Clarity between Service Tax and VAT

Tax on service provided and received has been covered under Service Tax by the Government which is increasing on a fast track. From 12.36% to 14 then 14.5 and now 15% just in few years. On the other hand, the rate of VAT is considerably low.


The government prefers to bring all the services under the ambit of service tax to increase the government fund whereas the assessee wishes to get taxed under VAT to decrease the tax burden thereon.


If you are confused about the taxability of services under these two heads then you must go below to clear it out. Clarity between Service Tax and VAT.




Service Tax simply means tax on practically on all the services provided by the service provider. Service tax made a small beginning in July, 1994 where only service tax was imposed on 3 sector but it scope increased every year and more services were in the list of taxation service in section 65(105) of the Finance Act, 1994. By 2011 the list of service tax reached to 117 activities. Practically every activity came under the ambit of services therefore the definition of service came very vague and board. There was always a dispute about taxability of a particular activity and also its classification in a particular taxable head. Therefore in 2012 the concept of Negative List of services” was introduced.


Negative list means that all the services except those in the negative list will be subject to service tax. There are 17 heads of services that are specified in the negative list. This does not mean that all services except those in the negative list will be automatically subject to service tax. In addition to the items included in the negative list, there will be exemptions, abatement and composition schemes.


Rate of Service Tax

The service rate is 14% with no education cess or Secondary and Higher Education Cess.


Swachh Bahrat Cess

 Swachh Bahrat Cess has been imposed from 2015 of 2% of value of taxable services. Though SBC is 2%, effective rate at which SBC payable is only 0.5%. This is in addition to the service tax. SBC is shown separately in invoice, payment, challans and service tax returns. All provisions relating to service tax, including provisions relating to refunds, exemptions, interest and penalty is applied to SBC also. This is levied and collected as service tax.


Krishi Kalyan Cess

In Budget 2016, FM Jaitely has increased the Service Tax @ 0.5% as Krishi Kalyan Cess. It will be levied on all taxable services. The same shall be effective from June 1, 2016. This shall be in addition to any cess or service tax leviable on such taxable services under Chapter V of the Finance Act, 1994, or under any other law for the time being in force. This cess basically means that any taxes paid on the inputs of the final service that you are providing, will be available to you as a Tax Credit.


Important Requirements of ‘Taxable Service’

 Section 65B (44) of Finance Act, 1944 defines service tax. The important requirements of the service to be taxable are the follows:


  1. It should be activity
  2. Should be carried out by one person for another
  3. Activity should be for consideration.
  4. It should include declared services/ deemed service.


Exclusion from Definition of ‘Service’

  1. Mere transfer of title in goods and immovable property by way of sale, gift or in any other manner.
  2. Transactions that are merely “deemed sale of goods” under Article 366 (29A) of Constitution.
  3. Transaction in money and actionable claim.
  4. Services provided by employee to employer
  5. Fees paid to Court or Tribunal for dispersion of justice.
  6. Duty performed by MP, MLA, person holding constitutions posts etc.




Value Added Tax (VAT) constitutes of a method of taxing final consumer spending in the economy in stages. The method consists of levying a tax on value added to a product (or service) at each stage of production and distribution. VAT is a “consumption tax” as the consumers bears the burden of it.


Value added is taken as the difference between the sales and purchases of intermediate products or goods for resale of business. VAT ensures that each input that goes into final product is taxed once and not cumulatively as it avoids the cascading effect.


VAT not only provides the full set – off for inputs tax as well as tax on previous purchases, but it also abolished the burden of several other taxes, such as turnover tax, surcharge, special additional tax, etc. Even Central Sales Tax will also get phased out. As a result when VAT will come into place the overall burden will get rationalized and the final price will fall.


VAT is related to the liability of the dealer when it is calculated by deducting the input tax credit in relation to any period means setting off the amount of input tax by a registered dealer against the amount of his output tax.


Input Tax Credit Under VAT


The main feature of VAT is providing the set-off for the tax paid earlier, this happens through the concept of input tax credit/ rebate. Input tax credit simply means setting off the amount of input tax by a registered dealer against the amount of his output tax. VAT is based on the value addition of the goods, and the related VAT liability of the dealer is calculated by deducting input tax credit from tax collected on sales during the payment period (may be, a month). Input tax credit is given for the entire VAT paid within State on purchase of taxable goods meant for resale/manufacture of taxable goods.



  1. Eliminates multiple taxes.
  2. Set off will be given for input tax as well as tax paid on previous purchases.
  3. Overall tax burden will get rationalized hence price will generally fall.
  4. Prevents cascading effects by providing input rebates.
  5. Avoids distortions in trade and economy due to uniform tax rates.
  6. Certainty and easy understandability
  7. Tax evasion will reduce
  8. Uniformity
  9. Neutral as no incentive or tax allowance will be given to any companies.
  10. Stable source of revenue
  11. Exports will become cheaper under VAT system.
  12. Tax transparency



  1. Non- inclusion of services as it extends to the retails stage.
  2. Inclusion of capital good and industrial inputs at concessional rate
  3. Applicability of VAT on MRP
  4. Increase in compliance cost
  5. Increase in the working capital

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