What is Service Tax?


The Indian government has imposed a tax on certain services and service providers, since the early 1990s. It is an indirect form of tax as although the service providers are responsible for paying the government, the real cost is paid by the consumers. The service providers later charge their customers for service tax. Originally the service tax in India was set at 5% and covered only a limited number of services. In the subsequent years though there has been a marked increase in both the rate and the number of services covered. It is right now around 15 percent.

Service Tax in India 

The service tax is a relatively new concept in India and was only implemented in 1994 after the passing of Finance Act in the same year. The service tax rate was increased to 12% by the Finance Act, 2006. After this increase Finance Act, 2007 increased the service tax rate to 12.36 %, with the addition of secondary and higher education cess.

In 2012 the number of services covered by this tax were increased. Now all service providers whose services are not mentioned in the negative list have to pay this tax. The negative list is explained in the Finance Act in Section 66D. Examples of the negative list are food served in factory canteens and Pradhan Mantri Jan Dhan Yojana. The services that educational institutions provide for either their students or teaching staff and some pilgrimage trip organisations are also not required to pay the service tax. The National Skill Development Organisation is also exempted from this tax. The list keeps undergoing modifications as per the current government policies.

Nowadays service taxes are levied from service providers like air conditioned restaurants and hotels. The service tax is only for businesses with transactions of 10 lakh or more per year and the service providers whose net transactions are below this amount are exempted. Apart from the fixed percentage, service taxes, also have some additional cesses like the Swachh Bharat cess and the Educational cess. All these combine to make the service tax reach about 15 percent.

How Service Taxes are a Generator of Revenue

As the service tax has been a significant generator of revenue for the country, every government has made alterations based on requirements. The service tax was quite low when it was introduced, and with passage of time it increase from 5% to 15%. The current rate is now however three times its earlier value. The revenue generated by the Indian government from service tax has increased considerably too.

The Focus of Budget on Service Tax

Indian Budgets generally have concentrating on the service tax and it is changed or improved on a regular basis. The total service tax percentage for the year 2015 was 14 but Swachh Bharat cess was added to bring it up to 14.5%. While the parliament had permitted the Swachh Bharat cess to be about 2%, keeping in mind the common people the government put it at 0.50%. According to the Indian Finance Minister Arun Jaitley, the funds generated from this cess will be used only in the Swachh Bharat campaign. Service tax may be raised at a later date, when the people of the country are more prepared to pay more to the government.

The 2016 budget saw the proposed adding of 0.50% cess called the Krishi Kalyan Cess which will bring the total figure of service tax charged to 15% from 14.5%. The Krishi Kalyan Cess came into effect from the 1st of June 2016. The government has made clear that the proceeds of Krishi Kalyan Cess would be solely used to finance initiatives related to welfare of farmers and agriculture improvement. Seeing the growing service tax rates! It is quite possible that the service tax rates may rise to 17-18% in the coming years.

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