Service Tax & VAT in India

Submitted by
Upasana Gautam
Sonia Yadav

Service tax an overview

Service Tax Laws w.e.f. 1.7.2012.
Section 66B of Finance Act,1994 as amended
provides:
There shall be levied a tax (hereinafter
referred to as the service tax) at the rate of
twelve per cent on the value of all services,
other than those services specified in the
negative list, provided or agreed to be
provided in the taxable territory by one
person to another and collected in such
manner as may be prescribed

AMBIT of Service Tax

As on 1st May, 2011,119 services are taxable

services in India. These taxable services are

specified in Section 65(105) of the Finance
Act,1994.
Section 64 of the Finance Act, 1994, extends the
levy of service tax to the whole of India, except the
State of Jammu & Kashmir.
Generally, the liability to pay service tax has been
placed on the service provider. However, in
respect of the taxable services notified under
Sec.68(2) of the Finance Act,1994, the service tax
shall be paid by such person and in such manner as
may be prescribed at the rate specified in Sec.66 of
the Act and all the provisions of Chapter-V shall
apply to such person as if he is the person liable for

Levy of service tax in India

Every person providing services in excess of Rs 9.0 lacs in a financial year is

required to apply for Service Tax Registration.

Service tax is payable by an assessee if the value of services provided by

him is in access of Rs 10 lacs.

If assesee is individual or proprietary or partnership firm, tax is payable on

quarterly basis. This facility is not available to HUF. In all other cases, service
tax is deposited monthly.
Service Tax should be paid by 5th day (6th in case of e-payment) of the

month immediately following the month/quarter in which service is deemed

to be provided as per the Point of Taxation rules.
For the month of March or quarter ending march, it shall be payable by 31st

March.

Method of charging service tax

Earlier service tax was charged on cash

basis for every service provider.

Currently it is charged on cash basis from
individual service providers, and on accrual
basis from companies (i.e. companies are
to deposit service tax as soon as the
service is provided irrespective of collection
of funds on the same).
However, individual service providers have
to deposit service tax only when the invoice
amount has been collected.

Negative List-Sec 66D of the Finance Act,1994

Services provided by Government or a local

authority (except Department of Posts by way of

speed post, parcel etc).
Service provided by the RBI to any person.
All services provided by a foreign diplomat
mission located in India.
Services relating to agriculture.
Purchased and sold goods are not liable to
service tax.
Any process amounting to manufacture or
production of goods on which excise duty is
leviable.

Negative List-Sec 66D of the Finance Act,1994

Selling of space or time slots for advertisements

other than advertisements broadcast by radio or

television.
Services provided by way of access to a road or a
bridge on payment of toll charges.
Betting, gambling or lottery.
Admission to entertainment events or access to
amusement facilities.
Transmission or distribution of electricity by an
electricity transmission or distribution facility.
Services by way of renting of residential dwelling for
use as residence. It does not include places meant
for temporary stay.

Negative List-Sec 66D of the Finance Act,1994

Specified services relating to education:
preschool and education up to HSS ,
education as a part of a curriculum for
obtaining a qualification, vocational education
course.
Services relating to transportation of
passengers by a stage carriage,
railways( except air conditioned coach),
metro, inland waterways, public transport,
taxis, auto rickshaws.
Funeral, burial, crematorium or mortuary
services.

services subject to be taxed

The following services have been notified under Sec.68(2) of Finance
Act,1994

A.
Services...
(i)in relation to telecommunication service;

(ii)in relation to general insurance business;

(iii)in relation to insurance auxiliary service by an insurance agent; and

(iv)in relation to transport of goods by road in a goods carriage, where the consignor or consignee of goods
(a) any factory registered under or governed by the Factories Act, 1948 (63 of 1948);
(b) any company established by or under the Companies Act, 1956 (1 of 1956);
(c) any corporation established by or under any law;
(d) any society registered under the Societies Registration Act, 1860 (21 of 1860) or under any law
corresponding to that Act
(e) any co-operative society established by or under any law;
(f) any dealer of excisable goods, who is registered under the Central Excise Act, 1944 (1 of 1944)
(g) any body corporate or a registered partnership firm

services subject to be taxed..

