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V Venkatesulu/Mint

V Venkatesulu/Mint

Service tax on a par with manufacturing in FY11

Service tax on a par with manufacturing in FY11

New Delhi: Tax raised from services in fiscal 2011 was for the first time on a par with tax inflows from the manufacturing sector, said S. Dutt Majumder, chairman of the Central Board of Excise and Customs (CBEC).

Provisional service tax collections between April 2010 and March 2011 added up to 70,200 crore, about the same as excise duty raised from manufacturing, he said.

Provisional central excise collections in 2010-11 were 1.37 trillion, of which around 50% came from petroleum products.

Services make up around 55% of the 72.56 trillion gross domestic product (GDP) forecast for 2010-11 by the central statistical organization, excluding construction. Manufacturing makes up about 15%.

But in terms of taxes, service tax has historically contributed only a fraction of the revenue raised through excise duty.

V Venkatesulu/Mint

In 2002-03, service tax was about 5% of the excise collection. In the budget forecast of 2011-12, service tax collection was projected to be a shade over half of the excise projection of 1.64 trillion.

According to S. Madhavan, executive director at audit firm PricewaterhouseCoopers, the relatively low contribution of services to indirect tax revenue is not surprising. Though services make up more than half of economic activity, the pattern of indirect taxes is unlikely to reflect the economy’s pattern at the moment.

“Domestic consumption is still skewed in terms of manufacturing," Madhavan said. “India continues to be largely a consumer of goods."

According to him, high-value services are generally exported. Consequently, services sector activity in areas such as information technology do not fall under the service tax net.

Even some high-value services where consumption originates in India do not fall under the service tax net. For example, when international telephone calls originate in India, the leg of the call beyond the Indian gateway falls out of the purview of service tax.

In addition, the number of services brought into the tax net has only gradually increased since 1994, Madhavan said. The service tax rate has also increased over time to settle at the current level of 10%. For a while, it was at 12% before it was lowered as part of the fiscal stimulus package in 2008-09.

The median excise duty had for long been higher than the current level of 10%. The tax base for excise has also been larger. With the advent of the goods and services tax (GST), taxation of services may eventually contribute more to the exchequer as the base increases beyond 119 services.

According to Majumder, the Union government will release a document to kick-start a debate on the best way to prepare a tax base for GST.

The two options are to either create a list of goods and services that could be taxed, or to prepare a list to be kept outside the purview of GST.

“It’s the tax of the future, there’s no doubt of that," Madhavan said of service tax.

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