Introduction to Service Tax

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Service tax is a tax on service. This is not tax on profession, trade. Calling or employment but is in respect of service rendered . If there is no service, there is no tax. As per Websters Concise Dictionary service means a useful result or product of labor, which is not a tangible commodity. Thus basically service is a value addition that can be perceived but cannot be seen, as its tangible. However, usage of some goods during the course of rendering the service would not mean that there is no service .It is the predominant factor in each case, which is to be studied to arrive at a conclusion. Service tax is a tax levied on service providers in India, except the State of Jammu and Kashmir. Service Tax, introduced from the financial year 1994-95 now covers as many as 41 services within its ambit. Service sector, which has an average annual growth rate of value addition of 7.9%, contributes nearly 50% of the GDP. The Economic Survey 2001-2002 observed that bringing more services under the tax net can offset the likely revenue loss through lower custom tariff. Finance Act, 2001 added 15 new services to the list of taxable services with effect from 16-72001 & it is expected that coming budget will add further services under the tax net. We are moving towards a total value added tax regime which was partially expected to come into force with effect from 1st April, 2002 replacing the local sales tax in about 17 states. However due to failure of reconciliation between the center & the states regarding some key issues, like amendment in Central Sales Tax regarding vat ability of Central Sales Tax against liability of local sales tax & loss of revenue to the state exchequer due to introduction of value added tax, it could not be

introduced. However it is expected to come into force with effect from 1st April, 2003 & by that time service tax may also be made vat able. Vat ability of service tax will compel the reduction in loss of revenue through tax evasion. To reduce the tax evasion in respect of service tax government has already taken some significant steps like introduction of service tax audit in the mode of Canadian system of excise audit introduced in India from financial year 2000 & collection of data from various associations of service tax providers like ICAI, ICSI, ICWAI, Internet Service Provider Association of India, Stock Exchanges, Council of architecture etc. Now let us discuss about some basic concepts of service tax regarding taxability, exemptions, payment, assessment, etc. The services provided by goods transport operators, out door caterers and pandal shamiana contractors were brought under the tax net in the budget 199798, but abolished vide Notification No.49/98, 2 June,1998. Government of India has notified imposition of service Tax on twelve new services in 1998-99 union Budget. These services listed below were notified on 7 October, 1998 and were subjected to levy of Service Charge of Service Tax and Alternative rates of Service Tax Section 66 is the charging section of the ACT which deals with the levy and collection of service tax. It prescribes the applicable rate of service tax which is to be levied on the value of various taxable services. For collection of service tax, it provides that the prescribed manner needs to be followed. Applicable rate is provided in the section itself whereas the prescribed manner for collection and payment of tax is provided in the Service Tax Rules,1994 .With effect from 18.04.2006 , the rate of service tax prescribed by section 66 is 12% of the value of taxable services referred to in section 65(105) of the Act . Section 65(105) provides that taxable service shall not only include service provided but also the services to be provided The charge is on the services provided or to be provided The services provided or to be provided must be the one which is covered in section 65(105) The rate is 12% The measure of tax is on value of taxable services provided which is defined in section 67

Education Cess : With effect from 10.09.2004 an education cess has been levied @2%, calculated on service tax on all taxable services. Education cess collected is utilized for providing and financing universalized quality basic education. Fully exempted taxable services are not subject to education cess. In case of a partial exemption, say by way of abatement, the cess is calculated on the net tax paid and not on the amount of tax that would have been payable, but for exemption Secondary and Higher Education Cess: With effect from 11.05.2007, a secondary & higher education cess@1% has been imposed on services liable to service tax. It is levied on service tax payable on such services . The secondary & higher education cess is additional to the Educational cess of 2% . Thus the effective rate of service tax works out to be 12.36% [ 12%+3%(2-1) of 12% ] Although service tax is levied at the basic rate of 12% but in case of certain services, an alternate rate is also provided. Some of these are under Specified immovable properties an optional composition tax rate of 4% of gross value has been provided In case of life insurance service alternate mode of discharge of service tax liabilities has been provided and rate of service tax in this case is 1% of total premium Exemptions : There is no minimum limit or basic exemption limit to small service providers on the basis of value of taxable services rendered as yet. Following exemptions are available to the service tax providers :1) Taxable services rendered in India by an assessee to a client in respect of overseas projects for which payment is received in non repatriable convertible foreign exchange are exempt from levy of service tax. 2) Serive tax is fully exempt in respect of payments of which is received in India in non repatriable convertible foreign exchange whether the service is received in India or abroad.

