The grapevine is that the focus of the Budget this time around would on service tax.
Netting new services?
It is Budget time and the gossip mills are working overtime. A unique feature this year around is that all the talk seems to be on service tax. While this is not surprising considering the fact that all the other tax areas leave little scope for innovation save for tweaking a provision here and there.
The first expectation is to bring all performing artists under the scope of the tax. As per the proposal, a film producer who engages an artist will have to pay tax at 12.24 per cent on the service charge paid to the artist. All artists will have to register themselves as service providers with the service tax department, and anyone with an annual income of above Rs 4 lakh will come under the new tax net.
If passed into law, this would be the second salvo to tax this community the first one being on brand ambassadors some years back. The proposal being examined by the Government will cover services of performing artists, authors, composers, sculptors and other artists. Besides, it also seeks to cover advertising, sponsorship and endorsement by artists, operation of performing arts facilities and other performing arts and live entertainment services.
Of these, some of the services may be transferred to States as a part of the compensation package for phase out of the Central Sales Tax.
The service tax law in India gives ample scope for the Government to attempt such efforts to increase the moolah.
An option that can be considered is to bring out a negative list of services that would not be taxed, and tax the rest with permissible set-offs. This would take us closer to the Goods and Service Tax (GST) when it rolls out in 2010.
Power consumers may be in for some rude shocks on the tariff front. The Government is contemplating bringing the power transmission and distribution industry under the service tax net. If the levy is imposed, it could push up power tariffs by an extra 5 per cent.
The proposed imposition of tax comes even as power companies are facing the heat of increased fuel costs. Both fuel cost and the service tax will be added to the electricity charges paid by the consumer. On an average, distribution costs are Re 1 per kWh.
There appears to be a very strong possibility of the threshold exemption limit going up to a generous Rs 10 lakh. One of the arguments in favour of this is the 80:20 rule 20 per cent of services contribute 80 per cent of the taxes.
This would also enable the really small service provider to escape the clutches of the tax which could turn out to be a blessing in disguise for everyone considering the administrative hassles to administer the tax which makes this provision worth implementing.
Another point worth considering is excess litigation under service tax. The Kelkar Committee had recommended that legislative provisions should minimise and not encourage needless litigation.
We can state with confidence that the levy of service tax has been accepted by and large and all we need now is a simple law with minimal scope for interpretation.
Mohan R. Lavi (The author is a Hyderabad-based chartered accountant.)