Finance Minister P Chidambaram is expected to exempt in the Budget for 2005-06 businesses with a turnover of up to Rs 500,000 from paying service tax. The list of services to be taxed will also be lengthened.

The move will provide relief to small traders and will also let the Central Board of Excise and Customs focus on a fewer number of assessees and possibly higher tax collection.

The thinking in official circles is in line with a similar exemption proposed in the white paper for the value-added tax.

The most compelling argument for the Rs 500,000 threshold is the cost of collecting tax from small entities. Tax experts said past studies had shown the cost of collecting tax from a very large base of tax payers exceeded tax revenues.

Given the limited resources that the revenue authorities have in terms of infrastructure, personnel and skills, experts felt focusing on a smaller group was a better option.

The argument against thresholds is that it encourages tax evasion. That is because owners split up their businesses in order to ensure that turnover does not cross the threshold.

The government had budgeted for a Rs 14,150 crore (Rs 141.5 billion) collection from service tax for 2004-05 against the revised estimates of Rs 8,300 crore (Rs 83 billion) in the previous fiscal year.

New services, which came under the tax net in this fiscal, are expected to generate around Rs 4,000 crore (Rs 40 billion).

Threshold debate

• For: Tax experts say the cost of collecting tax from a large base of tax payers has exceeded tax revenues; focussing on a smaller group is a better option.
• Against: It encourages tax evasion; owners split up their businesses in order to ensure turnover does not cross the threshold.