Govt set to shift most of service taxes to states

New Delhi, December 19: | Updated: Dec 20 2001, 05:30am hrs
The government is set to announce policy changes for transferring taxation of majority of services to the states in the next Budget. According to finance ministry sources, the GC Srivastava committee has recommended that barring the negative list suggested by the expert committee on service tax headed by M Govinda Rao, taxation of all other services, except those of typically Central nature, be shifted to the states.

The sources said the services to be retained by the Centre as per the Srivastava panel report were telecommunications, postal communication, financial services including banking and insurance, and transportation of goods and passengers by road, water and air. As major chunk of the service tax to the Central kitty came from the services to be retained by the Centre as per the Srivastava panel report, there would not be any major revenue loss to the Centre due to this step, sources pointed out.

Starting with three services in 1994, the Central list of services for taxation purposes has at present 41 services.

Finance minister Yashwant Sinha had already indicated that the government in principle was ready to shift taxation of certain services to the states. The Srivastava panel, having representation from the states, was asked to identify the services to be transferred to the states so that the Centre could take a final decision on the issue before April 1 next, the deadline for implementation of VAT by the states.

Sources also said the panel suggested that the opinion of the law ministry be taken on how the taxation of services should be shifted to the states. The report also said this switch-over must be carried out with certain pre-conditions, which included implementation of the VAT regime, keeping the service tax rate within a range, merger of the services taxed currently with the new set up, as also imposition of fiscal discipline by the states.

Sources said with seven major states already agreeing to implement VAT from April 1 next, the Centre had to take a final decision on the issue in the forthcoming Budget. The states, apprehensive of a revenue loss in the initial phases of the VAT regime had asked for this measure.

The Govinda Rao expert group set up by the government to look into the issue of taxing services had also favoured shifting of the same to the states. The group had also suggested that services relating to public utilities, essential health and educational services, and sovereign function of the state be excluded from the tax net.