproduced hereunder for facility of reference - “technical

testing and analysis” means any service in relation to physical, chemical, biological or

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any other scientific testing or analysis of goods or material or any immovable

property, but does not include any testing or analysis service provided in relation to

human beings or animals;

[Explanation: For the removal of doubts, it is hereby declared that for the
purposes of this clause, “technical testing and analysis” includes testing and
analysis undertaken for the purpose of clinical testing of drugs and formulations; but
does not include testing or analysis for the purpose of determination of the nature of
diseased condition, identification of a disease, prevention of any disease or disorder
in human beings or animals;]’

A perusal of the afore-mentioned provision makes it clear that the expression

‘technical testing and analysis’ does not include any testing or analysis service

provided in relation to human being or animals. The explanation goes to the extent

of excluding from the afore-mentioned definition, a testing or analysis for the

purposes of determination of the nature of diseased condition, identification of a

disease, prevention of any disease or disorder in human beings or animals. Such being

the statutory provision, we do not entertain any doubt that merely because any

incidental service is rendered by the assessee-respondent like putting across or

dropping of the name of the principal company, it would become part of the

definition of ‘Business Auxiliary Service’ within the meaning of Section 65 (19) (ii) of

the Act. The view taken by the Tribunal is unassailable and deserves to be upheld”. 2

Remark

The high court settled the law once again in favour of principle “ once there is

a specific entry for an item in the tax code, the same cannot be taken out of that

specific entry and taxed under any other entry.

Following are similar cases to above Case

i) CCE V/s Patient Service Centre 2008 (9) STR 229 (P&H)

ii) Federal Bank Limited V/s CCE 2008 (10) STR 320.

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iii) Jet Airways (India) Limited V/s CCE 2008 (11) STR 645.

5.2.2 Composite Contract-

Another issue aroused in classification. If the contract is one but in that several

services are provided then how to classify the service and under which category of

service tax has to be paid?

i) M /s Daelim Indl Co Ltd. Vs. CCE , V adodara 2003-TI OL-110-Bang

“Composite contract can not be vivisected.”

In this case M/s. Indian Oil Corporation Ltd. awarded a contract to M/s.

Daelim Industrial Co. Ltd. (appellant) for construction of a diesel hydro-

desulphurisation plant and utilities/off-site at Gujarat Refineries. The purpose of the

plant was to treat diesel so as to reduce the sulphur content in diesel from about 0.75

to 0.25 in order to meet the pollution standard stipulated by the Hon’ble Supreme

Court of India. The contract was on lump sum turnkey basis. The lump sum price

had an Indian rupee payment of about Rs. 184 Crore US $ payment of about 2.2

Crore. The contract involved “residual process design, detailed engineering,

procurement, supply, construction, fabrication, erection, installation, testing

commissioning and mechanical guarantee”.

A show cause notice dated 16-4-2001 was issued by the Additional

Commissioner of Central Excise, Vadodara holding that the appellant was liable to

pay service tax on residual process design and detailed engineering, “commissioning

of plant” applicable to “consulting engineers”. The appellant contested the proposal

contending that theirs was a construction contract and they have not rendered any

engineering consultancy services. They failed. The Additional Commissioner of

Central Excise, Vadodara passed his Order-in-Original dated 1-3-2001 upholding

duty demand of about Rs. 81 lakh. Certain penalties were also imposed. The matter

was taken up in the Appeal before the Commissioner (Appeals), Vadodara with no

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different results. Learned Commissioner (Appeals) held that engineering consultancy

service was involved in regard to residual process design and detailed engineering,

commissioning of the plant. He also held that service tax was imposable whether

engineering consultancy was rendered directly or indirectly to the client. The

Daelim Industrial Co. Ltd. (appellant) filed the appeal in CESTAT (Customs, Central

Excise and Service tax Appellate Tribunal) against that order of the Commissioner

(Appeals). The CESTAT held

“Thus, a perusal of the clauses of the contract leaves no doubt that the

appellant contract with IOC was a work contract on turnkey basis and not a

consultancy contract. It is well settled that a work contract cannot be vivisected and

part of it subjected to tax. The impugned orders have proceeded to do precisely that.

Therefore, they are required to be set aside.

In view of what has been stated above, the impugned orders are set aside and the

appeal is allowed. The amount so far paid by the appellants to the department shall

be returned without any delay.” 3

The Tax Admisistration filed SLP in Supreme Court, 2004-TIOL-66-SC-ST

SC dismisses Revenue's SLP and upholds tribunal order 2003-TIOL-110-CESTAT-

DEL that works contracts and turnkey projects are not liable to service tax.

Remark-

This decision led to introduction of W orks Contract category of Service in the

service tax, where turn key contract are included in work contract service.

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5.3 V aluation of Service -
In any taxation the valuation is important. On the basis of which, the

tax amount is decided. It is more important in indirect tax, so in the Service

tax. Section 67D provides how to value taxable service and the service tax rate

is prescribed under Section 66A5.3 .

The value of taxable service The value of any taxable service shall be the gross

amount charged by the service provider for such service provided or to be provided4

Then through explanation it was provided what is to be included and what is not to

be included in valuation.

From 18.04.2006 the section 67 is replaced and new section and the Service Tax

(Determination of value) RulesA5.5 is notified under section 67 vide Notification No.12

/2006-ST dated 19.04.2006. As per this amendment the value, where the

consideration received for provision of services is wholly in money, the value shall be

the gross amount charged by the service provider for the provision of service. W here

the consideration received for the provision of service is not wholly consisting of

money, the value in such case shall be the gross amount charged by the service

provider for provision of similar service to any other person in the ordinary course of

trade. All the amounts, in whatever so received by the Service provider from service

recipient will include in the gross value of service except the amount received as pure

agent. For the same there are 8 conditions are prescribed. (Refer the Valuation rule in

ref. No.4 at end of this chapter) Even the researcher has shared his own experience

after the suggestion in chapter 6.

5.3.1 Other issue

(1) As the provision of service in some time is pure service, which means

no material component / other component of expenses are there. In

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service of professional like CA (Chartered Accountant), CW A (Cost and

W ork Accountant) ,CS( Company Secretary) if provided at his office,

generally no other cost are there. Or in the contract of construction

only labour services provided.

(2) There is situation, where provision of service includes other

reimbursable cost. Like in the above example, CA /CWA/CS is traveling

and staying at the place, where the client is situated. (In different city

from his office), then these expenditure are reimbursed from the client.

(3) There is other situation, where the provision of service includes

material component as in cases of construction service with material. In

AMC (Annual Maintenance Contract) service involves consumables,

material which is not known at the time of entering service contract.

5.3.1.2 Some time in turn key (EPC) contract involves more

than material and labour, Design and Drawing.

5.3.2 Problems before the valuation rules

For the issue mentioned in serial 2 above, the government has dealt the subject

in circular for few services, while for others nothing is clarified in the act as well as

in the circular.

For e.g. i) while introduction of 10 services in Budget 2002, in case of CHA (Clearing

house agent service) it is clearly mentioned in the Circular No F. No. B11/1/2002-

TRU, dated 1-8-2002A5.6 that reimbursable expenses (at actual basis) are not to be

included in gross value of taxable service. ii) Similarly in the case of Manpower

Recruitment Agency service and Consulting Engineering Service the D

Commissioner Excise, Delhi has issued the trade notice 53 CE/Service tax/97 dated

04.07.1997A5.7 where in it is mentioned that reimbursable expenses are deductible for

purpose of determining the value of taxable service. There is no clarification, for

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reimbursable expenses for other service like Clearing and Forwarding Services (C & F

Service), hence the show because notices issued in this cases. Many contrary

decisions are given by the Tribunals and the matter is not resolved to its finality till

the date. The latest is that due to contradictory judgment the matter referred to

Larger bench in the case of M/s Amit sales Vs. CCE, Jaipur 1 (2008-TIOL-1749-

CESTAT-DEL)

(1) Judgments where the deduction of reimbursement of expenses allowed.

The Case-

i) 2008 (9) STR 19 (Tri. – Bang.)Jayalaxmi Enterprises Vs. Commissioner Of

Central Excise , Mangolre

The fact of the case

The Jayalaxmi Enterprises (herein after JE) are engaged in providing certain

services to their customers. In fact, they have been appointed as C & F agents for

Rajashree Cement/Birla W hite Cement/Birla Super Cement. Revenue proceeded

against the JE alleging non-payment of Service Tax under the category of C & F

Agents and for various violations of the provisions of the Finance Act, 1994. The

adjudicating authority confirmed the demand and imposed penalty under various

provisions. The JE approached the Commissioner (A) contending that their services

are in the nature of ‘Del Credere’ and as such they cannot be treated as C & F Agent’

for the purpose of the Service Tax. However, Commissioner (A) gave a finding that

the appellants render rightly the services of ‘C & F Agent’ because the essential

character of the service rendered by them is ‘C & F Agent’ and ‘Del Credere’ is one

aspect of the service rendered by them. Appellant also requested for deduction of the

amounts reimbursable expenses collected from their clients. This was also not

acceded to. The Commissioner (A) confirmed the order-in-original. The appellant

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have come before this Tribunal for relief.The Tribunal noted as

“W e have heard both sides. W e have gone through the agreement entered between

the appellant and their principals. It is very clear that the appellants have been

appointed as ‘C & F Agent’. However, in terms of the agreement, certain expenses are

liable to be reimbursed. They are as follows; Fixed reimbursement including

Accountant salary, Godown Keeper, Steno, Office Maintenance, Computer

Programmer Salary, Computer Installation, etc. This is clearly outlined in the

contract between the appellant and their principal. There is also separate mention of

the commission to be paid for the ‘C & F Agent’ depending upon the quantity of the

cement handled by them. In our view, the entire amount received by the appellant

from their principal cannot be subjected to Service tax. There are many decisions

which hold that deductions should be given to all the reimbursable expenses. This

has not been done. Therefore, we held that the appellants are liable for deduction of

the reimbursable expenses. It has been stated that they had already paid the Service

Tax to the tune of Rs. 34,328/- and interest of Rs. 22,874/-. In these circumstances,

we feel that the appellants are not liable to pay any Service Tax on the reimbursable

expenses. Therefore, we allow the appeal of the appellant with consequential relief.” 6

Other similar cases-

ii) 2008 (9) S.T.R. 503 (Tri. - Bang.)Keralam Enterprises Versus Commr. Of C.

Ex, Cus. & S.T., Cochin

iii) 2009 (14) S.T.R. 479 (Tri. - Bang.) Steel City Securities Ltd. versus Commr. Of

C.Ex. & Cus. Hyderabad II

iv) 2009 (16) STR 154 Aditya College of Competitive Exam Versus CCE ,

Visakhapatnam

v) 2008-TIOL-2261- CESTAT-BANG Pampa Agency Vs. Commissioner of

Central Excise, Belgaum

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3) Different Judgment

vi) 2008-TI OL-1749-CESTAT- DEL

M/s AMIT SALES Vs CCE, JAIPUR-I

M/s Amit Sales providing the service of Clearing and Forwarding Agent Service.

They were collecting service charges under two heads ‘commission’ and

‘reimbursement of expenses’. The reimbursement of expenses is godown rent, loading

and unloading charges, stationary, printing etc. They were not paying the Service

Tax on reimbursement of expenses. The department has issued the show cause notice

asking to pay Service tax on the amount collected under head reimbursement of

expenses and adjudicated the case against M/s Amit Sales. M/s Amit Sales filed appeal

in Tribunal.

The Tribunal stated

“On perusal of the above decisions, we do not find the reasoning for arriving at

the decision to exclude the amounts collected as reimbursement of various expenses.

The list of excluded category got enlarged in the later decisions following the

decision given in Sri Sastha Agencies Pvt. Ltd. and has permitted not only charge

reimbursed under specific head but under residuary heads by use of words such as

"like" and "etc." To render any service, manpower, equipments and other facilities are

required in varying proportions. No service can be rendered in a vacuum. The value

for the services should be the gross amount charged and should be determined

strictly as per Section 67 of the Finance Act, read with the Rules. W e are, prima

facie, of the view that the decisions rendered require re-consideration.

Inasmuch as the appellant is relying on the precedent decisions of the Tribunal

and claiming waiver of pre-deposit both on merits and on the ground that the

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demand is hit by time-bar aspect and since we are proposing to refer the matter to a

Larger Bench, we grant waiver of pre-deposit of dues as per the impugned order.

The following questions of law are referred to the Larger Bench:

(i) "W hether in determining valuation of clearing & forwarding agent service

charges such as go-down rent, loading and unloading, security charges,

electricity, cartage, stationery and printing, telephone, fax charges, photo

expenses, repacking charges, travelling charges, internet charges etc. are

excluded on the ground that they are collected as reimbursement from the

service receiver.

(ii) “W hether the judgments relied upon by the appellant referred above lay down
7
the correct law.”

5.3.3 V aluation Rule – Issue related to examples of reimbursable expenses

After The Service Tax (Determination of Value) Rules, 2006 introduced from

19.04.2006, the law provided the each and every reimbursement expenses not made

as pure agent are includible the gross value of Services.

W hile providing the example in the explanation of pure agent, all the 4

examples showed the reimbursable expenses as includible. Generally law maker

should provided both examples one for includable and the other for not includable.

5.3.4 Issue of Service with material (Specific e.g. of CCS and free supply, W CT and

free supply)

The service tax is on taxable services (Section 64A5.8 of the Finance Act, 1994).

However due to complicity of some services the issue of material used while

providing the service started creating conflict. The Government has issued

notification (Notification 12/2003A5.9) for excluding the value of goods sold at the

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proving the service subject condition that there is documentary proof specifically

indicating the value of the said goods and materials.

Even for individual services, where the issue of material aroused, the

Government issued the abatement in valuation through Notification.

Example- For Commercial or Industrial Construction Service (CCS) the government

has earlier Notification No.15/2004A5.10, whereby 67per cent abatement was given in

gross taxable value of such service if the person has not availed CENVAT credit of

Input and Capital goods CENVAT credit and he has not availed benefit under

Notification 12/2003 . However the person was eligible for Input Service CENVAT

Credit. I t was justifiable also as the abatement seems for goods.

Later on in March 2006 government has issued new Notification incorporating

different services and putting additional conditions.(Notification No. 01/2006A5.11)

The Notification 01/2006 has barred the assessee from taking the CENVAT credit of

input service also. From the angle of government it is correct as abatement is allowed

to the assessee. But in other angle, the abatement is allowed for the material portion

and why the restriction on CENVAT credit on Input service?

The additional condition was attached with notifications

“This exemption shall not apply in such cases where the taxable services

provided are only completion and finishing services in relation to building or civil

structure, referred to in sub-clause (c) of clause (25b) of section 65 of the Finance

Act.

Explanation.- The gross amount charged shall include the value of goods and

materials supplied or provided or used by the provider of the construction service for

providing such service.”

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The condition was to prevent the benefit by the assessee, who is not utilizing

the goods. The explanation ‘to add the value and material supplied or provided or

used in gross value’ has created some disputes.

The department has interpreted this if the client gives the material free to the

service provider; the value of this has to be added in gross value of the service for

charging service tax by the service provider. W hile in some cases the assessee has not

accepted. This issue is not resolved till the date.

1) Case pending in the High Court

The Madras high court has granted interim stay in case of Larson & Toubro.

2007 (7) S.T.R. 123 (Mad.)

The writ was filed by Larsen & Toubro Ltd. Challenging exemption under

Notification no. 01/2006-ST to include Value of goods supplied by recipient of service

to eligible for abatement.

The court while granting interim stay held

“On a reading of the explanation, this court is prima facie of the view that such

an insistence is not in accordance with the explanation. To that extent there will be

an interim order as prayed for.” 8

(2) This is the situation of Commercial or Industrial Construction Service.

The Government has brought the W orks Contract Service on 01.06.2007, the

works contract means, where the transfer of property in goods involved in the

execution of such contract in leviable to tax as sale of goods and such contract is for

the purpose of carrying out Specified 5 types of job (mentioned in the definition

itself).A5.17 The government has given a separate composition scheme (Works contract

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(composition scheme for the payment of Service Tax),Rule 2007)for this service,

where by the service provider opt to pay 2per cent (Now 4per cent from 01.03.2008)

amount on total amount with having eligibility of CENVAT credit on input service

and excise duty credit of capital goods. This type of contract (excluding turnkey

contract) can be classifiable under commercial or industrial construction service or

construction of residential complex service or erection, commissioning, or

installation service. In these services there is abatement of 67per cent (Notification

01/2006) without taking any CENVAT credit. Even the issue of free supply was not

faced by provider under W orks Contract service earlier. However from 07.07.2009

by notification 23/2009, government amended W orks contract (composition scheme

for the payment of Service Tax), rule 2007 and now the amount of free supply has to

added in gross value under this scheme. This is differential treatment for the same

service under two different categories of services. i) In the rate of service ii) the

eligibility in CENVAT credit

This creates confusions among every stakeholder, whether it administrative staff or

assessee.

5.4 Service Tax vs. V alue Added Tax

The issue is regarding valuation of Services when work is with material. For

sale of goods, Value Added Tax is applicable and For Services, The Chapter V of

Finance Act, 1994 (Governing Service tax) is applicable. However, question comes

when the sale of goods includes the service and when the provision of service

includes supply of goods. In these cases how to value the transaction for taxation is

major issue.

In this case, researcher is not taking the first situation of Sale of goods along

with service as this situation is under Value Added Tax, which is not in the scope of

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this paper. For the second situation, there are ample of confusions and due to that lot

of disputes between assessee and department. Though the government has tried to

slove this by issuing Notifications i)Notification 12/2003- exempting material

portion, ii) Notification 01/2006- Giving abatement to material portion. But the

question is not resolved fully. The researcher mentioned some of his own

experiences, related to the similar issues in Researcher contribution after suggestions

in chapter 6.

5.4.1 The Case

2010 (17) S.T.R. 249 (Tri. - Bang.) Hindustan Aeronautics Ltd. V Commr. Of Service
Tax, Bangalore

Facts of the case

M/s. Hindustan Aeronautics Ltd., Engine Division, Vimanapura, Bangalore

(hereinafter referred to as the ‘assessee’) is undertaking repair and overhaul of various

engines received mainly from Ministry of Defense and others. The said activities

constitute taxable service under ‘Maintenance or Repair services’ as defined under

Section 65(64) of the Finance Act, 1994 (hereinafter referred to as the ‘Act’) with

effect from 1-7-2003. Intelligence was received to the effect that the assessee short

paid Service Tax by resorting to suppression of value of taxable Service Tax. Section

67 of the Act relating to valuation of taxable services for charging Service Tax

prescribes that the value of any taxable service shall be the gross amount charged by

the service provider for such service provided or to be provided by him.

The Tribunal held as

“On further scrutiny of the records before us, we find that the appellant while

raising the invoices clearly indicates that fixed price quotation and cost of the

materials and the activity of repairs as considered by them as services rendered and it

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is seen that they are discharging the Service Tax liability on the amount shown as

labour cost. W e are convinced that the appellant has correctly availed the benefit of

the Notification No. 12/2003-S.T. and the said benefit of Notification cannot be

denied to them. It is the condition of the notification that there should be

documentary proof specifically indicating the value of the goods and materials,

which in the case before is on record. W e also find that the decision of this Bench in

the case of the appellants’ Helicopter Division will squarely cover the issue in favour

of the appellant. W e reproduce the relevant paras as under:

“6. W e have considered the submissions made at length by both the sides and

perused the records. First and the foremost issue to be decided in this case is

whether the value of the parts/materials consumed by the appellant needs to

be included for arriving at the Service Tax liability of the appellant. On the

factual matrix we find that the invoices which were produced before us

clearly indicate materials charges and labour charges differently and we also

find that in the very same invoices clearly indicate the discharge of Central

Sales Tax as the amount of material cost. The invoices produced before us are

not disputed by the Revenue. On perusal of the invoices, we find that the

contention of the ld. Counsel for the appellant that they are charging for

parts/materials separately and paying sales tax is correct. If that be so, we

find that the decision of the Hon’ble Supreme Court in the case of M/s. BSNL

(supra) will directly cover the issue in favour of the appellant as regard the

non-includability of the value of the parts/materials for arriving at the

correct Service Tax liability. W e also find that the Principal Bench of the

Tribunal in the case of M/s. Delux Colour Lab Pvt. Ltd. And ors. (Supra)

were dealing with similar issue, wherein it was held that sale cannot be

treated as service and vice versa.

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7. In the case before us, the appellant has produced invoices which would

clearly indicate that there is a sale of the parts/ materials and there is also an

element of labour charges charged separately. In view of this when there is a

clear distinction available between the sales of the materials/parts and the

labour charges, we are of the opinion that the impugned order which

confirms the demand on the amount of the materials/parts sold and used for

rendering of repair and maintenance service is incorrect and the impugned

order to that extent is liable to be set aside and we do so.”

Accordingly, respectfully following our own decision and in view of the facts and

circumstances, we set aside the impugned order and allow the appeal with

consequential relief, if any.” 9

5.5 Service tax and Central Excise –

Section 3 of the Central Excise Act, 1944 provides that duties of excise shall be

levied as may be specified under the Central Excise Tariff Act, 1985, or any other law

for the time being in force, on goods manufactured or produced in India. On the

other hand, section 66 of the Finance Act, 1994 levies service tax at specified rate on

the taxable services defined under section 65(105) of the Finance Act, 1994. Service

Tax is levied on rendering of taxable service. Central Excise duty is levied on the act

of manufacture of goods in India. Some time the department has tried to levy both for

a transaction.

5.5.1 The relevant case law 2007-TIOL-446-CESTAT-MAD; M/s Ericssion

India Pvt. Ltd., M/s. Aircel Ltd. Vesus CCE, Pondicherry

Facts of the case

AI RCEL imported various components under an agreement with ECPL to

install and integrate a system for providing radio telephony. Aircel had imported

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various apparatus for radio telephony viz., Mobile Switching Centers (MSC), Base

Station Controllers (BSC) and Base Transceiver Stations (BTS) under the supplier

agreement. ECPL had also procured certain indigenous materials for the manufacture

of the impugned goods and installed the same at various locations spread over several

districts. The adjudicating authority has found that the Mobile Switching Centre, the

Base Station controller and the Base Transceiver Station imported by Aircel installed

in several districts in the State by ECPL are excisable goods. I t was admitted by the

appellants that components of the system were movable goods, but could not be

moved as their alignment was software specific in relation to their relative locations

in the network. If the network was considered to be complete equipment the same

could not be considered a movable item as the same could be moved only by

dismantling the network. It is an undisputed position that the components had been

tested after assembly in a network/system before they had been dismantled and

exported to India. The company installed and commission the Transmission

Apparatus for Radio Telephony with the components imported. They had paid

Service Tax for the said activity.

The Tribunal held

“In the instant case, the appellants had imported various equipments

comprising the Transmission Apparatus for Radio Telephony network such as MSC,

BSC and BTS and installed the same at various locations spread over several districts.

The adjudicating authority has found that the Mobile Switching Centre, the Base

Station controller and the Base Transceiver Station imported by Aircel installed in

several districts in the State by ECPL are excisable goods. It was admitted by the

appellants that components of the system were movable goods, but could not be

moved as their alignment was software specific in relation to their relative locations

in the network. If the network was considered to be complete equipment the same

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could not be considered a movable item as the same could be moved only by

dismantling the network. In such cases, the item could not be considered to be

movable as decided by the apex Court in the case of Triveni Engineering & Industries

Ltd. (supra). W e are not in a position to accept this claim as it is an undisputed

position that the components had been tested after assembly in a network/system

before they had been dismantled and exported to India. W e find that what the

appellants had done was to install and commission the Transmission Apparatus for

Radio Telephony with the components imported. They had paid Service Tax for the

said activity. Therefore, tax cannot be charged under the Central Excise Act on the

same activity. As per the submissions of the appellants, the article decided to be

excisable comprises MSCs, BSCs and BTSs. No MSC or BSC is situated in the

jurisdiction of the adjudicating authority. This claim is not contested by the

Department. Hence the adjudicating authority was not competent to decide

installation/assembly of several equipments as constituting manufacture when critical

components of that system were situated outside his jurisdiction. In the

circumstances, we find that the impugned order is devoid of merits. Accordingly we

set aside the impugned order and allow the appeals.” 10

5.5.2 Case of Fabrication of structure

The structure fabricated at the site of client, the department has issued the

show cause for service tax on the above activity undertaken by the person under

taxable head of ‘Erection, installation or commissioning’ service under section 65(105)

of the Finance Act, 1994.

The situation is regarding fabrication of structure Chapter 73 of Schedule I to the

Central Excise Tariff Act, 1985 covers “Articles of Iron and Steel”. Chapter heading

7308 of the Central Excise Tariff Act, 1985, covers structures and parts thereof

excluding structures of pre-fabricated buildings of heading 9406.

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Relevant extract

7308 Structures (excluding prefabricated buildings of heading 9406) and parts of

structures (for example, bridges and bridge-sections, lock-gates, towers,
lattice masts, roofs, roofing frame-works, doors and windows and their
frames and thresholds for doors, shutters, balustrades, pillars and columns),
of iron or steel; plates, rods, angles, shapes, sections, tubes and the like,
prepared for use in structures, of iron or steel.

As decision in the case of the Hon’ble Larger Bench of the Tribunal in the case

of Mahindra & Mahindra Limited Vs CCE 2005 (190) ELT 301 wherein the Hon’ble

Larger Bench, after considering series of decisions, has held that fabrication of

structures at the site of the customer amounts to manufacture.

The relevant extract of the judgment

In our opinion, all these parts of structures which were fabricated were distinct
marketable commodities the existence of which was brought about by the process of
manufacture as defined in section 2(f) of the Act. These were not simply members
such as angles, etc., with holes or cut to a different size, but the process was
undertaken to bring them into a particular commercially known shapes and assemble
them for that purpose as per the designs and having fabricated them, to use them for
permanently fixing them in the structures which were to be erected as per the design
under the works contracts”.
Excise Vs Service tax-Section 3 of the Central Excise Act, 1944 provides that duties of

excise shall be levied as may be specified under the Central Excise Tariff Act, 1985, or

any other law for the time being in force, on goods manufactured or produced in

India.

