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Service taxes set to get a big infrastructure bump
September, 23rd 2014

The service tax net will be cast wider soon to include a wide range of construction-related services, which are currently exempt as “infrastructure services” and form more than a third of the country’s Rs 4.5-lakh-crore construction sector.

A 12% levy on services such as construction and upkeep of highways, bridges, airports, metro rail networks, post-harvest storage infrastructure, mechanised food grain handling systems and possibly even low-cost housing projects would add to the cost of these services, experts said.

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Currently, commercial real estate projects are the chief source of service tax revenue from the construction sector for the Centre.

The Centre’s service tax revenue had grown at just 15% in April-August this year compared with the targetted growth of 31% for the full year.

The government’s move to do away with the exemption for a slew of infrastructure services would appear to be at variance with the thrust being given to infrastructure investments, but tax experts said the industries concerned won’t really bear the brunt of the decision. This is because the new tax on their outputs would allow them to more efficiently utilise their input tax credits. It would, however, result in an additional tax burden on users of these infrastructure facilities.

“At present, real estate activities are subject to service tax but not infrastructure development services such as construction of roads, bridges and airports. If infrastructure services are subject to service tax, the real impact for developers would be on the net value addition as they would get credit for the taxes paid on the inputs,” said R Muralidharan, Executive Director, PwC India.

This means the additional tax revenue for the government from the move would be significant but much less than the figure derived from applying the levy on the total value of the output.

Sources privy to the government’s plan said that bringing infrastructure services under service tax would not only widen the base of this levy but also help in keeping exemptions to the minimum to facilitate an easy transition to the proposed Goods and Services Tax (GST). Under GST, businesses could utilise credit for the taxes previously paid on raw materials and services for meeting their final output tax liability, for which it is essential for the output of an industry to be within the tax net.

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