The Central Board of Direct Taxes (CBDT) has made a strong case before the Service Tax Administration to slash the 12% levy only for the final consumer so as to help boost consumption and, consequently, corporate tax revenue. The board's proposal has, however, created divisions within the finance ministry, with the Service Tax Administration flatly rejecting a cut in the tax, proceeds from which has grown at a spectacular 34% this year. The service tax should be allowed to stabilise and attain its full revenue potential, the administration reckons.
The CBDT also feels the need to cut the service tax rate to 8% to introduce the proposed goods and services tax (GST), the combined (Centre-state) rate of which could be 16% or 18%. On the other hand, there is a demand from the Kelkar panel that looked into government's fiscal health to further prune the negative list of services that are outside the tax net now in order to maximise revenue. The question, therefore, is a fundamental one: Whether to use direct taxes to boost revenue or indirect taxes.
Experts said that unlike in high-income countries, where the effect of a tax rate change on purchases may be short-lived, the same in India may be more pronounced and long-lasting. The impact of a change in tax rate on consumption depends on price elasticity of demand. In a country like India, we have seen a demonstrable evidence of impact on consumption arising from a change in tax rate, said Prashant Deshpande, senior director,
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