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Tax collections from service tax, first introduced in 1994, will cross customs and excise duties for the first time in the financial year 2014-15, an indication of the growing importance of services to India’s economy.

The only two tax heads that will contribute more than service tax are corporate tax and income tax.

Here’s a look at the 10-year data on tax collections:

Source: Budget 2015; *Figures for FY 2014 are revised and those for FY 2015 are estimated

From a modest base of around Rs 23,000 crore in 2005-06, service-tax collections are expected to sky-rocket 830% to Rs 215,973 crore in the financial year 2014-15.

Tax collections, on the whole, have increased over the last 10 years. Net tax revenue to the central government is expected to increase from Rs 270,264 crore in 2005-06 to Rs 977,258 crore in 2014-15, an increase of 260%.

So, what is service tax?

This is the official definition, from information provided by the Directorate General of Service Tax: “Service tax is a tax on transaction of certain services specified by the central government under the Finance Act, 1994. It is an indirect tax (akin to excise or sales tax), which means that normally the service provider pays the tax and recovers the amount from the recipient of the taxable service.”

In simple language, service tax is a percentage of the amount collected from a customer for services offered. Example of services includes hospitality, travel and construction.

Services as a percentage of gross domestic product (GDP) has increased from 50% in 2000-01 to nearly 60% in 2013-14. The actual value of services (at constant 2004-05 prices) has increased from Rs 1,576,255 crore in 2004-05 to Rs 3,441,017 crore in 2013-14.

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Source: Planning Commission

The current service tax rate is 12%. With an additional 2% as education cess and 1% as senior and higher education cess, the effective service tax rate now is 12.36%.

When it was first introduced in 1994 by the then finance minister Manmohan Singh, service-tax collections were Rs 407 crore. Starting 2012, all services, except those specified in the negative list, are subject to service tax. The negative list includes services by government, Reserve Bank of India, services by foreign diplomatic missions in India and services relating to agriculture.

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