Tax exemptions under Indirect Taxation with special reference to

Service Tax

PROJECT FOR THE SUBJECT

LAW OF TAXATION II (INDIRECT TAXATION)
SUBMITTED BY
Ms. Gunjan Jhamb
(09bal175)
Semester VIII
B.A.LL.B. (Hons)

UNDER THE GUIDANCE OF

Mrs. Khyati Shah
Asst. Prof., ILNU

Submitted to
INSTITUTE OF LAW
NIRMA UNIVERSITY, AHMEDABAD
ACADEMIC YEAR (2012-13)

D E C LAR AT I O N

I Gunjan Jhamb declare the work entitled Tax exemptions under Indirect
Taxation with special reference to Service Tax being submitted to Nirma
University for the project in the subject of LAW OF TAXATION II
(INDIRECT TAXATION) is original and where the text is taken from the
authenticated ,articles or web articles, appropriate reference is given. It is true in
my best of knowledge.

Date: 5-4-13

Gunjan Jhamb
Roll No 09 BAL 175
VIII Semester, (2012-13)
Institute of Law
Nirma University

C E R T I F I C AT E

This is to certify that the thesis entitled Tax exemptions under Indirect Taxation
with special reference to Service Tax submitted by Mr. /Ms. Gunjan Jhamb
for the project work in the subject of LAW OF TAXATION II (INDIRECT
TAXATION) embodies independent and original research work carried out by
him under my supervision and guidance.
To the best of my knowledge and belief, it is his original work submitted to
fulfill the project assignment for the Semester End Examination of Eigth
semester of B.A.LL.B. Programme during the academic year 2012-13.

Date: 5-4-2013
Khyati Shah
Ass. Prof., ILNU
Ahmedabad

Acknowledgement
A successful accomplishment of research project signifies great contribution of the Course
Coordinator. In the present research project Mrs. Khyati Shah has contributed significantly in
the accomplishment of this research project. Without his support and guidance this research
project would have been an unrealistic dream. Mrs. Khyati Shah has guided the researcher
throughout the preparation of project. Besides he also gave valuable inputs for the research
project. At this moment the researcher would like to heartily acknowledge contribution of
Mrs. Khyati Shah for the preparation of research project.
The researcher would acknowledge the contribution of library staff for extending such
support to the researcher. Last but not the least researcher would like to thank Institute of
Law for providing such opportunity in the form of project whereby our knowledge is
enhanced. Besides the researcher wish to express gratitude to those who may have
contributed to this work even though anonymously. The researcher extends his sincere thanks
to all.

CHAPTER 1
INTRODUCTION

RESEARCH PROBLEM AND INTRODUCTION

Tax Exemption means to be free from, or not subject to, taxation by regulators or government
entities. A tax exempt entity can be excused from a single or multiple taxation laws.
Governments are often trying to encourage investment when exempting taxation.1
Service Tax act/Rules has provided exemption to small scale service provider from service
tax up to aggregate value of taxable services provided of 10 lakhs in a Financial Year . This
exemption was available before 01.07.2012 and continued even after 01.07.2012 in negative
list regime with few changes wef 01.04.2012.2
A large number of industries are dependent on outside support for completing their
manufacturing activities. The activity undertaken by small industries to complete the process
on raw material/semi-finished goods as desired by principal manufacturer is known as "Job
Work". It has various nomenclatures "job work" or "sub-contracting" in engineering
industry, "processing" in chemical or textile industry and "a loan licensee" in pharmaceutical
industry.3
Job work under Central Excise Laws

Available at:http://www.investopedia.com/terms/t/tax_exempt.asp#axzz2NbRQIbS0, last visited 14 march

2013

Available at:http://www.simpletaxindia.net/2012/09/service-tax-exemption-limit-who-can.html, last visited

