Service Tax Moves To New Regime

Service tax was introduced in 1994 by then Union Finance Minister Mr P. Chidambaram. After completing 16 years, service tax laws have moved over to a new regime governed by a negative list with effect from July 1, 2012.

The Government released the Guidance Paper on the new approach to service tax on June 20. The release of the Guidance Paper marks the culmination of the year long efforts made by the Government to introduce a negative list based comprehensive approach to taxation of services as a part of the Budget exercise. The new approach to taxation of services is intended to take the country and the economy a step closer towards the introduction ofGoods and Service Tax (GST).

Since its inception, the service tax laws were governed by the positive list based selective approach to taxation of service. The release of the Guidance Paper on the new approach marked the end of the positive list based selective approach to taxation of services.

Henceforth, all services will be liable to taxation except those indicated in the Negative List or otherwise exempted. More than as a revenue garnering measure, Negative List is expected to make the administration of the tax simple, both for the Department as well as the taxpayers, reduce litigation and usher a regime much closer to our eventual goal of Goods and Services Tax.

Background

Journey of service tax has been a step-by-step progress that began in 1994, with every year more and more services coming under the tax net. The revenue from service tax has also increased from nearly Rs 400 crore in the first year to more than Rs 97,000 crore in the last financial year, an increase of nearly 37 per cent over 2010-11.

After appearing largely as just-another-tax for the first 8 years, with collections touching Rs 3,302 crore in 2001 -02, service tax took some giant leaps in the next 7 years, both on the back of wider coverage as well as increase in tax rate, reaching Rs 60,941 crore in 2008-09. Next two years saw the growth somewhat moderating with collections reaching Rs 70,896 crore in 2010-11.

The buyoncy began once again on the back of some policy initiatives and service tax contributed Rs 97,444 crore during 2011-12, an increase of nearly 37 per cent over the previous year. The current year is also witnessing growth in excess of 40 per cent in the first two months.

Negative List of Services

Negative list, basically means that all services, excluding those specified in negative list of services will be subject to service tax. Thus, one has to only see whether the service one is providing is in negative list. If not, one is liable to pay service tax (subject to exemption limit of Rs ten lakhs available to small service providers).

Now, with the exception of 38 services, which figure in the negative list, all other activities will attract 12 per cent tax service tax.

A two-slab rate of tax at 6 per cent and 12 per cent would ensure that revenues continue to flow, as tax history is witness to the fact that reasonable taxes improve collections.

The fact that the Government has a kind heart towards small enterprises is proved by the inclusion of services provided by incubates up to a turnover limit of Rs 50 lakh in the negative list and providing an option for entities with a turnover of up to Rs 50 lakh not to follow the Point of Taxation Rules and pay the tax on receipt basis. If at all the Government is keen on moving over to the Goods and Services Tax (GST), it should also minimise the abatements provided under Service Tax.(Source: The Downside to the Service Tax Negative List)