On the other hand, section 66 of the Finance Act, 1994 levies service tax at specified

rate on the taxable services defined under section 65(105) of the Finance Act, 1994.

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Service Tax is levied on rendering of taxable service. Central Excise duty is levied on

the act of manufacture of goods in India. .

For levy of excise duty, ownership of goods is irrelevant. W hen a job worker

processes the raw materials supplied by the customer to such an extent that a new

product with distinct name, character or use emerges, the job worker is said to have

manufactured/produced the goods, despite the fact that the resultant product was

always the property of the customer. The job worker is a manufacturer/producer and

would be liable to pay excise duty.

For example, if Maruti supplies sheet to the job worker to be converted into a

sheet metal component of a car, the activity undertaken by the job worker is certainly

one of labour and nothing else. However, the labour or effort of the job worker

results in creation of goods which are liable to duty of excise.

The above scenario would sound more anomalous when the Union of India

has competence to levy ‘Duties of excise on goods manufactured and produced in

India’ under Entry 84 of List I of Schedule VII of the Constitution ‘Duties of customs

including export duties’ under Entry 83 of List I of Schedule VII of the Constitution

read with Article 246(1) and power to levy ‘tax on services’ under Entry 92-C of List I

of Schedule VII of the Constitution.

The activity of manufacture undertaken by the person to fabricate structures

at the site of the customer using raw material is one of labour. The end result of the

labour of the appellants is the ‘structure’ having a distinct name, character and use

from that of raw material. In other words, it cannot be suggested that service tax is

leviable on the activity undertaken by the person under taxable head of ‘Erection,

installation or commissioning’ service under section 65(105) of the Finance Act, 1994

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and central excise duty is leviable on the structures manufactured by the person

under section 3 of the Central Excise Act, 1944.

5.6 Cost of Compliance and Basic Exemption from Service tax

The researcher has made the survey of for the cost of compliance for small

service tax assessee with 20 Chartered Accountants from different parts of the

country. (Appendix II & III ) A structured interview schedule was used to collect

relevant data from the practicing Chartered Accountants of the country. W hile

estimating the cost of compliance to small assesses, Service Tax Payers with taxable

service value in the range of Rs. 11 to Rs. 5 Lakh have been considered. The analysis

of data brings interesting facts to note that the average cost per assessee for 2003-04

was Rs. 5421.25, which is very high compared to the limited tax liability from Re. 1 to

Rs. 25000 (Service tax @ 5% ) The summarised report of the survey shows cost of

compliance as under:

Table 5.1

Cost of Compliance per year for small Service tax assessee for 2003-04
Sample Admin. Consultant Miscellaneous Any Total Average
Cost Cost (Conveyance, Other Cost
Printing etc.)
20 28500 67250 11400 1275 108425 5421.25

The Table 5.2 shows the cost of compliance for Rs. 100 is calculated for

different segments, which shows that in case of assessee having taxable income is Rs.

one lakh or less, the compliance cost is more than tax amount which makes taxation

burdensome to small assesses. Detailed Table of data collected from the sample CAs is

appended in Appendix II

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Table 5.2
Cost of Compliance per Rupee of Service tax to Small Taxpayer
Sr. No. Gross Receipt of Service Service tax @ Cost per Rs. 100 of tax
tax Rs. 5% (Average Cost Rs. 5421.25)
Rs.
1 100000 5000 108
2 200000 10000 54
3 300000 15000 36
4 400000 20000 27
5 500000 25000 22
The average cost of compliance of indirect taxes total is Rs. 1.23 per Rs. 100 of

all indirect taxes including service tax. The cost of collection has been allocated in

proportion of tax collection of each of the indirect tax. In respect of government

though the average cost is Rs. 1.23 per Rs. 100 of collected tax as shown in Table 5.3,

the cost for the small assesses is far more than the average cost of collection of

indirect taxes total to government, which is calculated in this section that follows.

Table 5.3
Cost of Collection for government For Rs. 10011&12
Particulars Tax Cost Cost Per Rs. 100 Tax
Revenue In apportionment Revenue
Rs. Crore Of Total Exp
1838.42 Crore
Customs 34586 425.97 1.23
Excise 70245 865.17 1.23
Services 7750 95.45 1.23
Other Tax on
36685 451.83 1.23
Commodities
Total 149266 1838.42 1.23
Source 1) http://saiindia.gov.in/english/home/Our_Products/Accounts/Combined_Finance/Combined_
Finance.htm 2) http://indiabudget.nic.in

Cost of Collection of Service Tax from small assessees is calculated as under

with certain assumptions.

a. Total Cost of collection for Service tax assessee = Rs. 95.45 Crore
b. Total cost Apportioned = a* 80%= Rs.76.36 Crore
c. Total Small assesses -323085
d. Cost of collection per small assessee =Rs. 2363.46

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e. Total Revenue per assessee = Rs 10000/- (Assuming Gross value 2 lakh *
5%- service tax rate)
f. Cost per Rs. 100 tax = b/c*e*100 Rs. 23.63

The service provider has to pay service tax from rupee one of receipt for

taxable service till 31.03.2005. From 01.04.2005 the government, vide Notification

No. 06/2005A5.12 , has exempted small service provider, whose turnover of preceding

year was less than 4 lakh. Again, in 2007 the limit is increased to 8 lakh. Later on in

the 2008 limit is increased to 10 lakh vide notification 08/2008 dated 01.03.2008. This

exemption is not applicable to the person who is paying the tax as recipient of service

or by using the brand name of other person.

Up to 2005 every person who was providing taxable service has to take

registration and comply with the provisions of service tax. Even one time provider

has to register with the service tax. W hich has increased lot of administrative work

and even for small assessee it was burden to understand and comply with the

provisions. The Small assesses in 2003-04 were roughly 80 per cent of the total

assesses, (Budget Speech of the FM) the estimated number works out to 3, 23, 085 had

to pay high cost of Tax compliance as shown in Table 5.1.

Even in the budget speech of 2005-06, Finance minister mentioned that nearly

80 per cent of present tax payers will gain the benefit from exemption.13 In budget

speech 2007-08, while increasing the exemption limit from 4 Lakh to 8 Lakh ,he

mentioned that 2 lakh assessee out of 4 Lakh will go out of service net.14

This proves the hypothesis no. 3 – that service tax is hardship for small tax payer.

The issue in exemption is as follows:

The exemption is on the basis of last year turnover. The exact wording of

notification

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“the aggregate value of taxable services rendered by a provider of taxable service from

one or more premises, does not exceed rupees four lakh in the preceding financial

year.” i.e. provision of service (billing), however the taxability is on the receipts.

“hereby exempts taxable services of aggregate value not exceeding four lakh rupees in

any financial year from the whole of the service tax leviable thereon under section 66

of the said Finance Act:” and

““aggregate value not exceeding four lakh rupees” means the sum total of first

consecutive payments received during a financial year towards the gross amount, as

prescribed under section 67 of the said Finance Act, charged by the service provider

towards taxable services till the aggregate amount of such payments is equal to four

lakh rupees but does not include payments received towards such gross amount

which are exempt from whole of service tax leviable thereon under section 66 of the

said Finance Act under any other notification.”

This created difficulties under certain circumstances:

As the amount is 10 Lakh as per notification 08/2008 Exemption limit is Rs. 10 lakh

turnover.

Rs. Lakh

Current Current
Situation Last year W hether exemption available in next
year year
No. turnover year
billing Receipt

1 9 8 11 ?

2 9 11 7 ?

3 11 8 9 Yes

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In the 1, the exemption will be available but in the current year he has to pay

the tax after 10 Lakh. But crossing the turnover, still the benefit is available In 2, the

assessee having less receipt, has to pay the service tax without crossing the basic

exemption limit of Rs. 10 Lakh in the current year. The issue has been send as query

to the Commissioner, which is mentioned in Resercher’s contribution in chapter 6.

5.7 Differential treatment for different Services (Definitions)

In any act the main part is definition. In the service tax, definition of Service is

not given. Even the definition of various taxable service, is differ from service to

service. Even the main definition of Service is different.

The service provided by Service Provider to Service Recipient is made taxable

under different category of service. The definition is provided in Sub clause 105 of

Section 65 However in different category the service made taxable if provided to

different sets of person,

(i) As per sub clause 105 of section 65

“Taxable service” means any service provided or to be provided –

i. to a client by an advertising company - - - - - - 15

ii. to a customer by a courier agency in relation to - - -.15

iii. to a client ,by a consulting engineer in relation to - - - - 15

iv. to any person , by a tour operator in relation to a tour ,- - 15

v. to a client ,by a practicing chartered accountant - - - - 15

Similar while defining the service provider in various categories

Some of the examples are:

i) As per Section 65 (105) sub clause (3)"advertising agency" means any

commercial concern engaged in providing any service connected with

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the making, preparation, display or exhibition of advertisement and

includes an advertising consultant; (The word “commercial concern” is

replaced “person” on 01.05.2006)

ii) sub clause (28)/29 "Commissioning and installation agency" means any

service provided by a commission and installation agency providing

service in relation to commissioning or installation; (W .e.f. 10.09.2004-

sub clause 29- "commissioning and installation agency" means any

agency providing service in relation to erection, commissioning or

installation ;)

iii) sub clause (34): "credit rating agency" means any commercial concern

engaged in the business of credit rating of any debt obligation or of any

project or programme requiring finance, whether in the form of debt or

otherwise, and includes credit rating of any financial obligation,

instrument or security, which has the purpose of providing a potential

investor or any other person any information pertaining to the relative

safety of timely payment of interest or principal; (The word “commercial

concern” is replaced “person” on 01.05.2006)

iv) sub clause (38) "Dry cleaner" means any commercial concern providing service

in relation to dry cleaning; (The word “commercial concern” is replaced

“person” on 01.05.2006)

v) sub clause (31) "consulting engineer" means any professionally qualified

engineer or engineering firm who, either directly or indirectly, renders any

advice, consultancy or technical assistance in any manner to a client in one or

more disciplines of engineering; (The word “engineering firm” is replaced

“any body corporate or any other firm” on 01.05.2006 “to a client” is

replaced by “any other person” on 16.05.2008)

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vi) sub clause (50b) “goods transport agency” means any commercial concern

provides service in relation to transport of goods by road and issues

consignment note, by whatever name called; (The word “commercial

concern” is replaced “person” on 01.05.2006)

vii) sub clause (68) “manpower recruitment or supply agency” means any

commercial concern engaged in providing any service, directly or

indirectly, in any manner for recruitment or supply of manpower,

temporarily or otherwise, to a client (The word “commercial concern” is

by replaced “person” on 01.05.2006 and “to a client” is replaced by “any

other person” on 16.05.2008)

This has made the Service tax more complicated in earlier phase.

Due to these complications, initially in some cases, the assessee has taken

advance and not raised the bill. Then the government amended the clause 105 of

Section 65 from 16.06.2005 to include the ‘services to be provided’ by extending the

scope of ‘taxable services’. Thus the advance received made taxable at the time of its

receipt. This has created problem, when there is change in Service tax rate at the

time of provision of service and at the time of receipt of advance. Suppose, the

advance received in August 2003 and assessee paid the Service tax @ 8per cent but the

service provided in December 2004, when the rate was 10.2per cent.

5.8 Administrative problems

Central Excise and Service tax - Demand on the basis of Financial Statements.

The payment of Service tax -The liability of service tax is created by section 66A5.3.

The liability to pay service tax is fastened on the service provider by section 68.A5.13

The section state the person will pay service tax inn such manner and within such

period as may be prescribed. Provision in this regard has been prescribed under rule

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6A5.14of the Service Tax Rule, 1994.The liability is on the basis of the

payment/advanced received for the service provided or to be provided.

W hile in central Excise the liability of payment of duty occurs at the time of sale, in

service tax the liability of payment of service tax occurs at the time of realization of

the service. In accounting term, Central excise duty is based on mercantile system and

Service tax is based on Cash basis. In Central Excise once the assessee raises invoice ,

he has to pay the Central Excise duty. W hile in Service tax after raising the invoice,

when the assessee will receive payment, he has to pay the Service tax. If payment not

received from the client, then in Central Excise duty has already paid but in the

service tax the assessee need not pay the amount of Service tax till he does not receive

the Service tax.

As the Service tax is administered by Central Excise Department, in some cases the

demand is raised on the basis of Company’s /Assessee’s Balance sheet and Profit and

Loss account. As per provision of the Companies act, company has to prepare the

Financial Statement under Mercantile System of Account

Some time this created confusions, i) The department has asked the service

tax on the basis of Balance sheet (Even it is prepared on Mercantile Basis of accounts)

ii) For CENVAT credit – the Input Service tax credit is eligible after the payment of

Input service has made. W hile availing CENVAT credit of Input Service the assessee

has made mistake (in some cases)of taking the credit on the receipt of input service. It

is also little bit tedious job to maintain the records of payment of Input Service.

Case 2007-TIOL-145-CESTAT-BANG: M/s Tempest Advertising (P) Ltd. Vs. CCE,

Hyderabad II

The fact of the case

The Show Cause Notice was issued to the M/s Tempest Advertising (P) Ltd. on

the basis of the Profit and Loss Account and the returns filed with the Income Tax.

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The Company’s contention is that in terms of the Income Tax Act, they have to show

the gross receipts as per the Income Tax Returns, while in the case of Service Tax, the

Service Tax is payable on the gross receipts received by them. The Assistant

Commissioner has withdrawn the show cause notice. However the Commissioner

under his revisionary power (Section 84 ) has issued the revisionary show cause and

confirmed the demand. Hence the company has filed the appeal.

The tribunal stated

“W e have heard both sides in the matter and have perused the T.Velu Pillai &
Co., Chartered Accountants have issued certificate based on the verification of books
of accounts of the appellant company, that till date the appellant did not receive
payments towards the debit notes raised for various engineering services provided to
M/s.B.S.Refrigerators Ltd., and M/s. B.S.Appliance Ltd., Bangalore. The appellants had
been filing returns regularly and informing the department about the outstanding
debit notes due to them. There is no dispute about this fact about the appellants not
having received the services amounts including the tax from their customers and they
had reflected these amounts under the heading sundry debtors. Section 68 of the
Finance Act 1994 and Rule 6 of the Service Tax Rules does not permit recovery of the
tax unless the payments are received. Both the Section 68 and Rule 6(1) are
reproduced herein below:-

“Section 68: Payment of Service Tax – (1) every person providing taxable
service to any person shall pay service tax at the rate specified in Section 66 in such
manner and within such period as may be prescribed.

(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable

service notified by the Central Government in the Official Gazette, the Service Tax
thereon shall be paid by such person and in such manner as may be prescribed at the
rate specified in section 66 and all the provisions of this Chapter shall apply to such
person as if he is the person liable for paying the Service Tax in relation to such
service.”

“RULE 6(1) Payment of Service Tax. The Service Tax shall be paid to the credit of the
Central Government by the 5th of the month immediately following the calendar
month in which the payments are received, towards the value of taxable services:”

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The tribunal has granted full stay by Stay Order No.334/06 dated 24.03.06, in view of
the fact that appellants have not received value of taxable services from their
customers in terms of Section 68 and Rule 6 (1) of Service Tax Rules. The service tax
is not liable to be paid as the assessee has not received the payments towards the value
of taxable service. The appellants have been filing returns and informing the
department about the non-receipt of the value of services rendered by their customers
and about the non-payment of the same. The department is aware of these facts as the
returns have been filed. Therefore, the issue of Show Cause Notice beyond the period
of one year is barred by time. For the reasons stated above, the appeal is thus allowed
with consequential relief if any.

The appellant’s contention is required to be accepted. The order passed by the Asst.
Commissioner is correct and the same is upheld. The impugned order is not just and
proper and hence, the appeal is allowed with consequential relief, if any. 16

5.9 Service-wise I ssues

As mentioned the Central Government has introduced 3 services in 1994,

which are increased to more than 100 services in period of within a period less than

15 years.

Due varied nature, trade practice, intention of Government (for e.g. to tax

particular section on say social ground), vested interest of trade, political pressure

there are so many pros and cons leads to different-different coverage for taxability

for Services. One can say each services has different flavor of taxability. In some

services the Service provider has to be Commercial concern or agency to become

liable, in others any person providing service is liable. Similarly In some services

Service recipient has to be client or customer to become taxable, in others service,

service provided to any persons made taxable. In some services , Service provider are

liable to pay and comply the provision of Finance Act, 1994 ( Governing Service Tax),

In some Service receiver are liable to pay and comply the provision of law .In others

both are liable depending upon the nature of service and persons involved. The

researcher has discussed related issues in researcher’s contribution in chapter 6.

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Due this in service tax various complications has aroused. In this section,

researcher have restricted to 3 services for study.

(2) Goods Transport Operator Service, Goods Transport Agents Service (GTA)

The service tax on Goods Transport Operator was brought under the Service tax by

the Finance Act w.e.f.16.11.1997 vide Notification No. 41/97 dated 05.11.1997. The

burden to pay the Service tax and comply with the provisions was put on the service

receiver instead of Service provider. However ,the Supreme court in the case of Laghu

Udyog Bharti &Others Vs Union of India & Others 199 (112) ELT 365 (SC) : 2006 (2)

STR 276 (SC ) has held that the levy of service tax on the user of service tax is illegal

and unsustainable in law. Then, the service “Goods Transport Operator” has

withdrawn w.e.f.02.06.1998.

Later on the Finance (No. 2) Act, 2004 has brought the Service under service

tax net (w.e.f.01.01.2005) by amending the provisions of Act. The government has

kept levy on this service in abeyance and clarified17 “in pursuance to an agreement

between Government and the representative of Transport industry, a committee has

been set up to look into appropriate mechanism /modalities for collection and

payment of service tax by commercial concern and the rules/notifications will be

finalized in the consultation with the committee The Committee would give its report

within two months. In terms of agreement, the tax would be levied and collected in a

manner to be notified. No tax would, therefore, be payable by the goods transport

agency till such time Government comes out with the relevant rules /notifications

prescribing the modalities for levy and collection. ” After that the Government Of
18
India has issued instruction letter for smooth implementation by which the tax has

made applicable for any service provided or to be provided ,to a customer ,by goods

transport agency , in relation to transport of goods by road in a goods carriage. The

responsibility to pay service tax is put on the person who pays the freight to

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transporter in the case of consigner /consignee of the goods transport is one of the

following

i. Factory registered under or governed by the Factories Act;

ii. Companies established by or under the Companies Act;

iii. Corporation established by or under any law;

iv. Society registered under Societies Registration Act or similar law;

v. Co-operative society established by or under any law ;

vi. Dealer of excisable goods ,registered under the central Excise law ;or

vii. Any body corporate established, or a partnership firm registered ,by

or under any law.

In cases other than those mentioned above, the service tax is to be paid by the

Goods Transport Agency.

Accordingly, the provisions of law have to be complied, in some situations by

service recipient, in other situations, by the service provider. It has created lot of

confusion in the trade and industry as well as in the administrative wing.

(3) Business Auxiliary service (BAS)

Business Auxiliary service has brought under the of service tax from

01.07.2003, by finance Act, 2003.The definition of Business Auxiliary ServicesA5.15

covers wide activities within its ambit. The government in its CBEC Circular no.

59/8/2003-ST 19 Relating to ‘Clarification on the scope of the term for levy of service

tax’ has mentioned

“W hile it not possible to give an exhaustive list of the business auxiliary

services, the following are illustrations of the services that are covered under this

under this category viz. evaluation of prospective customers, processing of purchase

orders, customer management, information and tracking of delivery schedules,

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accounting and processing of transactions, operational assistance for marketing,

formulation of customer service and pricing policies, managing distribution &

logistics. The services provided in relation to getting a customer, verification of

prospective customer, processing of purchase order etc would also be covered under

service tax, as the law specifically provides for inclusion of such services as business

auxiliary support services.” Even the commission Agent is covered under this service.

Problem

The service has created lot of issues regarding the taxability. Initially the main

issue of service related to business. Government has clarified “if a sovereign /public

authority provides a service, which is not in the nature of statutory activity and same

is undertaken for a consideration (not a statutory fee) then in such cases, service tax

would be leviable as long as the activity undertaken falls within the scope of a taxable

service as defined (point 999.01 of Master Circular No. 96/7/2007, dated 23.08.2007).

It held in the case of Smart Chips Ltd. vs. CCE, Bhopal 2008-TIOL-1726-

CESTAT-Deh that the some services are provided to Transport department of Madhya

Pradesh Government in relation to some statutory functions and it can not be held

that the same is in relation to business activities by the Government department.

In many cases the government has to issue clarifications some list of such

clarification

i) Service tax issues relating to authorized motor vehicle dealers and service

stations-reg. (Circular No. 87/05/2006-ST 06.11.2006)

ii) Levy of service tax on production of alcoholic beverages on job work basis-reg.

(Instructions (F.No. 249/1/2006-CX 4 )dated 29.08.2008)

196
iii) Service tax on the Job of Ginning and Pressing of Cotton under Business

Auxiliary Service – Clarification (Instructions F.No. 137/151/ 2006-CX 4 dated

13.12.2006)

iv) Clarification regarding leviability of service tax on ship broking activity –

regarding (MOF TRU Circular F.No. 332/41/2008-TRU dated 19.12.2008)

v) Service tax- clarification regarding ‘commission’ covered under ‘Business

Auxiliary Service’- reg. (Instructions Dy. No. 324/comm(Service tax)/2008,

dated 1-12-2008)

vi) Non –payment of service tax on commission received by various banks against

government business transaction and in r/o godowns let out on rental basis to

private parties- reg. (Instructions F.No. 137/26/2007-CX,4 dated 05.12.2008)

(3) Authorized Service station – free service

The Authorized Service Station Service has brought under the net of Service

tax w.e.f. 01.07.2003. As per the definition A5.16 the service provided to motor car, light

motor vehicles, and two wheelers by a service station which is authorized by any

motor vehicle manufacturer is taxable under this category.

One of the issues in this service is of Free service. The purchaser of new

vehicle gets the first three services as free of charge from manufacturer. However

these services are done by Authorised Dealer. As per the trade practice there are two

methods to pay consideration/ charges of these free services to dealer by the

manufacturer. One is the dealer send the free service coupon to the vehicle

manufacturer and vehicle manufacturer pays the amount to the Authorised dealer.

The second method is the vehicle manufacturer pay additional margin to Authorised

dealer at the time of sale of new vehicle and it becomes the dealer’s responsibility to

do the free service of vehicle. In this case if the person gets the free service done from

other authorized dealer then the selling dealer has to pay the charges to other dealer.

197
In this case the TRU20 has clarified that the reimbursement received from the

manufacturer of motor vehicles for free service rendered to the reimbursement from

the manufacturer of the motor vehicles for free service rendered to the customer is

includible in the taxable value.

However, for the first method this is correct, even for the second method

,where the dealer reimburse to other dealer is correct. But in second method ,where

the selling dealer does the free service and he already receive the amount in margin,

department has issued the notice for demand of service tax.

Relevant Case 2008-TIOL-114-CESTAT-KOL -ASL Motor Pvt. Ltd. V. CCEC&S,

Patna

ASL Motor Pvt. Ltd. is authorized dealer of Tata Motor. The free service

provided by the appellant, who was not reimbursed by the Tata Motor, the

manufacturer. The amount was part of the dealer’s margin. The department issued

show cause and adjudicated by confirming the demand and penalties. ASL Motor Pvt.

Ltd. has filed the appeal in Tribunal.

The Tribunal observed

W e also find that in the constitutional scheme of things, there is mutual

exclusivity between the taxability of sale of goods which is charged to sales tax by the
State; the excise duty on manufactured goods which is levied by the Centre; and the
tax on services, which is also levied by the Centre. The impugned amount in question
is a part of the dealers' margin which has been recovered by the appellants as a part of
the sale value of the cars from the customers and the entire amount has been
subjected to sales tax by the concerned State Government authorities. W hen the
appellants sold the cars and recovered the amount including the dealers' margin, the
dominant intent, was to sale the goods, namely, cars and not to provide free after sales
service. In our view, the entire amount including the dealers' margin has been rightly
taxed to sales tax representing the value of the cars. The provision of free servicing is
merely incidental and intended to promote the sale of the cars. Hence, we are of the
view that no service tax can be levied on the amount representing the dealers' margin

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or any part of it which already has been subjected to sales tax. Consequently, we set
aside the impugned order and allow the appeal.” 21

5.10 The service tax returns forms (ST-3) and tax challans (TR-6/GAR7)
The service tax assessee has to file the half yearly service tax. The form of

return called ST- 3 is given in the service Tax Rules, 1994. The first format of service

tax of single page was issued through Notification 2/1994 dated 28 June 1994 After

CENVAT credit rule it has been changed to incorporate CENVAT columns through

notification 12/2002 dated 01.08.2002. After that the notification the form ST-3

completely changed and new for m was inserted through Notification 14/2007 dated

02.04.2007. Then again it has been changed by Notification No. 10/2009-S.T., dated

17-03-2009

The general problems faced by administration assessee and consultant / service

tax return prepator.

The form in value of taxable service don’t have total column, which take lot of

time of assessee/ consultant / service tax preparator. If he wishes to recheck the

return of later date, once it is submitted, it is waste of time for all.

5.10.1 Administrative Problem of Service tax Return V erification

Though in service tax the self assessment scheme22 is there, still the circular

F.No.137/27/2007-CX.4 dated 08.02.2007 issued by the department asked the

department to verify the returns.

In the case of superintendent, it consumes lot of valuable time to make and

check the mathematical calculation of return. If any clerical mistake is done in any

column by the assessee while filling the data, then in this situation, it will consumes

more time of the superintendent and inspector, considering the fact that there are

more than 13 Lakh assessee. Even if 5per cent assessee’s return is checked by the

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superintendent/Inspector the time consumed , generally it takes minimum 45 Second

for 1 column and he has to check at least 5 columns. I) Gross Value Gross amount

received in money, ii) Abatement amount claimed, iii) Taxable value iv) Service tax

payable ,v) Taxable amount charged. The time requires will be 4062 hours (13 Lakh

x 5per cent x 45 seconds x 5). On which the government is spending lots of money.

