Finance Commission’s caution on corporate and service tax growth has come at the right time.
The finance ministry must have taken into consideration the Fourteenth Finance Commission’s (FC) estimates to project realistic tax collection targets for FY16. The FC has put a cautionary note on the two segments, corporate tax on the direct tax side and service tax in indirect tax, that have seen extraordinary growth in the past decade—19.08% and 39.28%, respectively, during FY02 to FY13. Finance minister Arun Jaitley would have done well by listening to the FC’s observation while deciding on the tax targets for FY16: “It would be unrealistic to assume that such a high level of corporation and service tax growth would continue, even if the economy returns to the anticipated growth rate projected in our assessment period.” The collapse in the service tax growth to just 8% during April-January FY15 clearly shows that the FC is bang on target in its reading.
Clearly, if the government wants to better this record, it will have to listen to the FC’s recommendation of pruning the negative list and bringing more services into the tax net. Going by the FC’s construct, those expecting benefits from the FY16 Budget to be presented on Saturday should be prepared for a balancing act by the finance minister—he would obviously not like to face a huge hole in tax collection in FY16 too. A higher income tax exemption limit may come with more spending on account of service tax.