Service tax made a modest beginning in the year 1994. At that time, only three services were brought in the Service Tax net and tax collection was merely Rs. 410 crores. Now, it has become a full fledged indirect tax with a tax collection of Rs.97.500 crores in the financial year 2011-12 and Rs.132.697 cores in 2012-13. The number of taxable services also increased to 119 from just 3 in the year 1994. The share of Service Tax in the total revenue of the Central Government also reached to the level of 11.5 percent.
The tertiary sector (also known as Service sector) plays a dominant role in today’s economy. In United States it contributes more than 75% of G.D.P. In China it’s shares is around 40 percent and in India Service Sector contributes around 58 percent national G.D.P. Depending upon the socio-economic compulsions, different countries either adopted either a comprehensive approach or a selective approach. Most of the developed countries have adopted comprehensive approach and they tax all the services with a few exemptions. India adopted a selective approach to tax services. Initially only three services namely telephone, general insurance and stock banking were taxed. However the service tax net was widened every year by bringing more and more services in the net. By the year 2011 the number of services in the service tax net reached to around 120.
The selective approach was appropriate in the beginning because the legislature was intending to tax a few services only. However, it started becoming complex with increase in number of services under the service tax net. It created a lot of confusion and litigation. Every new addition in the list of taxable services raised issues of overlap with the pre-existing services, raising a question as to whether an activity was taxed for the first time or was already covered under an earlier, even if a less specific head.
To overcome the aforesaid handicaps, the government adopted the comprehensive approach in the 2012 budget. The new system is also known as Negative List Regine. In the new system, except those specified in the Negative List, are subject to taxation. The new system of taxation came into force with effect from 1st July, 2012.
In order to shift to the comprehensive approach from selective approach many amendments were carried out in Finance Act, 1994 and various subordinate legislatures made there under. For the first time definition of ‘Service’ was given. The definitions of various taxable services contained Section 65 has been omitted. Large scale amendments have been made in Service Tax Rules, 1994, CENVAT Credit Rules, 2004, Point of Taxation Rules, 2011 to harmonize them with the new dispensation. Place of provision of Services Rules, 2012 has also been introduced to determine whether the services in question has been rendered in taxable territory or otherwise. Earlier though indirectly, this was done by import/export of Service Rules. Exemption given, by various notifications have been clubled in a mega exemption notification with necessary amendments.
Adoption of the comprehensive approach is certainly a welcome step. Efforts have been made to simplify the law and the policy makers are successful to an extent, but still there are gray areas, which are discussed at appropriate places.