CERTIFICATE

This is to certify that Faizan Khan is a regular student of Institute for

Excellence in Higher Education. He has conducted an authentic project report
on the topic Evaluation of Service Tax in India and has completed his
Indirect Tax Project successfully under the able guidance of ___Jagha Chorna
Kya ke Teacher Ka naam Ajaye __. The Project is being prepared for his
honors papers of B.Com part III (Accounts Honors) for examination 2015-16
and is being submitted thereof.
___Jagha Chorna
Kya ke Teacher Ka naam Ajaye __
(Commerce department)

DECLARATION
I hereby declare that the project entitled Evaluation of Service Tax in India
submitted to Institute of Excellence in Higher Education, is record of
original work done by me under the guidance of ___Jagha Chorna Kya ke
Teacher Ka naam Ajaye __ (Department of commerce).
Any inferences, research or similarity is purely coincidental.

Acknowledgement
I would like to take this opportunity to thank Dr. M.L. Nath (Director, Institute
for Excellence in Higher Education, Bhopal), Dr. S.S. Vijayvargiya (Head of
commerce department) and ___Jagha Chorna Kya ke Teacher Ka naam
Ajaye __ (Teacher guide) to have provided me with such a great opportunity to
work on this Indirect Tax project.
Last, but not the least, I would like to thank my family, friends and all those
who helped me in some way or the others in the successful completion of this
research project.
Faizan Khan
B.com III year
Accounts Honors Section B
Roll No. 113113

Service Tax

Budget 2015 Update: Finance Minister while presenting the Budget 2015 has
increased the Service Tax Rate from 12.36% to flat 14%. This new rate of Service
Tax @ 14% is applicable from 1st June 2015.
The rate of Service Tax for services provided before 1st June is 12.36% and for
services provided after 1st June is 14%. The Notification can be downloaded from
here Notification No. 14/2015 for applicability of Service Tax @ 14% from 1st
June.
If the Invoice is raised in the month of May 2015 for Services to be provided in
June 2015 Rule 4(b) of Point of Taxation Rules will apply and the rate of service
tax applicable would be the date on which the payment is being made. For more
on this kindly refer: Rate of Service Tax if invoice raised in May 2015 for services
to be provided in June 2015
The meaning and applicability of Service Tax has been explained below in simple
words for Beginners

When we use any service be it a phone bill payment or Hire a room in a hotel we
have to pay out little more than the actual rates charged. Ever wondered why?
The reason is very meek, we are made to pay service tax over and above the
usual charge but the bigger question is What is Service Tax, why do we have to
pay this Tax when the tax is applicable on the company providing the service and
also what is the Service Tax Rate. If these questions bother you, find answers
below.
What is Service Tax?
It is a tax which is payable on services provided by the service provider. Just like
Excise duty is payable on goods which are manufactured, similarly Service Tax is
payable on Services provided.
This Tax is payable by the provider of Service to the Govt. of India. However, the
Service Provider can collect this Tax from the Consumer of Service (also referred
to as Recipient of Service) and deposit the same with the Govt.
Applicability of Service Tax
This tax came into effect in 1994 and was introduced by the then Finance
Minister Dr. Manmohan Singh.
Earlier Service Tax was payable only on a specified list of services but Pranab
Mukherjee while delivering his budget speech on 16th March 2012 announced
that this Tax would be applicable on all services except the negative list of
services. From 1st July 2012 onwards, all services (except those specified in the
negative list of services by the Govt) are now liable for service tax.
However, there are some services which are composite services. For eg: Food
being served in a Restaurant. Although VAT is levied on Food, but we dont go to
a Restaurant only to have Food but also to avail the services of the waiters,
kitchen staff etc. Therefore, Service Tax is also levied on Food served in
Restaurant. In such cases, it is practically impossible to segregate how much the
customer has paid for the food and how much he has paid for the services.

