Story of riches and revenue sharing

Ritesh.D.jain | Last updated: 28 February 2008

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WITH two years to go for the introduction of a common goods and services tax (GST) in the country, the UPA government may not have sweeping changes in the service tax regime in the coming Budget. Ideally, the government ought to bring the tax rate on services closer to the tax rate on goods to ensure a smooth transition into GST. While services are taxed at 12%, most goods are taxed at 16%.

    As the first step towards convergence, the government could either hike the service tax rate to 14% or lower the central excise duty rate to 14%. But a hike in the service tax rate will not go down well with service providers who pay the tax and consumers who are passed on the burden. It could also fuel inflationary pressures, which the government is wary of.

    The other option of lowering the excise duty could mean taking a revenue hit, given that every percentage point cut in excise duty translates into a revenue loss of around Rs 6,000 crore. Despite the overall buoyancy in tax revenues, the government may not be in a position to cut the central excise duty to 14% and take a Rs 12,000-crore hit in the current fiscal.

    Moreover, the joint working group on the GST, formed by the empowered committee of state finance ministers has only drawn the broad contours of GST – where the centre will levy one component of the GST called the central GST and the state will levy the other component called the state GST.

    But a decision has not been taken on the GST rates yet. So the centre may prefer status quo on the excise and service tax rates till a consensus is reached on the GST rate. States also want a larger share of the service tax pie and the right to tax services which, in turn, will require a constitutional amendment.

    Over the last few years, the government has been bringing new services under the net and expanding the scope of taxing the existing services as well. Currently, 100 services are under the tax net.

    The Central Board of Excise and Customs is understood to have recommended expanding the scope of existing services, including banking and financial services, to ensure that the government collects more money from service tax in the coming fiscal.

    An area that could be looked at is equipment leasing. At present, service tax on financial leases is payable on any fees charged at the time of commencement of the lease and on the interest (finance charges). But only 10% of the interest is charged to service tax.

    The government could possibly consider charging tax on the entire amount or removing the exemption of 90%. “It could also look at taxing the value of goods themselves or bringing operating leases under the tax net, though these are already chargeable to VAT under the deemed sale of a ‘transfer of right to use goods,’ said an expert.

    Moves such as these could yield incremental revenues. The government has budgeted collections of Rs 50,200 crore from service tax in the coming fiscal. This is a 31.5% rise over the collections of Rs 38,169 crore in 2006-07. This target is likely to be surpassed. The buoyancy is despite the fact that the tax rate was not hiked in Budget ‘07-08. Last budget saw bringing six new services under the tax net, besides expanding the scope of and consolidating telecom services, already the single largest contributor to the service tax kitty.

    In the run-up to the GST, the centre and states need to decide how to tax services. The states are set to get the power to tax services. There is move to give states the power for levy and collection of service tax and appropriation of the proceeds. One proposal is that states tax some 44 services of `local nature’ and another 33 of the 100 services now taxed by the centre. However, this could be an interim model. In the GST regime, both the centre and the states may even be taxing roughly same set of services, at the same rate or otherwise.

    There has been a clutch of disputes over determining whether certain services sourced out of India by entities overseas are indeed exports. If the services are reckoned exported, they are not to be taxed. In many cases, the tax department has been interpreting the transaction as in the domestic tariff area and hence taxable, while the business communities take a contrarian view. Some experts hope that the Budget would provide more clarity in this regard.