The Hindu Business Line : Why should services be exempt from tax?

IF goods are taxed, why should services be exempt? Especially when they account for more than 50 per cent of the GDP but generate only 3 per cent of tax revenues. The question is whether commodities taxes will correspondingly be decreased.

No doubt the tax/GDP ratio fell from 11.7 to 9.6 per cent between 1991 and 2003 but increased household savings — from 15.2 to 24.9 per cent of GDP.

Why transfer more money from a sector that saves something from what it earns to a sector that consistently dis-saves? Why listen to Kelkar? Real GDP doubled in the past 10 years.

So, even a 25 per cent drop in the average rate of tax on GDP still left the fiscal with almost twice as much revenue. In real terms, why kill the goose that lays golden eggs? There are some other angles as well.

Like the logical fiscal implications of the attempt to downsize or rightsize the Government. Not by compromising on socially necessary allocations towards health, education, rural and urban development but rather by cutting down flab, and, as a study posted on the Financial Ministry Web site points out, huge misdirected subsidies.

Besides, it is at least half true that while taxes on goods tax consumption, taxes on services tax savings. Arguably, it was the 10-percentage point increase in household savings that fuelled the 7-percentage point growth of the finance, insurance and real estate components of the services sector, from 6.5 to 13 per cent of GDP over the period.

Since the tax on these services is to this extent a tax on savings, do we really want to clip these wings twice? Savings will anyway get taxed when they are eventually spent.

In short, a `service' tax on the banking, finance, insurance and construction is not at all the same thing as a tax on the services provided by the ad industry, hotels/restaurants, lawyers and accountants. Doctors, though they too fall in the latter category, may have to be treated differently.

Let us, if we can, grow two blades of corn where only one grew before; without spending twice as much to do so. But meanwhile why hinder the growth of what is already growing, of its own volition?

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