3) In certain cases like insurance, telephone, telegraph, air travel, courier, advertisement etc. services provided to UN, notified international organizations or notified diplomatic missions, service tax is exempt. 4) Software engineering enjoys a complete exemption from service tax.

Brief Introduction to Service Tax and Service Tax Registration in Question-Answer Mode What is Service Tax and who pays this tax? Service tax is, as the name suggests, a tax on Services. It is a tax levied on the transaction of certain services specified by the Central Government under the Finance Act, 1994. It is an indirect tax (akin to Excise Duty or Sales Tax) which means that normally, the service provider pays the tax and recovers the amount from the recipient of taxable service. 2. Who is liable to pay service tax? Normally, the person? who provides the taxable service on receipt of service charges is responsible for paying the Service Tax to the Government (Sec.68 (1) of the Act). However, in the following situations, the receiver of the Services is responsible for the payment of Service tax : (i) Where taxable services are provided by foreign service providers with no establishment in India , the recipient of such services in India is liable to pay Service Tax, (ii) For the services in relation to Insurance Auxiliary Service by an Insurance Agent, the Service Tax is to be paid by the Insurance Company (iii)For the taxable services provided by a Goods Transport Agency for transport of goods by Road, the person who pays or is liable to pay freight is liable to pay Service Tax , if the consignor or consignee falls under any of the seven categories viz. (a) a factory (b) a company (c) a corporation (d) a society (e) a co-operative society (f) a registered dealer of excisable goods (g) a body corporate or a partnership firm (iv) For the taxable services provided by Mutual Fund Distributors in relation to distribution of Mutual Fund the Service Tax is to be paid by the Mutual Fund or the Asset Management Company receiving such

service. [ Refer: Sec. 68(2) of the Act read with Rule 2(d) of the Service Tax Rules, 1994.] 3. Under what authority service tax is levied? Vide Entry 97 of Schedule VII of the Constitution of India, the Central Government levies service tax through Chapter V of the Finance Act, 1994. The taxable services are defined in Section 65 of the Finance Act, 1994. Section 66 is the charging section of the said Act. 4. What are the taxable services? Taxable Services have been specified under Section 65(105) of the Finance Act, 1994. All the taxable services as on 01 .07.2010 are listed in Appendix-1. The list also shows the relevant Accounting Heads required to be mentioned on the tax payment documents (GAR-7), while depositing the Service Tax and other related dues in the banks. 5. How to decide whether Service Tax is payable by a person? A. If you are engaged in providing a service to any person, please check:(i)Whether the service rendered by you is falling under the scope of any of the taxable services listed in the Appendix-1.; and (ii)Whether there is a general or specific exemptionavailable for the category of service provided under any notification issued under section 93 of the Finance Act, 1994. (iii)Whether you are entitled to the value based exemption available for small service providers under notification No.6/2005ST dated 1.3.05 as amended from time to time. (iv)Whether the service charges were received for the services provided or to be provided. In case the service provided by a person falls within the scope of the taxable services and if such service is not fully exempted, the service tax is payable on the value of the taxable service received, subject to the eligible abatements, if any B. If you are availing the services of the service provider, please check:a.Whether the service received by you is falling under the scope of any of the services where the recipient of the service is liable to pay Service Tax in terms of Section 68(2) of the Act read with Rule 2(d) of the Service Tax Rules, 1994 (Please also see Para 1.2 of this Booklet). b.In case the service received by recipients of such service is falling under the scope of any of the taxable services defined under section 65 of the Finance Act, 1994, the recipients of the service shall pay Service Tax after considering specific exemptions/abatements admissible, if any. c. Please note that the value based exemption for small scale service providers under Notification No.6/2005 ST dated 01.03.2005 as amended is not admissible to such recipients of