This is for 1 half yearly return and only one category of service. If we consider yearly

2 returns and more than one service category .This also not considered the time spent

by Audit party [In EA. 2000 Audit]. As per EA.2000 audit, the audit party, generally

consists of superintendent and inspector, do the detail verification as per the

procedure prescribed under EA.2000

5.10.2 Service Tax Challan

Earlier, the service tax was paid through TR-6 challan in yellow colour. Form

‘TR-6 challan’ means memorandum or challan refereed in its Rule 92 of Treasury

Rules of the Central Government 23. Now tax is paid by G.A.R. 7 challan 24

Problems / Difficulties- In this GAR 7 Challan following deficiencies are found

i) The challan does not have period for which it is paid.

ii) In the acknowledgement –a) Only the assessee code is mentioned and no

name of assessee is mentioned b) The category under which it is paid is not

mentioned. Instead of it only accounting code is mentioned .

Note – All the annexure for chapter 5 are in Appendix XI

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References

1. Para 11 & 12 of the Judgment CCE, Ludhiana vs. M/s Lal Path Lab (I) Pvt. Ltd. {2007-TIOL
533-P&H –ST}

2. Para 7&8 of the Judgment 2007 (8) STR 3(P&H)

3. Para 6 &7 of the judgment M/s Daelim Indl Co Ltd. vs. CCE, Vadodara (2003-TIOL-110-Bang)

4. The word to be provided is included from 16.06.2005

5. Para 4 of the judgment 2008 (9) STR 19 (Tri. – Bang.)
6. Para 4 of the judgment 2008 (9) STR 19 (Tri. – Bang.)
7. Para 4 to 6 of the judgment 2008-TIOL-1749-CESTAT-DEL
8. Para 2 of the Judgment 2007 (7) S.T.R. 123 (Mad.) Larsen & Toubro Ltd. vs. Union of India
9. Para 6and 7 of the judgment 2010 (17) S.T.R. 249 (Tri. - Bang.)
10. Para 9 of the judgment 2007-TIOL-446-CESTAT- Mad

11.
http://saiindia.gov.in/english/home/Our_Products/Accounts/Combined_Finance/combined_Financ
e.html

12. Source-http://indiabudget.nic.in

13. Para 145 of the Budget speech 2005-06

14. Para 152 of Budget Speech of 2007-08
15. Amended by Finance Act 2008 to ‘any person’
16. Para 5 and 5.1 of the judgment 2007-TIOL-145-CESTAT-BANG
17. Para 26 of instruction letter F.No.B2/8/2004-TRU, dated10th September 2004 ( Circular
80/2004, dated September 17,2004)
18. F.No.341/18/2004-TRU (Pt.) dated 17.12.2004
19. F.No.B3/7/2003-TRU dated 20.06.2003
20. Clarification on the scope of the term for levy of service tax (MOF Instructions F.No. B
11/1/2001-TRU dated 9-7-2001)
21. Para 5 of the judgment 2008-TIOL-114-CESTAT-KOL
22. From Point no.7.1 of Circular 97 of 2007
21. Explanation after Rule 6 , Service Tax Rule 1994
22. Ref- Answer to Q. No. 3.1 in Booklet Frequently asked questions released by Finance Minister
on 02.12.2007

Note – All the annexure for chapter 5 are in Appendix XI

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Chapter 6

Summary, Findings and Suggestions

6.1 I ntroduction

The service tax in India has long way to go with problem. There are

many special feature of Service tax. To name few i) it is offshoot of the

recommendation of the Reform committee, ii) though revenue from service tax

grown up by many fold, still the governing provisions are the part of Finance Act,

1994. iii) Service, which the base for collection of tax is not defined in the act. The

scope is bright, but development has many issues to resolve.

6.2 Summary

The present work ‘PROBLEM AND PROSPECTUCTS OF SERVICE TAX IN INDIA’

is completed in six chapters. The brief summary of research work done is narrated

below.

Chapter 1. It gives general introduction of taxes, their presence in the world and

India. It also gives the introduction of taxes on service in two part; pre and post 1994.

It gives the importance of topic under study, objectives of study, Statements of

Hypotheses, researcher methodology used, scope and limitations of studies and

chapter scheme.

Chapter 2. The chapter deals with the review of literature on Service sector, GDP

and direct and Indirect Taxes, Tax Administration, Service tax articles.

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Chapter 3. The chapter provides the meaning of Services in dictionaries and in

different acts, the characterstices of Service, specification of service, meaning of tax

and meaning of service tax. The development of service tax from the angles of finance

minister through their budget speeches is reviewed. The right of Central Government

in respect to levy service tax, power and constitution validity of service tax is

examined with help of judicial pronouncement and articles in tax magazine. It also

provides the global scenario of taxes on services.

Chapter 4. This chapter is core part of study. This chapter provides the

comparative study related to service sector and service tax with GDP. It shows service

sector importance in the growth of the economy. The study also provides the

comparative study of direct and indirect taxes and GDP, importance of Tax to GDP

ratio. It further provies the statistics of direct and indirect taxes, their major

components for the period of 16 years covering financial year 1994-95 to 2009-10.

This further provides the comparative study of the Service taxation, collection, the

Service tax and GDP of India, the data of yearly revenue, Number and growth of

assessee, Rate of Service tax, Number of category of Services, the zone wise and

commissonartewise collection, zone wise and commissonartewise number of assessee.

It also provides the comparison of W PI and Service tax.

Chapter 5. This chapter is also core part of study. This chapter provides the

problems, which covers problems of i) Classification of Service ii) Valuation of Service

iii) VAT vs. Service tax iv) Valuation of Service v) Exemption from Service tax vi)

Differential treatment for different Service (Definitions) vii) Administration problem

Basic difference. Further it provides vii) Service specific problems / issues 1) Goods

Transport Service 2) Business Auxiliary service (BAS) 3) Authorized Service Station.

viii) The service tax returns forms (ST-3) and tax challans (TR-6/GAR7)

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Chapter 6. This chapter deals with Testing of hypotheses, Major Findings and

suggestions, researcher’s contribution, fate of service tax after GST and scope for

further reaserch.

6.3 Testing of H ypotheses

Researcher has tested following statements of hypotheses through this study.

1. Service Tax as revenue will be major source for Govt. in the near future, though

the decadal development is slow.

The service tax collection initially was only 407 Crore when it introduced in the

year 1994-95. Till the financial year 2003-04, the yearly collection was below

8000 Crore. However after this, yearly collection is growing by 10000 Crore

every year with a single exception of the financial year 2009-10). This can be

seen from table 4.2.5

Even, if we compare it with the collection of Service tax to total Indirect tax

collection. In the year of Implementation it was just 0.65 per cent, which was

increasing every year. The collection of service tax collection to total indirect

taxes crosses 5 percent in financial year 2003-04. From the financial year 2008-

09, the share of service tax collection to total Indirect tax collection is more than

20 per cent .

Both the evidences prove hypothesis No.1

2. There are better prospects for Service tax in India; however, the prospects are

not likely to be free from problems.

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The prospect of service tax is bright. However, the finance minister

Yashwant Sihna in the budget speech, 2000-01 had also accepted that “Service

tax is emerging as an area of promise as well as problems”

The future of service tax seems to be bright from the angle of tax

revenue collection. The continuous double digit growth in collection of

service tax is a positive change in revenue receipt for Government. Some of

the problems related to implementation are discussed in the chapter 5.

This proves hypothesis No.2

3. I t is hardship for small tax payer as well as administrative cost for this

segment is high.

The average cost of compliance for small service tax assessee for the

year 2003-04, as per table 5.1 comes to Rs. 5421.25. It means for assessee

having taxable service Rs. one lakh and less, have to spend more than tax

amount for complying the service tax provisions. It is more than 5% of his

gross taxable receipts which is very high. The cost per 100 tax ranges from

Rs. 22 to 108. Certainly, it very high as compared to Rs. 1.23, the cost per Rs.

100 indirect taxes collection for the government. Even for the government,

the cost of collection of service tax for small tax payers is as high as

Rs.2363.46 per assessee and Rs.23.63 per Rs. 100/- of tax collection.

The service provider has to pay service tax from rupee one of receipt

for taxable service till 31.03.2005. From 01.04.2005 the government, vide

Notification No. 06/2005A5.12, has exempted small service provider, whose

turnover of preceding year was less than 4 Lakh. Then in 2007 the limit is

increased to 8 Lakh. Later on in the 2008 limit is increased to 10 Lakh vide

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notification 08/2008 dated 01.03.2008. This exemption is not applicable to

the person who is paying the tax as recipient of service or by using the brand

name of other person.

Even in the budget speech of 2005-06, Finance minister mentioned that

nearly 80 per cent of present tax payers will gain the benefit from

exemption. In budget speech 2007-08, while increasing the exemption limit

from Rs.4 Lakh to Rs. 8 Lakh, he mentioned that 2 Lakh assessees out of 4

Lakh will go out of service net. This shows the reduction in administrative

burden of the department. This was not the situation in the FY 2003-04 and

thus the administrative cost of collection from small assesses exceeded by 19

times the average cost to all tax payers total.

This proves hypothesis No. 3.

6.4 Findings

(1) GDP and Service sector

The sector has important role in the development of the economy and GDP.

The more, the share of service sector in GDP, the more, the development of

the economy.

(2) Direct and Indirect Taxes collection in I ndia

In India, for the period of review, it shows that Total taxes (Both

Central and State) to GDP ration has improved in the span of 16 years,

considered in this study. It was in the range of 13.13 per cent to 14.82 percent

from 1994-95 to 2003-04, which was increased to 17.7 in 2007-08, before

reducing to 16.47 percent in 2009-10. In this two years though the tax

collection has increased, but not in proportion of GDP.

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In the share of total taxes collection of Central and State, the ratio of collection

between Centre and State remain in the range of 62 to 65 percent: 38 to 35

percent. In the case of Central Direct and Indirect taxes, the revenue growth

of direct tax is more than indirect taxes. The collection of Direct taxes

exceeded the collection of indirect taxes in 2007-08. The three year moving

average shows the growth of 25.26 percent in direct taxes collection, while it is

6.3 percent for indirect tax collection in the period under review.

(3) Service tax collection and GDP, I ndirect taxes

The service tax collection to GDP percent reached to one in 2007-08. In the

first year, 1994-95, the service tax collection was only 0.07 percent of GDP.

The Service tax rate has increased by 62.5 percent on 14.05.2003 from 5

percent the rate changed to 8 percent. Later on the rate is increased by 12.5

percent (Rate 10.2 percent), 20 percent (Rate -12.24 percent) on 10.09.2004

and on 18.04.2006 respectively. It was changed reduced by 7.3 percent (rate

10.2 percent) on 24.02.2009.

The three year moving average shows the average growth of 45.77

percent in Service tax collection. This is the highest growth compare to direct

and indirect tax collection growth. The growth in number of assessee is also

tremendous. From 3943 assessees in 1994-95, the number increased to more

than 13.07 lakh assessees in 2009-10. The three yearly moving averages show

47.03 percent average growth in the service tax assessee. The data of zone wise

revenue shows that the major revenue comes from Mumbai I zone, and lowest

from shillong, in both the year under review, 2008-09 and 2009-10.

The revenue per assesses for 2009-10 is 4.45 lakh considering nation as

whole, while it is 5.06 lakh in 2008-09. In 100 plus services, top ten services

contributed 48.01 percent revenue in 2009-10. The Service wise revenue is

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highest for Banking and Financial service followed by Telecommunication

Service in 2009-10.

(4) Service Tax and W holesale Price I ndex (I nflation I ndex)

The study of yearly growth in Service tax revenue and W PI shows that

the trend is similar in growth. The service tax collection increases, the WPI

has increased. This shows that service tax is one of the reasons to increase

inflation.

(5) I ncrease in inflation

As the government finds the service tax as alternate source of revenue,

it started increasing the number of services and scope of services. The rate of

service tax is also increased by double to 10per cent from 5 per cent. This is

increased the cost. As discussed in earlier chapter the Service tax is one of the

reason to increase inflation. The following example shows that how the cost of

consumer increases due to service tax. The CENVAT scheme is there to take

the set of Input service. However it is available only those who pay either

excise duty on the goods manufactured by them and/or pay the tax on the

service provided by them. Even there is restriction to avail the CENVAT

credit. If the assessees provide non taxable service and/or manufacture the non

excisable goods along with taxable service and/or dutiable product. In this

situation the portion of non-cenvatable service tax becomes the cost for the

business or profession, which ultimately increases the product/ service price.

This is additional burden for the ultimate consumer for the product or service.

W here the consumer is ultimate user of service and the CENVAT

mechanism does not work for him, the cost for him, increases by the service

tax amount. For e.g. Residential telephone bill, personal income tax

consultancy bill from Chartered accountant, Cost of new flat. The following

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illustration shows that the cost of flat increased by 3.4per cent apart from

internal construction cost increased due to Contractor service tax.

(6) Classification Of service

The issue of deciding the category for the particular service, out of 100 plus

categories of services, is one of the major problems in service tax. This issue

has aroused not due to rate of tax but due to the different date of introduction

of service under the net of service tax and even there are different exemption

under different category of service. This has further increase when the Central

Government started to introduce the new services, which were made taxable

by the department in existing category. For e.g. i) Technical Testing and

Analysis service, which department tried to cover under Business Auxiliary

Service. Even the introduction of section 65 A has not solved the problem

fully and the litigations continue.

(7) V aluation of Service

In any taxation the valuation is important. On the basis of which, the tax

amount is decided. The manner and the provisions created the issues in service

tax. This has been reduced after introduction of valuation rule 2006, but it not

sufficient to deal the all situations. For example the issue of reimbursement of

expenses particular the reimbursement of statutory dues, has remains point of

dispute. Even the examples in valuation rules are seem to be not covered all

the situations as there is no example when the expenses are not includible.

The issue of provision of Service with material is not fully resolved.

(8) Service Tax vs. V alue Added Tax

The VAT is applicable for sale of goods act and Service tax is for the provision

of service. But when in the particular transaction both goods as well service

involves, the problems start with both the act. In some situation there are

solutions in some it becomes problem in either act. The introduction of

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deemed sale in VAT, The issue of adding the value of material in service tax

created the problems.

(9) Service tax and Central Excise

The Service tax is applicable for Services, while Central Excise applicable for

manufacturing of goods. Even similar situation like above (Service Tax and

VAT) has come in the case of Central Excise and Service tax but in very few

situations.

(10) Exemption to small Service providers

Initially there was no basic exemption in Service tax. It has created hardship to

small service provider for cost of compliance of service tax as well as to

government, as cost of collection was high. After the introduction of

exemption in 2005 the hardship of small service provider has reduced. Even

the high cost of collection in respect of small service provider reduced. But

the wording of the notification is complicated and in certain situations it is

create difficulty for general assessee to understand.

(11) Service-wise Issues

There are issues in the individual services also. Out of all services the findings

of three services with limited review are i) GTA- The definition and

application remains critical for compliances as well as for administration. ii)

BAS- The expectation to cover the services under this category by the

government, the definition of the service, the under standing of

Administrative wing and the understanding of persons from assesses side has

created the issues in this service. iii) ASS- The way the transaction is done, the

way tax has paid under different act and the basic understanding of law has

created the taxability issue of free services.

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(12) Future of Service tax

The future of service tax seems to be bright from the angle of tax revenue

collection. The continuous double digit growth in collection of service tax is

good sign of revenue receipt for Government. W hen yearly percentage growth

is below 10 per cent in case of other Indirect taxes (or in other words the share

in the percentage of Indirect taxes in composition of the total taxes is

reducing), the collection of service tax increasing. This is remarkable for

government. As far as Service tax provider, where he gets CENVAT credit, he

is not having the burden of Service tax. However the end consumer and the

Service recipient, who is not eligible for CENVAT Credit, this is additional

burden. For him the service tax issue is pinching issue.

If the Service tax withdrawn, the collection of tax revenue for

government will reduce. Again the cost of collection of other indirect taxes

will increase as today same machinery is used by the Government for

collection of Service tax. The person, who is eligible for CENVAT Credit, has

no effect of this withdrawal. For the Consumer, who are not eligible for

CENVAT Credit will benefited by reduction in cost/expenses.

(13) The service tax returns forms (ST-3) and tax challans (TR-6/GAR7)

The deficiencies in format of the service tax return and service tax

challan has created some of the issues like time consuming verification,

Incomplete columns in Service tax return as well as in Challan, issues for

administration and compliances of service tax. The researcher has developed a

model format of Service tax challan (GAR-7) and is appened in Appendix I.

This is special contribution of the reasercher to the exisiting fund of

knowledge. This form has practical utility that will be a taxpayer friendly

product as well as for administrative convenience of the taxation authority.

Development of the format for service tax return is time consuming process,

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which will take further time. Resaercher’s first post doctoral writing shall be

devovated for the purpose.

6.5 Suggestions

(a) Suggestion related to problems

(1) Classification of Service

Government should think either putting negative list, instead of introducing

the new service every year as the date of introduction in service has created

this issue sometime. W hile introducing service proper care should be taken in

drafting, when the new service, which overlap in existing service. Even, while

providing various exemption there should rationalization. The exemption

should not become the tax planning tool in two different category of Service.

For example – Commercial Construction service and W ork Contract service as

mentioned in the chapter 5.

If negative list is not possible, while introduction of new service proper care

should be taken, it should not overlapped earlier service. The new service

should not be part of existing service.

(2) V aluation of Service- The language should be simple. In the Service tax

(Determination of Valuation) Rule, 2006 the example, whether reimbursable

expenses are includible or not are given. No example of the expenses, which

are to be included is given. For example the taxes and statutory dues paid on

behalf of service tax recipient will not be treated as part of gross value of

service. W hen the exemption provided, care should be taken that the

exemption should not differentiate in two services, For example there are

different deduction for material in Erection Commissioning and Installation

service (67per cent abatement for material in as per Notification 1/2006) and

W orks contract service, which includes Erection Commissioning and

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Installation work has to pay 4 per cent on gross amount as per the W orks

Contract (Composition Scheme for payment of Service tax)Rules 2006

(alternatively 60per cent deduction for material).

(3) Service Tax GAR 7 challan- It should be amended to include in

acknowledgment-i)The name of the assessee in the challan ii) The period for

which it is paid ,iii)The category of service. Model GAR 7 is prepared by the

researcher, which in the Appendix 1

(4) Service tax –Return

i. Basic – The column of total is not provided in the existing form, which

should be there in the format of return.

ii. CENVAT- There is only one CENVAT columnar table, where the opening

CENVAT, addition, utilization and balance are disclosed. W hen there are

multiple services , the assessee fill this information for all services in that

one table ,however many time department people call and ask the detail of

service wise CENVAT credit detail from assesses. In some services the

assessee may opt for abatement and in some, he may not opt for the same.

This is not reflected properly in the return. W hile filing the return online

there should be column for the same.

iii. W hile filing the return online there should be remark Column, where

assesses can put notes, explanation.

iv. Presently the time limit for revise return is 90 days. (Rule 7B of Service

Tax Rule, 1994).This time limit for revised return for both the half yearly

returns has to be increased to 6 month from end of financial year. As many

times mistakes are dictated during various audits. The time limit for

completion of the tax audit is 6 month from the end of financial year.

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(5) Accounting code –

a. In the Central excise, the excise duty is paid under single accounting code in

the challan, however in Service tax, there is separate accounting code for every

service, this is cumbersome, and hence single accounting code should be

prescribed for service tax also.

b. For delayed filling of return, the late fee is prescribed. There is separate

accounting code for Interest / Penalty in every service category. W hen return

is filed for the multiple services, there is confusion for using accounting code

for paying this late fee. It is suggested that there should be single accounting

code to be prescribed for paying the late fee.

(6) Maximum electronic filling to reduce interference.

The lesser is the contact of the officer with tax payer, the less is likely

to be the corruption, harassment. If electronic return filing is made mandatory

for all assessee it will be beneficial to both, Government as well as tax payer.

The benefit for officer is that he can focus on finding the leakages and

concentrate his job on the tax evaders instead spending the time for

arithmetical accuracy. For the tax payer, he can save the time by filing return

at office and the printing and stationery cost will be saved.

(7) There should be basic exemption limit.

W hen the Service tax introduced in 1994, the tax was levied from Re.1.

Over period of times taxes on many services were introduced. Out those some

services are related to individual persons for e.g. Architect, Chartered

accountant, Tour operator. Even some time assessee has taxable receipt for one

time or petty some. This has increased the compliance work of the assessee.

Even for the small amount assessee has to apply for registration. Even one time

recipient of small taxable amount taxable has to take registration. This has also

214
increased the work of Departmental officers. Even cost of collection has

increased. Hence the researcher has suggested that there should be some basic

exemption limit, to small taxpayer so as to reduce the cost of collection.

This basic limit has introduced in 2005, which was Rs. Four Lakh

(Notification 6/2005). This was increased to 8 Lakh in 2007 (Notification

4/2007) and then it was increased to Rs. 10 Lakh in 2008(Notification 8/2008).

This should be more, considering the SSI exemption of Rs. one Crore for goods

under Central Excise Act. The wording of the notification is complicated and

in certain situations it is create difficulty for general assessee to understand. At

present it is based on previous year turnover only. Instead of based on previous

year turnover, it should be on the basis of both turn over or receipt of Rs. 10

Lakh in the preceding year.

(8) There should be Separate Act

One of unique feature of the Service tax is that it is governed by Chapter V of

Finance Act 1994. There is no Separate act for Service tax as the collection has

increased 125 times over 16 years time, litigations has also increased. Hence

there should be separate act for Service Tax.

(9) Service not defined in Service tax

In the Service tax the taxability is decided on the basis of provision of service,

however ‘W hat is service?’ is not defined in the provisions of the Finance Act,

1994.

(10) In the exercise for introduction of new Services, the prospective assessee,

professional like CA, CW A, and CS should be involved to discuss the difficulty

in implementing or understanding the new service. This procedure at present

restricted only to the department, field formation reports. At present

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whenever the new service is introduced, the source is only departmental

suggestion, field formation reports. The proposed introduction should be kept

in public domain and feedback from trade, public, professionals are to be taken

So that litigation will reduce and due to this exercise /publicity, there will be

more clarity, which ultimately will increase smooth flow of tax collection at

large.

(11) To increase awareness through publicity, seminars, meetings.

It has been proved that awareness of tax through publicity; seminars, meeting,

and individual touch from department in form of interaction through

phone/personal letter/meetings increase the smooth flow of tax revenue.

(12) Proper training to staff (Superintendent, Inspector)-The Service tax is with

central excise department. Many times it happen that the Superintendent and

Inspector are transferred to service tax wing are either not acquainted with

service or less acquainted with service. This in effect reduced the effectiveness

of the administration. This requires training for effective administration and

seminars for updating of knowledge.

(13) To increase scope of service tax and avoiding malpractice of non showing of

the taxable services receipts. There is should be sum incentive to the service

recipient. If he gets CENVAT Credit, then he will pay the service tax to service

provider. W here the service recipient is non business/ home user the incentive

in the other form. For e.g. Deduction in Income Tax in some per cent for

those who are not an assessee or for those who are not taking CENVAT credit

of service tax paid should one of the solutions.

(14) CENVAT mechanism should be improved- In some services CENVAT credit is

barred if assessee is availing abatement and in some it is not so. For e.g. In

W CT category ( includes a commercial contract) the assessee can pay Service

216
Tax @ 2.06per cent (from 1.3.2008 4.12per cent) on gross value and eligible for

availing CENVAT credit of ST paid on input services and duty paid on Capital

goods. If we see same in Commercial or Industrial Contract Service category

the assessee has option to pay service tax after abatement of 67per cent and he

is barred from availing CENVAT credit of ST paid on input services and duty

paid on Capital goods.

The Government says that every sub contractor should pay service tax

CENVAT mechanism is there to avoid cascading effect. However, due the

restrictions on availing the CENVAT mechanism, it has ultimately cascading

effect.

(15) The payer of service tax from the business/trade/professional person should get

the CENVAT Credit across the table without putting so many conditions to

avoid cascading effect. If the amount is not liable to CENVAT, they try to

avoid paying tax to service provider. Like contractor, builder, non excise

manufacturing units even government organizations including defense

services.

(16) To reduce litigation – The provisions of law should be simplified. The separate

act for service tax is to be prepared. The definition of “service” is to be added.

Instead of introducing separate service category, the option of introduction of

negative list could be thought of. There should be harsh treatment for

intentional tax evaders. The co-ordination between Central Excise department

and other tax departments is to be increased. The officer from the department

is to be given access of Income tax and VAT to verify the returns.

(17) The enquiry should be handled by one wing at time.

There are 4 wings in the Central excise department Assessment wing, EA-2000

audit wing, preventive wing, Intelligence wing (DGCEI). It may happen

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sometime a person has face enquiry from more than one wing, which don’t

have coordination between them. There is no problem for Factory or

company, where there is separate department to handle this. But for trader,

professional, proprietary concern, where single man looking after all. Or who

have one accountant or accounting job is outsourced to the accountant , It

become cumbersome job, which create negative image of the department

should be avoided. In these cases at least the job should be handled by one

wing and it may internally co-ordinate the other wing.

(18) W here there is Centralized registration, all enquiries, cross checking, should

be routed though jurisdictional commissioner/cc as the case may be.

(19) The law to be administered in true spirit at field level. The purpose and aim

should be properly percolated at filed level. For example, in the Scrutiny of

return – Provision says self scrutiny and assessee’s is called for the same. If it

require, Government should make the proper provisions, after verifying the

revenue generated. The provision says one return for all services, still the

superintendent are asking assessee to file separate service wise return as in

some places where the department is administering the Service assessee by

allocating service wise jurisdiction to superintendent./

6.6 Researcher’s Contribution

Researcher is practicing chartered accountant with special focus on service tax.

He is also member of Regional Advisory Committee (RAC) formed every year by

Commissioner, Central Excise, Customs and Service tax, Nashik since its inception

2001. W hile dealing in practice he has came across many circumstances related to (i)

issue of interpretation of law (ii) issue of implementation of law, (iii) issue of

administration (iv) suggestion for the service tax to government. Some of those

incidences are mentioned in this annexure.

