New Delhi: The Central Board of Direct Taxes (CBDT) has made a strong case
before the Service Tax Administration to slash the 12% levy only for the final
consumer so as to help boost consumption and, consequently, corporate tax
revenue.
The board's proposal has, however, created divisions within the finance
ministry, with the Service Tax Administration flatly rejecting a cut in the tax,
proceeds from which has grown at a spectacular 34% this year. The service tax
should be allowed “to stabilise” and attain its full revenue potential, the
administration reckons.
The CBDT also feels the need to cut the service tax rate to 8% to introduce the
proposed goods and services tax (GST), the combined (Centre-state) rate of which
could be 16% or 18%. On the other hand, there is a demand from the Kelkar panel
that looked into government's fiscal health to further prune the negative list
of services that are outside the tax net now in order to maximise revenue. The
question, therefore, is a fundamental one: Whether to use direct taxes to boost
revenue or indirect taxes.
Experts said that unlike in high-income countries, where the effect of a tax
rate change on purchases may be short-lived, the same in India may be more
pronounced and long-lasting. “The impact of a change in tax rate on consumption
depends on price elasticity of demand. In a country like India, we have seen a
demonstrable evidence of impact on consumption arising from a change in tax
rate,” said Prashant Deshpande, senior director, Deloitte.
“Only robust service tax collection will strengthen the government's hands to
introduce the proposed new Direct Taxes Code (DTC) with an income tax exemption
limit of Rs 5 lakh, as against to the current exemption limit of Rs 1.8 lakh,”
said a senior government official, who asked not to be named. “Globally, service
tax has helped many economies to keep income taxes low,” the official added.
While there is no hard and fast rule about the right balance between direct and
indirect taxes, some economists believe that in developed countries, where
services account for a larger share, indirect taxes surpass direct taxes. Many
also believe indirect taxes are distortionary in nature. India hopes to collect
Rs 5.6 lakh crore by way of direct taxes and Rs 5.1 lakh crore from indirect
taxes this fiscal, suggesting a direct-indirect tax ratio of 52:48.
There is another strong argument with the Service Tax Administration to guard
against a rate cut. Unlike direct taxes, indirect taxes including service tax is
unaffected by the tax residency of the individual or the company that consumes
the service and, therefore, is a more reliable source of revenue to the
exchequer.
An individual consuming a service here needs to pay service tax
irrespective of whether he had stayed 182 days in India or not in the previous
year.
But the call for a reduction in the service tax for the final consumer is
getting louder within the finance ministry as such a step may leave more money
in the hands of the common man to consume more, thus boosting the economy. The
common man bears the impact of all indirect taxes including excise, customs and
service tax that gets built into a purchase.
Since he does not get input tax
credit, there is a case for moderation in the rates, goes the thinking. It is
not fair to burden one class of assessees too much, according to some in the
government.
Service tax, which accounted for only 5.3% of the total indirect taxes in
2003-04, has now grown to be 23.5% of the indirect tax receipts in 2011-12 at Rs
95,000 crore. The ministry expects it to touch Rs 1,24,000 crore this fiscal.
Direct contest over indirect tax
- CBDT proposes to slash 12% levy for final consumer to help boost consumption
- CBDT also feels need to cut service tax rate to 8% to introduce the proposed
GST
- In FY13, India may collect R5.6 L cr from direct taxes & Rs.5.1 L cr from
indirect taxes
Source : financialexpress.com