(continued)

A continued
(v) In relation to Business Auxiliary Service of distribution
of mutual fund by a mutual fund distributer or an agent,

(vi) in relation to sponsorship service provided to any body

corporate or firm located in India.
B. Any taxable service provided or to be provided from a
country other than India and received in India, under
Sec.66a of the Finance Act,1994.

Who pays Service Tax

In the following situations, the liability to deposit service tax is as
follows :

i. in relation to [telecommunication service]

(a)the Director General of Posts and Telegraphs,
(b)the Chairman-cum-Managing Director, Mahanagar Telephone Nigam Ltd,
Delhi,
(c) any other person who has been granted a license by the Central Government.

ii. in relation to general insurance business, the insurer or re-insurer, as the

case may be, providing such service;
iii.in relation to insurance auxiliary service by an insurance agent, any person
carrying on the general insurance business [or the life insurance business, as the
case may be,] in India;
iv. in relation to any taxable service provided or to be provided by any person
from a country other than India and received by any person in India under section
66A of the Act, the recipient of such service;

Who pays service tax

(continued.)
in relation to taxable service provided by a goods
transport agency, where the consignor or consignee of
goods is- any factory, any company, any corporation, any
registered society, any co- operative society, any
registered dealer of excisable goods , any body corporate
or a partnership firm;
vi.in relation to business auxiliary service of distribution of
mutual fund by a mutual fund distributor or an agent, as
the case be, the mutual fund or asset management
company, as the case may be, receiving such services;
vii.in relation to sponsorship service provided to any body
corporate or firm located in India, the body corporate or,
as the case may be the firm who receives such
sponsorship service;
v.

Establishments to tax services in india

67 Central Excise & Service Tax Commissionerates (CBEC), 7 exclusive Service Tax

Commissionerates (23 Excise zones) and 5 Large Taxpayer Units administer

Service tax collection in India.
Following are the 7 Service tax Commissionerates:
1. Mumbai-I
2. Mumbai-II
3. Delhi
4. Chennai
5. Kolkata
6. Bangalore
7. Ahmedabad

There are 5 Large Taxpayer Units (LTUs) as listed below:

1. Bangalore,
2. Chennai,
3. Mumbai,
4. Delhi and
5. Kolkata

Value of Taxable Services

The valuation under service tax is governed by the

provisions made under section 67 of the Finance Act,

1994
Value of taxable service shall be determined on the

basis of one of the following:

a. consideration in money for providing the service.
b. consideration in money + consideration in any other
form
c. consideration in any form other than money
The consideration in any form other than money shall
be determined in a manner as prescribed in section
67(1) of the Finance Act, 1994.

Historical rates of service tax

The table below shows the rate of service tax
applicable at the relevant period of time.
Sr.No.

Period

Rate of Service Tax

Rate of Education Cess Rate of Secondary & Higher

Education Cess

Till 13.05.2003

5%

Nil

Nil

14.05.2003 to 09.09.2004

8%

Nil

Nil

10.09.2004 to 17.04.2006

10%

2% of S.T.

Nil

18.04.2006 to 31.05.2007

12%

2% of S.T.

Nil

01.06.2007 to 23.02.2009

12%

2% of S.T.

1% of S.T.

24.02.2009 to 31/03/2012

10%

2% of S.T.

1% of S.T.

01/04/2012 to date

12%

2% of S.T.

1% of S.T.

Interest
The table below shows the rate of interest

applicable at relevant period of time, if service

tax is not paid till due date.
Sr.No.

Period

Rate of Interest

1.

Till 11.05.2001

1.5% per month

2.

11.05.2001 to 11.05.2002

24% per annum

3.

11.05.2002 to 10.09.2004

15% per annum

4.

From 10.09.2004 to 31.03.2011 13% per annum

5.

From 01.04.2011

18% per annum

Service Tax Exemption

Taxable service of aggregate value not

exceeding Rs. 10,00,000 but registration is

required when the aggregate value of invoice
issued exceeds Rs.9,00,000.
Example: A firm has been providing taxable
services for several years. Gross value of invoice
issued for the past 2 years was as under:
FY 2010-11 15 lakh
FY 2011-12 8.70 lakhs
During FY 2012-13, issued invoices for Rs.
11,90,000. what will be its service tax liability.