Such services are popularly known as Composite Services and in such cases an
abatement scheme is announced by the govt under which Service Tax is only
levied only on a specified portion of the Total Bill.
Service Tax on Cash Basis
Earlier Service Tax was charged on cash basis for every service provider.
Currently, it is charged on cash basis for Individual service providers and for
companies it is being charged on accrual basis i.e companies liability to deposit
tax arises as soon as services are provided irrespective of the collection of funds
on the same.
However Individual Service Providers have to deposit this Tax with the Govt only
when the Invoice Amount has been collected. Service Tax Payment is deposited
by the Service Provider with the Govt. quarterly in case of Individuals/Partnership
and Monthly in all other cases.
Moreover, every Service Provider is now required to apply for Service Tax
Registration if the Value of Services provided by him during a Financial Year is
more than Rs. 9 Lakhs, but the Tax would be payable only when the Value of
Services provided is more than Rs. 10 Lakhs.
All service providers in India, except those in the state of Jammu and Kashmir,
are required to pay this tax in India. Service Tax is not levied on the persons
residing in Jammu & Kashmir.

Service Tax on Food in Restaurant @

5.6% from 1st June 2015
Every time you go and dine out in a restaurant, the food bill turns out to be more
than expected. And then when you go through the Bill in detail to cross check the
charges levied, you realise that there are a whole lot of charges and taxes which
have been levied on the food bill. Many people also raised concerns regarding
the manner of levy of Service Tax on Food served in Restaurants by
circulating mails and expressing their concern on Social Networking Platforms.
We conducted an extensive research the Service Tax Laws on the manner of
charging Service Tax on Food so as to ensure that the Restaurant Owners are not
overcharging Service Tax and this is what we found.
Charges and Taxes on Food served in Restaurants
When you dine out at a restaurant, the following charges and taxes are normally
levied on your food bill:1. Service Charge: This is a charge levied by the Restaurant Owners as payment
for the Services rendered like serving the food etc. This Charge is not levied by
the Govt and is collected by the Restaurant Owners themselves. This charge is

optional on the part of the Restaurant and they are free to charge any amount as
Service Charge after making proper disclosures in the Menu Card. In other words,
Service Charge is a Mandatory Tip to be paid, if proper disclosures for the same
are shown in the Menu Card.
Different Restaurants levy different Service Charges although it is normally in the
range of 5% to 10%. Some Restaurants levy Service Charge only for dine-in
customers and not for Takeaway or Home-Delivery Customers. Levying service
Charge is entirely at the sole discretion of the Restaurant Owner and they are
free to levy any amount as Service Charge.
2. VAT: VAT is Value Added Tax levied on the sale of any item. As food is being
sold in a restaurant, VAT is liable to be paid on such sale. VAT is levied by the
State Govt and is at the sole discretion of the State Govt. Different States
prescribe different rates of VAT. Moreover, even in the same state, different
Rates of VAT have been prescribed for different items. The Rate of VAT is
different for Alcoholic Beverages and different for other food items.
3. Service Tax: When you go to a Restaurant, you not only go there to eat food
but also avail of various amenities and hospitality services. The Cost of Food as
shown in the Menu Card is a composite charge and includes not only charges for
the Cost of Raw Material but also for the Cost of the Services rendered. And as
these Services are being rendered, the Centre Govt collects Service Tax on the
Services rendered.
Although Restaurants nowadays are collecting Service Charges separately, but
that is not enough to cover the Cost of Services provided and therefore, a portion
of the Cost of Services is also included in the Cost per Dish.
Applicability of Service Tax on Food in Restaurants
We dont always go in a restaurant for both Food + Services. Many a times,
people go in a small nearby restaurant not for the services provided but only for
the food. In such cases, Service Tax wont be leviable.
To distinguish between whether a customer is going to a restaurant only for the
Food or for both Food + Services, the Govt has announced the following
conditions for the levy of Service Tax in a Restaurant:1. The Restaurant should be Air Conditioned,
Earlier the Conditions were that the Restaurant should be Air Conditioned +
Restaurant should have license to serve liqour. However, in the Budget 2013, P.
Chidambaram removed the 2nd condition and now Service Tax would be levied
on all Restaurants which are air conditioned.
In Budget 2013, P.Chidambaram also announced that Service Tax would also be
levied on under-construction property where area of the property is more than
2000 sq ft.

