Chapter 1

Introduction and Research Methodology

1.1.1) Taxes in the world context-

It is a matter of general belief that taxes on income and wealth are of recent

origin but there is enough evidence to show that taxes on income in some form or the

other were levied even in primitive and ancient communities. The origin of the word

"Tax" is from "Taxation" which means an estimate. These were levied either on the

sale and purchase of merchandise or hvestock and were collected in a haphazard

manner from time to time.

As mentioned in his articles on ‘Study on proposed Goods and Service Tax’ by

Rajkumar S. Adukia , the first known system of taxation was in Ancient Egypt around

3000 BC - 2800 BC in the first dynasty of the Old Kingdom. Records from that time

show that the pharaoh would conduct a biennial tour of the kingdom, collecting tax

revenues from the people. Other records are granary receipts on limestone flakes and

papyrus. Early taxation is also described in the Bible. In Genesis (chapter 47, verse 24

- the New International Version), it states "But when the crop comes in, give a fifth of

it to Pharaoh. The other four-fifths you may keep as seed for the fields and as food for

yourselves and your households and your children." Joseph was telling the people of

Egypt how to divide their crop, providing a portion to the Pharaoh. A share (20per

cent) of the crop was the tax.

To the Athenians in Greece, war was a lifestyle, and a pricey one at that. As

such, Athenians taxed their citizens for war costs with a tax they called "eisphora."

The most historic factor of this tax was that it exempted no one, which many consider
the first democratic taxation system, as after the wars the money was often reftinded

to the people. There is also some documentation of a tax put on foreigners (or any

individual without an Athenian mother and father), called "metoikion.'*

Nearly 2000 years ago, there went out a decree from Ceaser Augustus that the

entire world should be taxed. In Greece, Germany and Roman Empires, taxes were

ako levied sometime on the basis of turnover and sometimes on occupations. For

many centuries, revenue from taxes went to the Monarch. In Northern England, taxes

were levied on land and on moveable property such as the Saladin title in 1188. Later

on, these were supplemented by introduction of poll taxes, and indirect taxes known

as "Ancient Customs" which were duties on wool, leather and hides. These levies and

taxes in various forms and on various commodities and professions were imposed to

meet the needs of the Governments to meet their military and civil expenditure and

not only to ensure safety to the subjects but also to meet the common needs of the

citizens like maintenance of roads, administration of justice and such other functions

of the State. Looking at Indian scenario from ancient times, taxes are there in India.

1.1.2) Taxes in the Indian Context

As per the government’s Income tax website. In India, the system of direct

taxation as it is known today, has been in force in one form or another even from

ancient times. There are references both in Manu Smriti and Arthasastra to a variety

of tax measures. Manu, the ancient sage and law-giver stated that the king could levy

taxes, according to Sastras. The wise sage advised that taxes should be related to the

income and expenditure of the subject. He, however, cautioned the king against

excessive taxation and stated that both extremes should be avoided namely either

complete absence of taxes or exorbitant taxation. According to him. the king should

arrange the collection of taxes in such a manner that the subjects did not feel the

pinch of paying taxes. He laid down that traders and artisans should pay 1/5* of their

profits in silver and gold, while the agricultiurists were to pay 1/6^, l/8‘‘' and 1/10'*' of
their produce depending upon their circumstances. The detailed analysis given by

Manu on the subject clearly shows the existence of a well-planned taxation system,

even in ancient times. Not only this, taxes were also levied on various classes of

people like actors, dancers, singers and even dancing girls. Taxes were paid in the

shape of gold-coins, cattle, grains, raw-materials and also by rendering personal

1.1.3) Service Tax-Pre 1994

As per the article in Service Tax Review on ‘Taxation of Services in India-Pre

legislative Historical Perspective by K.S. Ravi Shankar & B.N.Gururaj, Advocate ‘the

taxes on service is not new in the India. It is from the old ancient age, the tax on

services was levied in the different forms called Bali’, ‘Shulka’, ‘Kara’. In the Vedas

the principal taxpayers among other were workers and artisans. The noted historian

Prof. V. M. Apte, states that the main burden of taxation during the Vedic period fell

on the people, who pursued peaceful occupations such as agriculture, cattle keeping

arts, crafts, industries and trade. During the age of the Upanishads, one of the most

important branches of administration was that for the collection of taxes. The

artisans and other manual workers had to do one day’s work every month for the

king, and there were similar rules in respect of ovmers of ships and carts.

