By the end of the current fiscal, realisation from service tax would have touched 7.8% of Indias gross tax revenue. That may seem a big jump from 4.7% where it remained stuck for the past two fiscal.

But if one compares this stream with the growth rates of other major taxes, it becomes obvious this is where the action will be: in terms of tax policies. The tax on services yielded the exchequer Rs 14,200 crore in 2004-05, and this is estimated to more than double to Rs 34,500 crore this fiscal. However, for the middle class, service tax is bad news as it is almost as insidious as income tax. The reduction in the level of income tax in the past decade has been matched by a rise in service tax rate. As a result, practically any service that is availed of today, attracts the levy. The government hopes to merge the service tax rate with that of the tax on goods by 2009-10.

In the forthcoming Budget, if the rates are revised from the current 12%, the government could easily garner up to Rs 60,000 crore in 2007-08. The finance ministry has an informal target of reaching Rs 1,00,000 crore from this source by 2009-10. At the present rate of growth, the target does not look unachievable.

It is also possible because the services sector accounts for 60% of the GDP now, but obviously contributes much less to the exchequer. For instance, the manufacturing sector is expected to pay Rs 1,19,000 crore as excise duties in 2006-07. But it is only about 20% of the total GDP. There is also another angle to service taxation. Taxation of services is currently the domain of the Centre, but states are clamouring for a piece of it. The empowered committee of state finance ministers has agreed that states must have the powers to tax some services.

Budget 2007-08 should see some clarity on it with the finance minister expected to make some announcements. The service tax was introduced in 1994-95. And till now the government has relied more on voluntary compliance to expand its scope, with penalties having been rarely imposed. That picture, too, is distinctly changing.

The Past
The tax was introduced in Budget 1994-95. It was initially imposed on three services: telephone, stock broker, general insurance
More services were brought under the net every year. Budget 2006 widened the net to 15 new services, taking the total number to 99
At the current rate of taxation (12.24%), it is estimated that less than 10% of the sector is taxed. Services contribute 60% to the GDP
From Rs 410 crore in 1994-95, the realisation has risen to Rs 14,200 crore in 2005-06. It is expected to be Rs 34,500 crore this fiscal