Consumers to benefit from simple tax credit regime

With Goods & Services Tax (GST) likely to accompany the implementation of Direct Taxes Code (DTC) from April 1, 2012, there is an ongoing debate on whether the finance minister would make any major indirect tax announcements in the Budget 2011.

This is especially relevant with regard to service tax as there is not much scope left to widen the revenue base for other central indirect taxes, namely customs duty and central excise duty.

The key question is whether the service tax rate would be rolled back to pre-stimulus level. On the one hand, in view of the tentative combined GST rate of 16% on services hinted earlier this year by the FM, it is expected that the service tax rate would be increased to at least 12%. The prevailing public perception towards inflation is more likely to compel the FM to either maintain the service tax rate at 10% or reduce it even further, to say 8%.

While the service tax rate is unlikely to increase, it appears that the service tax base would be further widened by introduction of new taxable service categories. Presently, more than 100 service categories are under the tax net, and the end-consumer is already bearing service tax cost on almost all major services consumed by him, as either a necessity or a luxury.

The levy of service tax on health services in the last Budget did not augur well, especially the salaried class, as it led to withdrawal or restriction of cashless hospitalisation benefits for employees by business establishments who were not eligible to avail Cenvat credit of the service tax paid by them.

Thus, the government will tread cautiously while expanding the service tax base. It is possible that services in socially sensitive areas like education and health may be charged at a concessional service tax rate of around 4%.

Given the prevailing inflationary trends, the FM may raise the existing threshold limit of Rs10 lakh for service tax to Rs20-25 lakh, taking into account the increasing average value of services rendered even by service providers in the SME sector. This could provide immediate relief to the end consumer and reduce the administrative burden of the government.

Though the government has made efforts to ensure that any goods or services do not attract double taxation, there still exist many transactions which attract taxes at both central and state levels. For instance, the levy of both VAT and service tax on software or construction or annual maintenance contracts. In most cases, this double tax cost is finally borne by the end-customer. While the GST regime is expected to effectively resolve such issues, an immediate solution to such issues could be reached through appropriate policy measures.

Even where the consumer does not bear service tax directly, the absence of a free flow of input tax credits in the supply chain for both goods and services leads to increase in consumer prices. Thus, a timely resolution of the key issues relating to Cenvat credit rules is necessary and there could be various budget proposals in this regard.  Rationalisation and simplification of the service tax credit regime for the businesses is, in turn, likely to also benefit the consumer. 

Similarly, there have been demands that in public interest, any services provided to government organisations and departments for discharge of their statutory and sovereign functions should be exempted from the levy of service tax, especially where their activities/ functions do not attract service tax. Keeping in view the prevailing macroeconomic scenario, the FM could grant such exemptions to select governmental departments/agencies in the upcoming Budget.

While there could be some new service categories brought within the service tax net, hopefully, it would not substantially derail the common man’s household Budget at least this year.

The writer is tax partner, Ernst & Young. Sarika Goel, senior tax professional, E&Y, contributed to this article. Views are personal