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Government should make law firms and film producers pay service tax
August, 16th 2012

Law firms and film producers reportedly want to be under the service tax net. This is welcome. An end to exemptions will ensure a smooth transition to the goods and service tax (GST).

There is simply no reason for the government to give a special dispensation to law firms. Unlike other registered service providers, their clients businesses with a turnover of over Rs 10 lakh pay the tax.

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This is called 'reverse charge' in parlance. But because law firms enjoy an exemption, they do not get credit for the taxes they pay on inputs. So, their expenses are charged to tax, and now, they are complaining. However, law firms can't have their cake and eat it too.

The only way to fix their problem is to register them as service providers and make them pay tax. A reverse charge makes sense only when someone buys services from an overseas supplier.

To extend the principle to law firms or even, say, goods transport operators is absurd. Film producers copyright providers of cinematic films too are spared of service tax. Keeping all these groups out of the mainstream distorts the tax structure. Also, exemptions spell patronage and kill the spirit of simplification that has been the hallmark of indirect tax reform.

The government must eschew exemptions. It will bring many untapped sectors under the net, reduce disputes and make tax collections easy. Today, though services contribute to over 60% of the economy, service tax revenues account for less than 1% of GDP. This must change.

GST will make revenues more buoyant and raise the share of service tax in GDP. This is because there is a built-in incentive to pay tax under GST, only then can a manufacturer or a service provider get credit for the taxes paid on inputs.

The model GST recommended by the Thirteenth Finance Commission and accepted by the Centre which allows for no exemptions other than a small negative list makes eminent sense.

Area-based exemptions should also be withdrawn as it would be difficult to subsume such schemes under GST. The government must make the tax system clutter-free and have simple rules if it is serious about implementing GST and eliminating tax dodges.

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