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Service tax may climb back to 12%
June, 11th 2009

The government is considering a proposal to restore the rate of service tax to its earlier level of 12%. The government had reduced the service tax rate to 10% in the third stimulus package which was unveiled in February.

This option of withdrawing the service tax cut is being weighed on account of spiralling government expenditure a result of the governments attempts to boost the economy and shrinking revenues due to the slowdown in economic activity, according to a highly-placed government functionary who did not want to be identified.

The final decision on the issue would be taken by finance minister Pranab Mukherjee, in consultation with the Prime Ministers Office (PMO) and the Planning Commission, the source said. One view that has emerged is that the worst is over and the government should take steps to signal a gradual shift to fiscal discipline.

According to provisional estimates, service tax collections in 2008-09 were around Rs 60,000 crore registering a growth of around 18% even though indirect tax collections declined due to the downturn. This booming segment should not suffer due to concessions provided to India Inc, feel some sections within the government, including the revenue department.

Another option under consideration is to boost service tax collection by including more segments like education, legal and medical services under the tax net. However, past experience indicates that moves to tax these services will face stiff resistance.

The finance minister would have to build political consensus if these services are to be taxed, sources said. Education and medical services in particular are sensitive from the social sector point of view and taxing them could be difficult if the mood of the UPA government is any indication. The support of allies like the DMK and the TMC may not be forthcoming for such measures, they added.

While the government had kicked off its stimulus efforts with cut in excise duty, the third stimulus package which was the last before the elections reduced service tax rate to 10%.

Since goods & service tax (GST) is to kick in next April, there is a school of thought within the government which feels that indirect tax structure can be left undisturbed at this juncture. Introduction of GST provides an occasion for modification of the indirect tax burden on the industry, they add.

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