Service Tax Exemption

Solution-for FY 2012-13, preceding FY shall be 2011-

12, in which invoice issued is 8.70 lakhs less than 10

lakhs. Hence, the firm shall not pay any tax upto 10
lakhs. Service tax liability=12.36% of 1,90,000
Services provided to the united nations or
international organizations.
Services provided to diplomatic missions for their
official use as well as personal use.
Services provided to units in SEZ.
Services provided by technology business
incubators(TBI) or science and technology
entrepreneurship parks (STEP).

Export of Service
As per rule 3 of Place of Provisions of Service

Rule, 2012, the place of provision of a service

shall be the location of the recipient of
service.
Hence, in case of export of services, no tax
shall be payable as the recipient of service in
most of the cases shall be located in a country
outside India.

Payment of Service Tax

Payment of service tax compulsorily in accordance with Point

of Taxation Rules, 2011.

Point of Taxation means the point in time when a service shall
be deemed to have been provided.
Determination of Point of Taxation
a) When the invoice is raised within 30/45 days of completion of
service. The liability to pay service tax will arise on the date of
)Issue of invoice
)The receipt of payment
Whichever is earlier.
b) When invoice is not raised within 30/45 days of completion of
service
)Completion of provision of the service
)Receipt of payment
whichever is earlier.

Payment of Service Tax

In case of continuous supply of service where the

provision of the whole or part of the service is

determined periodically on the completion of an event
in terms of a contract, which requires the receiver of
service to make any payment to service provider, the
date of completion of each such event as specified in
the contract shall be deemed to be the date of
completion of provision of service.
Where the provider of taxable services a payment up
to rupees 1000 in excess of the amount indicated in
the invoice, the point of taxation to the extent of such
excess amount, at the option of the provider of
taxable service, shall be determined on the basis of
invoice issued.

Question: R ltd gives the following particulars

relating to the services provided by it to its various

clients for the month ending 31.07.2012.
a) Total bills raised for Rs.17,50,000 out of which bill
for 1,50,000 was raised on an diplomatic missions
and payments for bills 2,00,000 were not received
until 31.07.2012.
b) Amount of 1,12,360 (including service tax) was
received as an advance from XYZ Ltd. On
25.07.2012 to whom the services were provided
in august, 2012.
c) Compute:
Value of taxable services
Amount of service tax payable
Last date of service tax payable

Value Added Tax (VAT)

Submitted by
Upasana Gautam
Sonia Yadav

Introduction
VAT

is a tax, which is charged on the increase in

value of goods and services at each stage of
production and circulation. It is also chargeable on the value
of all imported goods.
It
is
charged
by
registered
VAT
businesses/persons/taxpayers. VAT has replaced a number
of other taxes and its introduction has not resulted in
either increased prices to final consumers or reduced
profitability of business.
VAT is levied on the difference between the sale price of the
goods produced or the services rendered, and the cost
thereof that is, the difference between the output and the
input.

EARLIER SALES TAX SYSTEM

VAT SYSTEM

1. Tax was levied at the stage of the first sale

or at the final stage. Thus levied at one single
stage.

1. Tax is levied and collected at every point

of sale. Thus, it is a multi stage tax system.

2. Successive sales (resale) of goods on

which tax is already paid did not attract tax.

2. Tax is collected at every point of sale and

the tax already paid by the dealer at the time
of purchase of goods will be deducted from
the amount of tax paid at the next sale

3. Dealers reselling tax paid goods did not

collect any tax on resale and file NIL returns

3. Dealers reselling tax-paid goods will have

to collect VAT and file returns and pay VAT at
every stage of sale.

4. Computation of tax liability was complex

4. It is transparent and easier

5.Sales Tax was not levied at the time of

purchases against statutory forms but there
was misuse of such reforms resulting in tax
evasion

5. VAT dispenses with such forms and sets off

all tax paid at the time of purchase from the
amount of tax payable on sale.

