Service Tax came into force w.e.f. 01-07-1994 and initial rate of Service Tax was 5%, since then rates have changed from time to time.

Currently Service Tax is levied at the rate of 12 % vide charging section 66 of the Finance Act 1994 (Chapter V), However, vide Service Tax Notification no. 8/2009 dated 24-02-2009,  the Central Government, exempts all the taxable services from so much of service tax leviable there on under section 66 of the Finance Act, as is in excess of the rate of ten per cent of the value of taxable services. Thus, although charging section 66 specifies rate of 12% but, effective rate of service tax will be 10% with effect from 24-02-2009.. [Please Refer : Service Tax Notification No. 8/2009 ST, dated 24-02-2009.]

In addition to the basic rate of 10%, Education Cess at the rate of 2% and Secondary and Higher Secondary education Cess at the rate of 1% are levied on service tax  rate in respect of all taxable services. Thus effective rate of Service Tax as of now is 10.30%. ( 10% Basic Rate + 2%EC on 10% + 1%SHEC on 10% )

Illustration

Rate of tax in case of an insurer, carrying on life insurance business, in relation to the risk cover in life insurance provided to a policy holder, shall have the option to pay an amount calculated at the rate of 1% on the gross amount of premium charged. This has not been changed since 10-09-2004 when it was first introduced [Please refer : Service Tax Rules, 1994, Rule 6(7A)]

There are Two exceptions to the above mentioned rate of 1% for insurer, 

(a)    When the entire premium is paid by the policy holder and it is only towards risk cover in life insurance; or  

(b)    When the part of the premium payable towards risk cover in life insurance is shown separately in any of the documents issued by the insurer to the policy holder.

Alternate tax rate of 0.25% of the currency exchanged, has been introduced w.e.f. 16-05­-2008 for the transaction of sale or purchase of foreign currency where no separate service charge is mentioned for the provision of such service.

[Please refer : Service Tax Rules, 1994, Rule 6(7B)]

Illustration:

Buying rate $US 1 = Rs.48, selling rate $US 1 = Rs.50 

(i) Person exchanged $100 for equivalent rupees

Transaction value   = Rs.4800 (Rs.48 x 100)

Service tax payable = Rs. 12 (0.25% x 4800)

(ii) Person exchanged equivalent rupees for $100

Transaction value   = Rs.5000 (50 x 100)

Service tax payable = Rs.12.50 (0.25% x 5000)

 Total Service Tax Payable = 12 (Buy:$) + 12.50 (Sell:$) = 24.5 Rs.

A Person liable to pay service tax in relation to works contract service shall have the option to pay service tax at 4% of the gross amount charged for the works contract on service provided or to be provided.  [Rule 3(1), Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007]

For calculating the gross amount charged for the works contract, it shall not include Value Added Tax (VAT) or sales tax, paid on transfer of property in goods involved in the execution of the said works contract.

Illustration

Please Note:-

1)    Applicable rate of Service Tax in case of Works Contract is 4%

2)    VAT / Sales Tax on goods are not be included in Gross Amount Charged

3)    2% Vat should be excluded from Cost of Goods while charging the same for Service Tax Calculation

Calculation :

  Service Tax Rate down to 10 % from 12 %  

  The effective rate of the Service Tax as on the day of providing service is to be taken into consideration