Sharekhan Blog

Service Tax: What is it, Features & Example

  • Apr 18, 2024

. In this blog, we will help you understand what is service tax, its features, and examples for your better understanding.

What is a Service Tax?

Service tax is an indirect tax that taxpayers must pay on paid services. When a corporation provides services, a service tax is applicable. It is paid by the service user, collected by the central government, and deposited there. Phone, travel agency, interior design, architect, health facility, advertising, bank and finance, event planning, maintenance, and consulting services are among the paid services. The service tax has a 15% interest rate.

Features of a Service Tax

The following are the key features of service tax:

1. The service provider pays a certain percentage of their money for the services, and that's what they're charged. This is the first of the basic features of service tax.

2. A specific percentage of the service tax is applied to the Secondary and Higher Education Cess and the Education Cess.

3. This is a delayed tax for the service provider (landlord or vendor, for example). The tax payment becomes due when the service recipient (such as a tenant or consumer) provides receipts. The proportionate amount of the secondary and higher education cess, education cess, and service tax must be paid partially to the tax authorities. As outlined in SAP Note 921634, the output taxes that become liable must be moved using the Deferred Tax Transfer (RFUMSV50) program from the deferred tax account to the regular output tax account.

4. When the vendor is paid the full amount of the invoice, the service recipient can use the tax credit to pay the taxes owed. The assessee is not entitled to a credit for the proportionate amount of input taxes in cases of partial payment. As a result, when the full invoice is paid, the taxes need to be moved from the deferred tax account to the regular tax account.

5. The interim general ledger account records the entire service tax that must be paid or received. The only amount in the final general ledger account is what you have paid or received. This implies that a target tax code needs to exist for the related tax codes. A tax rate should not be specified for service tax codes in the tax code itself. To make managing the frequent changes in tax rates easier, we advise you to define the tax rate in the condition records of the tax procedure (TAXINN).

6. The service tax is recorded in the intermediate general ledger account until the invoice or customer receipt is fully paid.

7. The final general ledger account determines the amount of credit utilisation or tax payments.

8. You can deduct the basic Excise duty from the Service Tax credit by cross-utilising input credit between Services and Goods.

9. The Central Excise Commissioners, employed by the Department of Revenue in the Ministry of Finance, Central Board of Excise and Customs (CBES), are responsible for collecting and managing this tax.

10. Corporate assessees have a deadline in the following month to pay the tax on the amount of taxable services they received in that month. There are also specified timeframes for individual assessees to pay their taxes.

11. The firm location and the tax office in charge of service tax collection should be identified in all financial documents for which service tax is due.

12. The leased-out rental objects in the Flexible Real Estate Management (RE-FX) component are liable to service tax, which you must pay to the relevant federal tax agency. You match the business location with the federal tax offices.

Also Read about Demat Account and Taxation: A Complete Guide

Examples of Service Tax

Now that you have understood what is service tax and its features, let’s understand it better using an example:

Suppose you have availed of a service worth INR 30,000.

The payable service tax is INR 3,000 (10%).

The education cess is INR 20, and the cess for higher and secondary education is INR 10.

The customer has to pay INR 33,030 in total. The system updates this sum in the interim general ledger account.

1. For the service provider:

Suppose the client pays in half, with INR 1,500 going toward service tax. This amount needs to be manually updated in the final general ledger account.

Only INR 1,500 can be deducted from the payables for that month.

2. For the recipient of services:

Let's say you give the vendor (the company offering the service) INR 33,030. Production tax can be paid using the INR 3,030 credit in this scenario.

I hope this example of service tax has helped you comprehend it better.

Conclusion

The government receives payments for service tax directly from clients or service recipients. At 15%, the current service tax rate is not deducted from the income tax owed.


You can subtract the cost of services, including service tax, from your income to operate a business. One example of a deductible item is your company phone bill, which includes the service tax.

Team Sharekhan
by Team Sharekhan

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