Some people have confused Service Tax on Restaurants with Service Tax on
under-construction property and think that Service Tax on Restaurants is levied
only when the Restaurant is air-conditioned and is more than 2000 sq ft.

However, this interpretation is completely wrong and Service Tax is levied on all
air-conditioned restaurants.
Service Tax on Food Served in Restaurants
The Charges for the Food served in a Restaurant is a composite charge for the
food as well as for the Services. As it is a composite charge, Service Tax cannot
be levied on the whole amount.
Bifurcation of the Total Bill into 2 parts i.e. Value of Goods Sold and Value of
Services Provided is very difficult. Therefore, in case of any Composite Charge,
the Govt usually announces an abatement scheme wherein Taxes are not levied
on the total amount but only on a certain portion of the total amount.
In order to ensure transparency and standardisation in the manner of
determination of the value of such service provided in a restaurant or as outdoor
catering, Rule 2C was inserted in the Service Tax (Determination of Value Rules)
As per this Rule, abatement has been allowed for the levy of Service Tax on the
Food Served in Restaurants, which says that Service Tax should be charged only
on 40% of the Food Bill (incl Service Charge) and not on the Total Bill.
Or in other words only 5.6% Service Tax on Restaurant (i.e. 40% of 14%) shall be
chargeable. The Computation of Service Tax has been explained below with the
help of an example. For the purpose of simplification, VAT has been presumed at
14.50% on the Total Food Bill.

However, in case the food is not being served in a restaurant and is being served
as part of outdoor catering, service tax should be levied on 60% of the Total Bill.

The Finance Ministry has also issued a circular on levy of service tax in some
special circumstances

Service Tax on Digital Ads on

Website & Mobile
Budget 2014 which was presented by Arun Jaitley has removed the service tax
exemption that was earlier available in case of Advertising on Website and
Mobile Ads.
In other words, Service Tax would now be payable on Online Digital
Advertisements rendered on Websites and Mobiles. The Rate of Service Tax on
Online Digital Advertisements on Mobile & Website Advertisements would be the
currently applicable Service Tax Rate i.e. 14%. (Earlier the applicable rate of
service tax was 12.36% but this has been increased to 14% with effect from 1st
June 2015)
However, the date from which the Service Tax on Digital Ads would be applicable
was not mentioned in the Budget 2014. At the time of making the
announcement, Arun Jaitley said that the date from which this tax would be
applicable would be notified later.
This date has now been notified and Service Tax on Online & Mobile Ads would be
applicable from 1st Oct 2014. This date has been notified vide Notification No.
18/2014 dated 25th Aug 2014. The same has also been mentioned in Pt. 1.3 of
DOF No. 334/15/2014-TRU dated 25th Aug 2014.

Scenario before Budget 2014 regarding Service Tax on Digital Ads on

Websites and Mobiles
Service Tax in India is levied on all types of services except certain specified
services called as Negative List of Services. No Service Tax is levied on any of
these specified services mentioned in the Negative List.
Earlier all types of Advertisements (except Radio and Television Ads) were a part
of these specified services (Negative List of Services) and were therefore
exempted from the levy of Service Tax.
However, after the introduction of Budget 2014, an Amendment has been made
to Section 66D(g) and now only Advertisements on Print Media are a part of the
specified services which are exempted from the levy of Service Tax.
This comes as a huge blow to the Online Industry which was trying to compete
with the Print Industry. Many experts have raised their concern stating that this
levy of Service Tax on Digital Advertising may impact the growth of Digital
environment which is fairly new in India.

