The government is vetting a proposal to introduce the concept of tax deducted at source (TDS) in service tax. This means service users will have to deduct service tax at source while making payments to service providers. The move is aimed at checking evasion and ensuring better compliance. The proposed scheme will be similar to TDS under the income-tax law.

Currently, the onus is on the service provider to collect and pay service tax. For instance, a computer firm, which secures an annual maintenance contract from a government agency has to pay a 12% service tax. The new plan envisages allowing the government agency to deduct service tax at source on payments made to the computer firm.

According to government sources, a few organisations can be asked to deduct service tax at source to start with. These include, among others, companies registered under the Companies Act, manufacturers registered under the excise law, central and state government departments, local bodies and autonomous bodies. The onus will be on these organisations to deduct tax and remit the proceeds to the government.

It is reckoned that the measure will prevent revenue leakages as there are cases where service providers collect the levy, but do not pay the amount to the government. It is also expected to improve the ease of tax collection. Airlines, for instance, can collect service tax at source on the commission paid to air travel agents. This will obviate the need for air travel agents to deposit the levy with the government. The same could be replicated in other sectors like telecom. where commission agents have a role.