Dr Bagchi, emeritus professor, National Institute of Public Finance and Policy (NIPFP) while delivering the keynote address at the second annual conference on service tax here on Thursday said, scientific scheme of dual VAT suggested by the Govinda Rao Committee would require major constitutional changes. One alternative would be to allow the states to levy taxes on services which are ancillary or incidental to the supply of goods. While tax on services which are ancillary or incidental to production or manufacture of goods can be administered by Centre.
He further said that tax on services which have inter-state ramification like transport and telecommunication can be administered by the Centre. This would prevent litigation.
He stressed that ultimately aim should be to move towards a VAT regime on a comprehensive base both at centre and in the state under a dual VAT model, as recommended by the Rao Committee. However, he added, the states should be left free to fix their rate of tax subject to a floor.
Dr Bagchi, however, regretted that the policies being formulated do not seem to follow a clear conceptual framework. It is difficult to see how a tax can be administered which does not provide any threshold, he questioned. The Rao Committee has recommended an exemption limit of Rs 10 lakh.
He also warned, while one cannot expect the ideal to be adopted, it should be remembered that once the system gets on the wrong track, reversing the directions will be vary difficult.
Director general of Standing Conference of Public Enterprise SM Dewan said the service sector was growing much faster than other sectors of the economy and was becoming a contributor to the gross domestic product. The service tax, which was introduced in a modest way in 1994, presently covers 64 sectors and was expected to contribute Rs 8,000 crore to the exchequer.