Service tax – a roller-coaster ride

Manmohan Singh — in partnership with P.V. Narasimha Rao — is credited with having saved the country from the brink of bankruptcy in 1991 by unleashing a big-bang reforms package that opened India to the world and let the dollars flow in.

Singh, this time probably singularly, should be credited with getting a multi-million dollar idea in 1994 that has turned out to be a gold mine for all future Finance Ministers. That idea was the levy of service tax. The Budget estimates service tax revenues for 2013-14 at Rs 180,141 crore. The roller-coaster ride that service tax has had can be gauged from the fact that the estimates are only 4 per cent less than that for customs duty (Rs 187,308 crore) and 9 per cent lower that the estimates for excise duty (Rs 197,553 crore). For a relatively new kid on the block, these are impressive projections. One shudders to think how the projected revenue and fiscal deficits would have looked without the support of service tax revenues.

As a law, service tax kept evolving every year since 1994. Ever since its arangetram , new services were identified every year ad nauseam — a reverse charge concept was introduced, a service tax credit scheme was thought of which later morphed into the Cenvat Credit Scheme, Valuation Rules were brought in and Import and Export criteria for services were established.

Probably realising that the law was getting too bulky to handle, a negative list was introduced in 2012 through a mega notification. Finance Minister P. Chidambaram should be complimented for not yielding to the temptation of tinkering with the negative list a year after its introduction.

A year before the hustings, the temptation to please some of the masses should have been pretty strong. This provides hope that the negative list would not try and match the erstwhile positive list for length and complexity.

GST roadblocks

Perhaps, one of the most disappointing aspects of the workmanlike Budget 2013 is the lack of a robust roadmap towards Goods and Service Tax (GST). Though there has been a statement that a proper Constitutional amendment would be introduced over the next few months, the lack of a roadmap belies this intent.

This point of view is fortified by the fact that there has been deft tinkering in Service tax laws — the levy of tax on all air-conditioned restaurants (instead of those with a licence to serve alcoholic liquor) being a case in point. The allocation of Rs 9,000 crore to provide compensation to the States for the loss of Central Sales Tax (CST) is an indicator that the battle between the Centre and the States is yet to be won.

For now, it appears that GST would remain a concept with many bridges to cross before it becomes a law. The fact that we are proposing a diluted multiple GST makes one question the very need for such a levy.

Voluntary Compliance

Budget estimates indicate a 36 per cent increase in service tax revenues in the year 2013-14. A large portion of this is expected to come from the voluntary compliance encouragement scheme introduced for errant tax filers.

The introduction of this scheme to nab errant tax-payers who have not filed their returns indicates a tendency to get into administrative nitty-gritty instead of looking at the larger picture.

Compliance under service tax has been greater than under other tax laws, considering the inevitability of the tax and the all-encompassing nature of the levy after the introduction of the negative list.

With a reasonable threshold limit of Rs 10 lakh and multiple entries in the negative list, the number of takers for the compliance scheme would probably be limited. The carrot of waiving off the interest and penalty and paying the service tax arrears in two instalments may not be sweet enough for tax payers, as they could still get the same with some haggling.

The main motive of the compliance scheme is clearly evident — to develop a database of service tax payers who have not filed their returns voluntarily, although they have a tax liability. They may save on interest and penalty now, but can ill-afford to be lax in compliance in future.

(The author is Director, Finance, Ellucian )

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