17 March 2013

Kumar

Sanjay,

Job

work

under

indirect

tax

laws,

available

web:http://www.taxindiaonline.com/RC2/inside2.php3?filename=bnews_detail.php3&newsid=16050,

on

the
last

visited 18 March 2013

Job work is defined in Notification No. 214/86 dated 25.03.1986 and rule 2(n) of the Cenvat
Credit Rules, 2004 thus Explanation I. - For the purposes of this notification, the expression "job work" means
processing or working upon of raw materials or semi-finished goods supplied to the job
worker/ so as to complete a part or whole of the process resulting in the manufacture or
finishing of an article or any operation which is essential for the aforesaid process.
(n) "job work" means processing or working upon of raw material or semi-finished goods
supplied to the job worker, so as to complete a part or whole of the process resulting in the
manufacture or finishing of an article or any operation which is essential for aforesaid process
and the expression "job worker" shall be construed accordingly.4
Occurrence of invisible loss in job work allowed and no duty will be applicable, even if
losses were higher than those permitted by raw material supplier who issues debit note for
excess charges.5
A job worker can import goods without payment of Customs duty subject to the condition
that the goods are exported within a period of six months from the date of clearance.6
OBJECTIVES:
1
2

To get acquaintance of the existing tax exemptions under the Indian Domestic laws.
To focus on and disseminate knowledge as to exemptions provided (if any) in the
recent financial budget for the financial year of 2013-2014.

HYPOTHESIS:
1

Most individuals are aware only about the most common tax deductions available to
them, and do not take advantage of the several benefits hidden in the complex clauses

of the Act.
An increase in exemptions may allow the importers and exporters to take undue
advantage of the loopholes existing under Indian laws.

4 Rule 2(n) of the Cenvat Credit Rules, 2004

5 Galaxy Surfactants vs. CCE, 2005-TIOL-1205-CESTAT-MUM.
6 Customs Notification No. 32/97-Cus dated 01.04.1997
6

RESEARCH QUESTIONS:
1) Is there a scope for law making authorities to simplify the law regarding the activities
undertaken by job workers?

SCOPE:
Looking at the vastness of the research topic, the researcher has tried to limit the scope of the
research project to Tax exemptions under Indirect Taxation with special reference to Service
Tax. The researcher would not be discussing about the existing tax exemption laws of other
countries.
RESEARCH METHODOLOGY:
The quality and value of research depends upon the proper and particular methodology
adopted for the completion of research work. Looking at the vastness of the research topic doctrinal legal research methodology has been adopted. The researcher has gone through
various articles and commentaries.

CHAPTER 2
TAX EXEMPTIONS IN SERVICE TAX

Service Tax act/Rules has provided exemption to small scale service provider from service
tax up to aggregate value of taxable services provided of 10 lakh in a Financial Year . This
exemption was available before 01.07.2012 and continued even after 01.07.2012.
The small service provider exemption of ` 10 Lakh is available towards aggregate value not
exceeding ` 10 Lakhs, means the sum total of value of taxable services charged in the first
consecutive invoices issued during a financial year but does not include value charged in
invoices issued towards such services which are exempt from whole of service tax leviable
thereon under section 66B of the said Finance Act under any other notification.7
Single Limit for all services By same person: Where a taxable service provider provides one
or more taxable services , the exemption under this notification shall apply to the aggregate
value of all such taxable services and not separately for each services.
Single Limit for all offices /Location : Where a taxable service provider provides taxable
services from one or more premises, the exemption under this notification shall apply to the
aggregate value of all such taxable services and from all such premises and not separately for
each premises. In brief this exemption is available person wise not location or service wise.
7

SERVICE TAX EXEMPTION LIMIT TEN LAKH WHO CAN AVAIL WHO CAN'T AVAIL, 9 September

2012, available at:http://www.simpletaxindia.net/2012/09/service-tax-exemption-limit-who-can.html, last visited