taxable services. (For further details, please see para 7.1 of this Booklet). 6. What is the rate of Service Tax? At present, the effective rate of Service Tax is 10.3% on the value of the taxable service. The above effective rate comprises of Service Tax @10% payable on the gross value of taxable service Education Cess @ 2% on the service tax amount, and Secondary and Higher Education Cess @ 1% on the service tax amount. 7. What is meant by ?value of taxable service"? i.The "value of taxable service" means, the gross amount received by the service provider for the taxable service provided or to be provided by him. Taxable value has to be determined as per the provisions of the Section 67 of the Finance Act, 1994, read with Service Tax (Determination of Value) Rules, 2006. ii. For certain services, a specified percentage of abatement is allowed from the gross amount collected for rendering the services (see Appendix 2) subject to the conditions, inter alia, that CENVAT Credit has not been availed by the service provider and the benefit under the Notification No.12/2003-ST dt. 20.6.2003 as amended has also not been availed. iii. There is also a composition scheme for ?works contract service, where the person liable to pay service tax in relation to works contract service shall have the option to discharge his service tax liability on the works contract service provided or to be provided, instead of paying service tax at the rate specified in section 66 of the Act, by paying an amount equivalent to 4% of the gross amount charged for the works contract. The gross amount charged for the works contract 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. 8. Can the Department modify the value determined by the service provider? (i)The Central Excise Officer is empowered to verify the accuracy of any information furnished or document presented for valuation. (ii)If the value adopted by the Service Tax assessee is not acceptable in accordance with the statute, the officer shall issue a show cause notice (SCN) proposing to determine the value as per the law. (iii)The SCN would be decided after providing reasonable opportunity of being heard to the assessee. (Rule 4 of the Service Tax (Determination of Value) Rules, 2006 read with Section 67 of the Act) 9. What are the statutes governing the taxation relating to Service Tax? The Statutes governing the levy of Service Tax are as follows: (i) The Finance Act, 1994 - Chapter V - Section 64 to 96 I. (Also referred to as Act in this book). This chapter extends to the whole of India except the State of Jammu and Kashmir.

(ii) The Finance Act, 2004 Chapter VI - for levy of Education Cess @ 2% on the Service Tax. (iii) The Finance Act, 2007 for levy of Secondary & Higher Education Cess of 1% on Service tax. (iv) The Service Tax Rules1994 (Also referred to as Rues? or STR,1994 in this book). (v) The CENVAT Credit Rules, 2004. (vi) The Export of Service Rules, 2005. (vii) The Service Tax (Registration of Special categories of persons) Rules, 2005. (viii) The Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (with effect from 19th April, 2006) Notification No. 11/2006-ST dated 19.4.2006 as amended vide Notfn.No.31/2007 ST dated 22.05.2007. (ix) The Service Tax (Determination of Value) Rules, 2006 (with effect from 19th April, 2006) Notification No. 12/2006-ST dated 19.4.2006 as amended vide Notfn.No.24/2006 ST dated 27.06.2006 and Notfn .No.29/2007-ST, dated 22.05.2007. (x) Works Contract (Composition Scheme for Payment of Service Tax) Rules, 2007-Notification No. 32/2007-Service Tax dated 22nd May, 2007, as amended by Notification No. 07/2008-St dated 1st March, 2008. (xi) Service Tax (Removal of Difficulty) Order, 2010 effective from 22.6.2010. 10. Is there any exemption from payment of service tax to Diplomatic Missions for official use and individuals and their family members posted in a Diplomatic Mission? Yes, any taxable service provided to Diplomatic Missions for official use of such Mission as well as for the personal use or for the use of the family members of diplomatic agents or career consular officers posted in a foreign diplomatic mission or consular post in India is exempt in terms of the notifications numbers 33/2007-ST dated 23rd May, 2007 and 34/2007-ST dated 23rd May, 2007 respectively. 2. Registration: 1. What is meant by Registration? Who should apply for registration under Service Tax law? In terms of Section 69 of the Finance Act, 1994 (Chapter V) read with rule 4 of the Service Tax Rules,1994 - Every person who has provided a taxable service of value exceeding Rs. 9 lakhs, in the preceding financial year, is required to register with the Central Excise or Service Tax office having jurisdiction over the premises or office of such service provider. In case a recipient is liable to pay service tax (Please see para 1.2 of this Booklet) he The Input Service Distributors are also required to registerNotfn. No.26/2005-ST dated Every person who provides taxable service and is liable to pay service tax.

