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Chapter - 2: Outline of Service Tax

Service tax was first introduced in India in 1994 on only a few services like telephone services, non-life insurance, and stock brokers. This was done to broaden the tax base as only manufacturing was taxed before through excise duties, while services contributed nearly half of GDP but were untaxed. The Chelliah Committee on Tax Reforms had also recommended taxing services. Subsequently, the Finance Minister in 1994 budget speech stated there was no reason to exempt services from taxation when goods were taxed. Over time, the legal provisions and scope of service tax were expanded through amendments to the Finance Act of 1994 to currently apply uniformly at 8% on all taxable services across India except Jammu and Kashmir.

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43 views

Chapter - 2: Outline of Service Tax

Service tax was first introduced in India in 1994 on only a few services like telephone services, non-life insurance, and stock brokers. This was done to broaden the tax base as only manufacturing was taxed before through excise duties, while services contributed nearly half of GDP but were untaxed. The Chelliah Committee on Tax Reforms had also recommended taxing services. Subsequently, the Finance Minister in 1994 budget speech stated there was no reason to exempt services from taxation when goods were taxed. Over time, the legal provisions and scope of service tax were expanded through amendments to the Finance Act of 1994 to currently apply uniformly at 8% on all taxable services across India except Jammu and Kashmir.

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CHAPTER – 2

Outline of Service Tax


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2.1 Prior to 1 July 1994 only the manufacturing sector was subject to indirect
tax in the form of Central Excise. This approach placed a disproportionate burden
on the sector producing commodities, while service-sector, which contributed about
48.45% of GDP, escaped taxation. The base of tax system was required to be
extended specially when present thinking favours lowering of tariff rates together
with wide-ranging input-duty relief. There is also a crying need for improving the
tax-GDP ratio. Therefore, the Service Tax was imposed in 1994 for the first time on
(i) Telephone services, (ii) Services relating to non-life insurance and (iii) Services
by Stock Brokers.
2.2 The report of the Chelliah Committee on Tax Reforms had also mentioned
services as a potential base for increasing revenue. On these recommendations,
the then Union Finance Minister, while introducing the Budget for 1994-95 stated
that:-
“There is no sound reason for exempting services from taxation,
when goods are taxed and many countries treat goods and services
alike for tax purposes. The Tax Reforms Committee has
recommended the imposition of tax on services as a measure for
broadening the base of indirect taxes”.
2.3 Depending on the socio-economic compulsions, each country evolved a
taxation system on services adopting either a comprehensive approach or a
selective approach. While most of the developed countries tax all the services with
very few and limited exemptions, some of the developing countries tax select
services only. Hitherto, India has adopted a selective approach to taxation of
services.
2.4.1 The legal provisions for the levy and collection of Service Tax were
introduced through Finance Bill 1994. Thus, the law relating to Service Tax was
enacted vide Chapter V of the Finance Act, 1994 (Sections 64 to 96 thereof) as
amended from time to time. Under the charging Section 66 of the Finance Act,
1994 as amended, the Service Tax is levied at a uniform rate on all taxable
services (@ 8% with effect from 14.5.2003). Except for certain limited exemptions/
concessions as allowed under Section 93 of the aforesaid Act, there are no general
exemptions from Service Tax.
2.4.2 Service Tax is applicable to the whole of India except the State of Jammu
and Kashmir. The provisions for Service Tax have been extended to the
designated areas in the Continental Shelf and Exclusive Economic Zone of India
vide Notification No.1/2002-ST dated 1.3.2002.
2.4.3 A new Chapter “V-A” has been inserted in the Finance Act, 1994 to provide
for advance rulings in respect of a question of law or fact regarding the liability to
pay Service Tax in relation to a service proposed to be provided, in the manner
specified.

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