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This annexure contains as Part 1- Suggestions in regards to various provisions

of Service tax, Part 2- Related to practical experience with judicial cases. In part 1

there are two sub parts, first suggestion in relation to provision, compliance etc. The

other is related to contribution in new service introduction.

In Second part of practical experience with judicial cases is divided in three

parts as - 1) Related to penalty issue 2) Issue of Interpretation covering three

situations. In these 3 cases the researcher has covered i) import of service issue,

refund of service tax and issue related to revenue ii) taxability of service, consulting

engineering service and GTA service, penalty iii) Issue related to Free service,

taxability under Authorised Service station. In one of the case identity is not

disclosed.

In part third the issue related to GTA service and the liability of compliance

under the service is discussed. These are some of the experience discussed by the

researcher.

Part I : I ndentification of New Service

The Researcher has informed to TRU (Tax Research Unit) regarding system of

the transaction happening in case of hiring of machinery. In VAT, if the

machinery/equipment / appliances provided on hire with transferring right of

possession and effective control of such machinery/equipment/appliances then VAT is

payable. (Transfer of the right to use any goods is leviable to Sales tax /VAT as

deemed sales of goods as per Article 366 (29A) (d) of the Constitution of India) For

example if A provide crane to B for the use of B, without driver or say with driver but

the control of crane is with B. B uses the crane at the discretion of his own. Then as

per VAT law, A has pay VAT on the said hire amount charged to B. However

transaction allowing another person to use the goods, without giving legal rights of

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possession and effective control is not been treated as sale of goods in other words if

machinery/equipment / appliances is provided on hire without transferring right of

possession and effective control of such machinery then there is no VAT. In these

regard, there are number of decisions under VAT act. In the case of one of clients of

the researcher, the client has won the cases, in relation to VAT not payable, in many

states of India. He was providing cranes to various companies, on rent. However the

driver was provided with the crane. Even the agreement contains the clause of crane

type, and he may change the crane, if he requires. The researcher has, with the

permission of client, provided those case laws along with details. In the next budget

the government has brought the service called ‘Right to use of Tangible goods service

’R4 There were win-win situations as revenue started for government under new

service while client was able save some money through Cenvat credit mechanism.

PART- 2- Practical experience with judicial cases

(a) I ssue of Penalty

In initial year, the awareness was less and there was no basic exemption in the

service tax. The department started the enquiry and issued show cause to many

assessees. Assessees, those who have not paid, have paid the Service tax and interest.

The main issue was of penalty under Section 76R5. In the section the penalty was as

Rs.100 to Rs. 200 per day of failure to tax, which is maximum of tax default. (100% of

tax amount)

However under Section 80R6 which overriding effect on penalty sections the

power has given to levy less/no penalty, if there is reasonable cause. This section is

only in Service tax and not in Central Excise or Customs.

The assistant commissioner after considering the facts and situations or

finalized the order with levying penalty less than prescribed without mentioning

section 80. The commissioner who has power under Section 84 (2) to review the

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orders of his subordinate has reviewed all the orders (Approx. 400 cases) and ordered

to pay full amount of penalty. It may be due to the section 80 is only in service tax

and not in Central Excise and the orders have not mentioned the section 80. In many

cases the parties went to Tribunal and got the relief, where by the revision order is set

aside and order of assistant commissioner has been restored. The department has gone

in Bombay High Court against the order of Tribunal but high court has confirmed the

order of tribunal.

It shows how the service tax has created the problem. Out the above cases in some

cases the assessee has paid the penalty amount also after the commissioner’s order.

This has also generated the revenue for the government.

Case - (2008 (10) S.T.R. 115 (Bom.) Commissioner of C. Ex. & Customs vs. M ukul S. Patil

In many cases the research has filed the appeal in the tribunal and the cases has

reported in the law journals. Some of reported cases are mentioned in Reference in

R7

(b) I ssue of I nterpretation

1 This issue relates ‘How Service provider has paid the tax without understanding of
law on the basis of instructions of the superintendent in EA-2000 audit? How the
researcher helped to the assessee to get refund of that tax.

The ABL ltd. (name changed) was exporting its product P. The company has
appointed a person from foreign country to help in getting the orders from the
buyers outside India. In relation to this, it was paying the commission to that
foreigner. At the of EA-2000 audit, the superintendent asked to pay the service tax
of Rs. 612000/- on the commission paid under the reverse charged mechanism for
the period 2005-06.

The client paid the amount and later on came to researcher for guidance. After
verifying the provisions and judicial pronouncement the researcher had advised
that the amount is not payable on the grounds that The amount is asked to pay
under rule 2(1(d)(iv). The rule cannot make the provision that the recipient of the

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service liable to pay tax, when act does not speak about said liability. Before the
enactment of Section 66A, there was no authority vested by law in government to
levy service tax on a person who o is resident in India, but who receives services
outside India.

The refund was filed and quoting the case of Commissioner C. Ex., Ludhiana
vs. Bhandari Hosiery Exports Ltd. [2008 (11)STR 151(Tri Del.)] along with other
grounds in reply to SCN, the ABL ltd. got the refund vide the OIO No.
23/ST(R)/2008 dated 23.10.2008 passed by Deputy Commissioner, Service tax
,Nashik. The story does not stop. In 2009, the Commissioner issued revisionary
show cause for recovering the refund amount under section 84(2) on the grounds
that there is sufficient recovery provisions were available by way of clause (iv) of
Rule 2(1) (d) of Service tax Rules, 1994 prior to insertion of Section 66A and the
proof of non collection of Service tax is not submitted, except the CA certificate.
The reply submitted with arguments that the section 66A is introduced from
18.04.2006 and before that there is no provision in the act to collect the Service tax
on import of service for the period prior to 18.04.2006, relying on the judgment of
Indian National Ship owner Association vs. Union of India [2009(13)STR 235
(Bom.)]. For CA certificate the case of CCE Chennai [2007(226) ELT] the show
cause was withdrawn vide OIR no. 15/ST/2010 dated 29.07.2010.

This shows how the assessee has to face problems, with complication of
provisions of law. First has to pay amount as tax on the instruction of departmental
authority. Then to face the refund music twice, first, at adjudication level, then, at
commissioner level to define his own subordinate’s order. Even the government
lost tax, which he wishes to collect due to framing the incorrect law. If the section
66A would have been introduced earlier, the government would have received
substantial tax amount.

2 This experience is related to 1) how department has collected the service tax for
non taxable service. 2) Even relates to confusion of law under Goods Transport
Agents /Operator Service GTA/GTO the assessee has not paid the service. 3) How
the penalty is waived.

Dirk India Ltd. is engaged in the business of collecting fly and processing ash
generated in Thermal. An investigation was started by DGCEI officer on getting an
intelligence that the company is providing the taxable service (i) Consulting

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Engineering service from a foreign origin person not having an office in India and
(ii) the Goods Transport Agency service for transportation of fly ash. The company,
during the period Oct 2004 to April 2006, has paid £ 45000/- (Rs. 36.17 Lakh) to its
MD , Mr. George Dirk ,who is person of foreign origin and also paid Rs. 253.84
Lakh to various transporter on which amounts the service tax was not paid. The
Department has booked the case against the company and issued the show cause to
the company to pay service tax under Consulting Engineering Service and Goods
Transport Agency. The company has paid the service tax along with interest prior
to Show cause. The Joint Commissioner has ordered the company to pay the
service tax, interest and equal penalty.

The amount under consulting engineering service was demanded under the reverse
charge mechanism. As per Reverse Charge Mechanism in Service tax, when the
service provider who is situated outside India and not having any establishment in
India, provides the taxable service to an Indian business entity, then the Indian
business entity has to pay the service tax under the reverse charge mechanism.

The company has approached to the researcher for the consultation. The
researcher has made the appeal against the order on the grounds that the service
under consulting engineering service taxable as per Section 65(31) when the
service is provided by professionally qualified engineer or engineering firm and the
person, Mr. George Dirk, who has provided service is not engineer. For the second
issue as service tax was new and do not having proper knowledge of Service tax not
paid the service tax under GTO, but immediately it paid the service tax and
interest.

The Commissioner (Appeal) vide his final order no CEX/AKD/NSK/2007 dated

27.04.2007 (F.No. NSK/42/2007/3830 dated 01.05.2007) accepted the argument and
set aside the taxability of Consulting engineering and waived the penalty on both
the issues.

This is example, where the administering authority (In case like charge of
Consulting engineering) has not understood the law properly. Even the assessee
has not known the law properly. This requires training on the part of the field staff
and administering authority. Even the publicity and seminar required for the
assessee.

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3 I ssue for ‘Authorized Service Station’ Category of service in relation to Taxability
Free service

This issue is discussed in the problems chapter.

Background- In the case of service provided by Authorised Service station to

the vehicle is chargeable under service tax. The Maruti dealer gives free three
services to the customer of new purchase of maruti vehicle.

Seva Automobiles Pvt. Ltd., Dhulia (herein after SAPL) is registered under the
category of ‘Authorised Service station’ and authorized dealer of M/s Maruti Udyog
Ltd., Gurgaon, Haryana. The Investigation carried on by the department reveal
that(i) M/s Maruti Udyog Ltd. has confirmed in their submission before CESTAT
2004 (63)RLT -373 (CESTAT-Delhi) the charges on account of the three free
services are not included in their assessable value (This case relates to the valuation
of vehicle under Central Excise Act.) (ii) Once it is not consider for assessable value
for paying excise duty, it means the dealer getting the value for the free services.
Hence the dealer has to pay service tax under the category of Authorised Service
station. SAPL has paid the amount. The Show cause notice (SCN) was issued for
Service tax , Interest and penalty. The Assistant Commissioner adjudicated the SCN
and confirmed the demand and penalty.

The department has ignored the fact put forward that the dealer this amount of
free service is included in the margin of vehicle and he has paid VAT on the
vehicle margin

The appeal has made with Commissioner (Appeal) on the various ground, one of
the main ground is once the VAT is paid on the amount of free service, which is
included in the dealer margin, the question of paying service tax does not arises.

The Commissioner (Appeal) in his Order –in-Appeal No. CEX/IPL/ 240/

NSK/2008 (F.No. NSK/190/2008/10963/24.12.2008) set aside the order of Assistant
commissioner on the ratio of judgments in the case of AVG motors Ltd. vs.
Commissioner of CEX, Kottayam (2008(10)STR -20 Bang.) and M/s ASL Motor Pvt.
Ltd. vs. CCE,Patna 2008-TIOL-CESTAT-Kol wherein it has held service tax is not
levy able on free service rendered by the authorized service station in respect of
the cars sold by them as the full value including the dealer margin is recovered
from the customers towards price of the cars and sales tax is paid thereon, hence

224
no service tax can be charged either on the amount representing the dealer s’
margin or part of it. The commissioner further stated that unless the department
/Revenue show that the appellant got reimbursement in some other guise, it will
not be possible to confirm the demand.

PART- 3 –I ssues related to Goods Transport Agency service (GTA)

This service has discussed in the problem chapter. The researcher has delivered the
lecture on the Goods Transport Agency service to departmental seminar for
Superintendent at Nashik organized by Commissioner Central Excise, Nashik. He has
analyzed the service thoroughly. The various situations and in those situations who
will have to comply the law has been discussed. In the service tax, generally service
provider has to comply with the provision of Service tax regarding registration,
paying tax and filling the returns etc. However in few cases like Insurance Company
(In case of his agent’s service), Under Reverse charge mechanism, and Sponsorship
service this responsibility is shifted to Service recipient. However under the Goods
Transport Service category it depends upon the person availing the service. There are
both situations in this service. Some time Service recipient has to comply with the
provision, sometimes, the service provider has to comply with the provisions of
service tax.

The situations are tabulated below:

Situation Person Responsible for complying the

Consignor Consignee
Service Tax Provision
No.

From Specified The person (even his agent is paying on his

1 Individual
person behalf) paying the transport agent.

From Specified The person (even his agent is paying on his

2 Individual
person behalf) paying the transport agent.

From Specified From Specified The person (even his agent is paying on his
3
person person behalf) paying the transport agent.

4 Individual Individual Good Transport Agency

Specified person -

i. Factory registered under or governed by the Factories Act;

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ii. Companies established by or under the Companies Act;

iii. Corporation established by or under any law;

iv. Society registered under Societies Registration Act or similar law;

v. Co-operative society established by or under any law ;

vi. Dealer of excisable goods ,registered under the central Excise law ;or

vii. Anybody corporate established, or a partnership firm registered, by or

under any law.

The Joint commissioner has appreciated the lecture. As there is general belief
/understanding in the trade as well as in the field staff that the individual person do
not have comply the provisions of service tax in the case of this service. This is not so.
If out of the two person i.e. Consignor and consignee, one is specified person and
other is from specified person and the individual person makes the payment to
transporter. In this situation the Individual has to take registration and comply with
the law. Even there is no basic exemption in this case.

In practice this is very hard to keep the track of whether consignor or

consignee is individual or from specified person. As It not required in trade that the
person is dealing with whom? W hether it is partnership or Individual? This has
created the problems in both for administration as well assessee.

The provisions of law should be simple, if the relatively uneducated person (in
relation to law) has to comply it. How one can expects the booking clerk of the small
transporter agency’s office to know the above complex provision? Same is the
situation, at the unorganized traders/ businessman’s shop/ office.

PART I V -Suggestions

The researchers has suggested following points through Regional Advisory

Committee:

(1) This suggestion is for the ‘GTA’ Category of Service and is related to practical

difficulty faced by big organization in taking out the information for

payment of Service tax and filling of Service tax return for GTA service.

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As per provision of the service tax in case of “Goods Transport Service”

service the specified person (which includes companies and firms etc.) has to

comply with the provisions of Service tax. Companies and even other firm

are maintaining their accounts on the basis of mercantile system of

accounting. In the case of transport charges, they are debited in the books

when Assessee receives those bills. The service tax has to be paid on the basis

of receipt / payment of the value of taxable service. So while paying the

service tax on “GTA” category liability, these assessees have to check up

every month all the payment details of transporter. It is very cumbersome

job.

Researcher’s suggestion is that the assessee should be given option in

this category to pay when they book the bill of transporter in the books of

account (as per mercantile system). So that it will be easy for the assessee and

department also. Generally Transporter’s payment is made after the booking

at bill. In this option even department will receive the revenue earlier. So

our request is “In case of ‘GTA’ option to the given to the assessee to pay

service tax on basis of booking the bill in the account instead of payment to

transporter.” Even audit department can do audit with less time as the value

of service tax returns will match the amount debited to profit and loss

account.

The department’s other concern may be –Suppose assessee book the bill

in the books at later stage and not at the time of payment, as per the

provision, the person has to pay the service tax even if receive /pay the

advance for the taxable service. So even if doesn’t record the bill he will have

to pay on the basis of payment and not on the basis of bill recorded at later

date. R1

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(2) Suggestions for procedural Simplification.

These suggestions are self explanatory.

(i) The Separate Act for Service Tax definition of Service:-

There should be separate act of “Service Tax” which may be helpful

even for proposed GST. There is no definition of ‘Service’. I t is very

essential for the act to have definition of “Service” for which

government is interested to collect the tax.

(ii) In Regards to GAR-7 challan-In GAR-7

(a) In acknowledgement counter the column for Name of Assessee

should be there. Though registration number is PAN base, nobody

is expected to remember his Reg. No. by heart. Not only the person,

who go in the bank and faces the problem, but also the concern

superintendent has to check from the file record for correctness of

the assessees’s name.

(b) Even GAR-7 challan not shows the period for which service tax is

payable, which may create problems.

(c) The late payment fee should have separate Accounting Number. If

the Assessee is multiple service providers, under which category he

will pay the late fee payment? For the late fee, for allservices only

one accounting code should be notified.

iii) Service Tax Returns:

This problem is discussed in chapter 5.

a) There should total column after the service period (6th month) last

month’s column, which is cross check for department and assessee. At

present one has to make total of six columns to check the taxable

receipt of service provided or tax paid.

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b) Even the service tax, Education cess, SHE cess and Interest has a final

Gross total that for particular half year how much assessee has paid the

total tax to tally with GAR-7. Even the challan should be mentioned in

following manner.

Sr. GAR-7 Amount Paid Date of

challan payment
No ST+Cess Interest Total

Or there should be amount column in 3(d) (II).

c) Service Return has to be column of address of assessee. It is difficult to

find the details immediately.

d) If assessee is filing the return under basic exemption Notification – he is

not able to mention in the return.

e) In D column if column for Notification claimed can be added in

column ‘f’ of ST-3 return there should be column.

f) Value on which Service tax not payable. W hen the S. Tax is introduced in

between period of the half year how assessee can mention this? (W hen

the receipt pertains to that period, when the tax is not payable.)

iv) In Regard to Service tax, Registration form ( ST-1 Form), In Declaration,

even for new registration – Date from which the assessee require the

registration is to be included.

(3) Efficiency of existing dispute settlement mechanism Adjudication

Of SCN.- The person, who issue the SCN and the person, who adjudicate the SCN

should be different to have better transference / judiciousness.

(4) Problems – Specific Service.

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Road repairs – As this covered under CCS as not taxable and Dept. circular

says it is taxable under ‘MMR’. Even road exempt under site formation

service.

As these problem has risen in pan India basis, the government has issued the

Notification 24/2009 dated 27 July 2009 exempting the Road repair service

under ‘MMR’ category of service from Service tax.

(5) Problems – faced in implementing S. Tax

This problem is discussed in the chapter 5.

(i) Exemption Notification - If taxable turnover at ABC Ltd. as follows.

Year Year

2006-07 2007-08
12 lakh 7 lakh

Can the assessee avail exemption in year 2008-09 for first Rs. 10 lakhs

receipt? It is not clear from exemption Notification.

(6) Suggestion on CENVAT credit scheme.

The Notification 1/2006 should be made at par with works contract category to

avail the Input service and capital Goods benefit.

(7) Suggestion regarding refund of Service Tax related issues

Procedure for Export refund.-The procedure should be standardized to process the

refund in time frame.

(8) Classification of Services:-

Amendment or charges needed to avoid overlapping of services.

230
i. Transport and Cargo handling Service.-There is confusion between trades. If

the transporter is doing activity of Loading & Unloading then whether it is

Cargo handling of transport of Goods by road Service?

(ii) Road Repairs already mentioned above.R2

(9) E- Payment of service tax/excise-Many time assesses is not able to take the

print out of GAR-7 after making the e-payment due technical problems and

when he login again for copy of GAR-7 the site ask 10 digit SIN No. that is

challan no., which is not with assesses.

- W hat assesses should do? W hether photocopy of bank statement showing

payment proof will be sufficient if assesses encloses this with return?

- One suggestion that assesses should able to see that how much payment of

excise/service tax he made, in the site of CBEC.

(10) NIL return of service tax -

I If the assesses file NIL return after the due date, whether he should pay late

fees?- As per board’s instruction wherein the bond through F.

no.137/58/2007-CX-4 dated 29.03.2007 has clarified that a person who is not

able to pay service tax because of exemption are also not require to file

service tax return.

II W hether it is compulsory to pay late fee for delay in filing the late return, at

the time of filing the return? Some time service tax returns are not accepted

by service tax dept.R3

The researcher has developed a model format of Service tax challan

(GAR-7) and is appened in Appendix I. This is special contribution of the

reasercher to the exisiting fund of knowledge.

231
References

R1. Letter dasted 10.12.2006 submitted to Commissioner, Central Excise, Customs and service tax,

Nashik for RAC meeting.

R2. Letter dated 12.02.09 submitted to Commissioner, Central Excise, Customs and service tax,

Nashik for RAC meeting.

R3. Letter dated 23.03.09 submitted to Commissioner, Central Excise, Customs and service tax,

Nashik for RAC meeting.

R4. Right to use of Tangible goods service

As per Section 65(105) (zzzzj) Taxable service means any service provided or to be provided, to

any person, by any other person in relation to supply of tangible goods including machinery,

equipment and appliances for use, w ithout transferring right of possession and effective

control of such machinery, equipment and appliances.

R5 SECTION 76. Penalty for failure to pay service tax. – Any person, liable to pay service tax in

accordance w ith the provisions of section 68 or the rules made under, who fails to pay such

tax, shall pay, in addition to paying such tax, an interest on that tax in accordance with the

provisions of section 75, a penalty which shall not be less than one hundred rupees for every

day during w hich such failure continues but which may extend to two hundred rupees for

every day which such failure continues, so, however that the penalty under this clause shall

not exceed the amount of service tax that he failed to pay.

R6 SECTION 80; Penalty not to be imposed in certain cases. – Notwithstanding anything

contained in the provisions of section 76, section 77 or section 78 , no penalty shall be

imposable on the assessee for any failure referred to in the said provisions if the assessee

proves that there was reasonable cause for the said failure.

232
R7 Cases represented by Researcher in CESTAT/ Tribunal

Sr Name of Assessee CESTAT Order No Reported Case Citation.

No

1 Jitendra Damodar Patel S/69 &70/C-IV/SMB/WZB/2007 2007 (7) STR 183 (TRI-M)

2 Girish S Satbhai A/1642 TO 1645/C-

IV/SMB/WZB/2006

3 Paresh C Mehta A/1642 TO 1645/C-

IV/SMB/WZB/2006

4 Jitendra W heels (N) Pvt Ltd A/382/C-IV/SMB/WZB/2010 2010 (20) STR 182 TRI-M

5 Soldiers Industrial Security S/67/C-IV/SMB/2007 2007 TIOL 286 CESTAT-M

Agency

6 Pravin Malpani S/448/C-III/SMB/WZB/2006

7 Prakash Chimote S/437/C-III/SMB/WZB/2006

8 Bhalchandra Chaware A/49/C-IV/SMB/WZB/2007

9 Om Marketing S/752/C-IV/SMB/WZB/2006 2006 TIOL 1264 CESTAT-M

10 Vijaylaxmi Kittur S/751/C-IV/SMB/WZB/2006 2006 TIOL 1264 CESTAT-M

11 Malyil James Anthony S/449/C-III/SMB/WZB/2006

12 Nitin Bhalerao A/837/C-IV/SMB/WZB/2007 2007 (7) STR 693 (TRI-M)

13 Hemant Dugad S/199/C-IV/SMB/WZB/2007/C-I 2007 TIOL 1834 CESTAT-M

14 Jeevanlal Ostwal S/753/C-IV/SMB/WZB/2006 2006 TIOL 1264 CESTAT-M

15 Ashish Patil S/171/IV/SMC/WZB/2006

16 Vijay Sabadara A/1535/C-IV/5148/WZB/2006 2006 TIOL 1381 CESTAT-M

17 Sital S Shah A/1536/C-IV/SMB/W ZB/2006 2007 (5) STR 101 TRI-M

18 Sandeep Sikchi 2006 TIOL 1298 CESTAT-M

19 Goverdhane D Sadashiv S/450/C-III/SMB/WZB/2006

6.7 Fate of Service tax after Goods and Service tax.

As proposed in the Goods and service tax the Service tax will be merged in this act.

Today only Central Government is leving the Service tax, after this new GST act, both

Central as well as State Government will levy Service tax. The Central GST, The State

233
GST and Integrated GST (For Inter State transaction). Thus the scope of taxes on

Service will increase. However due to CENVAT credit mechanism the cascading

effect of Service tax will reduce as today the trader, who is paying VAT only is not

eligible for CENVAT credit. Even only Service Tax assessee (Not paying vat) is not

eligible for VAT credit.

Thus, the tax on services has come to stay in our country and has bright

prospects in near future.

6.8 Scope for further research

The researcher has studied a few services out of 100 and odd services and that

too under restricted situations. Much of the work in this area can be done.

Prospective young researchers have a scope to proceed with the areas mentioned

below. The list of topics, however, is not exhausted but indicative of a few topics in

which further research can be carried out.

1) The study of behavior of Assessee to tax rate, classification etc.

2) The study of Administration of service tax

3) The litegation side – The study of Adjudication, the success of assessee

and/or department in adjudication

4) The consumer behavior to Service tax.

5) Cause and effect relationship between service tax and inflation.

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BI BLI OGRAPH Y

I BOOKS & ARTI CLES

A Study on proposed goods and Services Tax (GST) Frame work In India By

Rajkumar S Adukia. -http://taxclubindia.com/simple/rajkumar.pdf

Ravi Shankar K.S. & Guruaj B. N. ( Jan. 2006) Taxation of Services in India– Pre-legislative
Historical Perspective, Advocate, STR Vo l 1 Part 1st

Ravi Shankar K.S. & Guruaj B. N. Article in Service tax Review -Constitution of India and
Service tax

Singh, Mamohan (1994) Para 87 of budget speech 1994 delivered by Finance M inister.