2. Why registration is necessary? Registration is identification of an assessee. Identification is necessary to deposit service tax, file returns and undertake various processes ordained by law relating to service tax. Failure to obtain registration would attract penalty in terms of section 77 of the Finance Act, 1994, read with rule 4 of Service Tax Rules 1994. 3. What is the meaning of an ?assessee in relation to Service Tax? As per the sub-section (7) of Section 65 of the Finance Act, 1994 (Chapter V), assessee? means a person liable to pay Service Tax and includes his agent. 4. When should a prospective assessee obtain registration? i.When a person commences business of providing a taxable service, he is required to register himself within 30 days of such commencement of business [sub-rule (1) of Rule 4 of Service Tax Rules, 1994]. ii.In case service tax is extended to a new service, an existing service provider must register himself, unless he is eligible for exemption under any notification, within a period of 30 days from the date of new levy [sub-rule 5A of Rule 4 of the Service Tax Rules, 1994]. 5. What does the word ?person appearing in the definition of taxable service mean? The word "Person" shall include any company or association or body of individuals, whether incorporated or not. Thus, this expression includes any individual, HUF, proprietary firm or partnership firm, company, trust, institution, society etc. 6. What is the procedure for Registration? Who should be approached for Service Tax Registration? A prospective Service Tax assessee (service provider or service receiver) or Input Service Distributor? seeking registration should file an application in Form ST-1 (in duplicate) [prescribed vide Notfn.No. 32/2005 dated 20.10.2005 as amended Notfn. No. 11/2008 dated 1.3.2008] before the jurisdictional Central Excise/Service Tax officer. To verify the correctness of declaration in the said form, certain documents such as copy of PAN card, proof of address of business premise(s), constitution of the business [proprietorship, firm, company, trust, institute etc.] etc. may be required by the registering authority. The copies may be self-certified by the applicant. In case of doubts in select cases, original documents may have to be presented for verification. 7. How much time is taken for the issuance of the Registration Certificate? The Registration certificate should be issued within a period of seven days from the date of submission of application ST-1 along with all relevant details/documents. In case the registration certificate is not issued within seven days, the registration applied for is deemed to have been granted. [Rule 4(5) of the STR, 1994]. 8. Is there any provision for centralized registration? Service providers having centralized accounting or centralized billing system who are located in one or more premises, at their option, may register such

premises or office from where centralized billing or centralized accounting systems are located and thus have centralized registration. Commissioner of Central Excise/Service Tax in whose jurisdiction centralized account or billing office of the assessees exists, is empowered to grant centralized registration in terms of Service Tax 4(2) and (3) of Service Tax Rules,1994. 9. In case of multiple services provided by an assessee, is separate registration certificate required for each service? As per sub-rule (4) of rule 4 of the Finance Act, 1994, only one Registration certificate is to be taken even if the person provides more than one service from the same premises for which registration is sought. However, while making application for registration, all taxable services provided by the person should be mentioned. If there is centralized registration, only one registration certificate is required for services provided from different premises, declared in the application for centralized registration. 10. What is to be done when the existing assessee starts providing a taxable service not mentioned in the registration certificate? He should intimate the jurisdictional Central Excise officer in writing, furnishing the name of taxable service he starts providing. No fresh documents are required for verification by the officer unless there is change in any other details given in the original or earlier application(s). In case the changes relates to deletion of any premises or taxable service, the assessee may file intimation on plain paper along with the copy of the registration certificate. (As per Rule 4(5A) of Service Tax Rules, 1994). 11. Is PAN allotted by the Income Tax Department a must for obtaining Service Tax Registration? Having PAN is essential because the Service Tax Code/Registration number is generated based on the PAN issued by the Income Tax Department. The PAN based Service Tax Code/Registration number is a must for payment of service tax using the G.A.R. 7 Form.. 12. What should be done with the Service Tax Registration on cessation of business of providing taxable service -? The Service Tax Registration certificate (ST-2) should be surrendered to the respective Central Excise / Service Tax authorities [Rule 4(7) of the STR, 1994]. 13. What should be done with the Registration in case of transfer business to another person? In the event of transfer of the business, the transferee should obtain a fresh certificate of Service Tax registration based on his own PAN [Rule 4(6) of the STR, 1994]. The transferor should surrender his registration certificate, as mentioned at para 2.12 of this Booklet. 14. Whether a service provider can make payment of Service Tax and file returns before the grant of registration by the proper officer?

