Economy

New services brought into the tax net

| Updated on March 12, 2018 Published on February 28, 2011

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I propose to raise the service tax on air travel by Rs 50 in the case of domestic air travel and Rs 250 on international journeys by economy class.

The actual collections of service tax do not reflect the full potential of this sector. While retaining the standard rate of service tax at 10 per cent, I seek to achieve a closer fit between the present service tax regime and its GST successor by:

Bringing in a few new services into the tax net to expand the tax base while ensuring that the impact is predominantly on sections of society that have the ability to pay;

Suitably expanding or rationalising the scope of existing service categories;

Rationalising certain provisions relating to import of services and valuation;

Modifying provisions of the Cenvat credit scheme to achieve a more realistic balance between input credits and output tax and harmonising the provisions of the scheme across goods and services;

Rationalising penal provisions to reinforce the message that honest taxpayers would be facilitated and deviants would be dealt with severely; and

Adoption of Point of Taxation rules for services which would shift the basis for tax collection from ‘cash' towards ‘accrual' basis as with Central Excise duty.

I propose to levy service tax on the following new services:

Hotel accommodation, in excess of declared tariff of Rs 1,000 per day with an abatement of 50 per cent so that the effective burden is only 5 per cent of the amount charged;

Service provided by air-conditioned restaurants that have licence to serve liquor, by giving an abatement of 70 per cent. Thus, the effective burden will be 3 per cent of the bill.

I imposed service tax in 2010-11 on health check up or treatment. This levy has resulted in differential treatment between persons who make payments themselves and others where payments are made by an insurance company or a business entity. Thus, I propose to replace it with a tax on all services provided by hospitals with 25 or more beds that have the facility of central air-conditioning. Though the tax is on high- end treatment, I propose to sweeten the pill by an abatement of 50 per cent so that the actual burden is kept at 5 per cent of the value of service. I also propose to extend the levy to diagnostic tests of all kinds with the same rate of abatement. However, all Government hospitals shall be outside this levy.

I propose to raise the service tax on air travel by Rs 50 in the case of domestic air travel and Rs 250 on international journeys by economy class. I also propose to tax travel by higher classes on domestic sector at the standard rate of 10 per cent to bring it on par with journeys by higher classes on international air travel.

Life insurance

Services provided by life insurance companies in the area of investment are also proposed to be brought into tax net on the same lines as ULIPs. I propose to expand the scope of legal services to include services provided by business entities to individuals as well as representational and arbitration services by individuals to business entities. There shall, however, be no tax on services provided by individuals to other individuals.

There are certain other changes mainly by way of rationalisation or expansion in the scope of certain services or by plugging existing loopholes. I do not wish to take the valuable time of the House in further elaboration here.

The strength of a good value-added-tax lies in the free flow of the credit of the tax paid at the previous stage. Due to complexities, there have been many legal disputes on the availability of credit on a number of inputs or input services. These provisions are being rationalised by laying down clear definitions so that the scope of inputs and input services that are eligible and those that are not, is clear. Allocation of Cenvat credit to exempt and taxable goods and services is also being streamlined.

The number of assessees in service tax has grown manifold. I find that a large number of them comprise individuals or sole proprietors with small turnovers. Any audit at their premises tends to dislocate their activities for the duration of the audit. I, therefore, propose to free all individual and sole proprietor taxpayers with a turnover up to Rs 60 lakh from the formalities of audit. This will give relief to a large number of taxpayers. I also intend to give all assessees with turnover up to Rs 60 lakh, the benefit of 3 percentage points in interest on delayed payment.

In keeping with our thrust to encourage voluntary compliance, the penal provisions for service tax are being rationalised. A key component of this strategy would be to treat less harshly those who have maintained truthful records but have fallen short of discharging their tax liability. Simultaneously, deliberate evaders with unrecorded business transactions will be dealt with more severely. Similar changes are being carried out in Central Excise and Customs laws. The details of the provisions are in the Finance Bill.

My proposals relating to service tax are estimated to result in net revenue gain of Rs 4,000 crore for the year.

Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST. I propose to initiate an informed public debate on the subject to help us finalise the approach to GST.

Rs 11,500-cr loss

My proposals on direct taxes are estimated to result in a revenue loss of Rs 11,500 crore for the year. Proposals relating to indirect taxes are estimated to result in a net revenue gain of Rs 11,300 crore, leaving a net loss of Rs 200 crore in the Budget.

As an emerging economy, with a voice on the global stage, India stands at the threshold of a decade which presents immense possibilities. We must not let the recent strains and tensions hold us back from converting these possibilities into realities. With oneness of heart, let us all build an India, which in not too distant a future, will enter the comity of developed nations.

Madam Speaker, with these words, I commend the Budget to the House.

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Published on February 28, 2011
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