PRINCIPLES OF TAXATION

TOPIC- HIGHLIGHT THE MEANING AND IMPORTANCE OF SERVICE

TAX, TAXABLE SERVICE.

SUBMITTED BY- HEENA YASMIN SHAIKH

BBA LLB SEM- 10

ROLL NO- 18

GUIDED BY- Mr. BHASKAR CHAUDHURY (Asst. Prof of Law)

Indian Institute of Legal Studies

Dagapur, Matigara, Siliguri, Darjeeling, West Bengal 734001.

 Table of contents:

Contents Page Number

Acknowledgement I

Research Methodology II

Content Page no.

Chapter 1 Introduction 1

i. Types of taxes in India

Chapter 2 Brief history of Service Tax 3

Chapter 3 Importance and meaning of Service Tax 4

i) Constitutional Validity
ii) Salient features of Service Tax
iii) Activities not covered under Service
Tax

Chapter 4 Difference between Service Tax and GST 7

Chapter 5 Taxes are replaced by GST in India 8

i) Objectives of GST

Conclusion 10

Bibliography
 ACKNOWLEDGEMENT

With profound gratitude and sense of indebtedness I place on record my sincerest thanks to,
Mr. Bhaskar Chaudhury, Asst. Prof of Law, Indian Institute of Legal Studies, for his
invaluable guidance, sound advice and affectionate attitude during the course of my studies.

I have no hesitation in saying that he molded raw clay into whatever I am through his
incessant efforts and keen interest shown throughout my academic pursuit. It is due to his
patient guidance that I have been able to complete the task.

I would also thank the Indian Institute of Legal Studies Library for the wealth of information
therein. I also express my regards to the library staff for cooperating and making available the
books for this project research paper.

Finally, I thank my beloved parents for supporting me morally and guiding me throughout the
project work.

_____________ Heena yasmin shaikh

Teacher’s Signature Student’s Signature

Date: __/__/__2022 Date: / /2022

I
 RESEARCH METHODOLOGY

 AIMS AND OBJECTIVES:

The researcher would aim to study in detail the meaning and importance of Service Tax in
India.

The following will be the objectives of the study –

1. To ascertain as to what extent the migrant workers are getting the benefits of legislations
enacted for the protection of the migrant workers.

3. To highlight the difference between Service Tax and GST

4. To identify/highlight the constitutional validity of Service Tax

 STATEMENT OF PROBLEM

The reason for undertaking this work is that there are a wide variety of services on which
this tax is levied and the service tax revenue has become a very important source of

indirect tax revenue for the Government of India. Previously, though the services

sector accounted for 40% of the GDP, it was never taxed. Henceforth arises the

need to study the importance and economic developments after the introduction of

service tax.

 RESEARCH HYPOTHESIS

Research is commonly referring to a search of knowledge. It is done with the help of study,
observation, comparison and experiment. The researcher has been motivated by the
hypothesis that the service tax has been one of the most importance and successful tax reform
in our country.

II
  RESEARCH QUESTIONS:

The following questions can be formulated:

1. What are different types of taxes in India?

2. Which activities are not included under Service Tax?

3. Explain the difference between Service Tax and GST.

 METHODOLOGY OF RESEARCH

“Methodology” does not merely mean the methods used by the researcher to complete his
research work but it also means and implies the concepts and theories, which underlie the
methods. The methodology used for the completion of this project is Doctrinal and
Analytical. Doctrinal research in law field indicates arranging, ordering and analysis of the
structure, framework and laws by extensive surveying of literature but without any fieldwork.
Chapter -1

Introduction

The Government of every country requires funding to aid it in carrying out its necessary
functions and duties. These include operating public institutions, developing the country’s
infrastructure and financing public welfare initiatives and schemes. In exchange for providing
these amenities, a government generates the revenue required for them by taxing its citizens.

To make this process efficient, every country has a proper taxation process laid out by its
government. India, with its wide distribution of income earners and sources of revenue, is no
different. It places value in the importance of taxes across the board and marks an important
distinction between its major types of taxes.

Tax System in India:

India has a structured tax system and the importance of taxes are defined by two attributes -
progressive and proportional. It is progressive in that the tax is levied at increasing rates to
increasing brackets of income and revenue. Meanwhile, it is proportional in that the rate of
tax levied is in proportion to the amount of income or revenue it is being levied upon.

Any changes in tax rates, brackets and slabs are determined largely by the central and state
governments and must be accompanied by a law passed by the Parliament or State
Legislature.

