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States to discuss service tax issue with Centre
January, 09th 2012

11 finance ministers are reportedly in parleys to lobby strongly against Centre encroaching various sectors all with a view to levy service tax.

Most states of country will soon sense some ease in inflation if their finance ministers succeed in convincing the Centre today and on Tuesday about an overlapping of certain tax areas.

Such a result at the two-day conclave here between the empowered committee of the ministers and the union government would come as a relief for lead professionals, real estate players, advertises and hoteliers, besides the common people.
As many as 11 finance ministers are reportedly in parleys so as to lobby strongly against the central government encroaching sectors such as housing, entertainment, transportation, personal services, restaurants and advertisements -- all with a view to levy service tax.

If the Centre, which has reportedly encroached the state tax domain on various activities, withdraws and agree upon what states say, then construction services for several activities would be out of the service tax net. They would include commercial or industrial buildings, residential complexes, service provided by builder in relation to preferential locations, internal and external development, renting of immovable property and work contract service.

More importantly, promotion/marketing or organising of chance -- including lottery and bingo services -- besidese sale of space of advertisement, cable operators, advertisement agencies, broadcasting of entertainment programmes will also be out of the ambit of the service tax net.

The union government has no residuary power to levy service tax on these activities, a government official said. For, they are sale of goods. It falls under state tax domain, he told Business Standard.

Even air-conditioned restaurants having license to service alcoholic beverages in relation to services of food or beverages would also be out of the service tax net.

In the case of entertainment, the source clarifies, The industry controls entry into the premises where entertainment is provided by the proprietor. This entry is available to a person who wants to get entertained through the payment of an admission fee.

The state tax legislators use this fee as a measure to levy tax. If the central government levies tax on the right to entry, it would mean taxation of all sort of entertainment. They are already subject matter of the taxation by the states under Entry 62 of the state list, he adds.

The states even challenge the micro issues like the employee-employer relationship with contractual engagement of professionals. A state like Madhya Pradesh has an argument running with the Centre on whether an employee and a contractual professional working under a contract may be assigned the same task even as a professional is free to decide the manner in which the task is to be done. Therefore to tax the additional remuneration that an employee gets after normal office hours under service tax is not legal.

The states, according to the source, have so far readied a consensus to stick to their stand to oppose the proposal to tax all services provided by government for a fee or user charge. To press the point, they say the Centre should have a confined role to just Railways, besides Post and Telegraph. The states want the union government to be out of any service related with health, education and water supply.

States provide these services even at a loss, because of socio-economic obligation, the source notes. When most of the local bodies are not in a position to recover the cost of supply, there is no justification for the service tax levied by the Centre. It only triggers inflation.

States like Kerala and Madhya Pradesh already levy tax on building construction for sale or lease. Even Kerala levies an annual luxury tax on building constructionafter 1999if the plinth area is 277.7 square metres. States are likely to argue on service tax imposed on building construction. If insiders are to be believed, the states want a face-to-face debate over the definition of service industry and service economy.

The main objective of levying a tax on service is to raise resources from taxation of those economic activities, according to another government source. They are a part of service sector of the economy.

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