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Is Service Tax Applicable on My Service? – Everything About Service Tax Applicability

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Service Tax in India

Is Service tax is applicable on my service? This is one of the most important questions that every service provider asks from this legal advisor. Service tax is one of largest revenue source for the Indian government and hence, government is really after it and does not accept any non compliance with Service tax.

Before we can understand the very basic questions of service tax, we need to understand the basics of it. How it is being levied. If we know the basics of this tax, then we can really protect our self from the stringent laws of Service tax.

The three real Service Tax Basics:

1.) No Separate Tax: Service tax has no separate act, it is originally levied from finance Act, 1994 and parliament has used the entry no.97 from Union list to provide support of Constitution of India to levy this act.

2.) Basic Taxability: Before to proceed for anything, we must understand one thing that service tax will only apply on services provided. It cannot be applied on goods. Hence, if you are selling goods and not services, then you are not under the ambit of this tax.

3.) Understand the mechanism: Even if you are a service provider, then also it doesn’t mean that you have to pay the service tax. Once, it is proved that we are providing services, and then we have to check the mechanism of Service and its rules.

After learning the three basics about the service tax, we can now move towards out process of understanding the chargeability on Service Tax.

The mechanism is presented below:

#Step1 – Understand Your Business:

The first and foremost step of this mechanism is to understand your business properly. To understand, you must know that whether you are providing services? Or you are selling goods or you are providing both?

The first two questions are easy to answer; hence we will give you the example of third question, when a business provides services and goods both with practical examples:

ST Applicable*Restaurant business is held as providing the services and goods both and hence they are liable to pay VAT and Service tax both.

Other examples of similar lines of business are Builders, Constructors, etc.

#Step 2 – Basic Chargeability:

Once you are satisfied that you are providing the service, the next step is to judge yourself with the charging section of Service tax. In a layman language, we can understand this definition as

“Any activity carried out by one person to another for a consideration (money or anything in return) in a chargeable territory i.e. India except the state of Jammu and Kashmir”

After reading the definition, we could understand the three important points:

  • Any activity will be chargeable to tax only if it is being provided in India. So, if anybody is providing services outside India will not be liable to pay the Service tax.
  • If any activity is carried out by one person to another, without consideration, then it will not be liable to service tax. E.g. Any work carried out for noble cause, will not attract service tax.
  • Two people are required for service tax to become applicable. E.g. a MNC has four departments and depart A carried out some service for Depart B for a consideration, then also service tax will not be applicable, because services are not provided to another person.

Now, after reading this, if we understand that we fall under this definition, then we should move of step 3.

Service Tax Liability

#Step 3 – Negative List or Declared Service:

Once, we are covered under the step 2, then we should check whether, we are covered in negative list or not? In case we are covered under the negative list of services, then we not liable for service tax in India.

However, if we are not covered under step 2 nor under negative list, then we should check whether we are covered under declared Service or Not. If we are covered under declared service, then we are deemed to be covered under Service tax ambit and hence liable to service tax.

#Step 4 – Check for Exemption

: If we are not covered under negative list, then we have to check for exemption notification specifically for our service. If there is any exemption, then we are not liable to pay service tax. However, if there is no exemption available, then we have to move to the next step.

#Step 5 – The Value of Service:

Once, we are covered under the step 2, and then we have to calculate the value of services provided in a Financial Year. If the total value of Services provided in a financial year does not exceed Rs.10 lakh, then we are not liable to service tax in India

This is due to SSI exemption for Small Scale Business. The following table must be understood for this case:

CASE ACTION REQUIRED
Service are below 9 lakh No Action Required
Services exceeds 9 lakh Registration Required but not liable to Service tax
Services Exceeds 10 Lakh Liable to Service Tax

Once, we cross this exemption limit, then we are liable to Service tax and we are eligible to move into next step.

#Step 5 – Rate of Service Tax:

Once we are done with the value of service tax, then we have check the rate of Service tax applicable. The latest rate of service tax is 14.50% (including all cess). But this rate is only valid upto 1st June 2016. From 1st June, 2016 onwards, the rate of Service tax will be 15%.

Also, check for any abatement on the service tax rate.

Conclusion

Service tax mechanism cannot be explained in just 5 steps. But still, the above five steps will always holds true in 70% cases. We should go through the above pass to know our business better and also get to know about the environment under which it works. Understand your business, plan your taxes and go and win the world.

About the Author: CA Paras Mehra is a service tax consultant and a co founder of Hubco.in, a leading portal to register for Service tax in India

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