Sweeping service tax blow to doing business

The expansion of service tax will significantly raise the cost of doing business in India, said tax experts.

"Service tax is typically a cost of doing business. It is not a pass through and if it trends up to 16 per cent""as it will when we move to a goods and service tax""it will become a major cost," said S Madhavan, head of indirect tax practice, PricewaterhouseCoopers.

The ambit of the tax has been expanded to cover transport of goods through pipeline or other conduit, site preparation and clearance, excavation, earth moving and demolition, dredging services, survey and map making, among others.

A lot of these are actually work related activities and not services. The tax could become a huge disincentive, Madhavan said. The finance minister has said the list of taxable services will include services rendered from outside India to a recipient in India. This indicates a shift from an origin-based tax to a destination-based tax.

However, the recipient has to declare and pay the tax. It will be a pass through, but it will create a lot of paper work for companies.

In addition, tax will be payable on receipt of advances, even if the services are not rendered on time.

The stipulation of paying service tax by the 5th of the next month will be difficult to comply with. Currently, it had to be paid by the 25th of the next month, Madhavan said. Service tax related invoices also have to be given in 14 days, which is a very short period.

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No lip service this

The proposal: To include multi-system operators (MSO) and direct-to-home (DTH) players in the service tax net

The impact: Cable and direct-to-home (DTH) television service bills are set to be dearer by around 10 per cent

Industry view: Cable operators says they will have to jack up rates, which they haven't in the last eight months despite the increase in the cost of operations

The proposal: A 10 per cent service tax will be levied on construction of residential complexes having more than 12 houses or apartments

The impact: Realty prices are likely to go up by 3-4 per cent. The actual tax incidence on property prices will be up by 2 per cent and sales tax will increase it by another 1-2 per cent

Industry view: The government should either clarify which category construction falls in and reduce the surcharge of additional 10 per cent or remove the sales tax