Types of Taxes in India:1

From income tax to custom duty, there are a variety of taxes applicable to Indian citizens
under the nation’s taxation system. However, almost all taxes under the Indian taxation
system can be primarily distinguished under two categories: direct and indirect taxes.

 Direct Taxes: These forms of taxes are levied directly on the taxable income
generated by individuals and corporations. The importance of these taxes are that they
are paid directly to the government and make up a significant portion of India’s tax
generated revenue. An important thing of note is that while they are known as ‘direct’

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 taxes, the responsibility of submitting these tax amounts rests on the taxpayers
themselves.

Some of the most important direct taxes are the income tax, corporate tax, capital gains tax,
property tax, entitlement tax and such.

 Indirect Taxes: The other form of taxes are not levied directly on a taxpayer’s
income but rather indirectly when they avail or purchase goods and services. These
taxes are included and paid by the consumer to the service provider or goods seller.
The same amount is then paid by these parties to the government, hence the term
‘indirect’.

One of the most important indirect taxes is the Goods and Services tax (GST) which has
subsumed a large number of indirect taxes that existed before 2017. Apart from GST, there is
also Dividend Distribution Tax, Custom Duty, Securities Transaction Tax and such.

Importance of Direct Taxes:

Direct taxes display the importance of taxes by reducing income equalities with its
progressive tax structure. Citizens are taxed in proportion to their economic circumstances,
thereby encouraging social and economical equality.

Moreover, with direct taxes, taxpayers remain aware of how much tax they can be expected
to pay in a financial year and prepare well in advance. Direct taxes are also useful in
controlling inflation as any change in their rates can help in regulating demand and supply in
the economy.

Importance of Indirect Taxes:

The importance of taxes for the government when it comes to indirect taxation is that they are
an automatic function that accompany the buying and selling of goods and services across the
country. They are therefore easy to collect and convenient for both taxpayers and the tax
collection authorities.

They also help broaden the country’s net of tax liabilities, gathering contributions from those
sections of society that are otherwise exempted from direct tax.
Chapter 2:

Brief history of Service Tax

The Service Tax was introduced in India around 21 years back on July 1, 1994 at the
recommendations of Dr. Raja Chelliah Committee on tax reforms. The introduction of this
levy in India can be termed as milestone in Indian Tax history. This is also an indicator of
foresightedness and thoughtfulness of the reformers, economists and the government of India.
The tax collection figures themselves state the success story of service tax. On July 1, 1994,
the service tax was introduced on 3 services only. These were Telephone Services, Non-Life
Insurance Services and Stock Brokers’ Services. From July 1, 2012, the concept of Negative
List Regime has been introduced. Meaning thereby that all the services, other than those
mentioned in the Negative List (as per Section 66D of the Finance Act, 1994 as enacted by
the Finance Act, 2012) are liable to service tax if not specifically exempted otherwise. The
above information is sufficient to indicate the importance of service tax in: The contribution
of service sector in the Indian economy; Formation of appropriate fiscal and other policies by
the government and the growth of Indian Economy. 2

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Chapter 3:

Importance and meaning of service tax

Meaning of Service:

As per the dictionary meaning, the term service means- ‘A valuable action, deed, or effort
performed to satisfy a need or to fulfill a demand or an action of helping or doing work for
someone’.

Service Tax:

The Service Sector of Indian Economy contributes to around 53.7 percent of India’s GDP
during 2008. India is generating large revenue by levying service tax on various services.
Service tax is a form of indirect tax imposed on specified services called “taxable services”.
Service tax cannot be levied on any service which is not included in the list of taxable
services. Over the past few years, service tax has been expanded to cover new services. The
objective behind levying service tax is to reduce the degree of intensity of taxation on
manufacturing and trade without forcing the government to compromise on the revenue
needs. The intention of the government is to gradually increase the list of taxable services
until most services fall within the scope of service tax. For the purpose of levying service tax,
the value of any taxable service should be the gross amount charged by the service provider
for the service rendered by him.