March 26 2013

This exemption is optional so that even such small service providers can opt to pay tax
instead of availing the benefit of exemption. In case of such opting to pay service tax, the
service provider would get the benefit of CENVAT Credit of duties and taxes paid on capital
goods, inputs and input services. By this mechanism the CENVAT credit can get passed on
whereby the basic cost of output service would get reduced if the service receiver can avail
CENVAT credit. The option as to non-availment of such small scale exemption and opting to
pay tax once exercised, cannot be withdrawn during the remaining part of such financial year.
Option is granted to service provider to avail benefit of threshold exemption to the tune of `
10/- lakhs. In case option is exercised by service provider, service tax would be applicable
only if the aggregate value of taxable service (provided during the previous financial year
exceed ` 10 Lakhs ).8
Power to grant exemption from service tax:
1) If the Central Government is satisfied that it is necessary in the public interest so to do, it
may, by notification in the Official Gazette, exempt generally or subject to such conditions as
may be specified in the notification, taxable service of any specified description from the
whole or any part of the service tax leviable thereon.
2) If the Central Government is satisfied that it is necessary in the public interest so to do, it
may, by special order in each case, exempt any taxable service of any specified description
from the payment of whole or any part of the service tax leviable thereon, under
circumstances of exceptional nature to be stated in such order.9
2.1 Recent Service Exemptions
The government added services by lawyers and 13 other items to the list of services exempt
from the 12% tax as the nation migrates to a more comprehensive taxation of services from
July 1 when all but a few listed ones will come under the tax net. The wider list of tax exempt
services is in addition to a negative list of 17 services that remain unchanged.
The expanded 'exempt list of services' has included the services rendered by advocates to
other advocates and to business entities up to a turnover of Rs 10 lakh. The same benefit is
8 Ibid
9 Section 93, Service Tax Act,
9

also extended to a firm of advocates. The negative list of services had not spared lawyers
from service tax earlier. Unlike the 'exempt list of services', the negative list of 17 services
that are also outside the purview of service tax requires Parliamentary sanction for any
revision.

By switching from taxing a number of specified services to taxing all but those in the
negative and exemption list of services, the government hopes collect more than the targeted
Rs 1,24,000 crore service tax this fiscal.
Finance minister Pranab Mukherjee, who released an education guide on taxation of services
here, said that with these additions, the number of exemptions has gone up to 38.
The new exemptions include services rendered by advocates to other advocates and business
entities with a maximum of Rs 10 lakh turnover, services related to the Jawaharlal Nehru
National Urban Renewal Mission and Rajiv Awaas Yojna, building of monorail or metro
projects, auxiliary educational services and transportation by rope way, cable car or air-tram
way. Services of public libraries, services by Employees State Insurance Corporation (ESIC)
to those governed under the Employees Insurance Act and services by way of transfer of a
going concern are also exempt from the tax.10
With the migration from a positive list of taxable services to a negative list of exemptions
from July 1, the government hopes to widen the service tax base and increase the share of this
levy in the overall revenue collection. The government also wants to align the excise duty
that is levied on production of goods with the tax on services in light of the country's
proposed transition to a Goods and Service Tax (GST). The 17 services in the negative list
includes those provided by the government or local authorities except a few where they
compete with the private sector, pre-school and school education, agriculture services, renting
of residence, entertainment and amusement services and public transportation.11
10

Govt

to

exempt

14

more

services

from

tax,

Jun

20

2012,

available

on

the

web:http://www.indianexpress.com/news/govt-to-exempt-14-more-services-from-tax/964500, last visited March

26 2013

11 Ibid
10

Apart from the 38 services that figure on the government's negative list, which are outside the
ambit of service tax, several other services have also been exempted from the levy. These
additional tax-free services include healthcare, services provided by charities, religious
persons, individual advocates providing services to non-business entities, independent
journalists and services by way of animal care or car parking.
According to the new rules, there will be no service tax on renting a residential dwelling for
the bona fide use of a person or his family. However, if premises are given for a short stay for
different persons over a period of time, it would be liable to tax.
Similarly, while the tax will be levied for residential flats booked with builders, constructing
your own house will be out of its ambit. "The rationale is that payments for the flat with the
builder start before the flat is handed over to the buyer and this is liable to tax," a senior
official explained. Similarly, in case of eateries, service tax can be charged only from airconditioned restaurants or those serving alcoholic drinks. Hotels charging a tariff of up to
Rs.1,000 a night are exempt from service tax.
Providing a loan or overdraft facility or a credit limit facility in consideration for payment of
interest will also be liable to service tax. Similarly, the tax will be charged on mortgages or
loans with a collateral security to the extent that the consideration for advancing such loans or
advances are represented by way of interest. Service tax will be levied on service charges
normally charged for transactions in money, including charges for making drafts, letter-ofcredit issuance charges, and service charges relating to issuance of CDs/CPs etc.
Activities that constitute only transactions in 'goods' are also excluded from service tax.12