W ebster’s New W orld Dictionary: College Dictionary (Fourth Edition 2006)New M illennium
P. 1310

GATT – (1994) Report on Final Uruguay Round – Publication of M VIRDC, W TC, Bombay

Article ( Dec 17, 2009) Tax on Services but what is Service? (Website)

Central Board of Central Excise, Customs and Service tax ( ) Frequently Asked Questions

Chidambaram, P. (1997-98) Para 146 & 147 of budget speech delivered by Finance M inister

Chidambaram, P. (1998-99) Para 169 of budget speech delivered by Finance M inister

Chidambaram, P. (1997-98) Para 156 of budget speech delivered by Finance M inister

Sinha, Yashwant (2000-01) Para 126 of budget speech delivered by Finance M inister

Sinha, Yashwant (2000-01) Para 126 of budget speech delivered by Finance M inister

Sinha, Yashwant (2003-04) Para 134 of budget speech delivered by Finance M inister

Chidambaram, P. (2004-05) Para 150 of budget speech delivered by Finance M inister

Chidambaram, P. (2005-06) Para 145 and 146 of budget speech delivered by Finance M inister

Chidambaram, P. (2006-07) Para 152 to 155 of budget speech delivered by Finance Minister

Chidambaram, P. (2007-08) Para 152 to 159 of budget speech delivered by Finance Minister

235
Chidambaram, P. (2008-09) Para 155 to 159 of budget speech delivered by Finance Minister

M ukherjee, P. (2009-10) Para 129 to 136 of budget speech delivered by Finance M inister

M ukherjee, P. (2010-11) Para 176 to 184 of budget speech delivered by Finance M inister

Ravi Shankar K. S. - Taxation of Services in India – ‘Pre-legislative Historical Perspective’ an

Article in Service tax Review

Datey, V. S. An answer to a querry by the researcher on E-mail

Ravi Shankar K.S. & Guruaj, B. N. Article in Service tax Review - “Services” - General
Discussion & Countries Taxing Services by Advocate

II W EBSITES

http://en.wikipedia.org/wiki/Service_(economics)
http://www.iloveindia.com/finance/encyclopedia/service-tax.html
http://www.asiatradehub.com/srilanka/tax1.asp#6
http://www.ird.govt.nz/gst/#page
http://en.wikipedia.org/wiki/Goods_and_Services_Tax_%28New_Zealand%29

http://www.westpac.co.nz/olcontent/olcontent.nsf/Content/Tax
http://app.ica.gov.sg/about_ica/heritage/history_customs_excise/index.asp
http://www.worldbank.org/depweb/english/beyond/global/chapter9.html
http://www.wto.org/english/res_e/statis_e/services_training_pres_e.pdf
http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Sta
tistics%20on%20Indian%20Economy
http://www.servicetax.gov.in
http://www.direct.gov.uk/MoneyTaxAndBenefits/Taxes/BeginnersGuideToTax/Begin
nersGuideToTaxArticles/fs/en?CONTENT_ID=4015895&chk=8gHIJf
http://en.wikipedia.org/wiki/Goods_and_Services_Tax_%28New_Zealand%29
http://en.wikipedia.org/wiki/Goods_and_Services_Tax_ (Canada)
http://europa.eu.int/comm/taxation_customs/taxation/vat/how_vat_works/index_en.h
tm
http://europa.eu/geninfo/query/resultaction.jsp?page=1
http://ec.europa.eu/taxation_customs/taxation/vat/index_en.htm
http://www.westpac.co.nz/olcontent/olcontent.nsf/Content/Tax
http://ec.europa.eu/taxation_customs/taxation/vat/traders/vat_community/index_en
.htm
http://ec.europa.eu/taxation_customs/vies/en/faqvies.htm

236
http://www.ird.govt.nz/gst/#page
http://app.ica.gov.sg/about_ica/heritage/history_customs_excise/index.asp
http/www.service tax .gov.in and http://www .global-rates.com/economic-
indicators/inflation/consumer-
prices/cpi/india.aspxhttp://www.indiaservicetax.com/service/reports/stfin/evol.htm
http://mof.gov.in/kelkar/chp3dt.pdf
http://people.bu.edu/dilipm/publications/DasguptaGhMookITPF.pdf

http://www.hinduonnet.com/fline/fl2317/stories /20060908002204800.htm
http://www.jang.com.pk/thenews/feb2007-weekly/busrev-05-02 2007/p2.htm
http://www.cainindia.org/news/11_2008/can_you_plan_for_indirect_tax.html
http://www.cainindia.org/news/11_2008/service_tax_implications_brand_licensing_v
s_contract_manufacturing.html
http://incometaxindia.gov.in/HISTORY/PRE-
1922.ASPhttp://centralexcisechennai.gov.in/
http://www .ciionline.org/news/newsMain.asp?news_id =1111200340536PM 11 Nov, 2003
http://www.cainindia.org/news/11_2008/indirect_tax_administration
best_international_practices.html, November, 17th
2008http://pbr.co.in/view.php?id=264
http://business.mapsofindia.com/india-tax/concepts/fraud.html
http://www .kaytek.co.in/function/tax/ktek-tax.htm
http://siteresources.worldbank.org/INTW BIGOVANTCOR/Resources/CorruptioninTa
xAdministration.pdf
http://unpan1.un.org/intradoc/groups/public/documents/un /unpan006398.pdf

237
Appendix I
M odel Format for Service tax Challan

FORM G.A.R.-7 for Central Excise Tax Payments (Rule 26 Receipt and Payments Rule) for Payment
from April 2007 onwards G.A.R.-7 Proforma for Service Tax Payments (Receipts & Payment Rules 26)

Name

Complete Address

Pin Code

Telephone

Assessee Code

Commissionerate
Name
Commissionerate Code Division Code Range Code

Particulars Accounting Code from 2 nd row Amount

Name of Service

Accounting Code 0f 0 0 4 4
Service

EducationCess 0 0 4 4 0 2 9 8

SHE cess 0 0 4 4 0 4 2 6

Interest 0 0 4 4

Penalty 0 0 4 4

Total

Period

Amount in words___________________________________________________________

Cash/Cheque/Pay order Dated Drawn on

Signature of the Tenderer RECEIVING BANK BRANCH STAMP

238
TAX PAYER'S COUNTERFOIL

Received From
Name

Assessee
Code No
Particulars Accounting Code from 2 nd row Amount

Name of Service

Accounting Code 0f 0 0 4 4
Service

EducationCess 0 0 4 4 0 2 9 8

SHE cess 0 0 4 4 0 4 2 6

Interest 0 0 4 4

Penalty 0 0 4 4

Total

Period

Rs. In W ords_______________________________________________________

Cash/Cheque/Pay order Dated Drawn on

RECEIVING BANK BRANCH STAMP

239
Appendix I I
Summary of Cost for Compliance to Small Assessee in 2003-04

Sr. Name of CA Place Consul Adm. Cost Miscellaneous Total

No tant of Client

Any Other
Conveya

Printing
Value
Time
Fees

nce
1 P. Mohana Rao Hyderabad 250 2 300 550
2 Rashmin S Vaja Ahmedabad 2000 5 1050 3050
3 A. Khandhar Ahmedabad 2000 2500 500 5000
4 Boppudi A. Rao Hyderabad 5000 0.5 5000
5 C S N Sharma Hyderabad 5000 5000
6 Rama Murthy J Hyderabad 1000 3 600 200 200 2000
7 Uttamchand Jain Chennai 2500 2 2000 500 5000
8 Sunil Kumar R Chennai 4000 16 3200 200 100 7500
9 HKA Raj Nahar Chennai 2000 4 1000 500 3500
10 H.Bandari Chennai 3000 4 1200 200 50 4450
11 Rajendra Jain Mumbai 3000 4 800 60 40 25 3925
12 N. Khandelwal Indore 4000 1800 500 100 6400
13 Krishan Garj Indore 2000 2 6000 6000 14000
14 Anand Desai Mumbai 3000 800 150 50 4000
15 Naresh K Sheth Mumbai 6000 500 250 6750
16 Rajkamal Shah Mumbai 4000 2 1000 150 250 5400
17 Shailesh P Sheth Mumbai 7500 1350 1000 1250 11100
18 T. K. Chheda Mumbai 4000 4 2000 100 50 6150
19 Rajeev J Luthia Mumbai 3000 4 400 50 50 3500
20 Ketan Mamania Mumbai 4000 4 2000 100 50 6150
Total 67250 28500 9960 1440 1275 108425

240
Appendix I I I

I nterview Schedule for Practicing CAs

Name:

M obile No:

Email ID:

Cost of service tax compliance for small Assessees (Turnover below-5 lakh) 2003-04/2004-05

Sr.No Particulars Amount (`)

1 Fees of Consultant (` per return*2)

2 Administrative Cost

Accountant value &/or Proprietor's cost

Time Spent: (Hr/day)

Value per: (Hr/day)

3 M iscellaneous Cost (in `)

a. Conveyance

b.Printing & Stationery

4 Any other

Total Cost for the year

Place

Date

241
Appendix-I V
List of Services and their date of introduction

1 Telephone 01.07.1994
{This service has been de-notified and grouped as
‘Telecommunication Services’ w.e.f.01.06.2007 vide Notfn.
.23/07 ST dated 22.05.07 and Sec.135 of Finance Act,2007 (22
of 2007)}

2 Stock broker 01.07.1994

3 General Insurance 01.07.1994

4 Advertising agencies 01.11.1996

5 Courier agencies 01.11.1996

6 Radio pager services. 01.07.1994

{This service has been de-notified and grouped as
‘Telecommunication Services w.e.f. 01.06.2007 [Notfn.
No.23/07 ST dated 22.05.07 and Sec.135 of Finance Act,2007
(22 of 2007)}

7 Consulting engineers (7th July, 1997)

8 Custom house agents (15th June, 1997)

9 Steamer agents (15th June, 1997)

10 Clearing & forwarding agents (16th July, 1997)

11 Air travel agents (1st July, 1997)

12 Tour operators 01.09.1997 (exempted upto 31.3.2000 Notification No.52/98, 8th

July, 1998, reintroduced w.e.f. 1.4.2000)

13 Rent-a-Cab Operators 16.07.1997 (exempted from 1.3.1999 upto 31.3.2000 Vide

Notification No.3/99 Dt.28.2.99, reintroduced w .e.f. 1.4.2000)

14 Manpower recruitment (7th July, 1997)

Agency

15 Mandap Keepers (1st July, 1997)

16 Architects 16.10.1998

17 Interior Decorators 16.10.1998

18 Management or Business 16.10.1998

Consultants

19 Practicing Chartered 16.10.1998

Accountants

242
20 Practicing Company 16.10.1998
Secretaries

21 Practicing Cost Accountants 16.10.1998

22 Real Estates 16.10.1998

Agents/Consultants

23 Credit Rating Agencies 16.10.1998

24 Security Agencies 16.10.1998

25 Market Research Agencies 16.10.1998

26 Underwriters Services 16.10.1998

27 Scientific and technical 16.07.2001

consultancy services

28 PhotoFigurey 16.07.2001

29 Convention 16.07.2001

30 TeleFigure 16.07.2001
{This service has been de-notified and grouped as
‘Telecommunication Services w.e.f. 01.06.2007 vide Notfn.
No.23/07 ST dated 22.05.07 and Sec. 135 of Finance Act,2007
(22 of 2007)}

31 Telex 16.07.2001
{This service has been de-notified & grouped as
‘Telecommunication Services w.e.f.01.06.2007 ][Notfn. No.23/07
ST dated 22.05.07 and Sec.135 of Finance Act,2007 (22 of 2007)}

32 Facsimile (fax) 16.07.2001

{This service has been denotified and grouped as
‘Telecommunication Services’ w.e.f.01.06.2007 vide Notfn.
No.23/07 ST dated 22.05.07 and Sec.135 of Finance Act,2007 (22
of 2007)}

33 Online information and 16.07.2001

database access or retrieval

34 Video Tape Production 16.07.2001

services

35 Sound recording 16.07.2001

36 Broadcasting 16.07.2001

37 Insurance auxiliary services 16.07.2001

in relation to General
Insurance

243
38 Banking and other financial 16.07.2001
services

39 Port Services (by Major Ports). 16.07.2001

40 Authorized Service Stations 16.07.2001

41 Leased circuits Services 16.07.2001{This service has been denotified and grouped as
‘Telecommunication Services’ w.e.f.01.06.2007 [Notfn. No.23/07
ST dated 22.05.07] and Sec.135 of Finance Act,2007 (22 of 2007)}

42 Life Insurance services 16.08.2002

43 Insurance auxiliary services in 16.08.2002

relation to Life Insurance

44 Cargo handling 16.08.2002

45 Storage and warehousing 16.08.2002

services

46 Event 16.08.2002
Management

47 Cable operators 16.08.2002

48 Beauty parlors 16.08.2002

49 Health and Fitness centers 16.08.2002

50 Fashion designer 16.08.2002

51 Rail travel 16.08.2002

agents.

52 Dry cleaning services. 16.08.2002

53 Commercial Training & 01.07.2003

Coaching centers

54 Technical testing 01.07.2003

and analysis

55 Technical inspection and 01.07.2003

certification service.

56 Management,Maintenance or 01.07.2003
Repair services

57 Erection, Commissioning and 01.07.2003

Installation Services

58 Business Auxiliary Services 01.07.2003

244
59 Internet café 01.07.2003

60 Franchise Services 01.07.2003

61 Foreign Exchange Broker 01.07.2003

62 Port Services (Other or Minor 01.07.2003{extension to port services}

Ports)

63 Out door Caterer’s service (re- 10.09.2004

introduced)

64 Pandal or Shamiana service 10.09.2004

(re-introduced)

65 Airport Services 10.09.2004

66 Transport of Goods by Air 10.09.2004

Services

67 Business Exhibition Services 10.09.2004

68 Construction Services in 10.09.2004

relation to commercial or
Industrial Building

69 Intellectual Property Services 10.09.2004

70 Opinion Poll Services 10.09.2004

71 TV or Radio Programme 10.09.2004

Production Services

72 Survey and Exploration of 10.09.2004

Minerals Services

73 Travel Agent’s Services other 10.09.2004

than Rail and Air travel
agents

74 Forward Contract Services 10.09.2004

75 Transport of goods by road 01.01.2005

(earlier Goods Transport
Operators service re-
introduced).

76 Transport of goods through 16.06.2005

pipe line or other conduit
Services

77 Site Formation & Clearance 16.06.2005

245
etc. Services

78 Dredging Services 16.06.2005

79 Survey & Mapmaking 16.06.2005

Services

80 Cleaning Services 16.06.2005

81 Membership of Clubs & 16.06.2005

Associations

82 Packaging Services 16.06.2005

83 Mailing list compilation & 16.06.2005

Mailing Services

84 Construction Services in 16.06.2005

relation to Residential
Complexes

85 Sale of space or time for 01.05.2006

advertisement

86 Auctioneers’ Services 01.05.2006

87 ATM Operation, maintenance 01.05.2006

or management Services

88 Business Support Services 01.05.2006

89 Credit Card, Debit Card, 01.05.2006

Charge Card or other
payment Card Services

90 Internet Telecommunication 01.05.2006

Services

91 Public Relations Services 01.05.2006

92 Services provided by Recovery 01.05.2006

Agent

93 Services provided by Registrar 01.05.2006

to an Issue

94 Services provided by Share 01.05.2006

Transfer Agent

95 Ship Management Services 01.05.2006

96 Sponsorship Services 01.05.2006

246
97 Transport by Cruise ship 01.05.2006
services

98 Transport of goods in container 01.05.2006

by rail services (‘Other than
Govt. Railway’ ) The words
‘other than SS Govt. Railways’
have been deleted
w.e.f.01.09.2009)

Transport of passengers by air 01.05.2006

on international journey
services

Asset Management Services 01.05.2006

Development & Supply of 01.06.2007

Content Services

Designing Services 01.06.2007

Mining of Mineral, Oil or Gas 01.06.2007

Renting of immovable 01.06.2007

property services

W orks Contract Services 01.06.2007

Telecommunication Services 01.06.2007

108 Services of Clearing & 01.06.2007

Processing House (This is not a new service but the existing services
viz.Telephone services, pager, facsimile, teleFigure, leased
circuit, telex were grouped under it)

109 Registered or Recognised 16.05.2008

Associations’ services in
relation to sale or purchase of
goods and forward contract

110 Information Technology 16.05.2008

Services

111 Investment Management 16.05.2008

Services under ULIP

112 Services of Recognised Stock 16.05.2008

Exchange

112 Supply of tangible goods 16.05.2008

services

247
114 Cosmetic or Plastic Surgery 16.05.2008
Services

115 Transport of Coastal goods, 01.09.2009

Goods through National
W aterways or Goods through
Inland W aterways

116 Legal Consultancy Services 01.09.2009

117 Promotion, marketing 01.09.2009

or organizing of games
of chance including lottery,
bingo etc. services

248
Appendix-V (4.1) 8
Country wise tax to GDP Ratio
Country Tax /GDP Ratio

Afghanistan 6.4

Albania 22.9

Algeria 7.7

Angola 5.7

Argentina 22.9

Armenia 14.1

Australia 30.5

Austria 43.4

Azerbaijan 17.8

Bahamas, The 18.7

Bahrain 2.4

Bangladesh 8.5

Barbados 32.6

Belarus 24.2

Belgium 46.8

Belize 21.6

Benin 15.4

Bhutan 10.7

Bolivia 27

Bosnia and Herzegovina 41.2

Botswana 35.2

Brazil 38.8

Bulgaria 34.4

Burkina Faso 11.5

Burma 4.9

249
Burundi 17.4

Cambodia 8

Cameroon 18.2

Canada 33.4

Cape Verde 23

Central African Republic 7.7

Chad 4.2

Chile 17.1

China, People's Republic of 17

China, Republic of (Taiwan) 12.4

Colombia 23

Comoros 12

Congo, Republic of 5.9

Costa Rica 14

Côte d'Ivoire 15.3

Croatia 26.6

Cuba 44.8

Cyprus 36.6

Czech Republic 36.3

Denmark 50

Djibouti 20

Dominica 30.3

Dominican Republic 15

Congo, Democratic Republic of 13.2

Ecuador 13.2

Egypt 15.8

El Salvador 13.3

Equatorial Guinea 1.7

Estonia 31.1

250
Ethiopia 11.6

Fiji 21.8

Finland 43.6

France 46.1

Gabon 10.3

Gambia 18.9

Georgia 21.7

Germany 40.6

Ghana 20.8

Greece 33.5

Guatemala 11.9

Guinea 8.2

Guinea-Bissau 11.5

Guyana 31.9

Haiti 9.4

Honduras 15.6

Hong Kong 12.8

Hungary 37.3

Iceland 40.4

India 17.7

Indonesia 11

Iran 7.3

Irel and 34

Israel 36.8

Italy 42.6

Jamaica 27.2

Japan 27.4

Jordan 21.1

Kazakhstan 26.8

251
Kenya 18.4

Kiribati[4] 69.7

Korea, South 26.8

Kuwait 1.5

Kyrgyzstan 21.4

Laos 10.8

Latvia 30.4

Lebanon 14.4

Lesotho 42.9

Liberia 13.2

Libya 2.7

Lithuania 20.9

Luxembourg 36.4

M acau 20.1

M acedonia 29.3

M adagascar 10.7

M alaw i 20.7

M alaysia 15.5

M aldives 20.5

M ali 15.3

M alta 35.2

M auritania 15.4

M auritius 18.1

M exico 9.7

Federated States of Micronesia 12.3

M oldova 33.8

M ongolia 33.8

M ontenegro 28

M orocco 22.3

252
M ozambique 13.4

Namibia 28.8

Nepal 10.9

Netherlands 39.5

New Zealand 36.5

Nicaragua 17.8

Niger 11

Nigeria 6.1

Norway 43.6

OECD (average)

Oman 2

Pakistan 10.6

Panama 10.6

Papua New Guinea 24.5

Paraguay 12

Peru 15.1

Philippines 14.4

Poland 33.8

Portugal 37

Qatar 2.2

Romania 28.1

Russia 36.9

Rwanda 14.1

Saint Lucia 23.1

Saint Vincent and the Grenadines 26.5

Samoa 25.5

Sao Tome and Principe 17.4

Saudi Arabia 5.3

Senegal 19.2

253
Serbia 34.1

Seychelles 32

Sierra Leone 10.5

Singapore 13

Slovakia 29.5

Slovenia 39.3

Solomon Islands 24.7

South Africa 26.9

Spain 37.3

Sri Lanka 15.3

Sudan 6.3

Suriname 22.1

Swaziland 39.8

Sweden 49.7

Switzerland 30.1

Syria 10.7

Tajikistan 16.5

Tanzania 12

Thailand 17

Timor-Leste] 109.7

Togo 15.5

Tonga 27

Trinidad and Tobago 28

Tunisia 14.9

Turkey 32.5

Turkmenistan 20.2

Uganda 12.6

Ukraine 38.1

United Arab Emirates 1.4

254
United Kingdom 39

United States (all levels) 28.2

Uruguay 23.1

Uzbekistan 21

Vanuatu 17.8

Venezuela 25

Vietnam 13.8

Yemen 7.1

Zambia 16.1

Zimbabwe 49.3

255
Appendix V I

Table 4.1.1

GDP and Collection of Direct and Indirect Taxes of Centre and State 9

Year GDP at Centre States Centre & States combined

M arket (gross)
Prices
Direct Indirect Total Direct Indirect Total Direct Indirect Total

Base Year 1999- 2000

1994-95 1015764 26966 65328 92294 6902 47090 53992 33868 112418 146286

per cent
to GDP 2.65 6.43 9.09 0.68 4.64 5.32 3.33 11.07 14.4

1995-96 1191813 33563 77661 111224 7913 53603 61516 41476 131264 172741

per cent
to GDP 2.82 6.52 9.33 0.66 4.5 5.16 3.48 11.01 14.49

1996-97 1378617 38891 89871 128762 8288 60255 68543 47179 150126 197305

per cent
to GDP 2.82 6.52 9.34 0.6 4.37 4.97 3.42 10.89 14.31

1997-98 1527158 48274 90946 139220 6352 68800 75152 54626 159746 214371

per cent
to GDP 3.16 5.96 9.12 0.42 4.51 4.92 3.58 10.46 14.04

1998-99 1751199 46600 97197 143797 10653 75530 86183 57253 172727 229980

per cent
to GDP 2.66 5.55 8.21 0.61 4.31 4.92 3.27 9.86 13.13

1999-00 1952036 57959 113794 171753 12979 86813 99792 70937 200607 271544

per cent
to GDP 2.97 5.83 8.8 0.66 4.45 5.11 3.63 10.28 13.91

2000-01 2102314 68306 120297 188603 12449 99921 112370 80755 220218 300973

per cent
to GDP 3.25 5.72 8.97 0.59 4.75 5.35 3.84 10.48 14.32

2001-02 2278952 69197 117863 187060 13309 108578 121887 82506 226441 308947

per cent
to GDP 3.04 5.17 8.21 0.58 4.76 5.35 3.62 9.94 13.56

256
2002-03 2454561 83085 133181 216266 17714 118920 136634 100799 252101 352900

per cent
to GDP 3.38 5.43 8.81 0.72 4.84 5.57 4.11 10.27 14.38

2003-04 2754620 105090 149258 254348 20096 133654 153750 125186 282912 408097

per cent
to GDP 3.82 5.42 9.23 0.73 4.85 5.58 4.54 10.27 14.82

2004-05 3149407 132771 172187 304958 23375 157042 180417 156146 329229 485375

per cent
to GDP 4.22 5.47 9.68 0.74 4.99 5.73 4.96 10.45 15.41

Base Year 2004- 2005

2004-05 3239224 132771 172187 304958 23375 157042 180417 156146 329229 485375

per cent
to GDP 4.1 5.32 9.41 0.72 4.85 5.57 4.82 10.16 14.98

2005-06 3706473 165201 200949 366150 30211 180235 210446 195412 381184 576596

per cent
to GDP 4.46 5.42 9.88 0.82 4.86 5.68 5.27 10.28 15.56

2006-07 4283979 230192 243320 473512 37579 212932 250511 267771 456252 724023

per cent
to GDP 5.37 5.68 11.05 0.88 4.97 5.85 6.25 10.65 16.9

2007-08 4947857 312198 280949 593147 43409 240940 284349 355607 521889 877496

per cent
to GDP 6.31 5.68 11.99 0.88 4.87 5.75 7.19 10.55 17.73

2008-09 5574448 345000 282949 627949 48125 293774 341899 393125 576723 969848

per cent
to GDP 6.19 5.08 11.26 0.86 5.27 6.13 7.05 10.35 17.4

2009-10 6231172 370000 271079 641079 53683 331698 385381 423683 602777 1026460

per cent
to GDP 5.94 4.35 10.29 0.86 5.32 6.18 6.8 9.67 16.47

Ref9:http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbookpercent20ofper
cent20Statisticsper cent20onper cent20Indianper cent20Economy

257
Appendix V I I

Table 4.1.2 27

ZONE W ISE SERV ICE TAX COLLECTION for F.Y. 2008-09 & 2009-10

(Revenue in Crore)

Sr. Name of Zone Zone No. of Rev. No. of per per per

per cent to total

No w ise Assesse 2009-10 Assesse cent to cent to cent to

assesse 2009-10
. Rev. es es Total Total Total
2008- Revenu Revenu Revenu
09 e 2009- e 2008- e 2008-
10 09 09

1 Ahmedabad 2017.5 62636 1975.44 64419 3.4 4.93 3.31 5.2

8

2 Bangalore 3455.5 71836 3175 77489 5.46 5.93 5.67 5.96

6

3 Bhopal 1148.9 49396 1046.25 53346 1.8 4.08 1.88 4.1

1

4 Bhubaneshwar 817.23 16805 784.5 18986 1.35 1.45 1.34 1.4

5 Chandigarh 948.23 43540 680.96 45464 1.17 3.48 1.56 3.61

6 Chennai 3620.4 69191 3335.02 70475 5.74 5.39 5.94 5.74

8

7 Kerala 1009.7 23386 907.12 24158 1.56 1.85 1.66 1.94

8

8 Coimbatore 932.91 61743 765.95 64286 1.32 4.92 1.53 5.13

9 Delhi 10178. 144699 9895.07 156811 17.02 12 16.7 12.01

93

10 Shillong 279.92 12399 299.39 13303 0.52 1.02 0.46 1.03

11 Hyderabad 2190.7 40947 2039.34 45578 3.51 3.49 3.59 3.4

2

12 Jaipur 914.59 53303 817.14 56370 1.41 4.31 1.5 4.43

13 Kolkata 2744.6 51966 2712.79 64996 4.67 4.97 4.5 4.31

1

258
14 Lucknow 769.49 46490 704.9 54438 1.21 4.16 1.26 3.86

15 Mysore 661.51 24059 604.49 23636 1.04 1.81 1.09 2

16 Meerut 1145.7 36439 1082.45 45890 1.86 3.51 1.88 3.03

4

17 Mumbai-I 20205. 178328 18440.8 188843 31.72 14.4 33.15 14.8

1 4 5

18 Mumbai-II 350.13 3810 315.8 4375 0.54 0.33 0.57 0.32

19 Nagpur 761.88 48511 725.04 52340 1.25 4 1.25 4.03

20 Pune 2393.2 73920 2184.01 83075 3.76 6.35 3.93 6.14

4

21 Ranchi 636.26 24392 655.99 27303 1.13 2.09 1.04 2.02

22 Vadodara 980.57 38576 963.11 39810 1.66 3.05 1.61 3.2

23 Vishakhapatna 859.48 27654 814.03 31379 1.4 2.4 1.41 2.3

m

24 LTU 1935.5 544 3202.84 516 5.51 0.04 3.18 0.05

8

Grand Total 60958. 1204570 58127.4 1307286 100

44 7

259
Appendix V I I I

Table 4.1.3

Commissionarate wise Service tax collection for 2008-09 & 2009-10

- http://www .servicetax.gov.in

Sr.No. Commissionerate GAR7 No. of GAR7 No. of

Revenue Assessees Revenue Assessees
2008-09 2009-10

(Rs. In (Rs. In Crore)

