The Hindu : A mixed bag in service taxation

Online edition of India's National Newspaper
Saturday, Jun 28, 2003

Opinion

Opinion - Editorials

A mixed bag in service taxation

SERVICE TAX, A relative newcomer to the bouquet of indirect taxation, has reached a new stage this year in a manner that is not fully without its negatives. For, apart from expanding the scope of the tax to cover more services as has been done every year since the tax was introduced by Manmohan Singh in the 1994-95 Union budget, the Government has raised the rate to eight per cent from five per cent (namely, an effective increase of 60 per cent), and at the same time extended the system of tax credit or VAT fully within the service sector.

The sharp increase in the rate of service tax runs counter to the recommendation of the Govinda Rao Committee on Service Tax for retention of the rate at five per cent. Apart from suggesting a "lazy, easy" approach to fiscal management, the hike in the rate may dampen the growth rate of the service sector itself, whose present position in a developing economy such as India is often exaggerated by both officialdom and sections of academia. The growth in aggregate tax revenue from services has been incremental, with about 75 per cent of the yield coming from just five activities — general insurance, telephones, sharebroking, advertising and couriers — though about 60 activities have been covered so far. Also, the more the services in unorganised sectors and small businesses are covered, the smaller is likely to be the additional revenue compared with the cost of collection. However, little publicised but most welcome is the extension this year of the system of granting credit against the tax paid by service providers on all their "input services" against the tax payable on the value of the services rendered by them. Such universalisation of the principle of VAT within the service sector has commendably been introduced within just a year of introduction of the setoff system for "input" and "output" services within the same category of service. The new system should help minimise the cascading effect of input service taxes borne by big players such as insurance and telecommunication companies.

The Government has so far been levying service tax exercising its residuary powers under Schedule VII of the Constitution. Though States have, in a sporadic manner, been raising the issue of devolving the power to tax services, there has been no real debate on the question. The Centre last month got a Constitution (95th) Amendment Bill passed (as proposed by the Finance Minister, Jaswant Singh, in his budget speech), to enable "levy" of service tax by the Centre and "its collection and appropriation" by both the Centre and the States in a manner to be decided in future by Parliament. Thus the question whether federalism and decentralisation should amount to no more than devolution of funds or should allow States (and even lower self-governing institutions) to have their own taxing power has been answered in favour of centralisation. It is perhaps a reflection of the lack of a widespread debate on the issue that except the AIADMK, no major party, including the Left, which traditionally has shown sensitivity to issues of federalism and decentralisation, has raised its voice against the Bill in its present form. Neglect of issues of financial autonomy may encourage arbitrariness on the part of States ever eager to augment their coffers. An example is the proposal in the Tamil Nadu budget for 2003-04 (purportedly relying on a court ruling) to levy "sales tax" on telephone rentals as a tax on "right to use" goods, stretching the meaning of the 46th Constitution amendment of the 1980s which enabled States to levy tax on "deemed sales" (works contracts, hire purchase and leasing transactions where effective transfer of the ownership and control of goods used to escape sales tax). Perhaps it is not too late even now for a nationwide debate on legitimate concerns of States before finalising a new regime in taxation of services.

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