A person liable to pay service tax must apply for registration before he starts paying service tax and filing return. Service provider should apply well in advance to obtain registration, which is normally granted within 7 days of filing of application. If registration is not granted within seven days, it deems to have been granted. 15. Is there any penal provision for non-registration? Failure of registration may attract a penalty upto Rs.5000/- or Rs. 200/- for every day during which such failure continues, whichever is higher [Section 77(1)(a) of the Finance Act, 1994]. However, such penalty may be waived in case the assessee proves that there was reasonable cause for such failure [Section 80 of the Act]. 16. What should be done in case of change in the office/place of business? Any change in premises/office, as mentioned in Form ST-1, should be intimated to jurisdictional Central Excise/Service Tax Officer. 17. If a registration certificate issued by the Department is lost, can duplicate be issued? What is the procedure in this regard? The assessee is required to make written request for duplicate registration certificate. The same will be issued by the Department after suitable entry in the registers/records of the Office.

Service tax in India is an important form of indirect tax. The Central Board of Excise and Customs (CBEC) has the responsibility of collecting the levy in different states in India. It is not imposed in the state of Jammu and Kashmir. Currently, the rate is 10%.

What is service tax?

It is a type of indirect duty levied on particular services that are categorized as taxable services. The responsibility of paying this kind of levy lies on the service provider. This duty can't be levied on services that are not included in the specified list. Over last one or two years, the domain of service tax been broadened to include new services. The goal behind imposing service tax in India is to lower the extent of concentration of taxation on business and industry without compelling the government to find the middle ground on the revenue requirements.

Initiative of the Government

Pranab Mukherjee, the Union Finance Minister of India, in his budget speech has pointed toward the government's aim of combining all levies such as Excise, Service Tax, and VAT into a Universal Goods and Service Tax by the year 2011. For accomplishing this goal, the CEST rate will be gradually changed and taken to a general rate. While tabling the budget for 2008-2009, it was declared that all small-scale service providers whose turnover is less than or equal to Rs.10 lakhs don't have to pay this tax.

Synchronization of CENVAT and Service Tax Rate

By increasing the rate of CENVAT to 10%, equal to that of Service Tax, Mr. Pranab Mukherjee, the Finance Minister has adopted the initial measure on the road to synchronizing tax on Services and Goods. In spite of the fact the current rate of 10% may not essentially be the customary rate of Central GST, Service Tax and CENVAT will henceforth go simultaneously until GST is put into operation. To dismiss the anticipation that the rate of CSGT might be 10%, the Finance Minister has in a conference mentioned that the Revenue Neutral Rate (RNR) of CGST is still to be decided and the CGST Standard Rate may not essentially be 10%.

Taxed Services
Since the time of its inception in 1994-1995, only three services were liable to be taxed. From that time, the Government of India has introduced almost 100 categories under its ambit, which include the following: Traveling agencies (road. air, and railway services) Telecommunication Management consultants Architects Credit rating agencies Colleges, universities, and schools Broadcasting services (television and radio)

Market research analyst Authorized service stations Banking and other financial services Cargo and shipping Export import unit Hospitals and health care providers/services Telegraph services Maintenance and repair services Storage and warehousing services Retail stores Franchise owner Packaging services Transportation of goods Cable operators Airport services Beauty parlors Event managements Real estate agents Dry cleaning services Insurance underwriting agencies Consultants of different services Passport services Stock brokers Legal advising units Immigration services Customer service units Chartered accountant firms Tourist services Technical support advising firms Electronic and electrical service stations Automobile service stations Membership of clubs and association Human resource services Survey and exploration of minerals Share and stock transfer agent Internet telephony services Cost accountant

Transport of goods by air Security agencies Pager services Health clubs Ship management services Custom house agent Port services Containers by rail General insurance services Postal services

Exemptions for Service Tax in India

The Government of India can offer part or complete exemption by circulating an exemption notice. However, it cannot be offered with retrospective effect. Some of the exemptions are as follows: Small-scale service providers whose turnover is below Rs.4 lakhs per year are relieved from payment of this tax. Services offered to United Nations and Global Agencies and provisions to Special Economic Zones (SEZ) are excepted from payment of service tax. It is not imposed on export of services. Service tax is not payable on cost of commodities and substances rendered at the time of offering services. This kind of exemption is allowable only if CENVAT credit on those commodities and substances is not collected.

