Service tax net may widen

Get ready to pay tax on every service barring those in some 20 categories such as construction, health, entertainment, restaurants, non-AC rail fares, travel by the metro or public buses, etc.

A key official says the way has been cleared to bring this proposal in the Budget, as the finance ministry has agreed to take states' concerns on board.

Services constitute more than 60 per cent of India's GDP, but are projected to contribute just 8.7 per cent of the Centre's gross tax revenue in the Budget estimates for 2011-12. That is because service tax is a relatively new area in India. There was no tax on tertiary activities before 1994, when only three services came under the net.

Progressively, the net has widened to include over 125 services under its ambit, but that too is minuscule relative to their size in the economy. Analysts believe this step would alone increase service tax collections 20-25 per cent, which would help in narrowing the fiscal deficit.

States' opposition could have been a major roadblock in introducing a list of categories of services that would be out of the tax net, technically called the negative list of services.

States wanted the Centre to prepare the list in such a way that areas under their domain were not taxed by the Centre. States do not impose services tax, but certain categories that qualify as services are taxed by them under different heads.

As such, businesses paying tax to states may not be subjected to service tax by the Centre.

A finance ministry official said if levying service tax on items already taxed by states was creating hurdles in the way of a negative list, it would be better to keep them out of the tax net for the time being and tax them under the proposed goods and services tax.

"The Centre will be able to tax such services after making suitable amendments to the Constitution, but till then those can be kept in the negative list," said the official.

In its meeting in Bhopal last month, the Empowered Committee of State Finance Ministers had given its approval for the introduction of a negative list for services from April 1, 2012.

The nod, however, came with riders, with states telling the Centre not to venture into their territory by levying service tax in areas such as construction, entertainment, restaurants, transport, toll, betting and gambling.

Most of these categories could be clubbed with a negative list floated by the Centre for discussion, except for, say, entertainment.

Last year, the finance ministry had released its revised discussion paper on the concept of a negative list for services, which proposed to keep 22 categories out of the tax net, against 28 proposed earlier.

States also proposed some services within the ambit of the Centre's residuary powers but critical for socio-economic reasons, such as social welfare and public utilities, agriculture, education and health, be kept in the negative list.

In fact, the official said a few areas may not be in the negative list, but the Centre may decide to impose zero tax on them.