The Hindu Business Line : Another service tax hike?

ACCORDING to the tax grapevine, the service tax rate will be upped to 15 per cent, in the next Budget perhaps. This probably means that the Government has run out of ideas to increase the service tax revenue other than through a rate hike. Service tax, the rate of which was unchanged for nine financial years since its introduction, yielded a revenue of Rs 4,125 crore from 2,32,048 assessees in the financial year 2002-03. Since then, the service tax rate has been hiked twice which also gives credence to the fact that the only way to increase service tax revenue is through a rate increase.

An analysis of service tax revenues (see Table) throws up an interesting statistic — the revenue per assessee (RPA) has fallen in the financial year 2004-05 vis-à-vis 2003-04, which gives the impression that the rate increase coupled with education cess has not led to more revenues.

This appeared to be the trend for all the years since the tax was introduced, save the financial year 1995-96 wherein the first year blues perhaps ensured that the tax was paid in the second year. Since this is a feature across all years, it can be reasonably concluded that an increase in the rate of tax would not necessarily provide a proportionate increase in the revenue. A portion of the drop in the RPA can also be attributed to the fact that the cross-VATability of service tax reduced payouts for full-scale service providers.

It can be seen that the percentile growth of service tax revenue was much higher for financial years 1996-97 and 1997-98 despite a lower rate of tax which probably revalidates the argument that the rate of tax does not necessarily guarantee a revenue increase. The growth in the number of assesses — a natural result of bringing in more services under the net — would appear to be the major factor assisting the increase in the service tax revenue. The exemption given for small service providers does not appear to be affecting the revenues.

Reports suggest that the Government is serious, this time round, about implementing the Kelkar Committee recommendations on indirect taxes. If the suggestions of the Committee are accepted, the Government would do well to remove all artificial rebates and abatements that are provided under service tax — one of the primary suggestions of the Committee.

Instead of a rate increase now, when the Goods and Service Tax (GST) is ready to be rolled out, the tax rate can be pegged at 12 per cent — the median Central Excise rate — as suggested by the Kelkar Committee.

The intervening period should be used to ensure that all services fall under the tax net, exemptions and abatements are minimised and the administration made easier.

A rate of 15 per cent could deter the Government from rolling it back to 12 per cent when the GST law sees the light of day.

(The author is a Hyderabad-based chartered accountant.)

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