States to get more leeway for service tax

New bill on anvil; Centre may tax only key services like banking, telecom & transport.

Finance Minister P Chidambaram on Friday announced at a meeting of state finance ministers that an entirely new service tax Bill would be drafted in the course of this fiscal.

According to sources in the empowered committee on value-added tax, the Centre will only tax services of national importance, including banking, insurance and communications.

These sectors currently contribute 55 per cent of all service tax collection. The draft Bill circulated among states specifies that railway and air transport services, which are currently exempt, will be taxed by the Centre.

Asim Dasgupta, convener of the committee, told reporters that states had asked the Union finance ministry to scrap Schedule 3 of the draft Bill, which lists services to be taxed, collected and retained exclusively by the Centre.

Pointing out that the tax revenue from the services offered to states might not even yield Rs 1,000 crore in the first few years, Dasgupta said banking, insurance and railways should be taxed by states.

Chidambaram told state finance ministers that he was not in favour of the draft Bill. Today's unanimous opposition by states means that the draft Bill will be withdrawn while the 95th Constitutional Amendment, allowing the Centre the right to tax services, will be revoked.

Alternatively, sources in the committee said, the ministry could consider shifting some high-yielding services from the Centre's list to the states' list (Schedule 4) and the concurrent list (Schedule 2). The taxes collected from services in the concurrent list could be equally shared between the Centre and states, they said.

Services are expected to contribute significantly to the revenue basket of the Centre as well as states in the coming years. Dasgupta said in the last fiscal, the Centre had collected Rs 8,000 crore, which should be shared equitably with states.

Today's development on service tax also means that the value-added tax will be restricted to goods for the time being. While Dasgupta conceded that the constitutional amendment and the new service tax Bill would take a while, he said it would not affect the deadline for introduction of state-level VAT.

According to the Vijay Kelkar committee, with an integration of the service tax with Cenvat on goods at 16 per cent, the Centre's share could go up to as much as Rs 80,000 crore in the next four years. Among indirect taxes, the committee has projected highest buoyancy from the tax on services.