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The nation’s services sector accounts for the predominant share of GDP, and its performance is critical. The sector in India is characterised by a plethora of small establishments with low value addition, employing large numbers of unskilled persons. Therefore, even though the contribution of GST to the economy at the aggregate level is significant, the service tax revenue comes predominantly from 2 per cent of the enterprises. The important services sectors from the revenue point of view are banking, insurance, telecom, construction, business support and transportation.
The government has unveiled a four-tier GST rate structure for the sector — 5 per cent, 12 percent, 18 per cent and 28 per cent. The bulk of the services will, however, be taxed at 18 per cent. The sector is currently taxed at 15 per cent, so the GST regime will likely increase tax incidence for this sector.
The main challenge for the sector in the GST era is multiple registration. Service tax will be collected by the Centre under a system of centralised registration. States have been reluctant to agree to centralised registration; the government is now exploring an arrangement for centralised compliance verification. There is a provision to grant centralised registration, but it has to be seen if the Centre can persuade the States through the GST Council.
Besides this, there is the technological challenge of helping small enterprises in the services sector to electronically file their return. This would require technical support through tax return helpers. They will also have to be assisted in the area of maintaining documentary discipline.
The differential rate between the goods and services sectors may distort/influence business by providing arbitrage practice. For example, if a car is taxed at 10 per cent and leasing rates are at 18 per cent, we may have a situation where car sales could be replaced by car leasing. In the area of composite services, a contract may be specially designed to avail the lower rates on services. Therefore, there are implications in the area of dispute management.
(The author is a Senior Tax Advisor, EY India)
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