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Services that the FM can tax this year

TIOL Budget Research Team in New Delhi | June 24, 2004 15:12 IST

Of all the budget proposals being considered by Finance Minister P Chidambaram the most logical and revenue economics-friendly is the one related to service tax.

Although many top revenue statisticians would base their suggestions on the fact that the spreading of the service tax net would fetch more revenue, what remains the least known fact is that this nascent form of taxation has done wonders for income tax.

Many top Central Board of Direct Taxes CBDT officials may raise their eyebrows on such a statement but a close look at direct taxes buoyancy curve reveals that some 'invisible hand' has lent this buoyancy and the same could not be fathomed by the CBDT when an analysis was done in the third quarter of the last fiscal.

And this 'invisible hand' is nothing but service tax, which has compelled many a business entity to file its income tax returns as they were already caught in the clutches of service tax.

This may be further confirmed if a proper study is undertaken by the revenue boards or an independent agency.

Now, given that the finance minister needs more revenue to wipe out the rising revenue deficit, service tax alone could be the saving grace for his revenue targets in the current fiscal.

However, experts feel that he must not make the mistake of hiking the rate from 8 per cent to 12 per cent as this increase in rate would not only hit the voluntary tendency among service providers to comply with laws, but would also encourage the existing lot to get into the evasion mode.

Given that the best anti-evasion efforts could book only 5-7 per cent cases, it would drive the service tax into the income tax mode which has failed to curb even the most transparent lot of tax evaders!

Service tax should be used not only for garnering revenue, but also for tapping black money and ensuring some sort of equity in our overall tax system which is known more for distortions and prejudices.

So far as new services are concerned, before biting more than the department could chew, the finance minister should put a few things in place: an independent legislation and a separate collection mechanism within CBEC.

And any temptation to bring in any number of services under the tax net should be avoided.

Given the fragile political skeleton of the government, each new service should be carefully studied before roping it into tax net this year.

The TIOL Budget Research Team has made some effort to provide valuable inputs to our Budget Makers in this regard.

Some of the services chosen by our team are as follows:

Real Estate Developer: Given that a huge chunk of black money is generated by real estate developers and colonisers, bringing this category into the tax net would do wonders for both the service tax as well as income tax.

Some of the leading providers like DLF, Unitech, Parasnath, Rahejas, MGF and many more belong to the organised component of this sector and have the potential to contribute significantly to the exchequer's kitty.

But this is not to say that the State-owned developers like DDA, GDA and HUDA should be exempted.

Given that they are also generating huge profit and not selling either the flats or land at throwaway prices, their services should also be brought under the tax net.

Since cheaper loans are nowadays available for these flats, a marginal tax on the service component would not hurt the buyer much.

Restaurants registered with sales tax: Given that the former finance minister Jaswant Singh, has abolished the Expenditure Tax on hotels, restaurants, to begin with, registered with sales tax department could be tapped for revenue as well as curbing black money generation.

Haryana's experiment of putting VAT has been successful in this direction and service tax can also be levied either by the Central Government or States in lieu of VAT.

Some of the big players like Nirula's and McDonald's could be roped in.

Expansion of banking services: Though business auxiliary and some of the banking services are there but not properly defined. If it could be made clear this year that some of the banking services like making of draft, issuance of cheque books and ATM services could be a good revenue contributor without much protest.

Given that some of the banks like ICICI have already begun to charge separately for ATM services, such a move would be quiet timely.

Private nursing homes/pathological & radiological labs: Given that all these entities are operating along the concept of healthy bottomline and are also poor contributor to direct tax kitty as huge evasion is reported from this sector, such a decision would certainly go a long way boosting the revenue scenario of the central government.

Never mind if it may hike their cost a bit but they are already very sophisticated and tech-driven services and must be brought under net.

Discotheques & pubs: One of the manifestations of liberalisation and sweeping winds of globalisation could be seen in the vertically rising graph of pubs and discotheques / nightclubs. For that matter there are other types of clubs also which could jolly well enrich the exchequer under service tax category. With shopping mall coming up in a big way, there are about 10 such nightclubs in DLF area alone.

Outdoor caterers: This is one lot which is too big and ambiguous where even five- and seven-star hotels also masquerade as outdoor caterers and do not pay anything to the exchequer.

First, the exemption granted to the hotels should be withdrawn as it was more politics-driven rather than economics. Not a single user of their facilities ever bothers about service tax part when extravaganza is the prime objective. So, no amount of rationale justifies any exemption.

House-keeping services: Given that most security agencies which is already under service tax net nowadays do their billing under this category, it is high time a promise is kept with the house-keeping services.

Take any big bungalow, farmhouse or office, most of these lowly paid employees are billed as housekeeping services. So, here is a jackpot for the finance minister.

Labour contractors / building contractors / electrical and pluming contractors: These contractors form a rich class and have so far gone untaxed even by the income tax. Instead of beauticians and tutors these are the business entities which should be tapped first for maximising revenue as well as curbing black money.

Expansion of vocational institutes: The initial support for spreading computer knowledge has already been provided to the computer institutes which have mushroomed at every nook and corner in the country.

In fact, it is time now to rope them into the tax net so that non-serious players who have been doing fraud to aspiring students by vanishing into thin air after collecting huge fee could be checked.

There are many other types of vocational institutes like the one course for Air Hostess or personality development where these students are being charged Rs 25,000 to Rs 45,000.

Maintenance services by builders: Given that such a service has become a money-spinner for many real estate developers who have been charging huge amount for maintenance of common facilities in multi-storeyed buildings, this service must be taxed to ensure some sort of accountability as well as curbing black money.

Commission charged by air cargo agents: Given that CHA and other port services have already been brought under the service tax net, this particular service should not be left out.

They form the parallel to travel and ticketing agents for airlines or railways. They handle the cargo and collect their commissions from the airlines in bulk and they have the potential to pay.

Fashion shows by designers: The latest fad is that a large number of fashion shows are being organised by fashion designers of all shorts  -- garments and jewellery, and they have the potential to pay. They should certainly be brought under the tax net.

Though those which could provide the maximum revenue to the exchequer are the legal services and goods transporter services but putting these two services under the tax net require more of political will rather than any revenue calculations.

But even if the abovementioned 12 services are tapped this year, it would do a world of good to service tax collections.

However, all exemption granted so far should be reviewed and dispensable should be done away with as they have already made a big hole in the service tax net. And those which are relishing it are rent-a-cab operators and tour operators.

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Number of User Comments: 13

Sub: maintenance

merely detecting a defect can lead to maintenance

Posted by mohit

Sub: Tax on buiding maintainace

Dear Sir Please clarify whether any TDS is to be deducted from the payment made to building owner on the building maintainence charges (rs.57000 per ...

Posted by Phani Kumar

Sub: Re: Services that FM can tax

I am not here to suggest any new service for Service tax but to express my opinion that Service Tax should be administered by the ...

Posted by Prasad DV

Sub: Services that FM can tax

I agree on all of these authors suggestion but differ on the below ones: Private nursing homes/pathological & radiological labs: These are health services. How ...

Posted by Sunil K


Iam sure the author realises that the company that he/she runs would also come under the ambit of service tax. If service tax is the ...

Posted by Sudarshan


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