An opportunity missed

EXPERT EYE

This Budget missed a great opportunity to introduce a comprehensive service tax. It did only the usual fiddling with definitions, clarifications, threshold and introducing a few non-descript services. This budget was more significant from the point of view of Goods and Service Tax (GST) than the previous Budgets. The significance is for the following reasons:

a) Over a period of nearly 14 years since 1994, when service tax was first introduced, nearly a hundred services have come under the tax net. There are not too many services left which will give substantial revenue. The only exception is transport services. Therefore, a time has come to consolidate whatever taxes have been imposed into a viable and more workable system where it is not necessary to issue circulars after circulars after circulars to clarify matters. Comprehensive service tax will put things into a more theoretical groove.

b) There is a theoretical superiority of the comprehensive approach to the present one-by-one approach which has not only been stressed by a specialised committee on the subject, but by all economists.

c) The Government is now very near the ultimate time limit of April 2010 when dual GST is supposed to come into effect. At the Central level it will be a combination of Excise and Service tax.

I had written earlier that selective approach was better for India, but the situation has changed now, since dual GST, with the Centre having to mix central excise and service tax into one tax, is a near certainty. Service tax may only remain with the Centre as there is no authentic indication to anything else.

For comprehensive GST, the two requirements are a comprehensive goods tax (central excise) and a comprehensive service tax. If we do not do it now, what shall we combine later to make it a combined GST? So this Budget was the first opportunity to do it. After this it will be more difficult since the next budget for 2009-10 will be only to pass the accounts and the next one before April 2010 will be made by the next government.

Comprehensive service tax is based on the thesis that all services are taxable excepting those which are listed in a Negative List. For example, the Negative List will contain (i) transport services, (ii) health services, (iii) education services, (iv) services provided in exercise of 'sovereign functions' of the State, (v) financial services which will have to be enumerated, (iv) many other services which the Government has now exempted. 

Of course, the making of a Negative List needs a very serious consideration. One of the serious issues is about what a sovereign function is.  My solution is that no such expression as 'sovereign functions' should be used. The best thing to do is to provide that tax will be charged only when there is an invoice (including all bills, vouchers, fees charged statutorily or commercially) is supplied for the service provided.  

The Comprehensive service tax must also have the same rate as 14 per cent of CENVAT. And the other rates of 4, 8, 12, 14 and 24 must be converged to 14 which is a very tough job. It will be objected to by manufacturers who are asking for GST. They do not know the implications of what they are asking for. A common threshold has to be worked out since they are now widely divergent.

Some economists have asked for a definition of service but it is really not necessary as other countries and even Sri Lanka does not have a definition. Fiscal systems work without definition very well.

smukher2000@yahoo.com