If there was really nothing suspicious about the service mentioned in OP, government must not have taken action against them.
Lol. You think the government only take action against things which are illegal? The government works exclusively for themselves, and will take action against anyone or anything which threatens them, illegal or not. They'll take action against someone who did nothing except write open source code under the guise of tErRoRiSm, but they will ignore fiat banks laundering literally hundreds of billions of dollars for actual terrorist organizations.
I believe so. They are called government to govern its people and territory, so technically they are not only against to illegal activities but also to something that possesses a threat for their government this includes decentralization like cryptocurrencies. Government knows the darkest side of the story of their country and won't even give a bulge about it.
It is true that Bitcoin mixing is not money laundering, but it can be a tool or instrument to use in money laundering.
And the internet is a tool or instrument in money laundering, and fraud, and terrorism, and lots more. Should be ban the internet as well?
Good analogy, not every mixing is laundering. I agree it is used in money laundering but that doesn't mean it is illegal. Same as guns as well, you can kill someone with it or you can save someone using it.