6. Returns and challans were filed separately

and the dealers had to give numerous details

6. The returns and the challans are filed

7. A large number of forms were required

7. At the most a few forms are required

8. Tax on goods only

8. Tax on goods and services both

9. Assessment was done by the department

9. Self assessment is done by dealers

10. Penalty for defaulters/evaders not strict

10. Penalties are stricter

together in a simple format after self

assessment done by the dealer himself

Features
Tax levied and collected at every point of sale.
Tax collected at every point of sale and the tax already paid

by the dealer at the time of purchase of goods will be

deducted from the amount of tax paid at the next sale.
Dealers reselling tax paid goods will have to collect VAT and
file returns and pay VAT at every stage of sale (value
addition)
It is transparent and easier.
VAT dispenses with such forms and sets off all tax paid at
the time of purchase from the amount of tax payable on
sale.
The returns and the challans are filed together in a simple
format after self-assessment done by the dealer himself.
At the most a few forms are required.
Tax on goods and services both.
Self-assessments by dealers.

Terminology
Output

VAT :

percentage
or services

Amount

received by a seller as a
of the gross sale price of goods

Input VAT

:
Amount paid by a buyer as a percentage
gross purchase price for goods or services
used in production.

of the

Zero Rated

no

:
Transactions in which the seller collects
output tax and the corresponding input tax is
fully refundable. Exports are zero rated

Exempt

Transactions in which the seller collects

no
output tax but the corresponding input tax
is
non-refundable and absorbed by the seller.
Financial services are commonly exempt.

How to calculate VAT?

A trader registered for VAT effectively pays VAT only at one stage
when he sells his goods.
This tax is the only amount, which has an effect on his selling price
which includes VAT.
The VAT that he has paid as a part of his purchase price is charged on
him by his suppliers.
This is not a cost to him because he gets it back by deducting it from
tax on his sales (Output Tax).
Therefore, VAT should have a minimum impact on his selling prices.

Liability of tax
Liability of tax under existing sales tax system and VAT if

charged at each stage.

To curb the evasion of sales tax, the State Government had
desired instead of levying the sales tax at first or the last
stage, it should be levied at each stage.
However, levying it at each stage would have resulted into
the following two anomalies under the existing sales tax
system:
1. Sales tax would have been charged more than once on the
same item
2. There would be sales tax on sales tax i.e. it would result into
a cascading effect.
To overcome the above anomalies, VAT was introduced so that
VAT is calculated by deducting input tax credit from the tax
collected during the payment period.

1. Input Tax Credit

Tax paid by the dealer on its purchase of inputs and capital

goods is eligible for credit while making the payment of VAT

on the sale of such goods.
Such input tax credit is allowed as set off from the output
tax payable by the dealers on its sale.
Thus, VAT is calculated by deducting tax credit from tax
collected during the payment period.
A dealer cannot claim the input tax credit if the purchases
goods and capital goods are not meant for business.

Question 1.
R sells goods to S for Rs. 1,00,000. He charges sales tax/VAT @10% on the
sale price. S sells the same goods to T by adding Rs. 50,000. as his profit and
charges Sales Tax/VAT @ 10%.
Compute the tax payable under:
1. The existing sale tax system assuming sales tax is charged at each stage.
2. VAT

 Total Sales Tax Payable = Rs 10000 + 16000 = Rs 26000

Total VAT payable = Rs 10000 + 5000 = Rs 15000
In the case of VAT, tax is payable only on value addition of Rs

50000 i.e. Rs 5000.

Difference of tax: Rs 26000 Rs 11000

The above difference is due to the following reasons:

1. Sales Tax has been levied @ 10 % on Rupees 100000 twice.

Hence the difference amount is :

Rs10000
2. Sales Tax has been charged on sales tax i.e. 10% has been charged
on sales tax of :
Hence, the cascading effect due to extra sales tax:
Rs 1000
3. Total Difference:
Rs
11000

2. When raw material is used

more than once for production
Incidence of tax involving more than one transaction can be explained by

the following illustration:

QUESTION 2
R is the manufacturer of two raw materials X & Y. These two raw materials

have been manufactured by taking the basic produce of mines on which VAT
has not been allowed. The selling cost of raw material X is Rs 100/kg and
the rate of VAT is 4% whereas the selling cost of raw material Y is Rs 120/kg
and the rate of VAT is 12.5%.
S has used 1 kg each of both the above raw materials by purchasing it from

R and manufactured product Z. The quantity manufactured after allowing

for loss in manufacturing is 1.8 kg. The aggregate of wages, conversion cost
and profit on the sale of produce Z is Rs 500. Thus, product Z gas been sold
for Rs 720 and VAT has been charged @12.5%.
T who has purchased the above product Z from S sold the same to U for Rs

1000 and VAT has been charged @12.5%.

