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There's need for more clarity on service tax
December, 11th 2006

Marriages are made in heaven. So be it. But, thats no reason to spare the web-based marriage bureaus from paying service tax. This was apparently the view taken by an overzealous revenue official.

The reasoning: Such websites are offering nothing but online database access services and therefore should be taxed. Since marriage broker services and matrimonial ads are not taxed, the proposal to tax web bureaus could result in a differential tax treatment based on the mode of service delivery.

Predictably, the matter is under litigation. This adds one more case to the long list of service tax disputes between taxpayers and the government since 1994, when the levy was first imposed on telephone companies, insurance firms and stock brokers.

In hindsight, was it a prudent decision to tax services selectively? The then Narasimha Rao government went by the recommendations of the Raja Chelliah panel on tax reforms. Perhaps, it had to first ensure the acceptance of the concept of service tax.

But, there were problems with cherry picking of services in successive years. A classic case was the service tax on transport of goods by road, which erupted into a row that was settled later. Recently, builders and developers contested the levy, citing contradictory circulars of the revenue department.

Selective taxation of services creates chaos as it leads to distortions and classification disputes, besides breeding corruption. Ultimately, the burden of service tax has to be borne by consumers via the chain of service providers. This is the practice the world over, say tax experts.

The tax reforms committee had also recommended expanding the basket of services to be taxed and the eventual integration of service tax with value added tax. A task force, chaired by former finance secretary Vijay Kelkar, too pitched for such an alignment, saying that standalone taxation of services was inconsistent with the scheme of input tax credit across goods and services.

Other expert panels, namely, the ones headed by Parthasarathy Shome and Govinda Rao also endorsed this broad principle to address the problem of cascading of taxes at the central level. This was also a pre-requisite for ushering in a seamless unified common market for goods and services. 
Over the years, major services have been brought under the net. The tally is 99 now. While services are taxed at 12%, the effective incidence of tax on goods is much higher at around 22% at the retail level, after factoring in Cenvat and state-level VAT.

The core budget team has to take a decision to either lower the Cenvat rate or raise the service tax rate to bridge this gap. A hike in the service tax rate will pinch consumers. This is inevitable. But service tax is a progressive levy. Consumers with higher purchasing power pay more as they use more services.

A common man cannot be spared if he uses a service. The government can, perhaps, look at giving more direct tax relief to the aam admi, says a former government official. A decision on tax rates is normally taken at the fag end of the budget-making exercise. Meanwhile, revenue authorities are sifting through the WTO list of services to be taxed from the coming fiscal. Theres not much scope for expanding existing services, particularly, in the financial services sector.

Services account for around 54% of the GDP and tax revenues from this source have been growing at a fast clip. The government expects to collect around Rs 40,000 crore this fiscal, accounting for around 9% of the total tax of Rs 4.5 lakh crore.

The government will surely look at stepping up service tax revenues as states are seeking a larger share of the pie.An indiscriminate expansion of the list of services could, however, lead to more litigation and prove to be counterproductive.

Should there be a negative list of services to spare sectors like education and health? If the government decides to have one, then it should not attempt to levy a tax, say, on super-speciality hospitals. Perhaps, there could also be a rethink on taxing any service relating to education, directly or indirectly.

Theres a need for greater clarity on the interpretation of legal provisions so that tax payers dont keep rushing to courts. The problem of overlapping among services, which results in classification disputes and rationalisation of abatement, also needs to be looked into.

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