Govt may double service tax rate to 10% to integrate with Cenvat

New Delhi, January 7: | Updated: Jan 8 2002, 05:30am hrs
THE government may double the service tax rate to 10 per cent from the existing 5 per cent in the forthcoming Budget as a part of the exercise to integrate services with the Cenvat structure.

Sources said that the 10 per cent rate would be compatible with 16 per cent Cenvat and would also yield substantial additional revenue. They added that at the current 5 per cent rate, even an extension of the service tax to new areas will not result in any substantial revenue as most of the organised sector in the country was already covered.

Provision for Rs 14,000 crore likely in Budget
Anupama Airy
New Delhi, Jan 7: The finance ministry may have to make an additional provision of about Rs 14,000 crore in the annual budget for 2002-03 to meet expenditure on various accounts. It includes Rs 12,000 crore for subsidy on kerosene and LPG, in the first year after dismantling of the administered price mechanism. Full story

Officials added that with customs and excise duty realisation showing sluggishness, it was the services sector only which had the scope, and which can be tapped to enhance indirect tax mop-up. Budget estimate for service tax collection in the current fiscal is pegged at Rs 3,600 crore. The 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 Tenth 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 pointed out that the role of services in revenue generation cannot be ignored even in the short run, and has recommended that the integration of services with Cenvat should be accomplished in the budget for 2002-03.

It said that once services are were included in the tax base, no distinction should be made between service tax and Cenvat. "All manufacturers should be allowed to take credit not only of Cenvat, but also credit of service tax paid. Similarly, a service tax payer should be allowed to take credit of all excise duties, and also of the service tax paid," the advisory group has suggested.

According to revenue department officials, an integrated Cenvat structure had 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 six-fold growth till 2000-01.

From Rs 410 crore in 1994-95, service tax mop-up grew to Rs 2,581 crore in 2000-01. The assessee base has grown 30 times during the period from 3,943 to 1,22,326. Sources said that 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, the first three services brought under the tax net in 1994 telecom, insurance and stock broking have conventionally contributed a lions share in the overall revenue receipts.

Sources said that the government was likely to keep major services with the Centre and transfer services of the local nature to the states in the Budget.

The states have demanded transfer of service tax to the states to facilitate smooth implementation of the value added tax (VAT) regime from April.