U sold the product Z to the customer W for Rs 1500 and charged VAT

@12.5%.
Find out the total VAT earned by the State Government??

Total VAT earned by the State Government = Rs 19 + 71 + 35 +

62.5 = Rs 187.5

Central Sales Tax(CST)

It is charged by the seller of goods when he makes an inter State sale,

i.e., sale made to dealer/consumer in other states.

Goods move from one state to another
VAT is charged by the seller of the goods, when he makes an intra State

sale i.e. sale made to a dealer or a consumer within the same State.
CST is levied by the Central Government but it is collected and retained by

the State Government from where the movement of goods started

Whereas, Vat is levied by the respective State Governments and it is
collected and retained by the same State Government.

3. Eligible Purchases for availing

Input Tax Credit
It is available only when the taxable goods are purchased from the same State

for the following purposes:

1. For sale/resale with the State
2. For sale in the course of inter State trade or commerce, i.e., Goods are sold to

any other State or Union Territory of India

3. To be used as:
) Containers or packing materials
) Raw materials
) Consumable stores
4. For being used in the execution of a works contact
5. To be used as capital goods required for the purpose of manufacture of taxable

goods
6. To be used as
) Raw materials
) Capital goods
) Consumable stores
) Packing materials/containers

4. Coverage of Input Tax Credit

and its Set - Off
1.

Instant credit of Input Tax this will be given both to the

manufacturers and traders for purchase of inputs/supplies meant for
both sales within the State as well as to other States, irrespective of
when these will be utilized/sold.

2.

Carry forward of VAT credit If the input VAT credit exceeds the tax
payable on sales made within the State in a month, the excess credit
will be adjusted against Central sales Tax payable on inter State
sales but if there is still excess left it will be carried over to the
subsequent month(s) and the unadjusted VAT credit at the end of the
specified period is eligible for refund.

Question R purchases goods from X for Rs 2,25,000 which includes

VAT@12.5%. R sells 20% of goods to T in the same State by adding profit
@25%on cost. Balance 80% of goods are sold to V who is carrying on
business in another State. The profit charged in this case was 25% on
cost. VAT charged is 12.5% and CST charged is 2%.
Compute the input tax credit and its set off allowed to R.

No input credit on CST paid on purchases from other States

There is no credit of CST is inputs are purchased from the other
states. For example if the goods are purchased by Delhi
dealer from Mumbai for Rs 102000 which includes CST of Rs
2000. The cost of purchase in this case shall be Rs 102000.
4. Input credit on stock transfer to other States Stock transfer to
branches or on consignment basis does not amount to sale.
Therefore, it is not subject to VAT or CST. However, if goods are
sent outside State on stock transfer/consignment basis, credit
(set off) of tax paid on inputs purchased within the State is
available only to the extent of tax paid in excess of 2% as 2%
is retained by the State Government.
For example if tax paid on inputs is 12.5%, input credit of 10.5%
is available. If the tax paid on purchase is 4%, input credit of 2%
(4% - 2%) is available. However, if the goods are transferred on
stock transfer basis to other branches in the same State, full input
tax credit shall be available to the dealer.
3.

Purchases not available for Input

Tax Credit
1.
2.
3.

Purchases from unregistered dealers

Purchases from registered dealer who opt for composition scheme
under the provisions of the Act
Purchases of goods as may be notified by the State Government

Goods where Purchase Invoice is not available

5. Purchases of goods where invoice does not show the amount of tax
separately
6. Purchases of goods, which are utilized in the manufacture of
exempted goods
7. Purchases of goods used for personal use or provided free of
charge as gifts
8. Goods imported from outside the territory of India
9. Goods given away as free samples
10. Gods purchased from the other states viz. inter State purchases.
4.