Servicing taxes PDF Print E-mail
Thursday, 19 February 2015 00:00
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There is no reason for service taxes to grow so slowly

Given that average service tax collection growth in the last three financial years has been over 32%, the collapse in growth to a mere 8% in the first 10 months of FY15 is a complete shocker—the budget target was 30.5%. To be sure, there is always a surge in the last quarter of the year, but this won’t help as much. In the April-December period of FY14, around 54% of the year’s target had been achieved; the figure is a lower 49% this year. Some part of the slowing down, as in the case of customs and excise duties, can be explained by the near collapse of industrial growth and, as a result, of imports—the collapse in raw material prices has only added to the problem of customs duties. But since services growth has been more robust, the collapse is more difficult to understand. More so since, in the last Budget, finance minister Arun Jaitley had further pruned the list of exemptions as well as the negative list. All of which suggests the taxman needs to do some serious thinking about what is happening to service taxes. There has to be something quite wrong in the way service tax collections are made if, as in the case of some other taxes, the refunds are growing in the manner they are—from R33,325 crore in FY11 to R67,698 crore in FY13.

For starters, both excise and service tax rates can easily be brought up to 14%—excise duties were at that level before being brought down in FY08 as part of the stimulus package, and both excise and service tax have to be at the same level to prevent tax arbitrage. Apart from hiking rates, there is a need to relook both the negative list as well as the list of exemptions. Bringing in the Railways under service tax can, an NIPFP estimate suggests, raise around R8,000 crore after input credits are taken care of. Another proposal being discussed, to levy a service tax on spectrum auctions, opens up the possibility of getting another R4,500 crore or thereabouts. There is, similarly, no reason why healthcare services should be in the taxable list but should be exempted, as are legal services to households and small businesses. And why should education be in the negative list, given how fast the sector is growing? While service taxes have already crossed those from excise duties for the first time since they were introduced at a 5% rate in 1994, they have to be much higher than they are at the moment. If the services sector comprises over half the economy, it cannot comprise under a sixth of tax collections even if government services are kept out of the ambit of service taxes.


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