Tax services or we will: Centre

RUN-UP TO THE BUDGET

States dragging feet on health, education.

The finance ministry is likely to tax more services like power distribution, local entertainment, education and health but may keep the basic 12 per cent service tax rate unchanged in the forthcoming Budget.

According to finance ministry officials, some of the services identified by the ministry for transfer to states for taxation could be taxed in the Budget if states are not receptive to the idea.

The ministry had submitted a list of 77 intra-state services, including 44 new services like legal, education and health, hotel and restaurants, electricity transmission and distribution and entertainment, to the states, for them to tax.

Currently, 99 services are taxed. "The new services identified by the ministry have the potential to generate revenues of at least Rs 5,000-10,000 crore for the states. If the states are not willing to tax such services, the Centre may begin to bring them into the tax net," an official said.

States are expected to take a view on December 12 regarding service tax proceeds as part of the compensation for reducing central sales tax from 4 per cent to 2 per cent from April.

The options being considered by the states include increasing states' share of service tax revenue from 30 per cent to 50 per cent.

A second option is to increase the share from 30.5 per cent to 40 per cent, but allow states to tax services like telecommunications, banking and railways.

A third option is to put all services in the Concurrent List and allow both the Centre and states to tax services.

States are divided on the issue of taxing services because the smaller states do not want the burden of collecting the tax and the bigger states are eager to increase their revenue by taxing services like telecommunications and banking.

The finance ministry has so far opposed the proposal of the states for increasing their share of service tax proceeds to 40 per cent from the current 30.5 per cent.

"The finance ministry has clearly said it is not willing to increase the share of the states in the tax proceeds beyond the 30.5 per cent mandated by the Twelfth Finance Commission," an official said.

Officials said talks were stuck because states were not willing to accept the proposal of the Centre to hike the value-added tax rate from 4 to 5 per cent and count the increase in revenue on this account towards compensating for central sales tax losses.

States have calculated their central sales tax losses on the basis of an 18 per cent central sales tax growth rate. The loss on account of reduction in central sales tax from 4 per cent to 2 per cent next year is expected to be Rs 12,000 crore.