Allowing states to tax services will facilitate a shift to a full goods and services tax. And more important, will operationalise the 95th amendment to the Constitution in the spirit it was conceived and passed. The amendment sought to bring services explicitly into the Union List and pave the way for their inclusion within the purview of state-level VAT. Splitting of services between the Union and states, as part of the exercise to draw the Services Tax Bill, also makes sense for tax administration. It will not be easy for the Centre to tax the growing number of services, especially those of local nature. The then finance minister, and present Prime Minister, Manmohan Singh, it may be recalled, introduced tax on three services in 1994 telephone, non-life insurance and stock broking. The number has swelled to 96, while tax collections are projected to grow to Rs 34,500 crore. The number of assessees is also expected to exceed 10 lakh, from less than 4,000 in 1994-95.
Against this backdrop, it is more practical to hand over taxation of services of a local nature to state governments. For instance, there is little logic in the Union government taxing services like beauty parlours, dry cleaners, internet cafes, mandap keepers, commercial photographers, etc. These should be given to the states. The Union, however, may continue to tax services of an all-India nature like telephones, insurance, brokerage, etc. Such a division will also prompt states to encourage growth of revenue-yielding services within their territories.