In Kautilya’s period (Arthasastra) it is evident that certain types of service

activities were major sources of state revenue the Superintendent of courtesans shall

be appointed who shall collect a ransom of twenty four thousand panas for a

courtesan and twelve thousand for a courtesan’s son. In addition their musical

instruments when coming from foreign land shall be charged a fee per showoff five

panas. Prostitutes who live by their beauty shall pay per month a tax double the

normal fee charged by them. Betting and gambling activity was taxed. Taxes were

collected either in cash (kara) or in kind (pratikara), e.g. free labour (Samahanika)
such a processing grain, processing oilseeds or sugarcane in warehouses, in Ueu of

payment of tax. Various services were subject to fee as for example ferry charges.

During the age of Imperial Unity - 6'*' Century BC till the Satvahana Rule,

taxes included levies on artisans, fishermen, prostitutes, gambling houses, wine

houses, slaughter houses etc. Alauddin Khalji introduced new taxes and repressive

measures including a grazing tax on all mUch cattle.

Taxation of services in India before the British Rule- evidence from per the

Combatore District Manual p. 172, Major McLeod found the following imposts inter

alia were in full force and effect over and above the Land tax : i)Tax on watchmen;

u)Tax by persons wearing caste marks on the forehead; iii) Tax on keepers of pack

bullocks; iv)Tax on dancing girls; v)Tax on agricultural irrigation watchmen; vi)Tax

on overseers of labour (maistris); vii)Tax on immoral persons; viii)Tax on carpenters;

ix) Tax on goldsmiths; x) Tax on blacksmiths; xi)Tax on paper makers; xii)Tax on shoe

makers; xiii)Tax on barbers; xiv) Tax on washer men; xv) Tam on iron-smelters;

xvi)Tam on drawers and distillers of fermented palm juice; xvii)Tax on boatmen;

xviii)Tax on Stone mason.

Prof. R. Sewell states that he found in the Government Office of his last

District, Bellary, and a few items of village taxation collectable during 1985 - the list

below is not the entire list in the lecture at Pp. 21-22.

a) Tax called Handertaneky for erecting marriage pandals or pavilions;

Salt has been taxed in India for centuries. However, in 1835 the British East India

Company raised the import taxes drastically after they began to impose rule over
Indian provinces. The salt tax was raised and lowered by multiple leaders and events,

and was not repealed until 1946^

1.1.4) Service Tax -post 1994

The Tax Reforms Committee headed by Professor Dr. Raja Chelliah in 1990

has recommended the introduction of Service Tax. Based on the above

recommendation, the present Service Tax is first introduced by the then Finance

Minister Manmohan singh in 1994 through the chapter V & V A of the Finance Act,

1994.

While introducing, Dr. Mamohan singh FM in his budget speech said “Over

the years, while attempts have been made to widen the base for domestic indirect

taxes, the services sector has not been subjected to taxation. Yet this sector accounts

for about 40per cent of oiu: GDP and is showing strong growTii. There is no sound

reason for exempting services from taxation, when goods are taxed and many

countries treat goods and services alike for tax purposes. The Tax Reforms Committee
has also recommended imposition of tax on services as a measure for broadening the

base of indirect taxes.

After the date, in almost every budget, some services added to the net of

Taxable services. The collection of also tremendously increased from 407 Crore in

1994 to 58,000 Crore 2009-10. This has created litigations also.

The taxation history is very old. The concept of levying and collecting tax has

changed over a period of time. In earlier days taxes were not bifurcated like Income

tax , Excise duty, as there are in today’s form. In olden days It is in the form of 1/5 of

gross yield of crop (3000BC-2800 EC). It finds that after that war tax called ‘eisphora’

was levied for citizens in Greece. It was called first democratic taxation system, as
after wars money often refiinded. While a tax put on foreigners (including a person

without Athenian mother and father) called ‘metoikion’.

