Note: This article is for individuals & citizens of India. Readers from other countries should check out our archive for posts tailored for them.
In the age of the internet, Startups are working in a more dynamic environment dealing with a lot of complex laws. Also, ever changing laws are making it more competitive for start-ups to be more proactive in the approach. Modern start-ups like amateur bloggers, freelancers earns their basic revenue source such as Google AdSense without keeping worry about any taxation including Indian service tax laws. We need to understand that India is not a tax heaven and hence, start-ups should always have a legal strategy in place.
So many companies earn a lot of money from google ads. Many businesses are purely export based, as they provide various kinds services including web design, web development outside India. Even many freelancers also do the same. The primary source of income is outside India. But the one thing is very common in them is the lack of knowledge towards taxation. For example, as per law, you have to register for service tax, even if you are providing export services.
Also, one needs to understand that getting registered doesn’t mean that you have to pay the service tax. Registration is a different thing and paying service tax is different. Before we can discuss more, let me share a practical case to you.
The Practical Case of Raghvendra
Raghvendra Chandra Kumar (name changed) after quitting his job, started its own business. He was dealing in pharmaceutical products and Services through his website. He sells all his products/services to his client base in USA, Europe, etc.
In a span of months, his business kicked off and reached the new high of growth. In just a matter of 8 months, he was able to deliver services of worth $ 120,000 (around Rs.78,00,000).
He and his business were doing excellent until he reached out to us. He reached to me for his tax returns. He submitted me all his documents and invoices related to his business. After two days of analysis on the documents, I was pretty shocked to the blunder of mistakes that have put this person in big trouble. The following was my primary observations on the business of Mr.Ragvendra:
- He had received around 78 lakh into his bank account without charging any service tax. (Note: Not all services provided outside India are export) – An Important point in today’s scenario.
- He had delivered services and exported products without any import export code. (It is prohibited to import or export without IEC code, you are liable for strict action in case of any non-compliance) – This is as per Custom policy of India as drafted by Director General of Foreign Trade (DGFT).
- He had made a cash withdrawal of more than 50 lakh rupees and incurred expenses from that money. (Cash payments of more than Rs.20,000 in a day is prohibited as per Section 40a(3)(a) of Income Tax Act, 1961).
- Since his income from technical consultancy was more than Rs.25 lakh, hence tax audit applied to him, and he was liable to deduct TDS on expenses incurred by him. (As per section 44AB of Income-tax Act, 1961).
- He has taken roughly 11 lakh into his personal saving bank account, which is a risky business because transaction above 10 lakh comes under the scanner of Income tax directly. (This is as per Section 285BA of the Income-tax Act, 1961).
- He was in serious default for not deducting TDS on several payments made by him.
- He has not kept any proper supporting of the transactions nor did he have any proof that he has paid for that service, because in most cases, cash expenditure has been made.
- He was in default for not paying the advance tax liability. (Through practically SME and small businessman always non-comply with this section and ends up paying penalty for section 234B and 234C).
The above case is still open, and we are working on it to provide the best possible solution. Further, take the above practical case very seriously, because these things happen and we often overlook these things in our day to day work and one day they might come back as a blunder and can disrupt the business. (Further, all the above respective section of Income-tax Act, 1961 can be referred from here)
Service tax registration is mandatory for exports?
Yes, it is true that if you are providing the export services, then you are liable to register for service tax. As per the Service tax rules, every person responsible for paying service tax has to get registered with the authorities. Bloggers, Freelancers & Similar business also come under the ambit.
As an exporter, you are not eligible to pay service tax, but still you need to register. Rule 6A defines what export is regarding Service tax rules. To claim the benefit of export, you need to register first.
There are cases where registration is not mandatory, but still we recommend exporters to register to claim various benefits under Service tax schemes. Let us draw a table to describe where you need registration:
|Value of Services Provided||Exemption available up to 10 lakh*||Exporter||Registration Required|
|When value of Services is MORE THAN 10 Lakh||Yes||Yes||Yes|
|When value of Services is LESS THAN 10 Lakh||Yes||Yes||No, (he is under exemption limit of 10 lakh)|
|When value of Services is MORE THAN 10 Lakh (Without exemption)||No||Yes||Yes|
|When value of Services is LESS THAN 10 Lakh (Without exemption)||No||Yes||Yes, (without exemption, he is liable for service tax)|
*Notification no.33/2012 issued by Central Board of Excise and Custom (CBEC).
Hence, it is very clear, that if you are providing services to any person outside India, then whether it is mandatory or not, you should go for service tax registration. Service tax is not a bad thing when you are an exporter.
Termite – the myths about Service Tax for Bloggers & every Indian citizen
After dealing with a lot of startups and their founders, we have observed certain myths that are going as a termite in the business community. We thought of clearing out today.
#Myth 1 – Service tax registration means Service tax payment
Registration of service tax is not to say that you need to pay the service tax as well. Suppose, you get the service tax registration, and your total value of service provided is less than 10 lakh, then you are not liable to pay any service tax because you are under the exemption limit. Same in case you are exporting the services, you are not liable to pay any tax.
#Myth 2 – Exporter of Service hence no registration required
This is a dangerous myth. You must register for service tax if you are providing export services for more than 10 lakh. Also, in case you provide services lesser than 10 lakh, then also it is recommended to register to claim various tax benefits like input credit refund, etc.
#Myth 3 – Service tax is very complicated
This is true that service tax is complicated, but who told you to study the full act. You just need to understand the applicability on you services. You have to be like Arjun, who had just seen the bird’s eye and nothing else.
Myth 4 – Service tax registration means government Interferes
With the promotion of digital India, the service tax is going through a tremendous change due to which service tax officers treats you like a client. The government does not interfere in your business until it found any substantive proof that you are defaulting at your taxes.
Myth 5: Education cess is always over the Basic Rate
This is not true. Earlier, every rate is added by 3% on account of education cess. But the new rate is already submerged the educational cess into its rate. The current rate of service tax is 14.5% (including all cess). However, while calculating the taxes, one must adhere to latest service tax rates in India.
Myth 6 – Services provided outside India means Export
Not all services rendered outside India means export. For any service to be export, it must fulfill the conditions mentioned in Rule 6A of Service Tax Rules, 1994. The underlying requirements are as follows:
- The provider of service should be located in taxable territory (e. India excluding Jammu and Kashmir)
- The recipient should be located outside India
- Services should not come under negative list of services
- The place of provision of Service should be outside India (this is verified by Place of Provision of Services Rules)
- The payment for such service should be received in convertible foreign exchange.
If any of the conditions is compromised, then service will not be treated as export.
There is no point that we can finish this debate of service tax applicability on business. However, we have tried to explain the taxability of export business. Any non-compliance initially will not harm you much. However, don’t overlook this non-compliance, because it can become a strong problem if not solved correctly.
- Service tax guide for Indian bloggers & freelancers
- A complete guide on IncomeTax for Indian Bloggers & freelancers
- How to Calculate Income tax on AdSense income in India
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Have a question regarding service tax registration for your blogging business, freelancing career or even for your start-up? Feel free to ask in the comment section below.