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Net to widen, but rate may stay at 12%
February, 12th 2007

Finance minister P Chidambaran is expected to bring in additional services into the ambit of service taxa move that for sure would irk India Inc and also burn your wallet more.

According to preliminary information, the government is likely to bring legal professionals offering consultancy for mergers and acquisitions, solicitors, attorneys and lawyers in law firms providing services of drafting contracts and advising mergers under the ambit of service tax. Similarly, services offered by diagnostic centres, medical clinics and even private hospitals are likely to be brought under the service tax net. This move, for sure will see the cost of health care services spiraling.

The FM is also likely to look at Bollywood and the idiot box to boost collection as there are proposals to include film and TV serial actors and directors in the ambit of service tax. Other professionals attached to the TV and film content production, including studio operators, make-up artists, costume designers, music directors, choreographers and art directors are also likely to be added to the list. Chidambarams expanded list might also include sport event sponsors like Coke, Pepsi.

The FM has a reason to spread the service tax net. Service tax collection in 2005-06 stood at Rs 23,000 crore compared with a mere Rs 407 crore in 1994-95 and Rs 2,072 crore in 1999-2000. And the target for 2007 is Rs 34,500 crore. However, as a percentage of the gross tax revenue, it is less than 10%. Given the fact that services contribute over 50% to the countrys GDP, the government feels services are not well captured for taxation purposes.

Currently, there are about 96 services that draw a tax of 12% plus the 2% education cess. Since 1994, when the tax was first introduced, the government has been bringing more services into the tax net. While the government may not hike the service tax rate in the forthcoming Budget, the long-term plan is to usher in a uniform tax rate for goods and services.

Tax experts and companies feel that a comprehensive legislation should be brought in to address issues like overlapping of taxes and confusion regarding its calculation. Industry associations like CII have suggested broadening the tax base to bring more services into the tax net. It has also argued against hiking the rate from the present 12%. Consultants like PricewaterhouseCoopers, however, expect the FM to increase the service tax from the present 12% to 14%. Simultaneously, it expects the FM to give relief to small services providers by increasing the threshold level for exemption from the present Rs 4 lakh to Rs 8-10 lakh.

What Next?
Consultants like PwC expect the service tax rate to be hiked to 14%, but exemption threshold to be doubled to Rs 8-10 lakh
Industry chambers like Ficci want a comprehensive legislation on service tax. Levy has been notified through various Rules under the Finance Act
Most developed economies like the UK, and even the Asean, have a single taxation system for goods and services: Vat or goods and services tax
Countries like the US and the UK have a single value-added tax on both goods and services. The Asean too has either Vat or GST (Goods and Services Tax), a single tax for both goods and services. Advanced economies like Western Europe, North America and the Far East have a share of service sector in their GDP ranging from 60% to 80%.

But, in India, there is a lot of overlapping in the present service tax system. According to tax expert Vivek Mishra, For example the case of consulting engineer or engineers who write software. This category is exempted from tax but another category, technical analysis and testing is taxable. Just in case an IT firm gives a module to another IT service provider for technical analysis and testing, confusion arises. A comprehensive service tax legislation is necessary, but this might require a complete revamp of the entire system, he said. Even the task force on indirect taxes headed by Vijay Kelkar and the high-level single-member committee headed by M Govinda Rao had suggested a separate enactment for service tax. In fact, the government had set up a one-member committee headed by T R Rustagi, former chief commissioner of central excise to review all service tax circulars since 1994 and suggest weeding out of the redundant ones following changes made in the last 12 years.

MD of infrastructure company Soma Enterprise Ltd Ankineedu Maganti also voiced similar concern about ambiguity in service tax. There is a lot of ambiguity on the applicability of service tax in several sectors of infrastructure. As the government brings more types of construction services into the service tax regime, it is imperative that clarity be given to the application. One does not know on what basis a particular service is being taxed and how is it being calculated, he said.

Ficci, too, has expressed surprise that there is no separate enactment for the levy yet. Since its introduction in 1994, the levy has been notified through different Rules under the Finance Act of 1994.

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