Service tax: Once in, never out

Even if entrepreneurs bill less than Rs 10 lakh (Rs 1 million) after the first year, they will still have to pay tax

If you are an entrepreneur, this anomaly in the service tax rules should worry you.

While the threshold amount billed to customers has been put at Rs 10 lakh in a year.

But once you have registered for crossing the Rs 10-lakh amount, you will be paying tax, even if the billing amount is lower in the future. From June 1, service tax will be increased to 14 per cent from 12.36 per cent.

Anybody who provides a service is liable to pay service tax.

These could be professionals such as lawyers, doctors, chartered accountants or owners of beauty parlours, coaching classes, fitness centres, etc. 

But unlike Income Tax, service tax is not charged automatically and there are some exemptions.

The service provider has the option of not registering for service tax as long as the amount billed to customers does not cross Rs 900,000 in a year.

But there are some advantages of registering, even if your billed amount is less than Rs 9 lakh.

For instance, government departments or offices looking for any kind of service, typically insist on registered service providers, says Sanjeev Gokhale, a Mumbai-based Chartered Accountant.

So, if you own a company that provides housekeeping services and are vying for a government project, it is better to register yourself with service tax authorities to avoid getting rejected.

Even after registering, you don't have to pay service tax till the billed amount crosses Rs 10 lakh in a year.

But once it does, then you have to pay service tax.

The threshold value for service tax is calculated taking into account the previous year's turnover as well as the current year's turnover.

So, assuming the aggregate value of your or your firm's services is Rs 11 lakh (Rs 1.1 million) for 2014-15, you have to pay service since the threshold value of Rs 10 lakh (Rs 1 million) has been exceeded.

If the value of services for 2015-16 crosses Rs 800,000, you still have to pay service tax, since the aggregate value of service is calculated on the previous year.

Then if in 2016-17, the aggregate value of service comes to Rs 700,000, then you have the option of not paying service tax, because in the previous year (2015-16), the threshold was less than Rs 10 lakh (Rs 800,000 in this case).

But if in 2016-17, the aggregate value of service exceeds Rs 10 lakh, then you will have to pay service tax.

This exemption of not paying service tax is given to small-scale entrepreneurs so that they are not forced to increase charges to their customers.

But if you charge your customers service tax, then you are liable to pay the same to the government, even if your turnover does not increase Rs 10 lakh, says Bipin Sapra, tax partner, EY.

"One-way businesses try to reduce their tax burden is by splitting their companies or firms and keeping the turnover below Rs 10 lakh,'' says Sapra.

Another condition to keep in mind is that if you are the franchise of a chain, then you are liable to pay service tax from day one, irrespective of the turnover.

Taking the same example of a beauty parlour, if it is a standalone one, service tax is applicable only if the aggregate value of service crosses Rs 10 lakh.

But if it is a franchise of a chain, say, L'Oreal, then service tax is applicable from day one.

"The rationale behind this is that as franchise of a big chain, you already have an advantage of a big brand.

“Whereas the exemption is given only to encourage small-scale entrepreneurs,'' says Sapra.

To reduce the tax burden, many salon owners carve out separate premises for the bigger brand and register it as a separate entity.

Today, service tax is paid online.

For a company, the payment has to be done monthly and for propriety or partnership firms, it has to be made on a quarterly basis.

The returns have to be filed on a half-yearly basis.