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Service tax may not be raised
February, 22nd 2007

The governments move to usher in a uniform tax rate for goods and services is likely to gather momentum only in 2008-09. The finance ministry has put on hold the proposal, under active consideration till now, to hike service tax rate from 12% to 14% due to worries about managing public perception in the context of rising inflation. While new services will be brought under the net, the existing service tax rate is unlikely to be tinkered with.

One option being considered by the finance ministry was to lower the excise duty rate from 16% to 14% along with the hike in service tax rate. Such a move would have meant a uniform rate of tax for goods and services. An across-the-board cut in excise duty would have benefited consumers.

However, the ministry is understood to have shelved this proposal as well, after assessing the revenue implications. Selective cuts in excise duty to tame inflation is, however, not ruled out. Conventionally, excise revenues have accounted for the largest share of the Centres tax kitty: the budgeted excise collections for the current fiscal are Rs 1,19,000 crore. A 2% cut in excise would mean a revenue loss of Rs 2,380 crore.

However, the share of service-tax revenues in the total tax collections is much smaller: collections are budgeted at Rs 34,500 crore. This is reckoned to be low, considering the fact that services contribute to over 54% of GDP. However, service-tax collections have been more buoyant than excise over the last couple of years.

Some tax experts argue that a large proportion of services is consumed by high income groups. A hike in the service tax rate may, in a sense, not be a regressive measure. The UPA government has set 2010 as the target date for introducing a goods and services tax (GST), integrating state-level indirect taxes as well, to usher in a seamless common market in the country. The convergence of rates between taxes on goods and services at the central level is a pre-requisite for the big-ticket reform measure.

However, it is wary of raising the service tax rate at this juncture due to the perception that the move could trigger cost-push inflation.

Currently, there are 99 services under the service tax net. The tax rate was raised from 10% to 12% in Budget 2006 along with the introduction of new services. Service tax was introduced in 1994 on three services: telecom, stock broking and insurance. Ninety-six more services have been brought under the net in the 13-year span.

States are asking for a larger share of the service-tax pie to make good the revenue loss on account of a cut in the central sales tax rate from 4% to 3% this fiscal.

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