In 2000 year ago, in Greece, Germany and Roman Empires, the taxes were also

levied sometime on the basis of turnover and sometime on occupation. In 1188, In

Northern England, taxes were levied on land and immovable property.

Later on, the poll taxes and indirect taxes were introduced, known as ‘Ancient

Customs’. The Ancient customs were the duties on the woo; leather and hides. The

purpose of all these taxes were to meet the needs of military and civil expenditure of

the Government as well as to meet common needs of the citizens like maintenance of

roads, administration of justice and such other function of state.

In the Indian context. The system the system of direct taxation as it is known

today, has been in force in one form or another even from ancient times. There are

references both in Manu Sm rid and Kautilya’s Anbasastra to a variety of tax

measures. The taxes were 1/5 of the profit to artisans in silver and gold, while the

while the agriculturists were to pay 1/6*, I/S'** and 1/10* of their produce depending

upon their ciromistances. Even taxes were collected from various classes of people

like actors, dancers, singers and even dancing girls in the in the shape of gold-coins,

cattle, grains, raw-materials and also by rendering personal service.

The tax on services is not new to India. It is from the old ancient age, the tax

on services v^ras levied in the different forms called ‘B ali’, ‘S hulka’, or ‘K ara’. In

Kautilya’s period (Arthasastra) it is evident that certain types of service activities were

major source of state revenue. Si3cth Centmy BC, till the Satvahana Rule, taxes

included levies on artisans, fishermen, prostitutes, gambling houses, wine houses,

slaughter houses etc. Alauddin Khilji introduced new taxes and repressive measiu-es

including a grazing tax on all milch cattle. The taxation of services in India before the
English was there in the form of Tax on watchmen, dancing girl, Carpenters,
goldsmiths etc.

The present Service Tax is introduced in 1994, with only 3 services by the

then Finance minister, Manmohan Singh. The Service Tax was introduced on the

recommendation of the Tax Reform Committee to broaden the indirect tax base.

While introducing. Dr. Manmohan Singh, FM, in his budget speech said “Over the

years, while attempts have been made to widen the base for domestic indirect taxes,

the services sector has not been subjected to taxation. Yet this sector accounts for

about 40per cent of our GDP and is showing strong growth. There is no sound reason

for exempting services from taxation, when goods are taxed and many countries treat

goods and services alike for tax purposes. The Tax Reforms Committee has also

recommended imposition of tax on services as a measure for broadening the base of

indirect taxes.’’^

Then except three budgets (1995, 1999 2000), in every budget the Finance

Minister has introduced new services. It has become the important new source of

revenue year by year for the government.

Research Methodology

1.2.1) Choice of the Topic

The Service Tax is new for all. It is based on Canadian GST. Till the date

nobody has done researcher on it. Being new and challenging levy for all the

stakeholders, attracted researchers to make the research on this topic. Being chartered

accountant, research has took the keen interest as hobby on the development of law

as it has introduced in 1994 and the researcher has passed his CA in 1996. Being

interest area of practice of the researcher is the Service Tax; researcher has selected

this subject topic.

T h e S e rv ic e T ax started w ith 3 services and w ith sm all presen ce in taxation

has b ecom in g k ey resources for g o v e rn m en t as altern ate so u rce o f rev'enue. In budget

w h ere oth er in d irec t tax collection red u cin g percen tage w ise ,th e co llectio n o f Service

T ax has in cre asin g year after year. Even the trade and in d u stry p eo p le, h ave to

con sider th e effect o f Service T a x in th eir decision. In th e w o rld eco n o m y as w ell as

n ation al econ om y , th e Services S e cto r has creatin g m ore sp a c e for its c o n sid e ratio n as

its sh are in th e G ro ss dom estic p rod u ct has gon e up to m ore th an 50per cent. T h u s the

Services S e cto r an d Serv ice T ax has im p o rtan t in the econ om y . T he stu d y o f w h ich,

w ill con trib u te to th e field and w ill be u sefu l for all the stak eh o ld ers.