Manner of Levy of Service Tax on Digital Advertisements on Websites

and Mobiles
The Service Tax on Online Advertisements would be levied at a flat rate of 14% of
the Advertisement Charges. The rate of Service Tax applicable was earlier
12.36% but with effect from 1st June 2015, this has been increased to 14%.
The levy of Service Tax can be explained with the help of the following example:Advertisement Charges

15,00,000

Service Tax @ 14%

Total Charges

2.10,000
17,10,000

This is the manner in which the Service Tax would be levied. The manner of
computation of Service Tax is required to be specifically disclosed in the Invoice.
This Service Tax (i.e. Rs. 2,10,000) is to be collected from the Company whose
product has been advertised and is required to be paid with the Govt. However,
in case this Service Tax is not collected from the Advertiser, the Service provider
will have to pay this from their own pocket.
All Service Providers on whom Service Tax is now applicable would also be
required to apply for a Service Tax No. and comply with all Service Tax Rules.
Once a Service Provider applies for Service Tax Registration No., he would also be
required to file Service Tax Return after every 6 months.
Exemption from Service Tax
1. Service Tax is to be collected by all Service Providers. However, if the
Combined Total Value of Advertisements received during the year from all
the Advertisers (combined) is less than Rs. 10 Lakhs, Service Tax is
exempted for such small Service Providers.
2. If Services are being exported outside India, No Service Tax would be
levied in case of Export of Services as well.

Service Tax on Rent payable

In the past few years, there has been much confusion regarding the applicability
of Service Tax on Rent. The Govts stand was different to what the Courts had to
say regarding the applicability of Service Tax on Rent which lead to confusions
regarding whether service tax on renting of immovable property is payable or
not.
To remove all such confusions, the Govt while introducing the Negative List of
Services regime in Service Tax (which came in effect from 1 st July 2012), the Govt

has in the definition of service contained in Clause (44) of Section 65B,

specifically mentioned that Service includes a Declared Service.
Declared Services are those services which would be deemed to be a service
(whether it is a service or not), and Service Tax would be payable on the same.
The Govt has specifically mentioned the services which would be considered as
Declared Services and Renting of Immovable Property has been specifically
mentioned as a Declared Service.
In the light of the above changes, Service Tax on Renting of Immovable
Property is liable to be paid as per the rates in force.
Service Tax on Rent not chargeable in following cases
Consideration received for the following types of activities has been included in
the negative list of Services and and therefore rent received from the following is
not chargeable to Service Tax:1. Renting of Vacant Land, with or without a structure incidental to its use,
relating to Agriculture
2. Renting of Residential dwelling units for use as Residence*
3. Renting out any property by the Reserve Bank of India
4. Renting out any property by a Government or a Local Authority to a nonbusiness entity
*Please Note: Only Residential units let-out for use as Residence are exempted.
Service Tax on Residential units let-out for the purpose of any commercial
activity would come under the purview of tax and thus service tax would be
liable to be paid on Residential Units let-out for the purpose of any commercial
activity.
Renting or permitting usage of any property for a temporary purpose like
conduct of a marriage or any other social function would also be taxable.
Exemption from Service Tax on Rent
Apart from inclusion of certain activities in the Negative List of Services, the
following have been specifically exempted from the levy of Service Tax:1. Service Tax is only mandatorily liable to be paid if the total value of
services provided by the service provider exceeds the threshold limit of
Rs. 10 Lakhs p.a. If the total value of all services provided by the service
provider is less than Rs. 10 Lakhs p.a., he is not mandatorily liable to pay
service tax.

2. Renting of Precincts of a Religious Place meant for General Public.

3. Renting of a Hotel, Inn, Guest House, Club, Campsite or other commercial places
meant for Residential or Lodging purposes, having declared tariff of a room below
Rs. 1,000 per day.
4. Renting of an exempt educational institution.

