The finance ministry is likely to go for an across-the-board hike in service tax rate to 14% in Budget 2007, going by the recommendations of the Central Board of Excise and Customs. The 2% increase in service tax rate will add over Rs 7,000 crore to the tax corpus.
The move is in line with the road map for the goods and service tax (GST) regime. A major procedural overhaul of the service tax regime is also on the cards. Since the median rate for central excise at 16% is unlikely to be tampered with, raising the service tax rate to a comparable level is called for.
The government is looking at rolling out the GST regime by 2010, which, among other things, seeks to harmonise the rate for goods and services.
Minister of state for finance SS Palanimanickam told Parliament on Tuesday, The world over, goods and services attract the same rate of tax. Replying to a query on whether goods and service tax rate will be made equal, Mr Palanimanickam quoted the FRBM task force report, which said standalone taxation of both goods and services is structurally inconsistent with the scheme of input credit across goods and services.
The final decision is likely to be taken after the meeting of the empowered committee on sales tax in December. The government is also expected to expand the list of services covered, which include education, healthcare, power distribution, catering, parking contracts and painting.
In fact, the Centre has offered these services to states as a compensation for phaseout of the central sales tax. Though states have been asking for services like telecom and financial services, the issue stands unresolved for now.