Crore)

1 Ahmedabad Service Tax 999.31 25959 919.37 26222

2 Ahmedabad-III 204.01 7614 198.12 8225

3 Rajkot 703.3 18982 762.15 19544

4 Bhavnagar 110.96 10081 95.8 10428

5 Bangalore -Service Tax 3455.56 71836 3175 77489

6 Bhopal 354.91 16438 352.41 15748

7 Indore 459.78 20770 330.99 24086

8 Raipur 334.22 12188 362.85 13512

9 Bhubaneshwar-I 452.16 12049 458.42 14870

10 Bhubaneshwar-II 365.07 4756 326.08 4116

11 Chandigarh 635.85 18066 408.91 16931

12 Jalandhar 122.32 8764 98.79 9140

13 Ludhiana 190.06 16710 173.26 19393

14 Chennai-Service Tax 3367.86 56082 3071.9 57008

260
15 Chennai-III 126.14 7956 115.61 8537

16 Pondicherry 126.48 5153 147.51 4930

17 Cochin (Keral) 507.26 9739 456.07 10220

18 Calicut 208.82 7058 203.69 7312

19 Thiruvananthapuram 293.7 6589 247.36 6626

20 Coimbatore 317.72 22163 249.32 22163

21 Madurai 115.6 9737 92.26 10211

22 Salem 115.37 10904 118.93 11631

23 Thirunelveli 136.59 10000 126.44 10574

24 Thiruchirapali 247.63 8939 179 9707

25 Delhi-Service Tax 9906.05 129137 9662.15 142645

26 Rohtak 160.49 7834 120.07 8843

27 Punchkula 112.39 7728 112.85 5323

28 Shillong 165.38 2987 98.69 3277

29 Dibrugarh 62.14 2724 71.62 2731

30 Guwahati 52.4 6688 129.08 7295

31 Hyderabad-I 68.7 3610 56.83 3919

32 Hyderabad-II 1646.47 23821 1527.46 26043

33 Hyderabad-III 205.87 8242 185.16 9311

34 Hyderabad-IV 269.68 5274 269.89 6305

261
35 Jaipur-I 647.61 35451 596.83 37644

36 Jaipur-Ii 266.98 17852 220.31 18726

37 Kolkata-Service Tax 2437.24 38952 2421.43 51899

38 Bolpur 145.64 5841 153.36 6161

39 Haldia 124.47 2823 97.29 2782

40 Siliguri 37.26 4350 40.71 4154

41 Lucknow 419.91 13193 327.6 18841

42 Allahabad 104.59 11437 128.6 12381

43 Kanpur 244.99 21860 248.7 23216

44 Mangalore 256.16 5695 238.49 5843

45 Belgaum 320.42 12417 283.71 11865

46 Mysore 84.93 5947 82.29 5928

47 Meerut-I 230.67 14385 270.29 16938

48 Meerut-II 131.01 9205 102.41 10396

49 Noida 652.81 5897 574.54 11745

50 Ghaziabad 131.25 6952 135.21 6811

51 Mumbai-Service Tax 20205.11 178328 18440.84 188843

52 Raigad 350.13 3810 315.8 4375

53 Nagpur 321.75 18763 359.81 20624

54 Nasik 210.09 14971 166.65 15866

55 Aurangabad 230.04 14777 198.58 15850

56 Pune-I 347.34 11549 364.82 15701

57 Pune-II ( Kolhapur ) 180.42 11742 160.36 12047

58 Pune-III 1648.7 41979 1450.69 45761

262
59 Goa 216.78 8650 208.14 9566

60 Ranchi 201.36 8064 286.38 9128

61 Jamshedpur 232.6 6008 198.93 6526

62 Patna 202.3 10320 170.68 11649

63 Vadodara-I 260.58 8344 246.95 8672

64 Vadodara-II 255.14 10476 183.71 10422

65 Surat-I 298.59 9102 329.74 9303

66 Surat-II 46.44 2721 58.5 3033

67 Daman 74.46 5447 99.35 5794

68 Vapi 45.36 2486 44.86 2586

69 Guntur 226.52 10947 262.84 13886

70 Vishakhapatnam -I 292.99 5144 318.42 5548

71 Vishakhapatnam-II 250.93 5040 163.56 5081

72 ThirupatI 89.04 6523 69.21 6864

73 LTU Banglore 770.2 147 896 161

74 LTU Chennai 771.07 258 804.24 298

75 LTU Delhi 115.12 14 843.94 20

76 LTU Kolkata 0 0 0 0

77 LTU Mumbai 279.19 125 658.66 37

Grand Total 60958.4 1204570 58127.5 1307286

263
Appendix I X
Table 4.1.4

Commissionarate wise Revenue per assessee for 2008-09 and 2009-1032

Sr.No. Commissionerate GAR7 No. of Revenue GAR7 No. of Revenue

Revenue Assessees /Assessee- Revenue Assessees /Assessee-
2008-09 2008-09 Rs. 2009-10 2009-10 Rs.
Lac Lakh
(Rs. In (Rs. In
Crore) Crore)

1 Ahmedabad Service 999.31 25959 3.85 919.37 26222 3.51

Tax

2 Ahmedabad-Iii 204.01 7614 2.68 198.12 8225 2.41

3 Rajkot 703.3 18982 3.71 762.15 19544 3.9

4 Bhavnagar 110.96 10081 1.1 95.8 10428 0.92

5 Bangalore-Service 3455.56 71836 4.81 3175 77489 4.1

Tax

6 Bhopal 354.91 16438 2.16 352.41 15748 2.24

7 Indore 459.78 20770 2.21 330.99 24086 1.37

8 Raipur 334.22 12188 2.74 362.85 13512 2.69

9 Bhubaneshwar-I 452.16 12049 3.75 458.42 14870 3.08

10 Bhubaneshwar-Ii 365.07 4756 7.68 326.08 4116 7.92

11 Chandigarh 635.85 18066 3.52 408.91 16931 2.42

12 Jalandhar 122.32 8764 1.4 98.79 9140 1.08

13 Ludhiana 190.06 16710 1.14 173.26 19393 0.89

14 Chennai-Service Tax 3367.86 56082 6.01 3071.9 57008 5.39

15 Chennai-Iii 126.14 7956 1.59 115.61 8537 1.35

264
16 Pondicherry 126.48 5153 2.45 147.51 4930 2.99

17 Cochin (Keral) 507.26 9739 5.21 456.07 10220 4.46

18 Calicut 208.82 7058 2.96 203.69 7312 2.79

19 Thiruvananthapuram 293.7 6589 4.46 247.36 6626 3.73

20 Coimbatore 317.72 22163 1.43 249.32 22163 1.12

21 Madurai 115.6 9737 1.19 92.26 10211 0.9

22 Salem 115.37 10904 1.06 118.93 11631 1.02

23 Thirunelveli 136.59 10000 1.37 126.44 10574 1.2

24 Thiruchirapali 247.63 8939 2.77 179 9707 1.84

25 Delhi-Service Tax 9906.05 129137 7.67 9662.15 142645 6.77

26 Rohtak 160.49 7834 2.05 120.07 8843 1.36

27 Punchkula 112.39 7728 1.45 112.85 5323 2.12

28 Shillong 165.38 2987 5.54 98.69 3277 3.01

29 Dibrugarh 62.14 2724 2.28 71.62 2731 2.62

30 Guwahati 52.4 6688 0.78 129.08 7295 1.77

31 Hyderabad-I 68.7 3610 1.9 56.83 3919 1.45

32 Hyderabad-Ii 1646.47 23821 6.91 1527.46 26043 5.87

33 Hyderabad-Iii 205.87 8242 2.5 185.16 9311 1.99

34 Hyderabad-Iv 269.68 5274 5.11 269.89 6305 4.28

35 Jaipur-I 647.61 35451 1.83 596.83 37644 1.59

36 Jaipur-II 266.98 17852 1.5 220.31 18726 1.18

37 Kolkata-Service Tax 2437.24 38952 6.26 2421.43 51899 4.67

38 Bolpur 145.64 5841 2.49 153.36 6161 2.49

265
39 Haldia 124.47 2823 4.41 97.29 2782 3.5

40 Siliguri 37.26 4350 0.86 40.71 4154 0.98

41 Lucknow 419.91 13193 3.18 327.6 18841 1.74

42 Allahabad 104.59 11437 0.91 128.6 12381 1.04

43 Kanpur 244.99 21860 1.12 248.7 23216 1.07

44 Mangalore 256.16 5695 4.5 238.49 5843 4.08

45 Belgaum 320.42 12417 2.58 283.71 11865 2.39

46 Mysore 84.93 5947 1.43 82.29 5928 1.39

47 Meerut-I 230.67 14385 1.6 270.29 16938 1.6

48 Meerut-II 131.01 9205 1.42 102.41 10396 0.99

49 Noida 652.81 5897 11.07 574.54 11745 4.89

50 Ghaziabad 131.25 6952 1.89 135.21 6811 1.99

51 Mumbai-Service Tax 20205.11 178328 11.33 18440.84 188843 9.77

52 Raigad 350.13 3810 9.19 315.8 4375 7.22

53 Nagpur 321.75 18763 1.71 359.81 20624 1.74

54 Nasik 210.09 14971 1.4 166.65 15866 1.05

55 Aurangabad 230.04 14777 1.56 198.58 15850 1.25

56 Pune-I 347.34 11549 3.01 364.82 15701 2.32

57 Pune-II ( Kolhapur ) 180.42 11742 1.54 160.36 12047 1.33

58 Pune-III 1648.7 41979 3.93 1450.69 45761 3.17

59 Goa 216.78 8650 2.51 208.14 9566 2.18

60 Ranchi 201.36 8064 2.5 286.38 9128 3.14

61 Jamshedpur 232.6 6008 3.87 198.93 6526 3.05

266
62 Patna 202.3 10320 1.96 170.68 11649 1.47

63 Vadodara-I 260.58 8344 3.12 246.95 8672 2.85

64 Vadodara-II 255.14 10476 2.44 183.71 10422 1.76

65 Surat-I 298.59 9102 3.28 329.74 9303 3.54

66 Surat-II 46.44 2721 1.71 58.5 3033 1.93

67 Daman 74.46 5447 1.37 99.35 5794 1.71

68 Vapi 45.36 2486 1.82 44.86 2586 1.73

69 Guntur 226.52 10947 2.07 262.84 13886 1.89

70 Vishakhapatnam -I 292.99 5144 5.7 318.42 5548 5.74

71 Vishakhapatnam-II 250.93 5040 4.98 163.56 5081 3.22

72 Thirupati 89.04 6523 1.37 69.21 6864 1.01

73 LTU Banglore 770.2 147 523.95 896 161 556.52

74 LTU Chennai 771.07 258 298.86 804.24 298 269.88

75 LTU Delhi 115.12 14 822.29 843.94 20 4219.7

76 LTU Kolkata 0 0 0 0

77 LTU Mumbai 279.19 125 223.35 658.66 37 1780.16

Grand Total 60958.44 1204570 5.06 58127.47 1307286 4.45

Ref 32: http://www.servicetax.gov.in

267
Appendix X

Comparison of W TO classification of services and Classification of services in Service

tax

As per WTO as per finance act ,1994 section as per fin.

(service tax) act, 1994

sector and sub sector correspondin

g cpc

1. business services section b

a. professional services

a. legal services service by advocate 65(105) (zzzzm)

b. accounting, auditing and 862 if provided by ca 65(105) (s)

chartered accountant or
bookeeping services
business support service

c. taxation services 863 if provided by ca 65(105) (s)

chartered accountant

d. architectural services 8671 Architect 65(105) (p)

e. engineering services 8672 consulting engineer 65(105) (g)

f. integrated engineering services 8673

g. urban planning and landscape 8674 Architect 65(105) (p)

architectural services

h. medical and dental services 9312 cosmetic or plastic 65 (105) (zzzzk)

surgery services

i. veterinary services 932 till the date not

applicable

j. services provided by midwives, till the date not 268

applicable
nurses,
physiotherapists and para- 93191 till the date not
applicable
medical personnel

k. other till the date not

applicable

b. computer and related services

a. consultancy services related to the 841 information technology 65(105) (zzzze)

installation of computer service

hardware

b. software implementation 842 information technology 65(105) (zzzze)

service
services

c. data processing services 843 information technology 65(105) (zzzze)

service

d. data base services 844 information technology 65(105) (zzzze)

service

e. other 845+849 information technology 65(105) (zzzze)

service

c research and development service

a. r&d services on natural sciences 851 n.a

b. r&d services on social sciences 852 n.a

and humanities

c. interdisciplinary r&d services 853 n.a

D real estate services

a. involving own or leased 821 renting of immovable 65(105) (zzzz)

property
property

b. on a fee or contract basis 822

e.rental/leasing services without op supply of tangible goods 65(105) (zzzzj)

(where vat is not
erators
applicable)

269
a. relating to ships 83103

b. relating to aircraft 83104

c. relating to other transport 83101+83102

+
equipment

d. relating to other machinery and 83106-83109 supply of tangible goods 65(105) (zzzzj)
(where vat is not
equipment
applicable)

e. other 832

f. other business services

a. advertising services 871 advertising service 65(3) 105(e)

b. market research and public 864 market research 65(69) 105(y)

opinion

polling services

c. management consulting service 865 management consulting 65(65) 65 (105) (r

service )

d. services related to man. 866

consulting

e. technical testing and analysis 8676 technical testing and 65(106)

analysis service
service. 65(105) (zzh)

f. services incidental to 881 na

agriculture, hunting and

forestry

g. services incidental to fishing 882 na

h. services incidental to mining 883+5115 mining service 105(zzzy)

i. services incidental to 884+885 business auxiliary service 65(105) (zzzy),

65(19), 65(105)
manufacturing (except for
(zzb)
88442)

270
j. services incidental to energy 887 n.a

distribution

k. placement and supply services 872 manpower recruitment 65(68), 65(105)

or supply service (k)
of personnel

l. investigation and security 873 security service 65(94), 65(105)

(w)

m. related scientific and technical 8675 consulting engineer 65(105) (g)

consulting services service

n. maintenance and repair of 633+ Management, 65(50), 65(105)

maintenance or repair (zzg)
equipment (not including
service

maritime vessels, aircraft

or other transport 8861-8866

equipment)

o. building-cleaning services 874 cleaning service 65(24b),65(105)

(zzzd)

p. photoFigureic services 875 photoFigurey service 65(39),

65(105) (zb)

q. packaging services 876 packaging service 65(76b)65(105)

(zzzf)

r. printing, publishing 88442 n.a

s. convention services 87909* convention service 65(32), 65(105)

(zc)

t. other 8790 n.a

2. communication services

a. postal services 7511 na

b. courier services 7512 courier service 65(105)(f)

271
c. telecommunication services Telecommunication 65(105) (zzzx)
service

a. voice telephone services 7521 Telecommunication 65(105) (zzzx)

service

b. packet-switched data 7523**

transmission services

c. circuit-switched data 7523**

transmission services

d. telex services 7523** Telecommunication 65(105) (zzzx)

service

e. teleFigure services 7522 Telecommunication 65(105) (zzzx)

service

f. facsimile services 7521**+7529** Telecommunication 65(105) (zzzx)

service

g. private leased circuit services 7522**+7523** Telecommunication

service

h. electronic mail 7523** Tele 65(105) (zzzx)

i. voice mail 7523** Telecommunication 65(105) (zzzx)

service

j. on-line information and data 7523** n.a

base retrieval

k. electronic data interchange 7523** n.a

(edi)

l. enhanced/value-added 7523** n.a

facsimile services, incl.

store and forward, store

retrieve

m. code and protocol n.a. n.a

272
conversion

n. on-line information n.a

and/or data

processing (incl.transaction 843** n.a

processing)

o. other n.a

d. audiovisual services

a. motion picture and video 9611 video tape production 65(105) (zi),
(119), (120)
tape production and

distribution services

b. motion picture projection 9612 n.a

service

c. radio and television services 9613 radio service , 65(105) (zk)

television service

d. radio and television 7524 tv or radio programme 65(105)

(zzu),(86a),(86b)
transmission services

e. sound recording n.a.

f. other

e. other

3. Construction and related engi

neering services

a.general construction work for 512 complex service comm. 65(105)(zzzh)

buildings or industrial construction
service

b.general construction work for civil engi 513 works contract service 65(105) (zzzza)
neering

c. installation and assembly work 514+516 works contract service 65(105) (zzzza)

273
d.building completion and finishin g 517 n.a
work

e. other 511+515+518 n.a

4. distribution services c&f service 65(105)

(j)

a. commission agents' services 621 Business Auxiliary 65 (105) (zzb)

Service

b. wholesale trade services 622 na

c. retailing services 631+632 na

6111+6113+6
121

d. franchising 8929 franchising service 65(105) (zze)

e. other

5. educational services commercial coaching or 65(105) (zzc)

training service

a. primary education services 921 n.a

b. secondary education services 922 n.a

c. higher education services 923 n.a

d. adult education 923 n.a

e. other education services 929 n.a

6. environmental services

a. sewage services 9401 n.a

b. refuse disposal services 9402 n.a

c. sanitation and similar services 9403 n.a

d. other n.a

7. financial services

274
a. all insurance and insurance- 812**
related services

a. life, accident and health 8121 life insurance service 65(105) (zx)

insurance services

b. non-life insurance services 8129 general insurance 65(49)

c. reinsurance and retrocession 81299*

d. services auxiliary to insurance 8140 insurance auxiliary 65(105) (zl),

service 65(105) (zy)
(including broking and

agency services)

b. banking and other financial banking and financial 65(105) (zm),

service (zzk)
services (excl. insurance)

a. acceptance of deposits and other 81115-81119 na

repayable funds from the public
b. lending of all types, incl., inter alia, 8113 banking and financial 65(105) (zm),
consumer service (zzk)
credit, mortgage credit, factoring
and financing of

c. financial leasing 8112 banking and financial 65(105) (zm),

service (zzk)

d. all payment and money 81339**

transmission services

e. guarantees and commitments 81199**

v) trading for own account or for

account of customers, whether on an
exchange, in an over-the-counter
market or otherwise, the following:
- money market instruments 81339**
(cheques, bills, certificate of
deposits, etc.)
81333

- derivative products incl., but 81339**

not limited to, futures and
options

275
- exchange rate and interest 81339**
rate instruments, inclu.
products such as swaps,
forward rate agreements, etc.
81321*

other negotiable instruments and 81339**

financial

assets, incl. bullion

g. participation in issues of all 8132 underwriting 65(105) (z)

kinds of securities, incl. under-

writing and placement

as agent (whether publicly or

privately) and

provision of service related to

such issues

h. money broking 81339**

i. asset management, such as cash or 8119+** asset management and 65 (105) (zzzzc)
portfolio fund management
management, all forms of collective 81323*
services
investment management, pension
fund management, custodial
depository and trust services

j. settlement and clearing services 81339**

for financial
assets, incl. securities, derivative 81319*
products, or and other negotiable
instruments

k. advisory and other auxiliary 8131

financial services on all the 8133

activities listed in or article 1b of
mtn.tnc/w/50, incl. credit reference and
analysis, investment and portfolio
research and advice, advice on
acquisitions and on corporate

276
restructuring and strategy

l. provision and transfer of 8131 n.a

f inancial information,

and financial data processing

and related software by

providers of other financial

services

c. other

8. health related and social

Services (other than those

listed under 1.a.h-j.)

a . hospital services 9311 hospital service 65(105) (zzzzo)

b. other human health services 9319 health club and fitness 65(105) (zw),
service (51), (52)
(other than
93191)

c. social services 933 n.a

d. other

9. tourism and travel related

services

a. hotels and restaurants (incl. catering) 641-643 outdoor catering 65(105) (zzt)

b.travel agencies and tour operators 7471 tour operator 65(105) (n)
services

c. tourist guides services 7472 tour operator 65(105) (n)

d. other

10. recreational, cultural and

sporting services

277
(other than audiovisual services)

a. entertainment services na

(including theatre, live

Bands and circus services)

b. news agency services 962 na

c. libraries, archives, museums 963 na

and other cultural services

d. sporting and other 964 na

recreational services

e. other

11. transport services

a. maritime transport

services

a. passenger transportation 7211

b. freight transportation 7212

c. rental of vessels with crew 7213

d. maintenance and repair of 8868**

vessels

e. pushing and towing services 7214

f. supporting services for 745**

maritime transport

b. internal waterways

transport

a. passenger transportation 7221 n.a

b. freight transportation 7222 transport of goods 65(105) (zzzzl)

278
through waterways

c. rental of vessels with crew 7223 n.a

d. maintenance and repair of 8868** n.a

vessels

e. pushing and towing services 7224 n.a

f. supporting services for internal 745** transport of goods 65(105) (zzzzl)

through waterways
waterway transport

c. air transport services

a. passenger transportation 731 air travel services 65(105) (zzzo)

b. freight transportation 732

c. rental of aircraft with crew 734 n.a

d. maintenance and repair of 8868** n.a

aircraft

e. supporting services for air 746 n.a

transport

d. space transport 733

e. rail transport services

a. passenger transportation 7111 transport of goods by rail 65(105) (zzzp)

service

b. freight transportation 7112

c. pushing and towing services 7113 n.a

d. maintenance and repair of rail 8868** n.a

transport equipment

e. supporting services for rail 743 n.a

transport services

279
f. road transport services

a. passenger transportation 7121+7122

b. freight transportation 7123 transport of goods by 65(105) (zzp)

road

c. rental of commercial vehicles with 7124 n.a

operator

d. maintenance and repair of road 6112+8867 n.a

transport equipment

e. supporting services for road 744 n.a

transport services

g. pipeline transport transport by pipeline 65(105) (zzza)

conduits

a. transportation of fuels 7131 n.a

b. transportation of other goods 7139 n.a

h.services auxiliary to all modes of transpo

rt

a. cargo-handling services 741 cargo handling service 65(105) (zr)

b. storage and warehouse 742 storage and warehousing 65(105) (zza)

service
services

c. freight transport agency 748

services

d. other 749

i. other transport services

12.other services not included elsewhere 95+97+98+99 bas/ bss 65 (105) (zzb), 65
(105) (zzzq)

280
Appendix XI

Annexure - Chapter No. 5

A5.1 Circular No. ST-51/13/2002 [F.No.178/1/2002-CX.4], dated 7-1-2003

Service Tax — Classification of Services when falling under more than one head —
Clarifications
Circular No. 51/13/2002, dated 7-1-2003
F. No. 178/1/2002-CX.4
Government of India
Ministry of Finance (Department of Revenue)
Central Board of Excise & Customs, New Delhi
Subject: Classification of Services.
I am directed to say that doubts have been raised regarding classification of certain services which
appear to fall under two or more categories simultaneously. Some instances where such problems have
arisen relate to Management Consultants v. Manpower Recruitment Services, Mandap Keepers v.
Convention Services, Rent-A-Cab Scheme v. Tour Operators, Cargo Handling Services v. Storage and
W arehousing Services, Architect v. Interior Decorator, Scientific and Technical Consulting Services v.
Consulting Engineer, Practicing Chartered Accountants v. Management Consultants, etc.
2. The matter has been examined in the Board. It is hereby clarified that any service (transaction)
can be taxed only once, even if it appears to fall under two or more categories. Therefore, before
levying service tax it is essential to determine under which category a particular service falls. It should
be kept in mind that service tax is a tax on the service provided and is recovered from the service
provider (in some cases even from the service recipient). The position is akin to Central Excise duty
which is charged on manufactured goods. Just as Central Excise duty cannot be charged twice on the
same goods under two separate chapters/headings/sub-headings of the Central Excise Tariff, so also
Service tax cannot be charged twice on the same service (transactions). However, one service provider
may provide more than one taxable service. In such cases, the service provider need only take one
registration, but it shall be endorsed for all the taxable services and tax liability will have to be
discharged for each of the taxable services separately.
3. However, in the absence of any interpretative rules, it may become difficult at times to decide the
classification of a particular service. The guiding principle should be that a service should be
categorised under that category which is more specific. As for example, a hotel may rent out a
conference room for an official conference where lunch is also served. A dispute could arise in this case
as to whether this particular service would fall under the category of ‘mandap keeper’ and exempt from
tax vide Notification No. 12/2001-Service Tax dated 20-12-2001, or it w ill fall under the category of
‘convention services’ and charged to service tax. Between the two competing categories, in this case,
the more specific one would be that of a ‘convention service’ since a ‘mandap keeper’ includes official,
social as well as business functions whereas a ‘convention service’ covers conventions only which is
like an official function. Hence in this case the service would not be exempt from service tax.
4. Similarly, in each case w here such problems arise the proper Central Excise officer has to decide on
merits as to which is the more specific category and charge tax accordingly.
5. Pending issues may be disposed of on the basis of the above guidelines. Past cases need not be re-

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opened.
6. The field formations may suitably be informed.
7. Trade Notice may be issued for the information of the trade.
8. The receipt of this Circular may kindly be acknowledged.
9. Hindi version will follow.

