Service tax may go for firms with low turnover

Subhomoy Bhattacharjee

The government is likely to announce a roadmap in the forthcoming Budget to bring all services under the tax net over time and also define an exemption limit based on turnover. At present, all companies have to pay service tax irrespective of their turnover.

As per the proposal under consideration, the government is expected to announce the formation of a committee to examine the ways in which taxes on services can be levied by amending the Constitution and their integration into the value added tax structure.

After having brought most of the excisable goods under the central value added tax umbrella in the last Budget, the government is working on amalgamating service tax under the same cover.

According to tax experts, an amendment to the Constitution will not only make all services taxable, it will also enable the government to define a general exemption limit for services from tax liability based on the level of turnover which will be more equitable.

For the Centre, it has also become necessary to clarify the issue soon because it has agreed to transfer 51 services which are local in nature for taxation by states.

With the schedule for introducing VAT likely to be deferred by an year, the Centre has got a breather to clarify the contentious issues.

In the last two Budgets, the Centre had extended the tax net to cover more and more sections of the service industry to augment revenue as the manufacturing base was shrinking, while services had grown to account for nearly 53 per cent of the gross domestic product in 1999-2000.

But because the taxation powers on services are not clearly defined in the Union or the state list of the seventh schedule of the Constitution, the government has been forced each time to announce incorporation of specific services under the tax net.

The current tax rate on services is 5 per cent while Cenvat on goods is 16 per cent. Besides, each piecemeal introduction has created an unpleasant situation with the affected service associations clamouring for exemptions.

The N K Singh committee, for instance, which has recommended that the government should consider integration of service tax with Cenvat has apparently favoured exempting sectors like health services from any tax.

Tax experts like Raja J Chelliah have also pointed out that a VAT on services will yield a net addition to revenue of only about 1.5 per cent of the GDP as the Centre will have to leave out defense and public administration.

This leaves only construction and transport sectors with banking and insurance already under the net. But touching the former may be difficult in a recessionary year. The railways ministry has made a pitch for keeping its fares out of the service tax net.

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