Allow States To Tax Services, Says CII

New Delhi, October 20: | Updated: Oct 21 2002, 05:30am hrs
Confederation of Indian Industry (CII) has recommended that an important prerequisite for moving to a value added tax (VAT) regime is giving concurrent powers to states for levying tax on services.

Assocham Moots Uniform Tax Classification For Goods, Services

New Delhi, Oct 20: The Associated Chambers of Commerce and Industry of India has suggested evolvement of a harmonised classification system for extending tax coverage to goods and services, and concurrent powers to the Centre as well as the states to tax services.
The chamber feels that the selective approach of assigning the tax powers on certain services to the Centre and some others to the states cannot serve the objective of developing a scientific value added tax regime in the country. They should have concurrent powers to tax services for evolving a dual VAT system, it said.
Both the Centre and the states will have to exercise concurrent powers to levy tax on services and it should be extended to all services excluding a small and clearly defined exemption list if all input and capital goods taxes have to be credited and taxes on exports zero-rated, the chamber said.
The exemption list, the chamber said, will have to be carefully chosen, keeping in view administrative feasibility and developmental and distributional considerations.
Basic administrative services, meritorious services, services with significant externalities and those essential for physical and human development will have to be identified for exclusion and exemption.
The general approach must be preferred over the approach of taxing services selectively for two important reasons, it said, adding the first and foremost is that it is not appropriate to assume that some services have a regional scope and others have national scope. UNI
Since there is a constant interface between goods and services, relieving all input taxes and zero-rating exports will necessitate taking a general approach to taxing services, said the chamber, adding secondly, there are clear administrative advantages of adopting a general approach. Experience has shown that in this approach, each service has to be defined and in spite of this there can be several disputes and litigation.
There are over 300 cases pending with courts on matters relating to the definition and scope of tax on various services. The chamber further states that administrative considerations also necessitate exemption of services in the unorganised sector and small service providers from the taxation purview. UNI small service providers. Exclusion of such segments from the scope of tax without compromising on the fundamental approach of expanding the tax base is also important, said the chamber.
Exclusion of small and unorganised service providers is important from the viewpoint of administrative feasibility and convenience. One way to exclude the unorganised sector is to prescribe a threshold on turnover. But it may lead to tax avoidance by splitting around the threshold value. However, to keep the administration manageable, the chamber said it will be prudent to exempt unorganised sector and small service providers altogether from the tax net by prescribing the limits. UNI

This is important to keep the revenue neutral rate (RNR) within a range of 10-12.5 per cent and in the long run to reduce the total incidence of the Centre and state levies, the chamber has said in a note submitted to the government.

Apex industry chambers made their presentations on Saturday before the empowered committee of state finance ministers on VAT system to be introduced from April 1, 03, by the states.

The empowered committee in its meeting also discussed the existence of Central Sales Tax in the new regime, transfer of services to the states for taxation, and compensation of revenue losses in the initial years after introduction of the uniform tax system. On the service tax issue, the chamber cited the Tax Reforms Committees recommendations suggesting taxation of services for widening the tax base, emphasising that service tax must be a part of VAT to avoid cascading effect.

It is also essential that while moving towards a VAT regime issues such as homogenity should be resolved. And other operating procedures, specifically those relating to rate structure, classification of products, set-off mechanism and documentary procedures, are made uniform across the states.

Ideally, with the introduction of VAT, the various state taxes and other local levies such as sales tax, surchage, luxury tax, turnover tax, entry tax and any other taxes on the sale/movement of goods should be abolished, the chamber said.