A 5.2 Section 65A, Classification of taxable services. – (1) for the purposes of this Chapter,
classification of taxable services shall be determined according to the terms of the sub-clauses (105) of
section 65;

(2) W hen for any reason, a taxable service is prima facie, classifiable under two or more sub-clauses of
clause (105) of section 65, classification shall be effected as follows :-

(a) the sub-clause which provides the most specific description shall be preferred to sub-clauses
providing a more general description;

(b) composite services consisting of a combination of different services which cannot be classified in
the manner specified in clause (a), shall be classified as if they consisted of a service which gives them
their essential character, in so far as this criterion is applicable;

(c) w hen a service cannot be classified in the manner specified in clause (a) or clause (b), it shall be
classified under the sub-clause which occurs first among the sub-clauses which equally merits
consideration;]

A5.3 Section 66, Charge of service tax. –

66. There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent
of the value of taxable services referred to in sub-clauses (a), (d), (e), (f), (g), (h), (i), (j), (k), (l ). (m), (n),
(o), (p), (q), (r). (s), (t), (u), (v), (w ), (.v), (y), (z), (za), (zb), (zc), (zh), (zi), (zj), (zk), (zl), (zm), (zn), (zo),
(zq), (zr), (zest), (zt), (zu), (zv), (zw), (zx), (zy), (zz), (zza), (zzb), (zzc), (zzd), (zze), (zzf) (zzg), (zzh),
(zzi), (zzk), (zzl ), (zzm), (zzn), (zzo), (zzp), (zzq), (zzr), (zzs), (zzt) (zzu), (zzv), (zzw ), (zzx), (zzy), (zzz),
(zzza), (zzzb), (zzzc), (zzzd), (zzze), {zzzf), (zzzg), (zzzh), (zzzi), (zzzj), (zzzk), (zzzl), (zzzm), (zzzn),
(zzzo), (zzzp), (zzzq), (zzzr), (zzzs), (zzzt), (zzzu), (zzzv), (zzzw), (zzzx), (zzzy), (zzzz), (zzzza), (zzzzb),
(zzzzc), (zzzzd), (zzzze), (zzzzf), (zzzzg), (zzzzh), (zzzzi), (zzzzj), (zzzzk), (zzzzl), (zzzzm), (zzzzn),
(zzzzo), (zzzzp), (zzzzq), (zzzzr), (zzzzs), (zzzzt) and (zzzzu) of cl ause (105) of section 65 and collected
in such manner as may be prescribed.

A5.4 Section 67, Valuation of taxable services for charging service tax.–

(1) Subject to the provisions of this Chapter, where service tax is chargeable on any taxable service
with reference to its value, then such value shall —

(i) in a case where the provision of service is for a consideration in money, be the gross amount
charged by the service provider for such service provided or to be provided by him;

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(ii) in a case where the provision of service is for a consideration not wholly or partly consisting of
money, be such amount in money as, with the addition of service tax charged, is equivalent to the
consideration;

(iii) in a case where the provision of service is for a consideration which is not ascertainable, be the
amount as may be determined in the prescribed manner.

(2) W here the gross amount charged by a service provider, for the service provided or to be provided is
inclusive of service tax payable, the value of such taxable service shall be such amount as, w ith the
addition of tax payable, is equal to the gross amount charged.

(3) The gross amount charged for the taxable service shall include any amount received towards the
taxable service before, during or after provision of such service.

(4) Subject to the provisions of sub-sections (1), (2) and (3), the value shall be determined in such
manner as may be prescribed.

Explanation.—For the purposes of this section,—

(a) "consideration" includes any amount that is payable for the taxable services provided or to be
provided;

(b) "money" includes any currency, cheque, promissory note, letter of credit, draft, pay order, travellers
cheque, money order, postal remittance and other similar instruments but does not include currency
that is held for its numismatic value;

(c) "gross amount charged" includes payment by cheque, credit card, deduction from account and any
form of payment by issue of credit notes or debit notes and book adjustment, and any amount credited
or debited, as the case may be, to any account, whether cal led "Suspense account" or by any other
name, in the books of account of a person liable to pay service tax, where the transaction of taxable
service is with any associated enterprise.

A5.5 The Service Tax (Determination of Value) Rules, 2006

(Notification No.12/2006-Service Tax, Dated: April 19, 2006 as amended by Notifications No. 29/2007-
S.T., dated 22-5-2007 and No. 15/2010-S.T., dated 27-02-2010)

1. Short title and commencement.– (1) These rules may be called the

Service Tax (Determination of Value) Rules, 2006.

(2) They shall come into force on the date of their publication in the

Offi cial Gazette.

2. Definitions.–In these rules, unless the context otherwise requires,–

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(a) “Act” means the Finance Act, 1994 (32 of 1994);
(b) “section” means the section of the Act;
(c) “value” shall have the meaning assigned to it in section 67;
(d) words and expressions used in these rules and not defined but defined in the Act shall have the
meaning respectively assigned to them in the Act.

1
[2A. Determination of value of services involved in the execution of a works contract:

(1) Subject to the provisions of section 67, the value of taxable service in relation to services involved
in the execution of a works contract (hereinafter referred to as works contract service), referred to in
sub-clause (zzzza) of clause (105) of section 65 of the Act, shall be determined by the service provider
in the following manner:-

(i) Value of works contract service determined shall be equivalent to the gross amount charged for the
works contract less the value of transfer of property in goods involved in the execution of the said
works contract.

Explanation.- For the purposes of this rule,-

(a) gross amount charged for the works contract shall not include Value Added Tax (VAT) or sales tax,
as the case may be, paid, if any, on transfer of property in goods involved in the execution of the said
works contract;

(b) value of works contract service shall include,-

(i) labour charges for execution of the works;

(ii) amount paid to a sub-contractor for labour and services;

(iii) charges for planning, designing and architect’s fees;

(iv) charges for obtaining on hire or otherwise, machinery and tools used for the execution of the
works contract;

(v) cost of consumables such as w ater, electricity, fuel, used in the execution of the works contract;

(vi) cost of establishment of the contractor relatable to supply of labour and services;

(vii) other similar expenses relatable to supply of labour and services; and

(viii) profit earned by the service provider relatable to supply of labour and services;

(ii) W here Value Added Tax or sales tax, as the case may be, has been paid on the actual value of
transfer of property in goods involved in the execution of the works contract, then such value adopted
for the purposes of payment of Value Added Tax or sales tax, as the case may be, shall be taken as the
value of transfer of property in goods involved in the execution of the said works contract for
determining the value of works contract service under clause (i).] 1

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3. M anner of determination of value.– Subject to the provisions of section 67, the value of taxable
service, where the consideration received is not w holly or partly consisting of money, shall be
determined by the service provider in the following manner:–

(a) the value of such taxable service shall be equivalent to the gross amount charged by the service
provider to provide similar service to any other person in the ordinary course of trade and the gross
amount charged is the sole consideration;

(b) where the value cannot be determined in accordance with clause (a), the service provider shall
determine the equivalent money value of such consideration which shall, in no case be less than the
cost of provision of such taxable service.

4. Rejection of value.– (1) Nothing contained in rule 3 shall be construed as restricting or calling into
question the power of the Central Excise Officer to satisfy himself as to the accuracy of any
information furnished or document presented for valuation.

(2) W here the Central Excise Officer is satisfied that the value so determined by the service provider is
not in accordance with the provisions of the Act or these rules, he shall issue a notice to such service
provider to show cause why the value of such taxable service for the purpose of charging service tax
should not be fixed at the amount specified in the notice.

(3) The Central Excise Officer shall, after providing reasonable opportunity of being heard, determine
the value of such taxable service for the purpose of charging service tax in accordance with the
provisions of the Act and these rules.

5. Inclusion in or exclusion from value of certain expenditure or costs.– (1)Where any expenditure or
costs are incurred by the service provider in the course of providing taxable service, all such
expenditure or costs shall be treated as consideration for the taxable service provided or to be provided
and shall be included in the value for the purpose of charging service tax on the said service.

(2) Subject to the provisions of sub-rule (1), the expenditure or costs incurred by the service
provider as a pure agent of the recipient of service, shall be excluded from the value of the taxable
service if all the following conditions are satisfied, namely:

(i) the service provider acts as a pure agent of the recipient of service when he makes payment to
third party for the goods or services procured;

(ii) the recipient of service receives and uses the goods or services so procured by the service
provider in his capacity as pure agent of the recipient of service;

(iii) the recipient of service is liable to make payment to the third party;
(iv) the recipient of service authorises the service provider to make payment on his behalf;
(v) the recipient of service knows that the goods and services for which payment has been made
by the service provider shall be provided by the third party;
(vi) the payment made by the service provider on behalf of the recipient of service has been
separately indicated in the invoice issued by the service provider to the recipient of service;
(vii) the service provider recovers from the recipient of service only such amount as has been paid
by him to the third party; and

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(viii) the goods or services procured by the service provider from the third party as a pure agent of
the recipient of service are in addition to the services he provides on his own account.

Explanation 1.–For the purposes of sub- rule (2), “pure agent” means a person who–

(a) enters into a contractual agreement with the recipient of service to act as his pure agent to
incur expenditure or costs in the course of providing taxable service;
(b) neither intends to hold nor holds any title to the goods or services so procured or provided
as pure agent of the recipient of service;
(c) does not use such goods or services so procured; and
(d) receives only the actual amount incurred to procure such goods or services.

Explanation 2.– For the removal of doubts it is clarified that the value of the taxable service is the total
amount of consideration consisting of all components of the taxable service and it is immaterial that
the details of individual components of the total consideration is indicated separately in the invoice.

Illustration 1.– X contracts with Y, a real estate agent to sell his house and thereupon Y gives an
advertisement in television. Y billed X including charges for Television advertisement and paid service
tax on the total consideration billed. In such a case, consideration for the service provided is w hat X
pays to Y. Y does not act as an agent behalf of X when obtaining the television advertisement even if
the cost of television advertisement is mentioned separately in the invoice issued by X. Advertising
service is an input service for the estate agent in order to enable or facilitate him to perform his
services as an estate agent

Illustration 2.– In the course of providing a taxable service, a service provider incurs costs such as
traveling expenses, postage, telephone, etc., and may indicate these items separately on the invoice
issued to the recipient of service. In such a case, the service provider is not acting as an agent of the
recipient of service but procures such inputs or input service on his own account for providing the
taxable service. Such expenses do not become reimbursable expenditure merely because they are
indicated separately in the invoice issued by the service provider to the recipient of service.

Illustration 3.– A contracts with B, an architect for building a house. During the course of providing
the taxable service, B incurs expenses such as telephone charges, air travel tickets, hotel
accommodation, etc., to enable him to effectively perform the provision of services to A. In such a case,
in whatever form B recovers such expenditure from A, whether as a separately itemised expense or as
part of an inclusive overall fee, service tax is payable on the total amount charged by B. Value of the
taxable service for charging service tax is what A pays to B.

Illustration 4 – Company X provides a taxable service of rent-a-cab by providing chauffeur-driven cars

for overseas visitors. The chauffeur is given a lump sum amount to cover his food and overnight
accommodation and any other incidental expenses such as parking fees by the Company X during the
tour. At the end of the tour, the chauffeur returns the balance of the amount with a statement of his
expenses and the relevant bills. Company X charges these amounts from the recipients of service. The
cost incurred by the chauffeur and billed to the recipient of service constitutes part of gross amount
charged for the provision of services by the company X.

6. Cases in which the commission, costs, etc., will be included or excluded.– (1) Subject to the
provisions of section 67, the value of the taxable services shall include‚–

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(i) the commission or brokerage charged by a broker on the sale or purchase of securities including the
commission or brokerage paid by the stock-broker to any sub-broker;
(ii) the adjustments made by the teleFigure authority from any deposits made by the subscriber at the
time of application for telephone connection or pager or facsimile or teleFigure or telex or for leased
circuit;

(iii) the amount of premium charged by the insurer from the policy holder;
(iv) the commission received by the air travel agent from the airline;
(v) the commission, fee or any other sum received by an actuary, or intermediary or insurance
intermediary or insurance agent from the insurer;
(vi) the reimbursement received by the authorised service station, from manufacturer for carrying out
any service of any motor car, light motor vehicle or two w heeled motor vehicle manufactured by such
manufacturer;
(vii) the commission or any amount received by the rail travel agent from the Railways or the
customer;
(viii) the remuneration or commission, by whatever name called, paid to such agent by the client
engaging such agent for the services provided by a clearing and forwarding agent to a client rendering
services of clearing and forwarding operations in any manner; and
(ix) the commission, fee or any other sum, by whatever name called, paid to such agent by the insurer
appointing such agent in relation to insurance auxiliary services provided by an insurance agent.

(2) Subject to the provisions contained in sub-rule (1), the value of any taxable service, as the case may
be, does not include–

(i) initial deposit made by the subscriber at the time of application for telephone connection or pager or
facsimile (FAX) or teleFigure or telex or for leased circuit;
(ii) the airfare collected by air travel agent in respect of service provided by him;
(iii) the rail fare collected by 2[rail travel agent] 2 in respect of service provided by him; and
(iv) interest on loans.
2a
[(v) the taxes levied by any Government on any passenger travelling by air, if shown separately on
the ticket, or the invoice for such ticket, issued to the passenger.] 2a

7. Actual consideration to be the value of taxable service provided from outside India.– (1) The value of
taxable service received under the provisions of section 66A, shall be such amount as is equal to the
actual consideration charged for the services provided or to be provided.

(2) Notwithstanding anything contained in sub-rule (1), the value of taxable services specified in clause
(ii) of rule 3 of Taxation of Services (Provided from Outside India and Received in India) Rules, 2006,
as are partly performed in India, shall be the total consideration paid by the recipient for such services
including the value of service partly performed outside India.

A5.6- Circular No F. No. B11/1/2002-TRU, dated 1-8-2002

Relevant Extract
Subject :- Tax on 10 New Services to be effective from 2002 - Instructions regarding.

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Kindly refer to section 149 of the Finance Act, 2002 (20 of 2002) which, inter alia, provides for the levy
of service tax on 10 new services. -----

11. Extension of service tax to ten more services: In regard to the new services, which will be subject to
service tax from the 16th July, 2002, certain issues have been brought to notice during the course of
discussion with the departmental officials or the concerned Associations. These have been discussed
and clarified in the Annexures appended as per details below.

(i) Life insurance, including insurance auxiliary service relating to life (Annexure I)
insurance.
(ii) Cargo handling service (Annexure II)
(iii) Storage and warehousing services (Annexure III)
(iv) Event Management (Annexure IV)
(v) Rail Travel Agent (Annexure V)
(vi) Health club & fitness centres (Annexure VI)
(vii) Beauty parlours (Annerure VII)
(viii) Fashion Designers (Annexure VIII)
(ix) Cable Operators (Annexure IX)
(x) Dry cleaning service (Annexure X)

The section referred to hereinafter are the sections or clauses of the Finance Act, 1994 as amended by
the Finance Act, 2002. Reference to sub-clause or clause means clause or sub-clause of section 65 of the
Finance Act, 1994 as amended by the Finance Act, 2002.

11.1 The new assessee are required to file for service tax registration No. in form ST-1 to the
jurisdictional Superintendent within thirty days from 16-8-2002. The ST-1 form is enclosed herewith
(Annexure XI). In case of failure to take registration within the stipulated time of thirty days, the
assessee would be liable to pay a mandatory penalty of five hundred rupees.

12. The Commissioners are requested to issue suitable trade notices for the benefit of the new
assessees detailing the scope and coverage of the new services, gist of the service tax procedures and
formalities to be complied with by the assessees, formats of the application form for registration,
service tax returns, etc., the manner of payment of service tax, the banks through w hich service tax
payments can be made and other relevant aspects.

13. In case of any doubts or difficulties arising in the implementation of service tax on the new
services, which require clarification at the Board’s level, the Commissioners are requested to bring the
same to the notice of the undersigned immediately along with their suggestions/views for resolving
these difficulties.

----------- --------

Annexure II -Cargo handling service

288
1. The section referred to hereinafter are the sections or clauses of the Finance Act, 1994 as amended
by the Finance Act, 2002. Reference to sub-clause or clause means clause or sub-clause of section 65 of
the Finance Act, 1994 as amended by the Finance Act, 2002.

2. As per clause (21), the term “cargo handling service” means loading, unloading, packing or
unpacking of cargo and includes cargo handling services provided for freight in special containers or
for non-containerised freight, services provided by a container freight terminal or any other freight
terminal, for all modes of transport, and any other service incidental to freight, but does not include
handling of export cargo or passenger baggage or mere transportation of cargo. The taxable service, as
per sub-clause (zr) of clause (90), is any service provided, to any person, by a cargo handling agency in
relation to cargo handling services.

3. The services which are liable to tax under this category are the services provided by cargo handling
agencies who undertake the activity of packing, unpacking, loading and unloading of goods meant to
be transported by any means of transportation namely truck, rail, ship or aircraft. W ell known
examples of cargo handling service are services provided in relation to cargo handling by the Container
Corporation of India, Airport Authority of India, Inland Container Depot, Container Freight Stations.
This is only an illustrative list. There are several other firms that are engaged in the business of cargo
handling services.

3.1 The services provided in relation to export cargo and passenger baggage are excluded from tax
net.

3.2 Mere transportation of goods is not covered in the category of cargo handling and is therefore not
liable to service tax.

3.3 Cargo handling service provided in relation to storage of agricultural produce (scope of the term
“agricultural produce” is given under the storage and warehousing service) or for goods meant to be
stored in cold storage have been exempted from the levy of service tax. (See Notification No. 10/2002-
S.T.).

4. A point has been raised as to what would be the value of service tax in a case where transport and
cargo handling service is provided in a composite manner. The measure of tax is the gross amount
charged by the cargo handling agency from the customer. Therefore, if lumpsum amount is charged for
both transportation and cargo handling, the tax will be payable on the entire amount. On the other
hand, if the bill indicates the amount charged for cargo handling and transportation separately on
actuals basis (verifiable by documentary evidence), then the tax would be leviable only on the cargo
handling charges.

5. Cargo handling services are provided in the port also. W hether such service will be covered in the
category of port services or cargo handling service. In this context it may be mentioned that port
services cover any service provided in relation to goods or vessels by a port or a person authorized by
the port. This includes the cargo handling service provided within the port premises. Therefore to this
extent there may be an overlap in cargo handling service and the port service. However since port
services covers all the service in relation to goods and vessels and therefore more specific to port, the
service provided in a port in relation to handling of goods would be appropriately covered under port
service and no separate levy will be attracted under the category of cargo handling agency service.
Similar would be the case in respect of service provided for storage of goods in the port premises.

289
6. All goods meant for export are excluded from the scope of this levy. There may be cases where
goods may be transhipped at a place other than the place of packing before reaching a place from
where it is exported. For example goods are packed say at Agra for transportation to Bhopal where it is
transhipped and ultimately reaches Mumbai, from where it is exported. A doubt has been raised as to
whether service tax would be leviable on cargo handling service at Agra. It is clarified service provided
in relation to any cargo which is meant for export, would not be taxable irrespective of the fact that it
reaches the place of export after transhipment. However, the relevant documents should show that the
Goods are for export.

7. Passenger baggage has been excluded from the levy of service tax. In this regard a point has been
raised as to whether unaccompanied baggage of a passenger attracts service tax under the category of
passenger baggage. It is cl arified that unaccompanied baggage of a passenger will not be leviable to
service tax.

8. A point has been raised by Airports Authority of India (AAI) as to whether service tax will be
leviable in respect of handling of transhipment of export cargo from one international carrier to
another international carrier or from a domestic carrier to an international carrier. It is clarified that so
long as the cargo is for export, no service tax on handling of such cargo is leviable. For domestic cargo
service tax will be applicable.

9. Another point raised by them is that they undertake transhipment of import cargo from
international to domestic carrier which w ill be ultimately cleared at the final domestic destination. It is
stated that the service rendered by them should be held as exempted and it merely relates to
transportation of goods. This is not factually correct. Under the Notification No. Cargo/13519/Pt. I,
dated the 4th June, 1993, issued under the International Airports Authority Act, 1973, the AAI can
levy charges towards demurrage, handling charges, special charges for live animals, hazardous cargo,
radio-active cargo and cargo requiring strong room facilities, storage and processing charges, terminal
charges. They are not supposed to levy any transportation charges. Therefore whatever charges they
levy in this regard would be only towards handling charges and accordingly, service tax would be
leviable.

10. It has been pointed out that Container Freight Stations that they do not have any direct contact
with the importer and they only provide facility to the Customs House Agents (CHA) to handle the
container and import cargo for which they have a contract on a mutually agreed rate. It is the CHA
who claims all the charges from the importer including the charges made by the CFS on CHA and
remit to the CFS. Since services of a CHA is already covered under the tax net, the CFS service
providers should be exempt from tax when the billing is done on CHAs; otherwise there will be double
taxation. The above contention is not correct. In the case of CHAs, the service tax is levied only on the
agency or agency and attendance charges and not on the reimbursement expenses (on actuals basis)
such as port fees, statutory levies, landing and container charges, dock fees, examination charges,
terminal handling charges, etc. The CHA does not pay service tax on the handling charges charged by
the CFS. Thus there is no double taxation. Further, as per the law , whatever charges, the cargo
handling agency charges from any person (including the CHA) is liable to service tax.

11. Another point raised relates to cases where the CFS offers a total package rate, which includes
transportation and handling in respect of imported laden containers from Port to CFS. The question is
if the cost of transportation is shown separately in the bill raised, will it be excluded from the levy of

290
service tax. If the cost of transportation is claimed on actuals basis, then it will not be includible in the
taxable value of cargo handling services.

12. A clarification has been sought as to whether service tax is payable on abandoned cargo which are
auctioned by the CFS as no service is rendered to any person. In the case of auctioned goods, the
proceeds of the auction goes first to the cost of auction, then towards customs duties and then to the
custodian of the goods. It is clarified that no cargo handling service can be said to have been rendered
in such cases, therefore service tax is not leviable.

13. Some of the cargo handling agencies may also act as marketing agents for individual airlines for
which they get a commission, w hich seems to range from 5per cent to 15per cent of the freight. The
question is whether service tax is payable on this. Marketing or canvassing for cargo for airlines does
not come within the ambit of cargo handling services. Hence no service tax is payable under the
category of cargo handling service.

14. CFSs also sometimes undertake storing/washing/repairing and handling of empty containers for
the shipping lines for which they charge the shipping lines. Empty containers cannot be treated as
cargo. Therefore, the activities mentioned above do not come within the purview of cargo handling
services.

15. Another doubt raised in relation to cargo handling services is that whether individuals
undertaking the activity of loading or unloading of cargo would be leviable to service tax. For example,
if someone hires labour/labourer for loading or unloading of goods in their individual capacity,
whether he would be liable to service tax as a cargo handling agency. It is clarified that such activities
will not come under the purview of service tax as a cargo handling agency.

A5.7 TRADE NOTICE NO. 53 CE (SERVICE TAX)/97

Relevant Extract

CENTRAL EXCISE COMMISSIONERATE: NEW DELHI (C.NO. CE-20/41/ST/Trade

Notice/97 Dated: 4.7.97 TRADE NOTICE NO. 53 CE (SERVICE TAX)/97)

Subject :- Imposition of Service Tax on Consulting Engineer and Manpower Recruitment Agency - reg.

Attention of the Trade is invited to this office Trade Notice No. 50 to 52 (service Tax)/97 dated 4.7.97
through which it has been informed about the imposition of service tax on the services rendered by
Consulting Engineering and Man Power Recruitment Agency w.e.f. 7th July, 1997 in terms of
Notification 23/97 to 25/97-ST dated 2.7.97- Govt. of India, Ministry of Finance, Department of
Revenue.

2. It is felt that some clarification in respect of these two services for guidance of Public/Trade would
be beneficial/use to Trade, Industry and Public.

3. M ANPOW ER RECRUITM ENT AGENCIES:

3.1 As per Section 88 of the Finance Act, 1997 manpower recruitment agency means any commercial
concern engaged in providing any service, directly or indirectly, in any manner for recruitment of

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manpower to a client. The taxable service rendered by a manpower recruitment agency is defined as
any service provided to a client, by a manpower recruitment agency in relation to the recruitment of
manpower in any manner. The rate of service tax is 5per cent and the value of taxable service in
relation to service provided by a manpower recruitment agency to a client shall be the gross amount
charged by such agency from the client in relation to the recruitment of manpower in any manner.

3.2 It would be pertinent to note that the coverage of the term manpower recruitment agency is wide
and shall include within its ambit the services provided by an agency from the primary stage of
building a database of manpower for different categories of personnel employment, whether white
collar or blue collar, w hether for employment in India or overseas; determining manpower
requirement for the client, preliminary identification, short listing and screening of prospective
candidates, providing specialists for interviewing prospective candidates, arranging for their interviews
at each stage; placing advertisements for recruitment of manpower in the print or electronic media etc.
In short, service tax on manpower recruitment agency shall cover within its fold the entire gamut of
services provided by a manpower recruitment agency to a client from the incipient stage of
selecting/identifying man-power required for any prospective employment, till the stage of actual
selection for the same. It may be noted that in certain cases such as where a person approaches a
manpower requirement agency for being employed in a suitable position abroad, as normally happens
in case of employment in Gulf countries, the prospective candidate for employment become the client
for purposes of service tax.

3.3 Service Tax on manpower recruitment agencies shall be the gross amount charged to the client for
services rendered in relation to the recruitment of manpower excluding the amount incurred by the
manpower recruitment agency on behalf of the client towards expenses which are reimbursed on
actual basis. The Commissioners may selectively, in doubtful cases require the manpower recruitment
agency to substantiate such actual expenses on the basis of doumentary evidence. In case the
manpower recruitment agency is billing the client on the basis of a lump sum, any deductions from the
same on account of reimbursible expenses, for the purposes of determining the value of taxable service
may be permitted on the basis of documentary evidence adduced by the agency.

3.4 Normally the manpower recruitment agency receives remuneration from the client for the services
rendered by him as per the stipulations in the contract/agreement between them. The payment from
the client is received at different stages, based on the completion of work/service at each stage. The
manpower recruitment agency shall be required to pay service tax on the payments received at each
stage from the client by the 15th of the succeeding month. Subsequent modifications, if any, in the
bills raised to the client at the time of final payment may be allowed after verification.