Constitutional Validity:

Article 265 of the Constitution lays down that no tax shall be levied or collected except by thr
authority of law. Schedule VII divides the subject into three categories:

a) Union list (only Central Government has power of legislation)

b) State list (only State Government has power of legislation)
c) Concurrent list (both Central and State Government can pass legislation)

Salient Features of Service Tax:

 Service Tax is essentially an indirect tax

 Individuals are required to pay the Service Tax only once in a quarter
  Companies can pay Service Tax for one month by the 25th of the following month

The Statues governing the levy of Service Tax are as follows:3

i) The Finance Act, 1994

ii) The Finance Act, 2004
iii) The Finance Act, 2007
iv) The Service Tax Rules, 1994
v) The CENVAT Credit Rules, 2004
vi) The Export of Service Rules, 2005
vii) The Service Tax (Registration of Special categories of persons) Rules, 2005
viii) The Taxation of Services (Provided from Outside India and Received in India)
Rules, 2006
ix) The Service Tax (Determination of Value) Rules, 2006
x) Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007

Chargeability of Service Tax:

In the earlier times (up-to 2012), the service tax was charged on cash basis but after the
amendments the changeability will be as follows:

On Cash Basis: Applicable to Individual Service Providers, which means that service
provider will deposit the service tax only when the amount as shown in the Invoice has been
collected.

On Accrual Basis: Applicable to every company, partnership firm, LLP, professionals etc.,
which means that liability to pay services as soon as the services are provided irrespective of
the collection of the funds on the same.

Activities not covered under Service:

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There are few activities specifically mention in the definition of service and such activities
are not considered as service and hence no service tax shall be payable on those services. The
list along-with brief description of such service are given below:4

S. Activities Not Covered

No. under Service Brief Description

Any activity that constitutes only a transfer in title of

Sale of Immovable immovable property by way of sale, gift or in any
1. Property other manner.

Money or Actionable
2. Claim A transaction only in money or actionable claim

Any activity that constitutes only a transfer in title of

3. Sale of Goods goods by way of sale, gift or in any other manner.

Employer – Employee Any service provided by an employee to an employer

4. Relationship in the course of the employment.

Fees payable to a court or a tribunal set up under a law

5. Court / Tribunal Fees for the time being in force.

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Chapter 4:

Difference between Service Tax and GST

In-Service tax if the services provided by a Supplier cross Rs 9 Lakhs then registration of
service tax is mandatory and if the services provided cross Rs.10 Lakhs then he must collect
and pay service tax, whereas in GST the turnover limit is Rs.20 Lakhs and in case the
business is in Mizoram, Manipur, Meghalaya, Arunachal Pradesh, Nagaland, Sikkim,
Tripura, Himachal Pradesh, Uttarakhand the turnover limit is Rs.10 Lakhs for obtaining
registration. In the case of IGST transaction, there is no limit of registration. Further to pay
liability under Reverse Charge Mechanism GST registration is a must.

In-Service tax the rate is 15%, while in GST the rate of tax on services might be 12% or 18%.
The rate of tax on Services will be defined according to the Service Accounting Code.

In service tax the return is filed every six months i.e., for the period of April to September
and October to March, while in GST returns have to be filed every month (except for the
dealers who have registered under Composition Scheme; they have to file return quarterly)
and at the end of every Financial Year annual return is required to be filed. As per the
provisions of service tax, the service tax return can be revised within 90 days but a return
cannot be revised in GST and if GST returns are not filed for a period of 6 months, then the
GST registration will be cancelled. In service tax, company taxpayer has to pay service tax
monthly while proprietors, partnership firm, LLP, HUF, one person company have to pay
service tax quarterly. In GST, each and every person has to pay tax monthly. The provisions
for return filling in GST are very strict. Each person has to give invoice-wise details of
Outward supplies of services/goods before 10th of every month and for the inward supplies
of services/goods the same has to be confirmed before 15th of the month. The payments have
to be made before 20th of the same month and persons will not be allowed to avail credit if
the payment is not made.5

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Chapter 6:
Taxes are replaced by GST in India

GST is known as the Goods and Services Tax. It is an indirect tax which has replaced many
indirect taxes in India such as the excise duty, VAT, services tax, etc. The Goods and Service
Tax Act was passed in the Parliament on 29th March 2017 and came into effect on 1st July
2017.

In other words, Goods and Service Tax (GST) is levied on the supply of goods and services.
Goods and Services Tax Law in India is a comprehensive, multi-stage, destination-based
tax that is levied on every value addition. GST is a single domestic indirect tax law for the
entire country.

Objectives Of GST:6

 To achieve the ideology of ‘One Nation, One Tax’

GST has replaced multiple indirect taxes, which were existing under the previous tax
regime. The advantage of having one single tax means every state follows the same
rate for a particular product or service. Tax administration is easier with the Central
Government deciding the rates and policies. Common laws can be introduced, such as
e-way bills for goods transport and e-invoicing for transaction reporting. Tax
compliance is also better as taxpayers are not bogged down with multiple return forms
and deadlines. Overall, it’s a unified system of indirect tax compliance.

