Chidambaram to meet states FMs tomorrow on service tax

New Delhi, Nov 28 | Updated: Nov 29 2004, 05:30am hrs
The Centre will discuss with states on Tuesday the future course of action on service tax, following a long pending demand from states that they be empowered to tax some of the services that are local in nature.

The move comes after 12th Finance Commission sought the views of the Centre and states on ways of improving revenues, official sources told PTI here. Union finance minister P Chidambaram is scheduled to meet state finance ministers on November 30 to discuss ways of sharing the revenues coming from services sector, which contributes 50% of the countrys GDP.

At present, only the Central government can levy service tax. But the 92nd Constitutional amendment envisages that service tax levied by the Centre could be collected and appropriated by the Centre as well as the states in accordance with a principle formulated by Parliament.

There has been a long pending demand to allow states to levy and collect tax on some local services while the centre can tax those services which have national presence.

Finance ministry intends to draw up a list of services that will be under the purview of states for taxation.

Before allowing states to tax services, the Centre needs to bring in legislations. The NDA government had toyed with the idea of a service tax legislation to empower states to tax certain local services. This could be revived by the UPA government, sources said.

This is likely to happen only after states put in place value-added tax (VAT), they said, adding the ultimate aim is to merge service tax with VAT.

Sources said service tax along with VAT is expected to play a major role in improving the financial health of states.

The World Bank has recently come up with a report on state fiscal reforms, in which it suggested that states should be allowed to tax some services.

The Kelkar panel, which drew up the roadmap for implementing Fiscal Responsibility and Budget Management Act, had recommended a 20% goods and services tax (GST) that would replace excise and service tax.

The panel had proposed that 40% of the collections from GST could go to states and 60% could be retained by the Centre.

Mr Chidambaram had endorsed the need for such a tax and sought the views of states. The empowered committee of state finance ministers had some reservations on GST, as they fear that it might lead to lowering of their revenues.