2. WHAT IS TAX??
A tax may be defined as a “pecuniary burden laid upon individuals or
property owners to support the government, a payment exacted by
legislative authority”.
A tax is not a voluntary payment or donation, but an enforced
contribution, exacted pursuant to legislative authority.
In other words, tax is the money that the people have to pay to the
government, which is used to provide public service.
It is also an instrument of fiscal policy to stimulate economic growth.
3. WHY TAX IS LEVIED??
Responsibility of govt. to fulfill the increasing developmental needs.
India still striving to fulfill the obligations of a welfare state within its
limited resources.
Welfare of the general public vests in the hands of govt.
Govt. does not have any tree that grow money.
Taxes are the primary source of revenue for the state.
Taxes are collected to fulfill socio-economic objectives of any govt.
Revenue generated is used for various developmental and significant
purposes.
Used as an instrument of fiscal policy to stimulate economic growth.
Thus tax = welfare
4. TYPES OF TAXES
Taxes can broadly be classified into two clans- Direct and Indirect. Whether a
tax is direct or indirect, is determined via these two principles:
IMPACT OF TAX: when tax is imposed, the immediate effect of tax is on the
person on whom tax has been imposed and he is liable to pay the tax.
INCIDENCE OF TAX: issue to be solved next is whether the burden of such
tax could be shifted to another person.
If the impact and incidence of tax are on the same person, the tax so levied is
called Direct tax.
On the other hand, if the impact of tax is on one person and incidence part of
it is on other person, the tax so levied is called Indirect Tax.
5. Direct Tax
A direct tax is a kind of charge which is imposed directly upon the tax
payer and paid directly to the govt. by the person on whom it is imposed.
The burden of it cannot be shifted to anyone else.
Some of direct taxes imposed in India are:
Income tax,
Wealth tax,
Corporation tax.
6. Indirect Tax
An indirect tax is a kind of charge which is imposed directly upon an
individual (juristic or natural) and but not paid directly to the govt. by the
person on whom it is imposed. That is, impact and the incidence of tax are
on two different person.
The burden of it cannot be shifted to anyone else.
Incidence is borne by the consumer while the immediate liability to pay the
tax falls upon the manufacturer, seller or the service provider.
Indirect taxes are levied on consumption, expenditure, privilege or right
but not on income or property.
7. Some of the significant indirect taxes charged by Indian govt. are:
1. Service tax
2. Excise duty
3. Custom duty
4. Sales tax/ VAT
5. CST
6. Octroi
7. Entry tax
8. Purchase tax
8. SERVICE TAX
Service tax is the charge imposed on taxable services rendered in Indian
territory by any individual (juristic or natural) or service provider.
It is a destination based indirect tax levied on services provided in Indian
territory.
excise duty is paid on goods which are manufactured, similarly, service tax
is paid on services provided.
9. TAX AND LAW!!
According to the Article 265 of the constitution of India, no tax of any
nature can be levied or collected by central or state governments, except
by authority of law. The authority to enact law and levy taxes and duties is
given by the constitution vide Article no 246. according to the Article 246,
law can be enacted by parliament or the state legislature, if such power is
given by the constitution of India.
Such power is given in the 7th schedule of the Constitution of India under
the following three lists:
a. Union list
b. State list
c. Concurrent list
10. There are various matters enumerated in each list. Each matter in the list is
known as an entry.
Union list: as regards as matters under union list, the parliament has
exclusive power to make laws including the law for levy of taxes in respect
of that matter.
a. Income tax- entry no. 82
b. Custom duty- entry no. 83
c. Excise duty- entry no. 84
d. CST- entry no. 92A
e. Residual powers- entry no 97
11. State list: as regards as matters enumerated under state list, the
legislature of any state has exclusive power to make law for such state or
any part thereof with respect to such entry.
1. Income tax on agricultural income- entry no 46
2. State excise duty- entry no. 51
3. Local state tax- entry no. 54
Concurrent list: the parliament or the legislature of a state has power
to make laws with respect to any matter enumerated in concurrent list.
1. Education – entry no. 25
12. WHY TAX ON SERVICES??
The percentage share of service sector in India's GDP has significantly
increased in the last two decades.
Revenue from taxation of goods, property and income were insufficient to
meet the developmental needs.
Largest share of GDP comes from service sector.
Rising income and spending patterns are believed to further trigger the
boom in service sector.
Increasing growth rate of service sector has promised new and wider
avenues of taxation to the government.
While the goods produced and consumed are subject to multiple levies
such as VAT, sales tax, excise duty, etc. most of the services are not directly
subject to taxation.
Production and consumption of services consist a very large part of GDP
but very less in taxation.
13. Continued….
Extending the tax to service sector is imperative not only to ensure
neutrality and horizontal equity but also to broaden the tax base and
improve revenue productivity of tax system.
Need to evolve a coordinated system of domestic trade taxes both at
central and state levels.
Moreover, consumption of goods and services must be taxed alike.