12

S.P.S. Pannu, Several other services exempted from service tax, July 6, 2012, available on the

web:http://indiatoday.intoday.in/story/several-other-services-exempted-from-service-tax/1/204057.html,

last

visited 24 March 2013

11

CHAPTER 3
TAX EXEMPTIONS IN SERVICE TAX

Services by air conditioned restaurants not having licence to serve liquor shall now trigger an
effective liability of 3.71%. Therefore, dining out for a family of four costing Rs 1,500 will
now be costlier by Rs 56.13
Hence, there is a significant need to cut down these rates as the average earning families will
now have to pay more after the union Budget of financial year 2013-14 coming into force
which proves that the need of the hour is to provide exemptions on the abovementioned
services rather increasing the tax percentage.
Presenting the budget for 2012-13 in Parliament, Mr. Mukherjee provided a token relief to
individual taxpayers that will cost the exchequer Rs. 4,500 crore as a cushion from high
inflation during most of the current fiscal, while raising both excise duty and service tax
across the board from 10 per cent to near the pre-crisis level of 12 per cent as a step towards
seamless transition to the proposed Goods and Services Tax (GST) when implemented.
As a consequence, even as prices of all non-oil goods are set to go up and are feared to add to
the inflationary pressure, Finance Ministry officials sought to downplay the impact saying
that the burden in the near term would get subsequently absorbed over a period of time.14
13

Budget

2013:

Guide

to

indirect

tax,

MAR,

2013,

available

on

the

web:http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/budget-2013-guide-to-indirecttax/articleshow/18744944.cms, last visited 26 March 2013

14

Doctor

Pranab's

bitter

medicine,

March

16,

2012,

available

web:http://www.thehindu.com/news/pranab-banks-on-indirect-tax-hike/article3001916.ece,

last

on

the

visited

26

12

IMF while reviewing its experience on issues and good practices followed around the world
has suggested that developing countries may require to raise their Tax/GDP ratio by at least
4% not only to reach their poverty reduction and infrastructural targets, but also to achieve
the Millennium Development Goals. But IMF has cautioned that quality of taxation measures
will be important and increasing revenue by further taxing readily compliant taxpayers can
worsen distortions and perceived inequities. Hence there is a need of providing exemptions so
as to prevent the inequities in the market.15
In addition, there are serious issues in ignoring the effects of tax expenditures and quasi fiscal
operations, even at the sub-national level. Sometimes part of government fiscal activity may
go unnoticed because it is hidden in the form of revenue foregone and does not appear
explicitly as spending. Such activities, knows as tax expenditures, may take many forms
from tax exemptions to tax credits are generally aimed at supporting targeted sectors, firms
and individuals.16
To support the ailing civil aviation sector, Mr. Mukherjee proposed to fully exempt from
basic customs duty imports of parts of aircraft and testing equipment and allowed the national
carrier to go in for external commercial borrowings (ECBs) of up to $1 billion.17
Handmade carpets have been fully exempted from payment of basic excise duty. Carpet
worth Rs 10,000 could get cheaper by Rs 450-490. Price of daily use floor coverings made up
of coir or jute that costed about Rs 300 could be cost less by Rs 15. This in turn, might prove

March 2013

15 Dr. Sudip Kumar Sinha, Joint Commissioner, Sales Tax, Tax Research Unit & Consultant (Public Finance),
Department of Finance, Government of West Bengal, ISSUES IN INDIRECT TAX REFORM FOR SUBNATIONAL GOVERNMENTS IN INDIA available at:http://www.ctrpfp.ac.in/sudip_sinha.pdf, last visited 26
March 2013

