Finmin divided over CBDT proposal to cut service tax
“Only robust service tax collection will strengthen the government's hands to introduce the proposed new Direct Taxes Code (DTC) with an income tax exemption limit of Rs 5 lakh, as against to the current exemption limit of Rs 1.8 lakh,” said a senior government official, who asked not to be named. “Globally, service tax has helped many economies to keep income taxes low,” the official added.
While there is no hard and fast rule about the right balance between direct and indirect taxes, some economists believe that in developed countries, where services account for a larger share, indirect taxes surpass direct taxes. Many also believe indirect taxes are distortionary in nature. India hopes to collect Rs 5.6 lakh crore by way of direct taxes and Rs 5.1 lakh crore from indirect taxes this fiscal, suggesting a direct-indirect tax ratio of 52:48.
There is another strong argument with the Service Tax Administration to guard against a rate cut. Unlike direct taxes, indirect taxes including service tax is unaffected by the tax residency of the individual or the company that consumes the service and, therefore, is a more reliable source of revenue to the exchequer. An individual consuming a service here needs to pay service tax irrespective of whether he had stayed 182 days in India or not in the previous year.
But the call for a reduction in the service tax for the final consumer is getting louder within the finance ministry as such a step may leave more money in the hands