THE CONCEPT OF SERVICE TAX

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A Finance Minister usually gives details of any tax levied on goods and services in his budget speech. But this year, on February 28, 2003, the Finance Minister, Shri Jaswant Singh simply said, "I propose to enhance the general service tax rate from five per cent to eight per cent and also impose service tax on ten new services." He added, "the levy of tax on new services will take effect from a date to be notified."

In their budget speeches his predecessors -Dr. Man Mohan Singh, Shri P. Chidambaram and Shri Yashwant Sinha had announced the services on which service tax was to be levied.

Earlier Shri Jaswant Singh mooted the idea of amending the Constitution to empower the Central Government to levy the service tax. Both the Central and State Governments have sufficient powers to collect the proceeds.

The list of services on which tax will be levied from this year were made available in the Finance Bill. These include commercial vocational institutes, coaching centres and private tutorials, technical testing and analysis (excluding health and diagnostic testing, maintenance and repair services namely, annul maintenance contracts (AMC) and authorised maintenance and repair services, commissioning and installation services and business promotion and support services including customer care services. These services include launching of products, customer education programmes, conduct of seminars, help desk services, managing front offices and enquiry bureaus. However, computer-enabled services, namely, data processing, networking, back office processing and computer facility management will not be subjected to service tax.

The Finance Minister announced the extension of service tax on port services to minor ports also. Earlier, a port meant only a major port. Authorised automobile service was extended to cover multi-utility vehicles as well.

Also brought under this tax were banking and other financial services and foreign exchange brokers. At present the services provided by banks in relation to foreign exchange are covered under service tax. The proposal is to extend the service to proprietorship, partnership and other individual concerns providing such service.

Also, the exemption from service tax when payments are received in foreign exchange has been withdrawn.The present exemption from service tax on hotels has been extended beyond March 31, 2003 to encourage tourism.

Service tax was first levied in the 1997-98 budget by the then Finance Minister, Shri P. Chidambaram on transportation of goods by road and outdoor caterers, pandal contractors and mandap keepers. But in the budget for 1998-99, presented on June 1, 1998, his successor, Shri Yashwant Sinha said "in the last budget for 1997-98 a number of services were added to the service tax net. These included service rendered by transportation of goods by road. The House is aware that it led to widespread resistance and protests. As a result, this service tax was virtually kept in abeyance. I have decided to abolish the service tax on transportation of goods by road. I have also decided to abolish the service tax payable by outdoor caterers and pandal contractors".

But tax was collected by goods transporters till October 1998. Now by a retrospective amendment the tax collected prior to that date has been validated. The reason is that repaying the tax to all those would be time consuming, complicated and may not be fault-free.

Backdrop

Service tax was introduced in the 1994-95 budget by Dr. Man Mohan Singh. He then said "over the years while attempts have been made to widen the base for domestic indirect taxes, the service sector has not been subjected to taxation …..There is no sound reason for exempting services from taxation, when goods are taxed and many countries treat goods and services alike for tax purposes….I, therefore, propose to make a modest effort in this direction by imposing tax on services on telephones, non-life insurance and stock brokers at five per cent."

Shri Chidambaram and Shri Yashwant Sinha extended the list of services and now it covers 58 sectors covering almost all finance, stock exchange, transport and telecommunication- connected services besides a score of others.

Tax from the services added this year is expected to yield Rs. 400 crore. With this, the total receipts are estimated at Rs. 8000 crore. The budget estimate in the previous year was Rs. 6026 crore.

More than 58 per cent of the revenue will be from telephones, insurance and brokerage. This is because service tax is collected with the telephone bills, insurance premia and brokerage.

In the case of others, there is no census of service providers. Calculating and collecting tax from them is a big task. Some tax official feel that in some cases the tax collected may be less than the cost of collection.

Sometimes the tax will be collected and may not be shown in government account. Some of these services on which tax has been levied area rendered by one timers, short timers or companies which work in seasons. Also, some may render the service, pay the tax and may gain legitimacy, without merit. Many administrators feel that a re-look is necessary on the whole. (PIB Features)

Contributed by K. Viswanatha Rao, Freelance Journalist