Service Tax would be levied on Rent in all other cases. The Service Tax on Rent collected by
the Service Provider from the Service Recipient is required to be deposited with the Central
Govt before the Due Date of Payment of Service Tax.
Computation of Service Tax on Rent
The Ministry of Finance vide Notification No. 29/2012 Service Tax dated 20 th June
2012, announced that Service Tax is to be levied on the
Gross Amount charged for renting of such immovable property
(Less) Taxes on Such Property namely property tax levied and collected by
Local Authorities
However, any amount such as Interest, Penalty paid to the Local Authority by the
Service Provider on account of delayed payment of Property Tax or for any other
reason shall not be treated as Property Tax for the purpose of deduction from the
Gross Amount Charged.
Computation of Service Tax on Rent can be explained with the help of the
following example
Rent Received for the Year:
Property Tax paid for the Year:

Rs. 25 Lakhs
Rs. 1 Lakh
Rs. 24 Lakhs

Service Tax on Rent as per the rates in force would be payable on the above Rs.
24 Lakhs. The Rate of Service Tax applicable from 1st June 2015 is 14%

Service Tax on Air Travel Agent & Tour

Operator
Service Tax in India is levied on all types of services except a few specified
services mentioned in the Negative List of Services. Service Tax on Air Travel
Agents & Tour Operators is also levied and the rate of service on Air Travel
Agent and the manner of computation has been discussed in this Article.
Service Tax on Air Travel Agents for Air Ticket Bookings
When an Air Travel Agents books a Ticket for you, he charges a commission for
booking the air tickets. As he has provided you a service by booking the tickets
on your behalf, Service Tax would be levied on the Commission charged by him
for booking the Tickets.
In most of the cases, the Air Travel Agent does not charge any commission from
the person booking the air tickets and charges a commission from the Airline
whose ticket has been booked. In such cases, the Commission of the Air Travel
Agent is not disclosed in the Invoice and only the Air Ticket Fare is disclosed in
the Invoice.
In such cases where the Commission of the Air Travel Agent is not disclosed in
the Invoice and only the Air Ticket Fare is mentioned in the Invoice, the Service

Tax would be levied from 1st June 2015 onwards at the rates mentioned
below:In case of Domestic Bookings

0.70% of the Basic Fare

In case of International Bookings

1.4% of the Basic Fare

Service Tax on Tour Operator

Budget 2014 has exempted Service Tax on Services provided by Indian Tour
Operators to Foreign Tourists in relation to a tour wholly conducted outside India
is exempted from the levy of Service Tax.
However, Service Tax would continue to be levied on Tour Operators in all other
cases except the case specified above which has been specifically exempted in
Budget 2014.
The rate of Service Tax on Tour Operators is as follows
Type of Service

Abatement
allowed

Taxable
Portion

1. Services by a
Tour Operator in
relation to a
Package Tour
2. Services by a
Tour Operator in
relation to a Tour,
if the Tour
Operator is
providing
Services solely of
arranging or
booking
accommodation
for any person
3. Service
provided by a
Tour Operator
other than the 2
types of Services
specified above.

75%

25%

Effective Rate
of Service Tax
(incl. Cess)
3.50%

90%

10%

1.40%

60%

40%

5.6%

Service Tax on Under Construction

Property @3.50%
Service Tax on under Construction Property is levied on the Services provided by
Builders or Real Estate Developers or any other person, where Building
Complexes, Civil Structure or part thereof are offered for sale but the Payment is
received before the Issuance of Completion Certificate by a Competent Authority.

