Service Tax

The Service Sector is the fastest growing among all the sectors in today’s world. The traditional sectors such as agriculture and industry have taken a back seat even in developing countries such as India, Pakistan, China many Latin American nations. The sheer diversity of activities within this sector has crossed the traditional notions of intangibility and non-tradability. Services which once accounted for 61% of the economic activity for the developed economies in 1997, now constitute more than 50% of economic activity for the developing countries.

Service Tax is a form of indirect taxes and can be defined as a tax on “taxable services†provided by the “service providerâ€. Plainly speaking, services rendered by different professionals such as doctors, engineers and lawyers are liable for service tax to be paid on them. Service tax in India is administered by the Central Board of Excise and Customs and the Federal and State governments in case of the USA.

Service Tax in India is a relatively new concept and was imposed by the 1994 amendment of the Finance Act and falls under Chapter V. The tax is levied on the “value of the taxable servicesâ€, i.e. the gross amount received by the service provider as a result of offering his service. The modalities for payment of the tax vary between a quarterly basis to a monthly basis for individuals or partnership firms to joint stock companies. Entities have to be registered with the Central Excise Commissionerates, Central Board of Excise and Customs, Department of Revenue under the Ministry of Finance to able to pay its service taxes. Service Tax Returns have to be filed every six months as evidenced by regular payment of service taxes. If no service is provided during the half-year period, the return filed should be nil.

Some of the highlights of the Budget Announcement 2007-08 were as follows:

• The tax exemption limit for small service providers has been increased to Rs.8 lakh a year from the previous limit of Rs.4 lakh. This is expected to benefit nearly two lakh service tax providers.
• The Service Tax rate is fixed at 12% from the previous financial year.
• In addition to the Education Cess of 2%, Secondary and Higher education cess on taxable services is levied at the rate of 1%.
• New Services such as Banking Services, Maintenance or Repair, Management or Consultancy Services and services like Shamianas erected for marriages and social functions have under the scope of the service tax net.
• Club or Association Services related to resident welfare organizations where an individual consideration does not exceed Rs. 3000 a month have been exempted from payment of service tax.
• Services such as those in relation to delivery of content of a cinematograph in digitized form to a cinema theatre via satellite have also been kept outside the purview of service tax.
• Services provided by an entrepreneur in a Technology Business Incubator (TBI) or a Science and Technology Entrepreneurship Park (STEP) will not be amenable to service tax anymore.

With services accounting for 46% of the share of GDP (Gross Domestic Product) for India and in general about 50% in all the countries in the South and South-East Asian region, the Service Tax net is gradually widening. The corresponding figures for the developing Latin American countries such as Argentina and Brazil are 67% and 61% respectively. Share of services as a percentage of GDP is the highest in Hong Kong with 85% followed by USA with 74% at present.

Globalization of services has taken place with substantial trade in services brought about by heavy Foreign Direct Investment (FDI) flows of which 50% is devoted to trade in services. Various international regulations on trade in services are authorized by the General Agreement on Trade in Services (GATS) under the World Trade Organization (WTO). India’s role in the globalization of services can be understood from the fact that global trade in services amounted to $ US 30 billion in 1999-2000. India has a comparative advantage in the software services industry and by allowing more FDI in those sectors revenues from the industry could flow to the tune of US $57 billion by 2008 accounting for 6% of world market share according to a Nasscom-McKinsey report.

As for the collection of service tax in India, the share of the service tax as a percentage of the service sectors’ GDP rose from 0.12% to 0.41% from 1994-95’ to 2001-02 which is nearly a 350 % jump. With the share of the service sector and FDI flows to that sector gradually increasing, more services could be brought under the tax net which could increase the country’s revenue; and with a corrupt free government, this bounty could be distributed among the millions of poor in our country through various developmental schemes.