 "Service tax mop-up may see robust growth in FY15")
The tertiary sector holds the key to growth in indirect tax collections over the next few years as revenue from excise and Customs is likely to remain muted until the economy revives. Aided by the Negative List for taxation of services, new penal provisions, and an amnesty scheme for defaulters, the revenue department is banking upon the service sector to drive future growth in tax receipts.
At current rates, service tax collections are projected to increase by 30.6 per cent to Rs 2,15,478 crore next year. Customs and excise duties, on the other hand, are projected to yield around Rs 2 lakh crore each to the exchequer, growing by 15 and 11.72 per cent, respectively.
| WHAT LEADS TO RISE IN SERVICE TAX RECEIPTS |
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According to Budget documents, nominal GDP is projected to grow 13.4 per cent in 2014-15 and 11.9 per cent in 2013-14.
Services were first taxed barely 20 years ago, whereas customs duties date back to 1962 and excise to 1944. Including construction, services contribute about 60 per cent of India's GDP. The sector expanded by a higher rate than manufacturing and agriculture and so did tax collections from it. However, this is not the only factor that contributed to the 24.3 per cent growth in service tax collections this year, according to, revised estimates in the budget.
The Voluntary Compliance Encouragement Scheme (VCES), announced in Budget 2013-14 as a one-time opportunity for defaulters to pay up all their dues and escape penalty, added about Rs 4,000 crore to the government kitty. A total of 66,062 applications were received under the scheme and as many of these are first-time taxpayers, it widened the tax base and these assessees will the pay tax next year, too.
The last Budget also made non-payment of service tax above Rs 50 lakh a cognisable and non-bailable offence. This gave power to officials to arrest defaulters without requiring a warrant from court. The authorities have nabbed 28 executives in the last six months for non-payment of the tax.
The introduction of a Negative List in July 2012 also helped expand the tax base. Earlier, only 119 services were taxed, but now every service is taxable, barring the 17 mentioned in this list. People who were not paying service tax earlier are paying now and will continue to pay in subsequent years. The gains, however, may not be as high as seen in the first year.
"Services contribute the biggest chunk of GDP. We need to be tapping all of it. The real growth is in services and it will be there (in the future too), but the collections may not grow at that rate (as seen in the recent past) due to the economic slowdown," Central Board of Excise & Customs Chairperson JM Shanti Sundharam told Business Standard.
The finance ministry had originally projected a 36 per cent growth in service tax collections this year, but due to a slowing economy it fell short of target. Services, however, still performed better than excise and customs, where the revenue growth was barely 1.7 per cent and 5.8 per cent, respectively.
Sundharam said another reason for service tax collection surpassing excise receipts was that many manufacturers were discharging their liability by setting off of the excise duty or service tax paid on inputs against the tax on the final product.
"After the introduction of Place of Provision of Services Rules, 2012, the liability to pay tax on import of certain services has risen in India," said Rohit Jain, Partner, Economic Laws Practice.
If the place of provision of service is in taxable territory, service tax will be payable even if payment is received in foreign exchange and the service receiver is located outside the taxable territory.
Jain said the target set for service tax collections for 2014-15 set by the finance ministry is slightly optimistic and the mop-up may not grow at the same pace in the future, but the growth will be more than excise. Telecommunications, insurance, works contract, renting of immovable property, business support, construction of residential complex, business auxiliary service, banking, and transport of goods by roads are some of the sectors contributing highly to service tax collections.