The salient features of levy of service tax are:

1. Scope: It is leviable on taxable services provided or to be provided by a service provider. The services to be provided in future are taxed only if payment in its respect is received in advance. Two separate persons required Payment to employees not covered: For charge of service tax, it is necessary that the service provider and service recipient should be two separate persons acting on principal to principal basis. Services provided by an employee to his employer are not covered service tax and, therefore, salaries or allowances paid to them cannot be charged to service tax. 2. Rate: It is leviable @ 12% of the value of taxable services. Education Cess @ 2% and Secondary and Higher Education Cess @ 1 % are chargeable on the amount of service tax, thus, making the effective rate of service tax at 12.36% of the value of taxable service. 3. Taxable services: Service tax is leviable only on the taxable services. Taxable services mean the services taxable under section 65(105) of the Finance Act, 1994. 4. Value: For the levy of the service tax, the value shall be computed in accordance with section 67 read with Service Tax (Determination of Value) Rules, 2006. 5. Free services not taxable : No service tax is leviable upon the services provided free of cost. 6. Payment of service tax : The person providing the service (i.e. the service provider) has to pay service tax in such manner and within such period as is prescribed in the Service Tax Rules, 1994. The service tax is to be paid only on the receipt of payment towards the value of taxable services. 7. Procedures: Provisions have been made for registration, assessment including self assessment, rectifications, revisions, appeals and penalties on the service provider. 8. CENVAT credit: The credit of service tax and excise duty across goods and services is allowable in accordance with the CENVAT Credit Rules, 2004. Accordingly, output service provider (i.e. provider of any taxable service) can avail credit not only of the service tax paid on any input service consumed for rendering any output service but also of the excise duty paid on any inputs and capital goods used for rendering output service. CENVAT credit so availed can be utilized for payment of service tax on taxable output service. 9. Services provided by an unincorporated association/body to its members also taxable [Explanation to Sec. 65] : Taxable service includes any taxable service provided or to be provided by any unincorporated association or body of persons to a member thereof, for cash, deferred payment or any other valuable consideration. Hence, the services (falling under any category of taxable service) provided or to be provided by any unincorporated association/body to member thereof shall be liable to service tax. This provision is an exception to the principle of mutuality. 10. Performance of statutory activities/duties, not service: An activity performed by a sovereign /public authority under provisions of law does not constitute provision of taxable service to a person and, therefore, no service tax is leviable on such entities.

11. Import/Export of services: While import of services is chargeable to tax u/s 66A, the export of services has been made exempt from tax. Import/export provisions are discussed separately

1. Convenient
Indirect taxes are imposed on production, sale and movements of goods and services. These are imposed on manufacturers, sellers and traders, but their burden may be shifted to consumers of goods and services who are the final taxpayers. Such taxes, in the form of higher prices, are paid only on purchase of a commodity or the enjoyment of a service. So taxpayers do not feel the burden of these taxes. Besides, money burden of indirect taxes is not completely felt since the tax amount is actually hidden in the price of the commodity bought. They are also convenient because generally they are paid in small amounts and at intervals and are not in one lump sum. They are convenient from the point of view of the government also, since the tax amount is collected generally as a lump sum from manufacturers or traders.

2. Difficult to evade
Indirect taxes have in built safeguards against tax evasion. The indirect taxes are paid by customers, and the sellers have to collect it and remit it to the Government. In the case of many products, the selling price is inclusive of indirect taxes. Therefore, the customer has no option to evade the indirect taxes.

3. Wide Coverage
Unlike direct taxes, the indirect taxes have a wide coverage. Majority of the products or services are subject to indirect taxes. The consumers or users of such products and services have to pay them.

4. Elastic
Some of the indirect taxes are elastic in nature. When government feels it necessary to increase its revenues, it increases these taxes. In times of prosperity indirect taxes produce huge revenues to the government.

5. Universality
Indirect taxes are paid by all classes of people and so they are broad based. Poor people may be out of the net of the income tax, but they pay indirect taxes while buying goods.

6. Influence on Pattern of Production

By imposing taxes on certain commodities or sectors, the government can achieve better allocation of resources. For e.g. By Imposing taxes on luxury goods and making them more expensive, government can divert resources from these sectors to sector producing necessary goods.