Taxation on services could reduce degree of intensity of taxation on
manufacturing and trade.
14. IMPLEMENTATION OF TAX LAWS
Any law can be made by the Indian govt. only when it is authorized by the
constitution of India.
Laws can be made either by then central or the state govt.
To make any law, following procedure is followed:
Step 1: first a draft is prepared. It is a rough format of the law
Step 2: the draft is then discussed by various experts and technical
committees to give it a blue print.
Step 3: it is then introduced in various legislatures in case of state law or in
the parliament in case of central laws.
16. Approval of state laws
Draft
Legislative
assembly
approval
Vidhan
Sabha and
Rajya Sabha
approval
Governor
Approved
set
17. HOW CAN THE GOVT. CHARGE TAX?
Entry no 97 of the union list {residuary entry} empowers the central
government to levy tax on any matter not enumerated in list II and list III.
In 1994, the service tax was levied by the central govt. under the powers
granted under the said entry 97 of list I.
The government has also passed the constitution (88th amendment act), 2003
which provides the formal levy of service tax by the Centre through the
insertion of Article 268A of the constitution.
Further, in addition to Article 268A, Entry 92C has been inserted to the Ist list
in the VIIth schedule. It enables the state to collect and appropriate the
proceeds of the levy.
18. Article 268A of Constitution of India
“268A(1) taxes on services shall be levied by the government of India and
such tax shall be collected and appropriated by the govt. of India and the
states prescribed in clause (2).
Clause (2): the proceeds in any financial year of any such tax levied in
accordance with the provisions of clause (1) shall be:-
(a) Collected by the govt. of India and the states
(b) Appropriated by the govt. of India and the states
in accordance with such principles of collection and appropriation as
may be formulated by the Parliament by Law.
19. THE ROOTS OF SERVICE TAX….
The imposition of service tax was a result of the Report of the CHELLIAH
Committee on tax reforms.
Dr. Manmohan Singh, the then Finance minister, introduced the new
concept of service tax by quoting the following words inn his speech:
“there is no sound reason for exempting services from taxation, when
goods are taxed and many countries treat goods and services alike for tax
purpose. I, therefore, propose to make a modest effort in this direction by
imposing a tax on services of telephones, non-life insurance and stock
brokers”.
Thus, initially service tax was imposed on only 3 services.
20. GRADUAL EVOLUTION OF SERVICE
TAX
In the year 1991, Dr. Manmohan Singh became the Union Finance Minister of India.
Before that India followed WTO. Due to this, India was forced to reduce tax rate and
provide exemption. This resulted in fall in revenue for the govt. and India went in
Financial crisis.
A Tax reform committee was formed by Dr. Manmohan Singh. The chairman of the
committee was Dr. Raja Challiaha.
The committee suggested that tax must be applied on services in the same manner as
goods.
Dr. Manmohan Singh was not having any specific power to charge tax on service but
residual power under entry 97 to impose the service tax.
21. In the fifth chapter of Finance Bill, 1994, Dr. Manmohan Singh introduced
all provisions of service tax.
The Finance Bill was approved and made into Finance Act.
It came into effect from 1st July, 1994.
Three services were chargeable under the Act that time:
1. Telephone services.
2. Non-life Insurance.
3. Stock brokers.
And the rate to be charged was 5% exclusive of any other cess.
The baton then passed on to successive Finance Ministers who widened
the service tax net in their rein.
The number of services taxable under the Act increased from 3 in 1994 to
119 in the 2012.
22. The coverage and levy of tax has been expanded year after
year.
In 2005, BJP was in power and they amended the constitution
of India, giving power to the central Govt. to levy tax on
services.
However no notification has been issued till date.
For this reason, entry no. 92C is ineffective.
Till 2012, 119 services were covered under the purview of
service tax.
The rates of service tax have dwindled throughout the years.
23. RATES OF SERVICE TAX OVER THE YEARS
5%
8%
12% 12.24% 12.36%
10.30%
12.36%
14%
0%
2%
4%
6%
8%
10%
12%
14%
16%
1994-2003 2003-2004 2004-2006 2006-2007 2007-2009 2009-2012 2012-2015 2016- till date
Rate
Years
24. At present, 14% service tax + 0.5 Swaccha Bharat Cess is charged.
Till 2012, selective approach was followed. But in 2012, the govt. shifted
from selective approach to comprehensive approach of levying service tax.
Selective approach: under this approach, only a few selective services
were taxed. This approach was followed till 30/06/2012.
Comprehensive approach: under this approach, all services are
taxed except a few services and they are given in a list specified by the
government.
Such services are covered under mega exemption notification and
negative list.
Comprehensive approach came into effect from 01/07/2012.
25. Taxable Services
ExemptServices - Threshold
Negative list + exempt
116
Taxable
Services
Approach – Selective V/s comprehensive
Selective Approach –
selected services are taxable
Comprehensive Approach– all
services are taxable
26. Services Taxable Under Service Tax
0
20
40
60
80
100
120
140
No.ofservices
Years
no. of services
