Service tax may be doubled to 10% to integrate it with cenvat

Santosh Tiwary

New Delhi, Jan 7: The government may double the service tax rate to 10 per cent from the existing 5 per cent in the forthcoming Budget as part of its exercise to integrate services with the Cenvat structure.

Sources said the proposed 10 per cent rate would be compatible with the 16 per cent Cenvat rate and would also yield substantial amount of additional revenue. They also pointed out that at the current 5 per cent rate, even an extension of the service tax to new areas would not result in any substantial revenue mop-up as most of the organised sectors were already covered.

Officials further said with customs and excise duty realisation showing sluggishness, it was only the services sector which had the scope, and which could be tapped to enhance indirect tax collection. Budget estimate for services tax during the current fiscal year is pegged at Rs 3,600 crore. The services sector contributing around 50 per cent to the GDP is considered to be a potential area for enhancing revenue collection.

The Planning Commission advisory group on tax policy and tax administration for the 10th Plan has also recommended that “it would be better to begin with a larger base and a higher rate and to integrate services with the Cenvat right from the start”.

The panel has also pointed out that the role of services in revenue generation could not be ignored even in the short-run, and has suggested that the integration of services with the Cenvat regime be accomplished in the next Budget itself.

The panel has also said once the services were included in the tax next, no distinction should be made between service tax and Cenvat. “All manufacturers should be allowed to take not only credit of Cenvat but also credit of service tax paid. Similarly, a service taxpayer should be allowed to take credit of all excise duties and also of the service tax paid,” the advisory group has said.

According to revenue department officials, an integrated Cenvat regime has the potential of yielding around Rs 10,000 crore from service tax. Though only partially-utilised due to a lower rate and less coverage, service tax revenue receipts have shown a steady rise since 1994 by witnessing almost a six-fold growth till 2000-01.

From Rs 410 crore during 1994-95, the service tax mop-up grew to Rs 2,581 crore during 2000-01. The assessee-base has also grown 30 times during this period from 3,943 to 1,22,326. Sources said the mismatch between revenue growth rate and assessee-base clearly indicated that the collection from the services introduced in the later years had been considerably lower.

Interestingly, first three services brought under the tax net in 1994 - telecom, insurance, and stock broking - have conventionally been contributing a lion’s share in the overall revenue receipts.

Sources said the government was likely to keep major services with the Centre and transfer services of local nature to the states in the Budget. It can be recalled that the states had demanded transfer of a large number of service tax from the Centre to them to facilitate smooth implementation of the VAT regime from April.