What is Service Tax?
Service tax is the tax levied on the taxable services provided within the boundary of India. Finance Act, 1994 guides the provisions of service tax in the country. It is a kind of indirect tax, which means that service provider pays the tax and recovers it form the recipients of the service tax.
Section 66 of the finance act, 1994 is the charging section of the service tax which provides that there shall be levied @ 12% of the value of taxable services and shall be collected in such manner as prescribed. Read an earlier tutorial of on service tax and current rate of service tax.
Liability of Service Tax :
The liability of service in normal cases rests with the person providing the services, i.e., the service providers is the person liable to pay service tax to the account of the government.
According to section 68(1) of the income tax act, every person providing taxable service to any other person shall be liable to pay service tax at the rates specified in section 66. This means, in normal cases, liability to pay service tax lies with the service provider. But in certain situations, instead of service provider, service recipient is liable to pay service tax to the account of the government. You can learn about point of taxation for service tax by following the link.
According to Section 68(2) of the income tax act, central government may specify certain class of services who shall be liable to pay service tax and thus all provisions of service tax shall apply normally. This means any person other than service provider, i.e., the service recipient is the person liable to pay service tax. This mechanism of shifting the service tax liability from service provider to the service recipient is known as reverse charge mechanism. Earlier we had special post on service tax on flat purchase
Determining the Person liable to pay service tax-
There can be two cases which define the persons liable to pay tax-
Normal service tax liability: Under normal service tax liability, person providing the services shall be responsible to pay service tax. He shall collect the service tax from the service recipients as a fixed percentage of the total value of service provided by him and shall deposit it to the account of the government. This applies to all services except on those on which reverse charge is applicable.
Reverse charge: Under reverse charge, instead of the service provider, the person receiving the services is responsible to pay service tax. In such case, the service recipient shall calculate the service tax to be paid by him as a definite percentage of the total value of services received by him. This total billed amount of services received by him doesn’t include any service tax and he doesn’t need to pay it to the service provider. In fact, he shall directly deposit it to the account of the government.
This applies to only specified services. There is an inclusive list of services under reverse charge which also define the persons liable to pay service tax. It involves some specified services only which are as follows-
- Import of services – The person importing the service from outside India (Importer of service) shall be liable to pay service tax.
- Services of insurance agent – In such case, agent are the service provider and insurance company is the service reciever. Thus insurance company shall be liable to pay service tax.
- Services of Goods Transport Agency (GTA) – 75% of service tax on GTA is abated. So, the remaining 25% service tax is paid by the service recipients, i.e., the person paying the freight to the goods transport agency.
- Services of sponsorship – Person receiving any kind of sponsorship (except for promotion of sports and business) shall be liable to pay service tax.
- Services of tribunal – Tribunal is also considered as service provider so the person receiving the service, i.e., the person whose conflict is being resolved is liable to pay service tax.
- Services of advocates – The liability of service tax lies with the person receiving the services of advocate
- Services of manpower supply – In this case, 75% of the total liability of service tax lies with the service recipient while remaining 25% lies with the service provider. So, 75% of the total service tax liability shall be paid by the business entity getting manpower while 25% shall be paid by the agent/contractor providing manpower.
- Services of renting motor vehicle – Renting a cab is also included in availing services.
In case the service provider is availing the input credit, service tax liability shall be distributed between service provider and service recipient in the ratio 60:40. This means service provider shall be liable to pay 60% of the total service tax while the service recipient shall be liable to pay 40% of the total service tax liability.
In case the service provider is not availing the input credit, the whole service tax liability lies with the service recipient and he shall be liable to pay service tax.
- Services of directors of a company – This has also been made taxable from 07.08.2012. So, the company receiving the services of directors shall be liable to pay service tax.
- Support services by authority – Any support services provided by government authorities are also taxable and the service tax liability lies with the person receiving such services.
- Works contract – In case of works contract, the service tax liability lays equally with both parties and thus both parties shall pay service tax equally.
Besides above cases of reverse charge, there are some cases where liability of service tax will remain with the service provider if the service provider is a corporate or company-
- Renting of a vehicle
- Manpower services
- Works contract
Some services are covered under the negative list of Service Tax; this earlier article explains about them
Determining the liability of service tax isn’t a difficult task. One just needs to know some basic provisions of service tax and the nature of service concerned. Then it would be a simple thing to decide who has to pay service tax for which service.