How Service Tax became the major source of Govt Revenue

Service Tax is the most talked about thing in the ecosystem right now. Just after the Swachh Bharat Cess, tax payers were further burdened with the Krishi Kalyan Cess. All considered, today Service Tax constitutes the biggest portion of the Govt’s revenue. This is a humongous transition when we think about the fact that Service Tax started off at mere 5% in 1994. Today we have tried to gauge the journey of service tax and how Service Tax became the major source of Govt Revenue.

Image Credit: Shutterstock
Image Credit: Shutterstock

Service tax & its need

It is an indirect tax charged by service provider and collected from the recipient of service. The service provider collects it on the behalf of government of India. The government earns revenue from direct as well as indirect taxes charged from people. Earlier Excise duty on manufactured goods & custom duty on imported goods were the only sources of revenue for government in the form of indirect taxes. But these revenue receipts were not sufficient enough to match with the growth of economy. This gave birth to service tax because services were largely consumed by rich people and with the introduction of service tax government revenue could be increased.

History of service tax

The concept of Service tax was introduced in 1994-95 by Dr. Manmohan Singh who was the Union Finance Minister at that time. He did not find any valid logic behind exempting the services rendered by service provider. Thus, he introduced this concept and imposed service tax on few services such as telephone, insurance etc.  The rate of service tax at that time was 5% on services provided. There were certain suggestions made by Tax reforms committee regarding introduction of service tax during 1990s. They were of the view that indirect tax should be neutral at central level regarding production & consumption of goods. They also thought of introducing VAT that will cover taxation of commodities & services. The service tax will be treated as part of VAT at central level. The motive behind introducing this concept was increasing government revenue, widening tax base and encouraging people to support economic development.  After that the scope of service tax was widened every year. Every year not only services charged under service tax was increased, rate of service tax charged was also increased.

Transition over the years

Service tax has undergone various reforms that lead to transition over the years. It has been observed that changes in law are becoming stricter year by year. The higher degree of compliance was demanded with the introduction of number of offences & penalties under service tax act. The rate of service tax was same @5% till 2003. But after May 2003 it was increased to 8% and this rate was maintained until 2004. In September 2004, it rose straight away to 10.20%. In next year it again increased to 12.24% and remained same until May 2007. Every year the tax burden got increased on recipients of services. In 2007 there was a minor change and rate became 12.36% till Feb 2009. 2009 came as a year of relief because service tax was reduced directly by approx. 2% and charging rate was 10.30%. This rate prevailed till March 2012 and it again increased to 12.36% after that. Since then it is increasing and during 2016, it has increased to 14.5%. Not only rates, the exemption limit has also changed. At the inception of the service tax there was no limit until March 2005. After March 2005, limit of 4 lakhs was introduced as exemption limit. This limit was increased to 8 lakhs during 2008 and in next year it was increased to 10 lakhs and it is prevailing till date. Besides that number of services has been increased under the scope of service tax and negative list has been introduced exempting many services from service tax.

This transition can be summarized in the following table:





















Service tax as major source of revenue

Since the introduction of this act, it has been a sunrise area for government as it has contributed a lot towards revenue. The role of service sector is major in the development of economy as it contributes more than 50% towards the growth of GDP. It has converted the economy’s position from developing to developed nation. This is the reason it is assumed as lion’s share to government revenue.  When service tax act was introduced, it was levied @5% only. But its tremendous growth over the years has resulted into major source of government revenue. It has become need of the economy and this concept is much needed to ensure continuous growth of the economy. The ultimate motive behind imposing service tax is to earn sufficient revenue by reducing the burden on manufacturing and trade sector. The government is not required to compromise anywhere related to revenue. But its contribution is not enough if we consider the tax basket applicable to whole India. Hence there is a greater need to implement GST in future years.

Hard Fact -No growth in exemption to Small Service Provider

The growth in rates of Service Tax has been steep over the years. Interestingly, the exemptions provided to small service providers (SSP) have not exactly been in line. The transition of the exemption can be routed below:

Applicable from

Threshold Turnover



4 lakhs

6/2005 dated 1/3/2005


8 lakhs

4/2007 dated 1/3/2007


10 lakhs

8/2008 dated 1/3/2008


10 lakhs

33/2012 dated 20/6/2012

Hence, we see that the exemption allowed to Small Service Providers has been pretty much steady at Rs. 10 lakhs since as long as 2006.  The current Govt is promoting startups and businesses in almost every sector. Considering this, now might be just the right time to spare the exemptions a thought as well.

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