16 Ibid
17 Supra note 14
13

to be an effective exemption for those families who could ill afford luxuries at the expense of
their meager salaries.18

CONCLUSION

OUTCOME OF HYPOTHESIS:
The first hypothesis as taken up by the researcher has proven to be correct.
The hypothesis was:
Most individuals are aware only about the most common tax deductions available to them,
and do not take advantage of the several benefits hidden in the complex clauses of the Act.
The laws are so complex that the individuals themselves even cannot recognize that, they
have waived some of their right by not availing the allowed exemption, and moreover not all
individuals are well versed with the existing taxation laws.
The second hypothesis taken up by the researcher has not been proven correct.
The hypothesis taken up by the researcher was:
An increase in exemptions may allow the importers and exporters to take undue advantage of
the loopholes existing under Indian laws.
18 Supra note 13
14

This is not true in practical sense because the law makers are well aware of the fact that
where the loopholes are and how those mistakes could be protected by taking efficient steps.
Overall, the exemptions on the taxes to be payable might prove effective as well as important
because of the reason that these exemptions have their direct effect on those who are not
successful in living or who are not been able to live a luxurious life. Also the removing of
exemption or raising the tax limit on some goods might prove effective in some way, taking
example of the proposal that is being made in the union budget of the financial year 2013-14
to increase the rate of cigarettes so as to prevent injury to the health of the people.
Therefore, it is not always necessary that the exemptions that are not being provided hamper
the meager wealth of the poor, it at times also take measures to protect and prevent the
degrading health of the citizens of the country.
Taking another example of one more proposal as to increase the excise duty on imported cars
is a good step according to the researcher because the rich are never going to get poor just on
account of paying some extra tax or on account of not being able to avail the tax exemptions
because they are going to buy expensive, luxurious cars inspite of the fact that no tax
exemption is being provided on them.

15

BIBLIOGRAPHY

Articles Referred:
1) Exemptions under direct, indirect taxes, Feb 18, 2006
http://articles.economictimes.indiatimes.com/2006-02-18/news/27428732_1_tax-exemptionstax-laws-indirect-taxes
2) Union Budget 2012-13: Income tax exemption limit raised to Rs 2 lakh, March 16, 2012,
available on the web:
http://articles.timesofindia.indiatimes.com/2012-03-16/unionbudget/31201021_1_exemptionlimit-tax-slabs-income-tax
3) Deepshikha Sikarwar, Budget 2013: Govt mulls higher tax exemption on savings schemes
to wean away investors from gold Jan 24, 2013, available on the web:
http://articles.economictimes.indiatimes.com/2013-01-24/news/36527054_1_equity-savingsrajiv-gandhi-equity-80c
4) Govt to exempt 14 more services from tax, Jun 20 2012, available on the web:
http://www.indianexpress.com/news/govt-to-exempt-14-more-services-from-tax/964500

16

5) S.P.S. Pannu, Several other services exempted from service tax, July 6, 2012, available on
the web:

http://indiatoday.intoday.in/story/several-other-services-exempted-from-servicetax/1/204057.html
6) Budget 2013: Guide to indirect tax, 1 MAR, 2013, available on the web:
http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/budget-2013guide-to-indirect-tax/articleshow/18744944.cms
7) Doctor Pranab's bitter medicine, March 16, 2012, available on the web:
http://www.thehindu.com/news/pranab-banks-on-indirect-tax-hike/article3001916.ece
8) Dr. Sudip Kumar Sinha, Joint Commissioner, Sales Tax, Tax Research Unit & Consultant
(Public Finance), Department of Finance, Government of West Bengal, ISSUES IN
INDIRECT TAX REFORM FOR SUB-NATIONAL GOVERNMENTS IN INDIA available at:
http://www.ctrpfp.ac.in/sudip_sinha.pdf

17