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Two tier service tax structure in Budget '07
January, 16th 2007

Finance Minister Palaniappan Chidambaram may introduce two tier service tax structure in his forthcoming budget for next fiscal.

Finance Ministry has undertaken an exercise aimed at doing away with the service tax exemption currently available for small service providers with an annual taxable turnover up to Rs 4 lakh.

Instead, a modest levy of 8 10 percent may be considered on small service providers with an annual taxable turnover of up to Rs 10 lakh per annum, a senior Finance Ministry official said.

While doing away with the exemption for small service providers and fixing a higher ceiling for them, Finance Ministry is seriously considering the option of hiking the service tax levy to 14 percent from the prevailing 12 percent in the run up to introducing the Goods and Services Tax (GST) in next three years.

Further, bringing in more services into the net is also being considered. Till now, doctors and lawyers are two major professions that are yet to be brought under the service tax net.

Overhaul in the service tax structure has been undertaken by Finance Ministry as the levy was introduced six years back. And, a serious move to shift some of the services into state domain for taxation is being contemplated in the deliberations betwen the Empowered Group of Finance Ministers led by Asim Das Gupta and UPA Government at centre.

Further, both Prime Minister and Finance Minister have harped upon phasing out various tax exemptions.

Revamp in service tax structure, according to sources, is also aimed as it has been identified by the Finance Ministry as a major source of revenue. According to indications, none of the major services like telecom and financial services that contribute large chunk of service tax kitty -- would be shifted to the states domain.

In this backdrop, the Finance Ministry may look at targeting revenue mobilization up to Rs 50,000 crore from the service tax alone during 2007-08. Finance Minister P.Chidambaram has taken credit for Rs 34,500 crore from service tax during 2006-07. Against these budget estimates, the government has been able to mop up Rs 21,779 crore during April November 2006. During first eight months, the service tax collection has seen a spurt up to 65 percent in the comparative period during 2005-06.

During 2005-06, the centre has mobilized Rs 23,000 crore via service tax after having increased the rate to 12 percent from an earlier 10 percent. Mobilisation through service tax in 2004-05 has been Rs 14,196.97 crore.

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