1.3 Objectives of Study

The o b jec tiv e s set for this stu d y are

1 To stu d y an d an alyze o rig in an d grow th o f Serv ice T ax in India.

2 T o stu d y an d an aly ze p ro v isio n s o f Service T ax in India.

3 T o stu d y in cid en ce an d effects o f Service T a x an d it’s sh iftin g eith er

fo rw ard to cu sto m er or sh arin g a part o f th e b u rd e n b y serv ice p ro v id e r’s

th em selv es.

4 T o stu d y th e levy and co llectio n ad m in istratio n o f Serv ice T ax in In d ia &

th e e ffic ie n c y o f tax a d m in istrato r in collection o f S e rv ic e T ax rev en u e.

5 T o stu d y th e prob lem an d p ro sp ects o f Serv ice T a x in In dia

1.4 Statements of Hypotheses

R esearch er h as tested fo llo w in g statem en ts o f h y p o th eses th rou gh th is stu dy.

future though the decadal development is slow.

2. There are better prospects for Service Tax in India; however, the

prospects are not likely to be free from problems.

3. It is hardship for small tax payer as well as administrative cost for

this segment is high.

1.5 Research Methodology

Proposed study is aii exploratory research based on historical secondary data

on the theme and review of the related literature. The research is mainly based on

secondary dau such as Books, Acts, reports of the Government of India official

statistics on levy and collection of Service Tax Vis-a-vis other direct and indirect taxes

of the Union Government of India, various magazines, and news papers published

articles etc. and electronic media like web sites, e-newsletters. Researcher initially

thought to coUect part of the primary data from a few tax authorities, practitioners,

and tax payers who were to be interviewed for noting their expert opinion on

complications of Service Tax. However, this couldn’t be realized because these

respondents were not open and free to reveal the facts either on account of ‘official

secretes’ and imwillingness of the practicing consultants and tax payers to reveal the

true facts. As a result, this work is now entirely based on analysis of secondary data

collected through official sources.

Simple statistical tool like mean, ratios and percentages have been use to

analyse statistical data on levy and collection of Service Tax in India.

1. The scope of this study is limited to a single indirea union tax, “Service Tax”

out of the overall Tax Structure of India, though passing references of other

taxes appear in the body of text have appeared for comparison purposes.

2. The study shall cover the entire geoGraphical area of India, wherever the

“Service Tax" is applicable.

3. The scope of this study covers a time period from implementation of this tax,

i.e. from 1994-95 till the date of completion of this work in 2009-10.

1.7 Limitatioiis

1. The area of coverage of the topic being too large for an individual researcher,

he could not coUect primary data from the respondents spread over the

country. Covering only local respondents from Maharashtra could have

presented only a partial picture that could not have been capable of being

representative of the country as a whole, the dependence on primary data was

to be given up.

2. While collecting primary data and information, the departmental personnel

though discussed the issues, showed inability to provide documented

information. Even professionals, on the plea of professional secrets, ethics have

expressed inability to disclose the statistics. With these limitations, the

research is carried out entirely on the basis of secondary data.

The entire thesis is organized in six chapters as detailed below:

Chapter
Nximber

Title

1 Introduction and Research Methodology

2 Review of Related Literature

3 Meaning and Development of Service Tax in India

4 Ratio of Direct and Indirect Taxes and Service Tax to GDP

5 Problems and Prospects of Service Tax in India

6 Summary, Findings and Suggestions

11
References

1) A Study on proposed goods and Services Tax (GST) Frame work In India By
Rajkumar S Adukia- http://taxclubindia.com/simple/rajkuinar.pdf

2) http://incometaxindia.gov.in

3) pp20-23, Taxation of Services in India- Pre-legislative Histrorical Prespective

4) A Study on proposed Goods and Services Tax (GST) Frame work In India By
Rajkumar S Adukia. http://taxclubindia.com/simple/rajkumar.pdf

5) Para 87 of budget speech 1994 delivered by Dr. Mamohan Singh, Finance