When the Service Tax on under construction property was first levied, many Real
Estate Developers and Builders had appealed to the Courts against the
applicability of Service Tax on Under Construction Property and the Court had
also issued a Stay Order for the same. But, the Courts eventually decided in the
favour of the Govt. as a result of which Service Tax on under Construction
Property is now liable to be paid.
To remove confusions created by the Court Orders, the Govt while introducing
the Negative List of Services (applicable from 1 st July 2012), has very specifically
in the definition of Service contained in Clause (44) of Section 65B of the Act
stated that Service includes Declared Service. The Govt. has also mentioned the
activities which would be considered as Declared Services and Construction of
Complex, Building, Civil Structure or part thereof has been stated as a Declared
Service.
In the light of the above, Service Tax on Construction is liable to be paid as per
the Service Tax Rates in force.
Exemption from Payment of Service Tax on Construction
The Ministry of Finance on 20th June 2012 issued a Mega Notification pertaining to
exemption from applicability of Service Tax on many activities. As per this
Notification No. 25/2012-Service Tax dated 20th June 2012, Exemption from
Service Tax on Under Construction Property is available in circumstances
pertaining to services provided in the following cases:1. Construction of a Single Residential Unit*
2. Construction of Low Cost Houses upto a carpet area of 60 sq. metres per
house in a housing project approved by competent authority empowered
under the Scheme of Affordable Housing in Partnership framed by the
Ministry of Housing and Urban Poverty Alleviation by the Govt. of India
*Please Note: Single Residential Unit has been defined as a self contained
residential unit designed for use of a single family. If the house/complex has
multiple floors/units and the title of each of the units/floors is capable of being
transferred to another person by Mutation in land/municipal records, all the
floors/units would be considered as separate single residential units and Service
Tax on Construction would be levied on the same.
Service Tax on Under Constuction Property would be levied on all other cases
except the ones which have been mentioned above. The Computation of Service
Tax on Under Construction property has been explained below.
Computation of Service Tax on Under Construction Property
At the time of sale of property, the amount paid by the purchaser to the Builder
is for:1. Value of Land
2. Construction Service provided by the Builder/Developer
Service Tax can only be levied on Services and not on sale of goods/immovable
property & therefore in the above case Service Tax wont be levied on the Value
of Land and would only be levied on the Construction Service provided by the

Builder/Developer as per the rates in force which currently is 14% (applicable

from 1st June 2015)
The Service Tax on Construction would be levied as per the rates in force on the
total value of services provided by the Builder/Developer provided the purchase
price of land and the value of construction services are shown separately in the
Invoice.
In cases where it is difficult to show the cost of goods/immovable property and
the cost of services separately, the Govt issues an Abatement scheme wherein
tax is levied on a small proportion of the Total Amount. Abatement Scheme has
also been announced for the service of Construction of Building and as per
Notification No. 26/2012-Service Tax dated 20/6/2012, an abatement of 75% is
allowed and Service Tax would be levied only on 25% of the total purchase price
(incl. of price paid for Land)
So Service Tax @ 14% on 25% of the Total Purchase price is levied on under
Construction Property. In other words Service Tax @ 3.50% (25% of 14%) is levied
on the total price paid for the purchase of an under construction property.
The Budget 2013 brought in an amendment to the above provisions and reduced
the abatement from 75% to 70% for flats above 2000 sq. feet (Carpet Area)
or costing Rs. 1 Crore and above. In such cases, the Service Tax shall be
charged on 30% of the amount (70% abatement). In other words, Service Tax in
such cases shall be charged @ 4.20%.
The above details on levy of service tax on property have been summarised in
the table below
COMPUTATION OF SERVICE TAX ON UNDER CONSTRUCTION PROPERTY
Particulars

Abateme Taxable
Normal Rate Effective Rate of
nt
Compone of
Service Tax on
Allowed nt
Service Tax Property

Flat size over 2000 sq ft

(Carpet Area)

70%

30%

14%

4.20%

Sale price of Flat over Rs 1

Crore

70%

30%

14%

4.20%

In all other cases except

specifically exempted (as
mentioned above)

75%

25%

14%

3.50%

The Ministry of Finance vide Notification No. 9/2013 has re-confirmed that the
above abatement provided for payment of service tax on property would can be
availed by the builder only if:1. Cenvat Credit on inputs used for providing the service has not been
availed
2. Total amount charged includes the value of land and the value of land is
not shown separately in the invoice.

The Service Tax so collected by the Builders/Real Estate Developers does not go
in their pockets and is deposited with the Govt. by the person collecting the
same before the due date of payment of Service Tax.

Bibliography
Books
1. Indirect Tax by VP Agarwal
Websites
1. www.taxguru.in
2. www.charteredclub.com