From 2010 onwards, states will get power to levy and collect the dual goods and service tax (GST) on certain services like amusement parks, private health and education services.
On its part, the Central government will levy and collect GST on all India services like banking, insurance and telecom. In effect, states will collect both central GST and state GST on intra-state services, while the Central government will collect both taxes on all inter-state services.
This has been recommended by the Empowered Committee of State Finance Ministers in the draft GST roadmap, which will be submitted to the Union government for consideration next month.
The states will transfer the centers share from their collections as per the central GST rate on services. The Centre will do the same while transferring states share in tax on services, but it will be based on destination principle.
In effect, if the service transaction is between parties in two states, the state GST collected by the centre will be transferred to the importing state or consuming state. This is a well-founded principle globally where the dealer could claim input tax credit also if the services are used as an input.
This strategy for services under GST regime is more or less certain and waits for central governments approval. In this context, the Committee has recommended that states be given powers to levy tax on all services.
Currently, only Centre has the power to levy tax on services as per the Finance Act, 1994.
Currently, states receive full collections from 33 services and 30.5 share from the remaining 67 services taxed by the central government. This sharing arrangement will continue till March, 2010. However, the number of services, from which entire collections go to states, may go up by atleast six in 2008-09.
From April 2010, both central and state GST will be applicable on services comprehensively (compared to 100 services taxed now) with the exemption of primary education and primary health services.
Service tax is going to be a big money-spinner for both the central and state governments. Service tax collections are likely to be around Rs 55,000 crore in 2007-08, compared to the estimate of Rs 50,200 crore. It is expected that service tax collections are likely to cross Rs 1,00,000 crore by 2010.
Taxation of services is going to be difficult as both central and state GST will be applicable on all services. Currently, only centre levies service tax at one rate of 12 per cent.
Experts say governments should ensure that the effective tax rate on services under GST framework, that will see two rates - central GST and state GST - is such that the economy can bear.
The aggregate incidence of service tax must be moderate under dual GST. The combined GST rate on services should not be more than the tax incidence on goods, if not equal, said S Madhavan, executive director, PricewaterhouseCoopers.
It is expected that the combined GST rate will be around 20 per cent on goods. A combined tax rate of around 20 per cent on services is even okay as long as end-consumer bears the tax burden, Madhavan added.