To curb tax evasion, the finance ministry is considering introducing tax deduction at source (TDS) provisions for around two-dozen services, which might include transportation, security agency and beauty parlour services. The move is aimed to bring under the tax net those fly-by-night service providers which are not registered with the tax department.
According to government officials, there are a large number of service providers in the unoragnised sector which are unregistered and are difficult to track. These service providers are able to give an unequal competition to the registered players.
Under the proposed rule, the service receiver will deduct the TDS, keep the record and issue a TDS certificate in the case of a few identified services. Many services such as dry cleaning, commission agents, outsourcing activities and utility services are likely to fall under the ambit of the proposed rule. Sources said the rule would be introduced in the Union Budget for 2012-13. Currently, 119 services are under the tax net and there is a move to shift to a system of negative list of services, which means that all services except a few that would figure in the list would be taxed.
The revenue department had set up a committee two months back to explore the feasibility of introducing TDS on services.
The committee was to submit its report last month, but was given more time to complete its work. Central Board of Excise and Customs (CBEC) chairman S Dutt Majumder had also said that the board was examining whether the TDS system could be replicated in service tax, just like in the cace of income tax.
The large tax evasion in the services sector has prompted the revenue department to explore the possibility of such a mechanism. According to sources, there has been a rise of 70% in service tax evasion cases in the last two years.
The services sector contributes around 60% in GDP, however, its share in indirect tax collection is still very low. Out of Rs 1.08 lakh crore collected from indirect taxes in the first four months of the current fiscal, only Rs 21,500 crore was mopped up from service tax.
However, the move to implement TDS provision in service tax has not impressed many experts. According to Bipin Sapra of Ernst & Young, unless the TDS mechanism is foolproof, there could lead to increased transaction costs and rise in litigation. ?It might work well in business to business scenarios but not in business to customers model. The unorganised sector constitutes mostly the business to customers model,? Sapra said.
Even industry body Ficci has questioned the rationale behind the proposal to introduce TDS in service tax collection on the grounds that it would lead to higher cost of compliance, problem of TDS credit and refunds and intricacies of input tax credit claims. It has also questioned the rationale of the TDS proposal at “this juncture” when the introduction of the Goods and Services Tax is imminent and service tax is to be subsumed within the proposed indirect tax regime.
In the Budget session this year, the government had introduced a Constitution amendment Bill in the Lok Sabha to facilitate implementation of GST, an indirect tax regime that would subsume levies like excise, service tax and sales tax. The government is hopeful to implement GST sometime next year.
