Basic Exemption under Service Tax is not basic

Generally, it is understood that no service tax is payable, if a person™s taxable service turnover does not exceed Rs 10 lakhs in a financial year.  Basic emption  is given under taxation law and other laws to ensure that a person does not suffer undue hardship in complying with applicable legal requirements. For example, basic exemption of Rs 2 lakhs under Income-Tax Act for payment of Income-Tax. For compliance with Transfer Price Provisions, exemption is given if total value of domestic transactions with related parties/others do not exceed Rs 5 cr in a financial year. Similar exemptions are given in SEBI Takeover Regulations and other Regulations. However, the basic exemptions are not subject to minimum  turnover etc in immediate previous year.

However, clause (viii) of Notification no 33 /2012 dated 20-6-12 by Service Tax Department provides that basic exemption of Rs 10 lakhs for payment of service tax is  available if

the aggregate value of taxable services rendered by a provider of taxable services from one or more premises, does not exceed Rs ten lakhs ruppes in the preceding financial year.

In other words, if a person™s taxable services in financial year 2011-12 was Rs 15 lakhs, he will not be able to get benefit of basic exemption of Rs 10 lakhs in financial year 2012-13 even if his aggregate taxable service is Rs 8 lakhs.

Is it fair to deny basic exemption benefit to small service provider, particularly when business conditions are bearish?  Besides, business conditions always remain uncertain. Hence, there is no justification for denying benefit of basic exemption limit of Rs 10 lakhs to small service provider if his taxable service turnover exceeds Rs 10 lakhs in previous year.

Is it fair to not to permit cenvat credit to a person – who paid service tax after crossing basic exemption limit of Rs 10 lakhs for the period prior to payment of service tax for the first time?

Generally, it is understood that service tax is to be paid after reducing cenvate credit for Input and Input services used for providing taxable services. Rule 3 ( 1) of Cenvat Credit Rules, 2004 provides that-

A manufacturer or producer of final products or a provider of output service shall be allowed to take credit of excise duty, service tax etc paid on any Input or Capital Good or Input services used in providing output taxable services.

Notwithstanding the general understanding and the crystal clear Cenvat Credit Rules, 2004, clause ( iv ) of Notification no 33/2012 which grants basic exemption limit of Rs 10 lakhs provides that

the provider of taxable service shall avail the Cenvat credit only on such inputs or input services received, on or after the date on which the service provider starts paying service tax, and used for the provision of taxable services for which service tax is payable.

Unfair implication of the clause may be explained with an example. If a person™s total taxable services  exceeds Rs 10 lakhs on 15th December, 2012 during financial year 2012-13, he will be required to pay on taxable turnover in excess of Rs 10 lakhs on 5th January, 2013. He will be able avail cenvat credit for input and input services received on or after 5th January, 2013. Though, in fact, he must have received and  paid for Input and Input services, and the same must have been used  in providing taxable services from 15th December, 2012. The problem may be more serious if payment for taxes for input services / input were paid in advance i.e long before rendering hitting limit of Rs 10 lakhs.

The clause of the notification is highly unfair and contradicts Cenvat Credit Rules 2004 as explained. It settled law that a notification must be as per applicable rules and regulations. Otherwise, the notification is not binding to a tax-payer.

However, since the requirement is applicable to a small service provider, he is compelled to comply with the unfair requirements though it violates Cenvat Rules 2004. Otherwise, he will be compelled to refund Cenvat credit with interest and penalty.

Tags: Capital goodFiscal yearIncome taxIncome Tax ActPaymentService ProviderTaxTax exemption

profile image

About Uday N. Kajaria

Uday N. Kajaria | Chartered Accountant


  1. bg reddy says:

    i am running a bar & restaurant.  Sale turnover in Ac room is rs 27 lakhs and Sales turnover in Non-Ac room is Rs 45 lakhs during the financial year 2011-12.  How to calculate service tax?.   when do apply basic exemption of Rs 10 lakhs,  Abatement at @70% and service tax @ 10.3%.  Finally how much service tax shall I pay for the financial year 2011-12

  2. Uday N Kajaria says:

    I may inform you Service Tax provisions as applicable w.e.f 1st July, 2012.

    1. As per clause 19 of Notification 19/2012 dt 20-6-12, a restaurant having AC at “any part” of establishment during a year + license to serve liquor will attract Service Tax.

    Hence, your turnover at AC room + non AC room will attract Service Tax.

    2. As per rule 2 (c) of Service (Determination of Value) Rules 2006, 40 % of total value charges to your clients will be subject to Service Tax.

    3. Applicable Service Tax is 12.36%.

    4. As per clause 2 (viii) of notification no 33/2012 dated 20-6-12 basic exemption of Rs 10 lakhs is granted if taxable service turnover does not exceed Rs 10 lakhs in previous financial year. It seems that your taxable turnover in Financial Year 2011-12 exceeds Rs 10 lakhs, you will not get basic exemption of Rs 10 lakhs in Financial year 2012-13. If we presume that your taxable turnover in financial year 2011-12 is less than Rs 10 lakhs, then you can get basic exemption of Rs 10 lakhs during Financial year 2012-13, and liability to pay service tax on amount in excess of Rs 10 lakhs during Financial year 2012-13.

    5. If you are not registered with Service Tax dept and you have not received any notice for payment of service tax, you may avail benefit of Voluntary Encouragement Compliance Scheme under which you have to file a declaration on or before 31st December, 2013 and pay 50 % of Service Tax liability. Balance 50 % is to be paid on or before 30-6-14. You will be exempted from payment of Interest and Penalty for delay in registration and delay in payment of Service Tax/filing Tax return.

  3. Rajib Lochan Das says:

    We are running a Language academy in Delhi on sole proprietorship. We have registered for Service Tax in FORM ST2 dated 06.12.2012

    Our Annual turnover is around less than Rs 5 lakhs.

    How to apply for Service tax Exemption to Central Board of Excise & Customs (CBEC)? Please guide us.

    Rajib Lochan Das.


    1. hafeez says:

      file st3 return with declaring your turnover is less than rs.5 laks, its enough to claim service tax exemption limit

  4. […] Basic Exemption under Service Tax is not basic | Corporate … – Generally, it is understood that no service tax is payable, if a person™s taxable service turnover does not exceed Rs 10 lakhs in a financial year. […]

India’s Leading Compliance Software

India’s Leading Compliance Software

Get A Demo Today !

Corporate Law Referencer

Corporate Law Referencer

Corporate Law Referencer

Recent Articles

Recent Legal updates

Recent Gst Updates