The concept of Classification of Services is fundamentally adopted from the Sister law, viz. Central Excise Act 1944 read with Central Excise Rules, wherein the erstwhile provisions of rule 173 B governed the Classification Principles. Similarly  Section 65A of the Finance Act 1994, specifies norms for classification of services which are taxable u/s 65 of the Act.

The effective rate of the Service Tax varies from one taxable Service to another. Thus to determine the correct effective rate of Service Tax, it is essential that the Service is properly classified.

Incorrect classification of service may result into non availability of certain exemptions or abatements. Thus the assessee pays tax more than what is required by the law, or vice-a-versa. Further,  it is also possible that certain exemption or abatement is not available to the service provider  however, due to mis-classification  the assessee may  wrongly avail such benefit and as a consequence, the department can initiate Recovery proceedings along with  interest and penalty.

Any Service can be taxed only once, even if it appears to fall under two or more categories. Therefore, before levying Service Tax it is essential to determine under which category a particular service falls.  Service tax cannot be charged twice on the same service

If a service is classified under one category, the tax liability may start from earlier period then other category. For example Service Tax on Mandap Keeper Service was levied from 01-07-1997, whereas service tax on Convention Service was levied from 16-07-2001. Therefore proper classification becomes necessary to determine the date from which Service Tax was to be levied on the service provided.

Provisions of “Import of Services” and “Export of Services” are different for different service. Some services are categorised on the basis of property situated outside India whereas others  even if partly performed in / outside India they are considered fully performed in / outside India  whereas some Services are to be completely performed in / outside India to be considered as Import or Export respectively.

Classification of taxable services shall be determined according to the terms of the sub-clauses of clause (105) of Section 65, if service provided belongs to any specific sub-clause then it should be classified as per that sub-clause.[ Please Refer : Section 65A(1), Finance Act, 1994. ]

When taxable service is, prima facie, classifiable under two or more sub-clauses of clause (105) of Section 65, classification shall be effected as follows :-  

(1)  Most Specific Description : The sub-clause which provides the most specific description shall be preferred to sub-clauses providing a more general description. [ Please Refer : Section 65A(2)(a), Finance Act, 1994. ] 

(2)  Composite Services : Composite services are services consisting of a combination of different services which cannot be classified by their specific description. Such services are to be classified on the basis of the service which gives them their essential character. [ Please Refer : Section 65A(2)(b), Finance Act, 1994. ]

Often services provided consist of more than one service. In such cases, it is important to decide, whether each element of the transaction should be treated separately or as a single composite transaction, although, made up of two or more separate services. A composite service, even if it consists of more than one service, should be treated as a single service based on the main or principal service and accordingly classified.

The decision is to be made on question of facts and law. It will not make a difference if the tax rates of the components are the same as that of the principal service. The problem may arise when some elements are taxable and others are exempt. The guiding principle is to identify the essential features of the transaction. The method of charging does not in itself determine whether the service provided is a single service or multiple services.