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Could Budget '12 have signals on service tax
January, 10th 2011

Now that we are in the new year, and the Budget is less than two months away, there is a flurry of activity with regard to finalising and submitting pre-budget memoranda on the part of the several chambers of commerce and industry/trade associations. The distinctive feature in this particular year 2011 is that the Budget will necessarily be seen as a precursor to the Direct Tax Code and the GST, both of which are scheduled for implementation by no later than a years time from now. Particular to indirect taxes, this point is doubly important given that Budget 2011 affords a major opportunity for the Government to signal its intention regarding the likely GST rates, besides also possibly in regard to various other dimensions of GST law and rules, most of which, at least at the Central level, need to be seen as a logical advance of what is already in place in excise and service tax law.

Given this context, let us consider what Budget 2011 could have in store for service taxes in particular. Let us begin with the service tax rate. Today, there is a federal service tax at 10 per cent that is levied on a whole host of services. There is no service tax at the State level. However, in the dual GST that is envisaged, there would be a State GST on services, besides the Central one. Now, the information that is in the public domain, in terms of the Centres suggestions to the States on the GST rates, is that the aggregate GST rate will be at 16 per cent on services.

If this suggestion were to be accepted by the States and assuming the respective State and Central GST rates are 8 per cent each, aggregating to the 16 per cent, it would mean that the present Central service tax rate should trend down by 2 percentage points, should the Government use Budget 2011 as a signalling mechanism. The moot point however, given that there is no state service tax at present, unlike the situation in regard to goods, is whether the Centre will necessarily do this or pass up the opportunity and maintain the rate at 10 per cent. Indeed, this logic can be carried further to argue that the Centre may even, for the period that is available prior to the introduction of the GST, consider a rate increase, in order to maximise its short term revenues on service taxes! This is however not expected.

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