4. Consulting Enginners

4.1 Consulting Engineer means any professionally qualified engineer or engineering firm who, either
directly or indirectly, renders any advice, consultancy or technical assistance in any manner to a client
in one more discipline of engineering. The taxable service rendered by a consulting engineer means
any service provided to a client, by a technical assistance in any manner in one or more disciplines of
engineering. The rate of service tax is 5per cent and the value of taxable service in relation to service
provided by a consulting engineer to a client shall be the gross amount charged by such engineer from
the client for advice, consultancy or technical assistance in any manner in one or more discipline of
engineering.

292
4.2 Consulting engineers shall include self-employed professionally qualified engineer who may or may
not have employed others to assist him or it could be an engineering firm - whether organised as a
sole-proprietorship-partnership, a private or a public Ltd., Company.

4.3 The services which attract the levy include all the services which are rendered in the capacity of a
professional person and specifically include the services pertaining to structural engineering works
civil/mechanical/electrical engineering works or relating to construction management. All services
rendered within the above scope of the term engineering attract service tax provided they are rendered
in the capacity of a consulting engineer. The scope of the services of a consultant may include any on
or more of the following categories:

(i) Feasibility study.

(ii) Pre-design services/project.
(iii) Basic design engineering.
(iv) Detailed design engineering.
(v) Procurement.
(vi) Construction supervision & project management.
(vii) Supervision of commissioning and initial operation.
(viii) Manpower planning and training.
(ix) Post-operation and management.
(x) Trouble shooting and technical services, including establishing systems and procedures for an
existing plant.

Though the above list is not exhaustive, it illustrates the wide scope and nature of the services rendered
by a consulting engineer.

4.4 The services should be rendered to a client directly, and not in the capacity of a sub-consultant
associate consultant to another consulting engineer, who is the prime consultant. In case services are
rendered to the prime consultant, the levy service tax does not fall on the sub-consultant, the levy
service tax does not fall on the sub-consultant but is on the prime of main consulting engineer who
raises a bill on his client (which include the charge for services rendered by the sub-consultant).

4.5 As in the case of manpower recruitment agencies service tax on consulting engineers shall be the
gross amount charged to the client for services rendered in relation to the recruitment of manpower
excluding the amount incurred in the manpower recruitment agency on behalf of the client towards
expenses which are reimbursed on actual basis an in case the client is titled on a lump sum basis any
deduction from the same on account of reimbursible expenses, for the purpose on the basis of
documentary evidence adduced by the agency.

A5.8 Section 64 Extent, commencement and application. -

(1) This Chapter extends to the whole of India except the State of Jammu and Kashmir.

(2) It shall come into force on such date as the Central Government may, by notification in the Official
Gazette, appoint.

(3) It shall apply to taxable services provided on or after the commencement of this Chapter.

293
A5.9 Notification No.12/2003- Service Tax, DATED : June 20, 2003

In exercise of the powers conferred by section 93 of the Finance Act, 1994 (32 of 1994), the Central
Government, being satisfied that it is necessary in the public interest so to do, hereby exempts so much
of the value of all the taxable services, as is equal to the value of goods and materials sold by the service
provider to the recipient of service, from the service tax leviable thereon under section (66) of the said
Act, subject to condition that there is documentary proof specifically indicating the value of the said
goods and materials.

2. This notification shall come into force on the 1st day of July, 2003.

A5.10 Notification 15/2004 Service Tax, Dated : September 10, 2004

In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994
(32 of 1994), the Central Government, being satisfied that it is necessary in the public interest so to do,
hereby exempts the taxable service provided by a commercial concern to any person, in relation to
construction service, from so much of the service tax leviable thereon under section 66 of the said Act,
as is in excess of the service tax calculated on a value which is equivalent to thirty-three per cent. of
the gross amount charged from any person by such commercial concern for providing the said taxable
service:

Provided that this exemption shall not apply in such cases where –

(i) the credit of duty paid on inputs or capital goods has been taken under the provisions of the
CENVAT Credit Rules, 2004; or

(ii) the commercial concern has availed the benefit under the notification of the Government of India,
in the Ministry of Finance, (Department of Revenue) No. 12/2003-Service Tax, dated the 20th June,
2003 [G.S.R. 503 (E), dated the 20th June, 2003].

F. No. B2/8/2004-TRU

V. Sivasubramanian
Deputy Secretary to the Government of India

A5.11 Notification 01/2006- Service tax, dated: March, 1, 2006.

G.S.R. (E). - In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act,
1994 (32 of 1994) (hereinafter referred to as the Finance Act), the Central Government, on being
satisfied that it is necessary in the public interest so to do, hereby exempts the taxable service of the

294
description specified in column (3) of the Table below and specified in the relevant sub-clauses of
clause (105) of section 65 of the Finance Act, specified in the corresponding entry in column (2) of the
said Table, from so much of the service tax leviable thereon under section 66 of the said Finance Act, as
is in excess of the service tax calculated on a value which is equivalent to a percentage specified in the
corresponding entry in column (5) of the said Table, of the gross amount charged by such service
provider for providing the said taxable service, subject to the relevant conditions specified in the
corresponding entry in column (4) of the Table aforesaid:

TABLE

S. Sub Description of taxable Conditions Percentage

No clause service
of
clause
(105)
of
Section

(1) (2) (3) (4) (5)

1 (m) (1) The use of mandap, This exemption shall apply only in 60
including the facilities such cases where the mandap keeper
provided to the client in also provides catering services, that is,
relation to such use and also supply of food and the invoice, bill or
for the catering charges. challan issued indicates that it is
inclusive of the charges for catering
service.

(2) Taxable service provided The invoice, bill or challan issued 60

by a hotel as mandap keeper indicates that it is inclusive of charges
in such cases where services for catering services.
provided include catering
services, that is, supply of food Explanation.- The expression “hotel”
alongwith any service in means a place that provides boarding
relation to use of a mandap. and lodging facilities to public on
commercial basis.

2. (n) (a) Services provided in The bill issued for this purpose 40
relation to a tour, by a tour indicates that it is inclusive of charges
operator, - for such a tour. The bill issued
indicates that the amount charged in
(1) where the tour operator the bill is the gross amount charged
provides a package tour; for such a tour.

(2) where the services Explanation.- The expression “package

provided are other than in tour” means a tour in which the
relation to a package tour. provisions for transportation and
accommodation for stay of the person

295
undertaking the tour has been
afforded by the tour operator.

(b) Services provided in (i) The invoice, bill or challan issued 10

relation to a tour, if the tour indicates that it is towards charges for
operator is providing services such accommodation, and
solely of arranging or booking
accommodation for any (ii) this exemption shall not apply in
person in relation to a tour. such cases where the invoice, bill or
challan issued by the tour operator to
the client only includes the service
charges for arranging or booking
accommodation for any person in
relation to a tour and does not include
the cost of such accommodation.

3. (o) Renting of a cab. - 40

4. (zc) Holding of a convention, The gross amount charged from the 60

where service provided client is inclusive of the charges for
includes catering service. the catering service.

5. (zzd) Erection, commissioning or This exemption is optional to the 33

installation, under a contract commissioning and installation
for supplying a plant, agency.
machinery or equipment and
erection, commissioning or Explanation.- The gross amount
installation of such plant, charged from the customer shall
machinery or equipment. include the value of the plant,
machinery, equipment, parts and any
other material sold by the
commissioning and installation
agency, during the course of
providing erection, commissioning or
installation service.

6. (zzp) Transport of goods by road in - 25

a goods carriage.

7. (zzq) Commercial or industrial This exemption shall not apply in 33

construction service. such cases where the taxable services
provided are only completion and
finishing services in relation to
building or civil structure, referred to
in sub-clause (c) of clause (25b) of
section 65 of the Finance Act.

Explanation.- The gross amount

296
charged shall include the value of
goods and materials supplied or
provided or used by the provider of
the construction service for providing
such service.

8. (zzt) Catering. This exemption shall apply in cases 50

where,-

(i) the outdoor caterer also provides

food; and

(ii) the invoice, bill or challan issued

indicates that it is inclusive of charges
for supply of food.

9. (zzw) Services in relation to pandal This exemption shall apply only in 70

or shamiana in any manner, cases where,-
including services rendered as
a caterer. (i) the pandal or shamiana contractor
also provides catering services, that is,
supply of food; and

(ii) the invoice, bill or challan issued

indicates that it is inclusive of charges
for catering service.

10. (zzzh) Construction of complex. This exemption shall not apply in 33

cases where the taxable services
provided are only completion and
finishing services in relation to
residential complex, referred to in
sub-clause (b) of clause (30a) of
section 65 of the Finance Act.

Explanation.- The gross amount

charged shall include the value of
goods and materials supplied or
provided or used for providing the
taxable service by the service
provider.

Provided that this notification shall not apply in cases where, -

(i) the CENVAT credit of duty on inputs or capital goods or the CENVAT credit of service tax on input
services, used for providing such taxable service, has been taken under the provisions of the CENVAT
Credit Rules, 2004; or

297
(ii) the service provider has availed the benefit under the notification of the Government of India in
the Ministry of Finance (Department of Revenue), No.12/2003-Service Tax, dated the 20th June,
2003[G.S.R. 503 (E), dated the 20th June, 2003].

Explanation.- For the purposes of this notification, the expression “food” means a substantial and
satisfying meal and the expression “catering service” shall be construed accordingly.

[F. No. 334/3/2006-TRU]

(G. G. Pai)
Under Secretary to the Government of India

A5.12 NOTIFICATION NO 6/2005-Service Tax, Dated : M arch 1, 2005

In exercise of the powers conferred by sub-section (1) of section 93 of the Finance Act, 1994 (32 of
1994) (hereinafter referred to as the said Finance Act), the Central Government, on being satisfied that
it is necessary in the public interest so to do, hereby exempts taxable services of aggregate value not
exceeding four lakh rupees in any financial year from the whole of the service tax leviable thereon
under section 66 of the said Finance Act:

Provided that nothing contained in this notification shall apply to,-

(i) taxable services provided by a person under a brand name or trade name, whether registered or not,
of another person; or

(ii) such value of taxable services in respect of which service tax shall be paid by such person and in
such manner as specified under sub-section (2) of section 68 of the said Finance Act read with Service
Tax Rules,1994.

2. The exemption contained in this notification shall apply subject to the following conditions,
namely:-

(i) the provider of taxable service has the option not to avail the exemption contained in this
notification and pay service tax on the taxable services provided by him and such option, once
exercised in a financial year, shall not be withdrawn during the remaining part of such financial year;

(ii) the provider of taxable service shall not avail the CENVAT credit of service tax paid on any input
services, under rule 3 or rule 13 of the CENVAT Credit Rules, 2004 (herein after referred to as the said
rules), used for providing the said taxable service, for which exemption from payment of service tax
under this notification is availed of;

(iii) the provider of taxable service shall not avail the CENVAT credit under rule 3 of the said rules, on
capital goods received in the premises of provider of such taxable service during the period in w hich
the service provider avails exemption from payment of service tax under this notification;

(iv) the provider of taxable service shall avail the CENVAT credit only on such inputs or input services
received, on or after the date on which the service provider starts paying service tax, and used for the
provision of taxable services for which service tax is payable;

298
(v) the provider of taxable service who starts availing exemption under this notification shall be
required to pay an amount equivalent to the CENVAT credit taken by him, if any, in respect of such
inputs lying in stock or in process on the date on which the provider of taxable service starts availing
exemption under this notification;

(vi) the balance of CENVAT credit lying unutilised in the account of the taxable service provider after
deducting the amount referred to in sub-paraFigure (v), if any, shall not be utilised in terms of
provision under sub-rule (4) of rule 3 of the said rules and shall lapse on the day such service provider
starts availing the exemption under this notification;

(vii) where a taxable service provider provides one or more taxable services from one or more premises,
the exemption under this notification shall apply to the aggregate value of all such taxable services and
from all such premises and not separately for each premises or each services; and

(viii) the aggregate value of taxable services rendered by a provider of taxable service from one or more
premises, does not exceed rupees four lakhs in the preceding financial year.

3. For the purposes of determining aggregate value not exceeding four lakh rupees, to avail exemption
under this notification, in relation to taxable service provided by a goods transport agency, the
payment received towards the gross amount charged by such goods transport agency under section 67
for w hich the person liable for paying service tax is as specified under subsection (2) of section 68 of
the said Finance Act read with Service Tax Rules, 1994, shall not be taken into account.

Explanation.- For the purposes of this notification,-

(A) “brand name” or “trade name” means a brand name or a trade name, whether registered or not, that
is to say, a name or a mark, such as symbol, monogram, logo, label, signature, or invented word or
writing which is used in relation to such specified services for the purpose of indicating, or so as to
indicate a connection in the course of trade between such specified services and some person using
such name or mark with or without any indication of the identity of that person;

(B) “aggregate value not exceeding four lakh rupees” means the sum total of first consecutive payments
received during a financial year towards the gross amount, as prescribed under section 67 of the said
Finance Act, charged by the service provider towards taxable services till the aggregate amount of such
payments is equal to four lakh rupees but does not include payments received towards such gross
amount which are exempt from whole of service tax leviable thereon under section 66 of the said
Finance Act under any other notification.

4. This notification shall come into force on the 1st day of April, 2005.

[F. No. 334/1/2005-TRU]

(V. Sivasubramanian)

299
A5.13 Section 68

68. Payment of service tax. – (1) Every person providing taxable service to any person shall
pay service tax at the rate specified in section 66 in such manner and within such period as may be
prescribed.

(2) Notwithstanding anything contained in sub-section (1), in respect of any taxable service notified by
the Central Government in the Official Gazette, the service tax thereon shall be paid by such person
and in such manner as may be prescribed at the rate specified in section 66 and all the provisions of
this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation
to such service.

A5.14 Rule 6 of The Service Tax Rule ,1994

41
{6. Payment of service tax –

42
[(1) The service tax shall be paid to the credit of the Central Government,-

(i) by the 6th day of the month, if the duty is deposited electronically through internet banking; and
(ii) by the 5th day of the month, in any other case,

Immediately following the calendar month in which the payments are received, towards the value of
taxable services:

Provided that w here the assessee is an individual or proprietary firm or partnership firm, the service
tax shall be paid to the credit of the Central Government by the 6th day of the month if the duty is
deposited electronically through internet banking, or, in any other case, the 5th day of the month, as
the case may be, immediately following the quarter in which the payments are received, towards the
value of taxable services:

Provided further that notwithstanding the time of receipt of payment towards the value of services, no
service tax shall be payable for the part or w hole of the value of services, which is attributable to
services provided during the period when such services were not taxable:

Provided also that the service tax on the value of taxable services received during the month of March,
or the quarter ending in March, as the case may be, shall be paid to the credit of the Central
Government by the 31st day of March of the calendar year.] 42-Substituted 01.04.2005

Explanation.- For the removal of doubts, it is hereby declared that where the transaction of taxable
service is with any associated enterprise, any payment received towards the value of taxable service, in
such case shall include any amount credited or debited, as the case may be, to any account, whether
called ‘Suspense account' or by any other name, in the books of account of a person liable to pay
service tax.

[(1A) W ithout prejudice to the provisions contained in sub-rule (1), every person liable to pay
42a

service tax, may, on his own volition, pay an amount as service tax in advance, to the credit of the
Central Government and adjust the amount so paid against the service tax which he is liable to pay for
the subsequent period:

300
Provided that the assessee shall,-

(i) Intimate the details of the amount of service tax paid in advance, to the jurisdictional
Superintendent of Central Excise w ithin a period of fifteen days from the date of such payment; and (ii)
indicate the details of the advance payment made, and its adjustment, if any in the subsequent return
to be filed under section 70 of the Act.] 42a- inserted 01.03.2001

(2) The assessee shall deposit the service tax liable to be paid by him with the bank designated by the Central
Board of Excise and Customs for this purpose in Form TR-6 or in any other manner prescribed by the
Central Board of Excise and Customs.

43
[Provided that where an assessee has paid a total service tax of rupees ten lakh or more including the
amount paid by utilisation of CENVAT credit, in the preceding financial year, he shall deposit the service
tax liable to be paid by him electronically, through internet banking.] 43-substitued 01.04.2009
44
[(2A) For the purpose of this rule, if the assessee deposits the service tax by cheque, the date of presentation of
cheque to the bank designated by the Central Board of Excise and Customs for this purpose shall be deemed
to be the date on which service tax has been paid subject to realization of that cheque.] 44- I nserted 16.08.2002.

(3) W here an assessee has paid to the credit of Central Government service tax in respect of a taxable service,
which is not so provided by him either wholly or partially for any reason, the assessee may adjust the excess
service tax so paid by him (calculated on a pro rata basis) against his service tax liability for the subsequent
period, if the assessee has refunded the value of taxable service and the service tax thereon to the person
from whom it was received.

45
[(4) W here an assessee is, for any reason, unable to correctly estimate, on the date of deposit, the actual amount
payable for any particular month or quarter, as the case may be, he may make a request in writing to the
Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may
be, giving reasons for payment of service tax on provisional basis and the Assistant Commissioner of
Central Excise or the Deputy Commissioner of Central Excise, as the case may be, on receipt of such
request, may allow payment of service tax on provisional basis on such value of taxable service as may be
specified by him and the provisions of the Central Excise (No.2) Rules, 2001, relating to provisional
assessment, except so far as they relate to execution of bond, shall, so far as may be, apply to such
assessment.] 45-substituted 16.07.20011
46
[(4A) Notwithstanding anything contained in sub-rule (4), where an assessee has paid to the credit of Central
Government any amount in excess of the amount required to be paid towards service tax liability for a
month or quarter, as the case may be, the assessee may adjust such excess amount paid by him against his
service tax liability for the succeeding month or quarter, as the case may be.

(4B) The adjustment of excess amount paid, under sub-rule (4A), shall be subject to the follow ing conditions,
namely:-

(i) excess amount paid is on account of reasons not involving interpretation of law, taxability, classification,
valuation or applicability of any exemption notification,
(ii) excess amount paid by an assessee registered under sub-rule (2) of rule 4, on account of delayed receipt
of details of payments towards taxable services may be adjusted without monetary limit,
(iii) in cases other than specified in clause (ii) above, the excess amount paid may be adjusted with a

301
monetary limit of 45a[one lakh rupees]45a for a relevant month or quarter, as the case may be,
(iv) the details and reasons for such adjustment shall be intimated to the jurisdictional Superintendent of
Central Excise within a period of fifteen days from the date of such adjustment] 46-Substituted 01.03.2007

[(4C)
47
Notwithstanding anything contained in sub-rules (4), (4A) and (4B), where the person liable to pay service
tax in respect of services provided or to be provided in relation to renting of immovable property, referred
to in sub-clause (zzzz) of clause (105) of section 65 of the Act, has paid to the credit of Central Government
any amount in excess of the amount required to be paid towards service tax liability for a month or quarter,
as the case may be, on account of non-availment of deduction of property tax paid in terms of notification
No.24/2007-Service Tax, dated the 22nd May, 2007, from the gross amount charged for renting of the
immovable property for the said period at the time of payment of service tax, the assessee may adjust such
excess amount paid by him against his service tax liability within one year from the date of payment of
such property tax. The details of such adjustment shall be intimated to the Superintendent of Central
Excise having jurisdiction over the service provider within a period of fifteen days from the date of such
adjustment.] 47- insertew .e.f.01.07.2007

(5) Where an assessee under sub-rule (4) requests for a provisional assessment he shall file a statement giving
details of the difference between the service tax deposited and the service tax liable to be paid for each
month in a memorandum in Form ST-3A accompanying the quarterly or half yearly return, as the case
may be.

(6) W here the assessee submits a memorandum in Form ST-3A under sub-rule (5), it shall be law ful of the
48
[Assistant Commissioner of Central Excise or the Deputy Commissioner of Central Excise, as the case may
be,] 48-subst ituted16.07.2001 to complete the assessment, w herever he deems it necessary, after calling such further
documents or records as he may consider necessary and proper in the circumstances of the case.

Explanation. – For the purposes of this rule and rule 7, "Form TR-6" means a memorandum or challan
referred to in rule 92 of the Treasury Rules of the Central Government.

(7) The person liable for paying the service tax in relation to the services provided by an air travel agent, shall
have the option, to pay an amount calculated at the rate of 49[0.6per cent] 49 of the basic fare in the case of
domestic bookings, and at the rate of 50[1.2per cent] 50 of the basic fare in the case of international bookings,
of passage for travel by air, during any calendar month or quarter, as the case may be, towards the
discharge of his service tax liability instead of paying service tax 51[at the rate of specified in Section 66 of
Chapter V of the Act] 51 and the option, once exercised, shall apply uniformly in respect of all the bookings
of passage for travel by air made by him and shall not be changed during a financial year under any
circumstances.

Explanation - For the purposes of this sub-rule, the expression "basic fare" means that part of the air fare on
which commission is normally paid to the air travel agent by the airline.

302
52
[(7A) An insurer carrying on life insurance business liable for paying the service tax in relation to the risk cover
in life insurance provided to a policy holder shall have the option to pay an amount calculated at the rate of
one per cent. of the gross amount of premium charged by such insurer towards the discharge of his service
tax liability instead of paying service tax at the rate specified in section 66 of Chapter V of the Act :

Provided that such option shall not be available in cases where -

(a) the entire premium paid by the policy holder is only towards risk cover in life insurance; or

(b) the part of the premium payable towards risk cover in life insurance is shown separately in any of the
documents issued by the insurer to the policy holder.] 52-I nserted 10.09.2004

(7B) The person liable to pay service tax in relation to purchase or sale of foreign currency, including money
changing, provided by a foreign exchange broker, including an authorised dealer in foreign exchange or an
authorized money changer, referred to in sub-clauses (zm) and (zzk) of cl ause (105) of section 65 of the
Act, shall have the option to pay an amount calculated at the rate of 0.25 per cent. of the gross amount of
currency exchanged towards discharge of his service tax liability instead of paying service tax at the rate
specified in section 66 of Chapter V of the Act:

Provided that such option shall not be available in cases where the consideration for the service provided
or to be provided is shown separately in the invoice, bill or, as the case may be, challan issued by the
service provider.

Illustration

Buying rate $US 1 = Rs.38, selling rate $US 1 = Rs.40

(i) Person exchanged $100 for equivalent rupees

Transaction value = Rs.3800 (Rs.38 x 100)

Service tax payable = Rs.9.5 (0.25per cent x 3800)

(ii) Person exchanged equivalent rupees for $100

Transaction value = Rs.4000 (40 x 100)

Service tax payable = Rs.10 (0.25per cent x 4000).

(8) Omitted.-19.04.2006

(9) Omitted. 19.04.2006} 41-substitued16.10.1998

303
A5.15 Definition of Business Auxiliary Service

Clause 19 of the Sec. 65

(19) “Business auxiliary service” means any service in relation to, —

(i) promotion or marketing or sale of goods produced or provided by or belonging to the client; or

(ii) promotion or marketing of service provided by the client; or

[***]

(iii) any customer care service provided on behalf of the client; or

(iv) procurement of goods or services, which are inputs for the client; or

17
[Explanation.— For the removal of doubts, it is hereby declared that for the purposes of this sub-
clause, “inputs” means all goods or services intended for use by the client;] 17

[(v) production or processing of goods for, or on behalf of, the client;]18

18

(vi) provision of service on behalf of the client; or

(vii) a service incidental or auxiliary to any activity specified in sub-clauses (i) to (vi), such as billing,
issue or collection or recovery of cheques, payments, maintenance of accounts and remittance,
inventory management, evaluation or development of prospective customer or vendor, public relation
services, management or supervision,

and includes services as a commission agent, 18a[but does not include any activity that amounts to
manufacture of excisable goods.] 18a

19
[Explanation. — For the removal of doubts, it is hereby declared that for the purposes of this clause,
—

(a) “commission agent” means any person who acts on behalf of another person and causes sale or
purchase of goods, or provision or receipt of services, for a consideration, and includes any person w ho,
while acting on behalf of another person —

(i) deals with goods or services or documents of title to such goods or services; or

(ii) collects payment of sale price of such goods or services; or

(iii) guarantees for collection or payment for such goods or services; or

(iv) undertakes any activities relating to such sale or purchase of such goods or services;

20
[(b) "excisable goods" has the meaning assigned to it in clause (d) of section 2 of the Central Excise
Act, 1944;(1 of 1944).

304
(c) "manufacture" has the meaning assigned to it in clause (f) of section 2 of the Central Excise Act,
1944;'(1 of 1944).] 2

A5.16 Definition of Authorised Service Station

Clause 9 of Section 65

“authorised service station” means any service station, or centre, authorised by any motor vehicle
manufacturer, to carry out any [service, repair, reconditioning or restoration] of any motor car, light
motor vehicle or two wheeled motor vehicle manufactured by such manufacturer;

Sub clause (zo) of clause 105 of section 65

Taxable Service means any service provided or to be provided , [to any person], by an
authorised service station, in relation to any service [, repair, reconditioning or restoration of motor
cars, light motor vehicles] or two wheeled motor vehicles, in any manner;

A5.17 Definition of works contract

Sub clause zzzza of clause 105 of section 65

Taxable service means any service provided or to be provided,

to any person, by any other person in relation to the execution of a works contract, excluding works
contract in respect of roads, airports, railways, transport terminals, bridges, tunnels and dams.
Explanation. - For the purposes of this sub-clause, "works contract" means a contract wherein, -
(i) transfer of property in goods involved in the execution of such contract is leviable to tax as sale of
goods, and
(ii) such contract is for the purposes of carrying out, -
(a) erection, commissioning or installation of plant, machinery, equipment or structures, whether
prefabricated or otherwise, installation of electrical and electronic devices, plumbing, drain laying or
other installations for transport of fluids, heating, ventilation or air-conditioning including related pipe
work, duct work and sheet metal work, thermal insulation, sound insulation, fire proofing or water
proofing, lift and escalator, fire escape staircases or elevators; or
(b) construction of a new building or a civil structure or a part thereof, or of a pipeline or conduit,
primarily for the purposes of commerce or industry; or
(c) construction of a new residential complex or a part thereof; or
(d) completion and finishing services, repair, alteration, renovation or restoration of, or similar
services, in relation to (b) and (c); or
(e) Turnkey projects including engineering, procurement and construction or commissioning (EPC)
projects;

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