Everything you need to know about service tax in India

You pay taxes almost everywhere, whether you are buying, selling or earning something. Obviously, the rates differ based on a long list of conditions and criteria. One tax that you may notice paying often is the service tax, which is an indirect tax and has its roots in the Finance Act 1994. 

Yes, it is that old! Intrigued yet? Let’s get started then and discover everything you need to know about service taxes! 

What is service tax?

Service tax is an indirect tax paid on availing yourself of services offered by the service provider. This tax is borne by the consumers and collected from you on the invoiced bill.

Wait, these days, we mostly hear about goods & service tax (GST). How is this service tax different from goods & service tax? The major difference is that GST is an all-inclusive and comprehensive tax levied on the supply of all goods and services.

In contrast, service taxes are only limited to the services category. One important thing to note is that since 2017, these service taxes are subsumed under GST and hence are a part of GST itself.

According to Section 66 of the Service Tax Act, the service tax rate is 15%. This 15% service tax system was prominent before the introduction of the GST bill. After GST has come into the picture, there are now a total of five slabs of taxes, which are:

1. 0%
2. 5%
3. 12%
4. 18%
5. 28%

Based on the type of services you opt for, the applicable tax slabs may differ.

Here is a service tax example to clear things up further.

Let’s say that the cost of rendering the services was Rs. 1000, with 18% GST being levied. Without taxes, you will only be paying them Rs. 1000, but once the service tax is imposed, you would be paying Rs. 1180. effectively to your service provider.

The above example only holds true when 100% of the amount does not come under tax exemption, but what if there is a tax exemption?

Here is another example to address this query as well!

Let’s take the same example as above, but now imagine that 60% of the 1000 Rs. qualifies for tax exemption. In this scenario, you will calculate 18% on the other 40%, which is Rs. 72, and hence, you would be paying Rs. 1072. instead of Rs. 1180.

We have consolidated all these calculations into a table; you can thank us later! 

Where is service tax in India applicable?

Any service not listed in the Negative List Section 66D of the Finance Act of 1994 is subject to service taxes. Naturally, the services subject to these taxes are pretty large, and you can not count them on your fingers.

However, we have tried to cover a list of services you regularly avail yourself of. So, the next time you opt for a service, you will know if a service tax will be imposed! 

1. Telecommunication
2. Asset management
3. Legal consultancy services
4. Photography
5. Broadcasting
6. Cosmetics and beauty parlour
7. Airport services
8. Health clubs and fitness centres
9. Banking and various other financial services

Important Notice: This is not the complete list!

How are service taxes paid in India?

If you are a consumer, your job ends after the transaction. You avail yourself of the service, benefit from it, and pay for it.

However, if you are a service provider, your work is still unfinished. As per the service tax rules, you should pay the taxes before the 5th of every month. In short, the service taxes are paid to the Central Government on a monthly basis.

So where and how do you pay this tax? Well, firstly, this tax should be deposited into a bank, but here is a catch. The bank that you are depositing the money into should be designated by the Central Board of Excise. 

Service taxes are levied either on a cash basis or an accrual basis. Below, we have explained both of these aspects.

Cash basis method

If you are an individual service provider, the service tax is levied on a cash basis. In this method, the income and expenses, debit and credit, are recorded on the day that it actually takes place.

For instance, if you provided services on the 29th of October but received the payment on the 7th of November, the 7th of November will be the date that will go into the records. It might be a little confusing to get a grip on this.

So, if we have to explain this concept in a nutshell, this transaction will be a part of the November service taxes instead of October’s. 

Accrual basis method

An accrual basis is applicable to companies. We are sure you must have already figured out what this method does, but here is our version.

The dates recorded in this scenario are based on the dates that they get accrued and not on the dates that are actually realised. If we apply the above example here, the 29th of October will be the date that will be recorded, and hence, this transaction would be a part of October’s service tax payment.

Are there exemptions for service taxes?

Service tax is not levied on all the services in India. We have listed a few below, but if you are interested, you can check out Section 66D’s negative list to get a comprehensive list of services that are excluded from service taxes.

1. If you are a small-scale service provider with an aggregate turnover below 10 lakh per annum.
2. If you are an employee providing services to an employer.
3. If the services are rendered to diplomatic missions or international organisations such as the United Nations. 
4. If the services are provided by the Department of Posts or the Reserve Bank of India.
5. If the services are related to agricultural operations. (Not all of them; more details here)

Conclusion

So this was everything about the service tax you pay every day to avail yourself of different services. By the way, did you know that taxes are crucial because these funds are invested in the country’s economic growth? 

The more you read, the more exciting these things will turn out to be. If you are a service provider and are still with us, here is a reminder to pay service taxes on time and avoid penalties!

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