7. May not affect motivation to work and save

The indirect taxes may not affect the motivation to work and to save. Since, most of the indirect taxes are not progressive in nature, individuals may not mind to pay them. In other words, indirect taxes are generally regressive in nature. Therefore, individuals would not be demotivated to work and to save, which may increase investment.

8. Social Welfare
The indirect taxes promote social welfare. The amount collected by way of taxes is utilized by the government for social welfare activities, including education, health and family welfare. Secondly, very high taxes are imposed on the consumption of harmful products such as alcoholic products, tobacco products, and such other products. So it is not only to check their consumption but also enables the state to collect substantial revenue in this manner.

9. Flexibility and Buoyancy

The indirect taxes are more flexible and buoyant. Flexibility is the ability of the tax system to generate proportionately higher tax revenue with a change in tax base, and buoyancy is a wider concept, as it involves the ability of the tax system to generate proportionately higher tax revenue with a change in tax base, as well as tax rates.

Disadvantages / Demerits of Indirect Taxes

Although indirect taxes have become quite popular in both developed & Under developed countries alike, they suffer from various demerits, of which the following are important.

1. High Cost of Collection

Indirect tax fails to satisfy the principle of economy. The government has to set up elaborate machinery to administer indirect taxes. Therefore, cost of tax collection per unit of revenue raised is generally higher in the case of most of the indirect taxes.

2. Increase income inequalities

Generally, the indirect taxes are regressive in nature. The rich and the poor have to pay the same rate of indirect taxes on certain commodities of mass consumption. This may further increase income disparities among the rich and the poor.

3. Affects Consumption
Indirect taxes affects consumption of certain products. For instance, a high rate of duty on certain products such as consumer durables may restrict the use of such products. Consumers belonging to the middle class group

may delay their purchases, or they may not buy at all. The reduction in consumption affects the investment and production activities, which in turn hampers economic growth.

4. Lack of Social Consciousness

Indirect taxes do not create any social consciousness as the taxpayers do not feel the burden of the taxes they pay.

5. Uncertainty
Indirect taxes are often rather uncertain. Taxes on commodities with elastic demand are particularly uncertain, since quantity demanded will greatly affect as prices go up due to the imposition of tax. In fact a higher rate of tax on a particular commodity may not bring in more revenue.

6. Inflationary
The indirect taxes are inflationary in nature. The tax charged on goods and services increase their prices. Therefore, to reduce inflationary pressure, the government may reduce the tax rates, especially, on essential items.

7. Possibility of tax evasion

There is a possibility of evasion of indirect taxes as some customers may not pay indirect taxes with the support of sellers. For instance, individuals may purchase items without a bill, and therefore, may not pay Sales tax or VAT (Value Added Tax), or may obtain the services without a bill, and therefore, may evade the service tax.

Conclusion
Elaborate analysis of merits and demerits of direct and indirect taxes makes it clear that whereas the direct taxes are generally progressive, and the nature of most indirect taxes is regressive. The scope of raising revenue through direct taxation is however limited and there is no escape from indirect taxation in spite of attendant problems. There is common agreement amongst economists that direct & indirect taxes are complementary and therefore in any rational tax structure both types of taxes must find a place.

taxes are revenues of the government. 2. Through these, they be able acquire budget which could further use to build or improve consumption expenditures of the government, capital outlays, national defense, education, health and other social investments. 3. taxes are lifeblood of a nation. Without it, the country will always have insufficient funds which would sought them to always borrow money in World Bank or IMF. 4. taxes are also used to pay international debts. 5. the purpose of the tax is to bridge the gap between those with more in life and those who have less in life. 6. there is a type of tax which is called "sintaxes". an example of it is the taxes levied to cigarettes. it is regressive in reference to tax burden (those in lower income ends up paying more) because primarily cigarettes are dangerous to ones health. it's the government's way to discourage people to smoke; but if a person can't stop himself use his penny to puff cigarette, in one way or another the government resort to obtain income them because on the assumption that if they could afford it, therefore they have more in life. 7, by having taxes, the government could somehow gain protection for incurring large fiscal deficit. the impacts of fiscal deficit would lead the government print out so much money that will eventually lead to inflation. 8. borrowing from he domestic market would lead to "crowding out" with taxes the government could lessen the probability of this to happen. 9.tariffs, which is an excise tax levied upon foreign goods and service, is given to balance international balance of payments. 10. lastly, taxes are automatic stabilizers of a country. 4 months ago

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