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Service Tax – Policy and Prospect Gautam Bhattacharya Commissioner, Service Tax, CBEC, New Delhi Comparison between commodity sector and service sector 12 10 8 6 4 2 0 COMMODITY SECTOR-%CHANGE OVER LAST YEAR 19 97 19 98 98 19 99 99 20 00 00 -0 20 1 01 20 02 02 20 03 03 20 04 04 -0 5 PERCENTAGE GROWTH OVER LAST YEAR GROWTH IN COMMODITY & SERVICE SECTOR SERVICE SECTOR% CHANGE OVER LAST YEAR YEAR Barring 2000-01, the growth rate of service sector has been higher than that of commodity sector. This indicates that that unless taxation is extended to service sector, the growth rate in revenue collection would not be able to keep pace with the growth in economy. Growth in service tax revenue collection 25000 20000 SERVICE TAX REVENUE (In Rs. Crores) 15000 10000 5000 -0 5 20 04 -0 3 20 02 -0 1 20 00 -9 9 19 98 19 96 19 94 -9 7 0 -9 5 Revenue (In Rs. Crores) SERVICE TAX REVENUE year After 2000-01, the growth rate in service tax revenue collection accelerated. Policy: What different Finance Ministers have said in Budget Service sector accounts for 40% of our GDP and is showing strong growth…………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 by imposing a tax on services of telephones, non-life insurance and stock brokers. Budget 1994 With a view to widening the tax base, I propose to bring in advertising services, radio paging services and courier services under the tax net. Budget 1996 Policy: What different Finance Ministers have said in Budget Service tax is emerging as an area of promise and problems. Many experts advise me that the best way to deal with this tax is to make it applicable to all services in one go. However, some others have suggested basic changes in the very structure of the service tax. I am setting up an expert group to go into all aspects of the matter, review the experience so far and give me its considered advice. Budget 2000 Main recommendations of ‘Govinda Rao Expert Group’ • • • • Tax all services, excluding a negative list of essential services. Exclude unorganized sector by prescribing a threshold exemption. Provide credit facility. Prescribe moderate rate of service tax. Have a self contained independent enactment for service tax Have computerized web-based administration with minimum interface between assessed and taxman. Self assessment , couple with a risk based audit programme. Wide based publicity to educate, prepare and persuaded the tax payer for increased voluntary tax compliance. Various taxes like electricity tax, entertainment tax should all be merged with the general Value Added Tax (VAT) to reduce the multiplicity of taxes. Policy: What different Finance Ministers have said in Budget I proposed to enhance the general service tax rate from 5% to 8%...... Last year credit of service tax on input services was extended for payment of service tax, provided the input and the final services fell within the same category. I proposed to extend this facility across all services. Budget 2003 I proposed to take a major step towards integrating the tax on goods and services. Accordingly, I propose to extend of service tax and excise duty across goods and services……..I propose to enhance the rate of service tax from 8% to 10%. Budget 2004 Service sector accounts for 52% of GDP………I propose to exempt from service tax …service providers whose gross turnover does not exceed Rs.4 lakhs per year Budget 2005 Comparative growth rate: Number of taxable service and service tax revenue collection 35000 30000 25000 20000 15000 10000 5000 0 -0 5 20 04 -0 3 20 02 -0 1 20 00 -9 9 19 98 -9 7 SERVICE TAX REVENUE (In Rs. Crores) 19 96 19 94 -9 5 GROWTH GROWTH IN SERVICE TAX NUMBER OF SERVICES TAXED( X / 100 ) YEAR Till 2002-03, the growth in service tax revenue was in line with the growth in number of services taxed. Thereafter the growth in revenue surpassed the growth in number of services added. This was because the services added later were corporate or industry based, where the service provider as well receiver were in organized sector. Definition of ‘Service’ General Definitions Performance of duties or provision of space and equipment helpful to others. Work done by one person or group that benefits another. An act of help or assistance. Employment in or work for another. work performed for pay. System of National Accounts (1993) service’ is a heterogeneous set of outputs produced on demand and typically consists of changes in the condition of the consumer. By the time the activities of the producers are complete, they must have been provided to the consumers”. Definition of ‘service’- Blacks Law Lexicon Service is the non-material equivalent of a good. Service provision has been defined as an economic activity that does not result in ownership, and this is what differentiates it from providing physical goods. It is claimed to be a process that creates benefits by facilitating either a change in customers, a change in their physical possessions, or a change in their intangible assets. By supplying some level of skill, ingenuity, and experience, providers of a service participate in an economy without the restrictions of carrying stock (inventory) or the need to concern themselves with bulky raw materials. On the other hand, their investment in expertise does require marketing and upgrading in the face of competition which has equally few physical restrictions. Providers of services make up the Tertiary sector of industry. The service-goods continuum The dichotomy between physical goods and intangible services should not be given too much credence. These are not discrete categories. Most business theorists see a continuum with pure service on one terminal point and pure commodity good on the other terminal point. Supply of service o o o Singapore Law Anything which is not a supply of goods but is done for a consideration (including if so done the granting, assignment or surrender of any right) is a supply of services EU Law Supply of ‘services’ shall mean any transaction which does not constitute a supply of goods (i.e. the transfer of the right to dispose off tangible property as owner). Supply of service includes,Assignment of intangible property Obligation to refrain from an act or to tolerate an act or situation Performances made in pursuance of an order of public authority., Issues concerning service tax Moving towards mean rate Broadening of service tax base. Cross boarder movement of services. Valuation of services. Increasing service tax compliance. How many of these concerned have been addressed to Moving towards mean rate- 12% rate prescribed Broad-basing the service tax net 15 new services added The concept of commercial concern has been done away with in case of 17 services. the scope of 11existing services expanded Cross Boarder transactions,- issues clarified Valuation of service- Valuation rules contemplated. Increasing service tax compliance Provision for voluntary compliance/scope of advance Ruling expanded Provisional attachment of property Changes in interest and penalty provisions THANK YOU