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Service tax helping Centre bridge revenue shortfall
October, 12th 2015

Last week, the government said that it might not be able to garner the ?7.98 lakh crore direct tax revenue it had originally budgeted for in 2015-16. This is not new as the Budget estimates for direct taxes have often fallen short of target.

The misses can be explained by the strong link between direct tax collections and corporate performance. This cyclical imbalance in direct tax collections is, however, being partly addressed by the increasing share of service tax. With tepid corporate earnings growth so far this fiscal year, direct tax collections too are likely to be sluggish. But the government expects to collect almost the entire budgeted tax revenues of ?14.5 lakh crore for 2015-16, thanks to robust indirect tax collections.

Unmet many times

Over the last 10 years, direct tax collections have missed their Budget target six times, or 60 per cent of the time.

With corporate taxes accounting for 60-65 per cent of the total direct tax collections, it is clear that direct tax revenues exceed the target during good times for India Inc. During the high-growth years of 2006-07 and 2007-08, the profits of the Top 500 listed companies moved up by 40.9 per cent and 25.8 per cent, respectively, over the corresponding previous year. Direct tax collections in these two years exceeded the Budgeted amount by 5-10 per cent.

In 2014-15, when profits of these companies grew by a mere 0.7 per cent, the government achieved only 94.7 per cent of its Budgeted direct tax collection.

At your service

However the growth in service tax collection can, to an extent, make up for the fluctuations in direct tax collections. Ease of collection and low evasion possibilities make service tax more bankable. With the addition of more services and a gradual increase in rates to the current 14 per cent, the share of service tax in indirect taxes has been increasing. From about 12 per cent in 2005-06, it moved up to 31 per cent in 2014-15. With the rollout of GST (Goods and Services Tax), the service tax rate is expected to be bumped up further.

This is good news, as service tax revenue targets have been met or exceeded more often than any other direct or indirect tax. Service tax collections have exceeded the target six times in the last 10 years. While customs collections have outperformed only four times, excise duty collections have never met the target even once in this period.

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