 To subsume a majority of the indirect taxes in India

India had several erstwhile indirect taxes such as service tax, Value Added Tax
(VAT), Central Excise, etc., which used to be levied at multiple supply chain stages.
Some taxes were governed by the states and some by the Centre. There was no unified
and centralised tax on both goods and services. Hence, GST was introduced. Under
GST, all the major indirect taxes were subsumed into one. It has greatly reduced the
compliance burden on taxpayers and eased tax administration for the government.

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 To eliminate the cascading effect of taxes

One of the primary objectives of GST was to remove the cascading effect of taxes.
Previously, due to different indirect tax laws, taxpayers could not set off the tax
credits of one tax against the other. For example, the excise duties paid during
manufacture could not be set off against the VAT payable during the sale. This led to
a cascading effect of taxes. Under GST, the tax levy is only on the net value added at
each stage of the supply chain. This has helped eliminate the cascading effect of taxes
and contributed to the seamless flow of input tax credits across both goods and
services.

 To curb tax evasion

GST laws in India are far more stringent compared to any of the erstwhile indirect tax
laws. Under GST, taxpayers can claim an input tax credit only on invoices uploaded
by their respective suppliers. This way, the chances of claiming input tax credits on
fake invoices are minimal. The introduction of e-invoicing has further reinforced this
objective. Also, due to GST being a nationwide tax and having a centralised
surveillance system, the clampdown on defaulters is quicker and far more efficient.
Hence, GST has curbed tax evasion and minimised tax fraud from taking place to a
large extent.

 To increase the taxpayer base

GST has helped in widening the tax base in India. Previously, each of the tax laws had
a different threshold limit for registration based on turnover. As GST is a consolidated
tax levied on both goods and services both, it has increased tax-registered businesses.
Besides, the stricter laws surrounding input tax credits have helped bring certain
unorganised sectors under the tax net. For example, the construction industry in India.

 Online procedures for ease of doing business

Previously, taxpayers faced a lot of hardships dealing with different tax authorities
under each tax law. Besides, while return filing was online, most of the assessment
and refund procedures took place offline. Now, GST procedures are carried out
almost entirely online. Everything is done with a click of a button, from registration to
return filing to refunds to e-way bill generation. It has contributed to the overall ease
of doing business in India and simplified taxpayer compliance to a massive extent.
 The government also plans to introduce a centralised portal soon for all indirect tax
compliance such as e-invoicing, e-way bills and GST return filing.

 An improved logistics and distribution system

A single indirect tax system reduces the need for multiple documentation for the
supply of goods. GST minimises transportation cycle times, improves supply chain
and turnaround time, and leads to warehouse consolidation, among other benefits.
With the e-way bill system under GST, the removal of interstate checkpoints is most
beneficial to the sector in improving transit and destination efficiency. Ultimately, it
helps in cutting down the high logistics and warehousing costs.

 To promote competitive pricing and increase consumption

Introducing GST has also led to an increase in consumption and indirect tax revenues.
Due to the cascading effect of taxes under the previous regime, the prices of goods in
India were higher than in global markets. Even between states, the lower VAT rates in
certain states led to an imbalance of purchases in these states. Having uniform GST
rates have contributed to overall competitive pricing across India and on the global
front. This has hence increased consumption and led to higher revenues, which has
been another important objective achieved.
 Conclusion

The introduction and levy of service tax in India w.e.f. July 1, 1994 is one of the most
important and successful tax reforms in the country. Huge tax collections of service tax prove
this fact. These are also indicators of role of service sectors in the growth of Indian economy
since last 21 years. In fiscal and other policy formations in the country, the service tax and
service sectors play a vital role. In order to term an activity a service it is necessary to see that
such activity is carried out by once person for another for monetary consideration and that
activity is neither sale/transfer/gift of immovable/movable property or goods nor a deemed
sale in terms of Article 366 (29A) of the constitution of India.
 Bibliography
Primary Sources:

 Dr. Vinod K. Singhania & Dr. Monica Singhania, Taxmann 66 (2021)

 Dr. J.N. Pandey, Constitutional Law of India, 56 (2019)

Webliography
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 https://taxguru.in/service-tax/service-tax-india-history-meaning-service.html visited on
7/05/2022 at 7:30 pm IST
 https://www.researchgate.net/publication/295857310_Service_Tax-
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 https://taxmasala.in/what-is-service-tax/ visited on 11/05/2022 at 9:00 pm IST

 https://www.quora.com/What-are-the-major-differences-between-GST-and-service-tax
visited on 12/05/2022 at 6:30 pm IST
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