It is now clear that the decelerating growth in service tax receipts is not only due to possible tax evasion and a statistical effect of the high growth rate in previous years, but also due to the severe manpower shortage affecting the Central Board of Excise and Customs (CBEC) which delays registrations, say official sources.
Thanks to the introduction of the more inclusive negative list approach for taxation of services from July 2012, this years service tax collection target is kept at R1.8 lakh crore, up 36% over last year. Revenue growth from this levy, envisaged to be the tax of the future in an economy dominated by services, has faltered in H1, belying expectations that adopting the negative list (which means all services except a select few will be taxed) would boost collections.
The finance minister has issued verbal instructions to all chief commissioners of customs, central excise and service tax to clear the backlog of applications for registration as soon as possible, said a person familiar with the development. Although data is not centrally maintained, it is believed the total pending applications run into several tens of thousands.
Adding to the backlog is about 7,500-10,000 companies incorporated every month in the country, more than half of which are in the services sector. A similar number of partnerships and limited liability partnerships add to that. This, sources said, is a curious situation, as rather than evasion and recalcitrance of some potential taxpayers, the administrations inability to get the businesses registered is hampering collections.
Growth in service tax receipts during April-June of 2012-13, which averaged 40% from the same period a year ago, dropped to 34% in the remaining three quarters of 2012-13.
Some officials said the negative list based approach to taxing services is yet to sink in. We are implementing a major reform in service tax. One year is too short a period to see the full impact (of negative list), said a CBEC field officer who asked not to be named. Some officials also believe the coverage of the earlier positive list of taxing services was by and large comprehensive, leaving little to be achieved under the new policy of taxing all services except the listed few.
Meanwhile, some states like Madhya Pradesh have alleged the Centres revenue expectations from a negative list-based approach were too high and that the net additional increase in states tax base by getting the right to tax services under the proposed goods and services tax (GST) was overestimated. According to them, it does not compensate for the loss of revenue on account of removal of central sales tax on sale of goods and other input based taxes under the proposed indirect tax regime.