Your visit to the neighbourhood beauty parlour, dry cleaner or a cyber cafe may become cheaper in the next financial year.
For the first time since the introduction of service tax, the government is seriously considering the introduction of dual tax rates for service tax for beauty parlours, cyber cafes and other services for mass consumption.
According to sources in the know, under the proposed dual tax system, services for mass consumption and non-Cenvatable services may be taxed at a lower rate of 6 per cent, as compared to the prevailing service tax rate of 12 per cent.
As per the latest data, service tax collections for fiscal 2006-07 are expected to touch Rs 38,000 crore, higher than the Budget estimate of Rs 34,500 crore.
Overall, indirect tax collections are expected to be higher by Rs 10,000 to Rs 13,000 crore. Approximately, 80 to 85 per cent of service tax revenue comes from telecom services, stock broking services and the insurance sector.
This proposal, if it comes through in the forthcoming Budget 2007-08, would prove to be a bonus for consumers. A consumer who now pays a tax of Rs 60 on a Rs 500 bill at the beauty parlour, will have to pay half of that at Rs 30.
Introduction of dual taxes will also be a politically correct move, since it will be largely welcomed by consumers, sources said.
Service tax, since 1994, has been levied on all taxable services at a single rate which is 12 per cent at present.
According to J K Mittal, a tax expert and co-chairman of the expert committee on indirect taxes, dual tax rate is necessitated by the fact that all the taxes have multiple tax rates except for service tax.
Besides, a single rate for service tax was acceptable when the tax rates were low at 5 or 6 per cent but with the increase in the rates, there is a need to introduce dual tax for services which cannot avail of Cenvat facilities.
The government increased the service tax rates in the belief that the tax burden will be offset by Cenvat facilities. However, there are still many services which are non-Cenvatable and their contribution to the overall service tax revenue is negligible. It makes sense to have a lower tax rate for these services, Mittal said.
This year, the demand for dual tax rates was part of the pre-budget proposals of industry chambers.
Assocham had recommended dual tax rates for services under the argument that taxable services have different commercial value and different utility and therefore there cannot be one tax rate for all the services.
Assocham had further recommended that for small tax payers who have turnover of up to Rs 25 lakh, summary assessment should be started with lower tax rates without giving Cenvat facilities and the assessee should not be subject to mandatory records and audits.