Hitting the road to ‘service economy’

Sachin Menon, executive director, PwC

Finance minister P Chidambaram seems to be banking on the service sector to neutralise the loss of revenue caused by his income tax initiatives, which were long overdue.

He is justified as the service sector contribution has already touched 55% of the GDP and with new services added to the levy list each year, India’s ‘service economy’ would lead revenue collections.

The good news is that the service tax rate has not been increased from the present 12 to 14%, as expected.  On the contrary, the threshold limit for exemption has been increased to Rs 10 lakhs from Rs 8 lakhs, granting relief to approximately 65,000 small service providers.

Also, the honeymoon period for the IT industry seems over because it is among the 7 new services slapped with a levy.

This would help the software exporters as they will now be eligible for input tax credit for the goods and services consumed by them.

Where the domestic software consumers are concerned; the service tax cost may be a passthrough as users can neutralise by availing input credit.

The Budget has also sought to tap the opportunity thrown up by market fluctuations by seeking to levy tax on services rendered by stock and commodity exchanges and processing and clearing houses.

Among the other services introduced include services provided in relation to management of investment under the ULIP scheme and services provided in relation to Net telephony.

The construction industry and oil and gas sector may incur more service tax as, supply of vehicles, aircraft, vessels, construction equipments with driver or crew are subjected to service tax under the service category of “supply of tangible goods for use”.

The telecom sector and the soft drinks industries may have to cough up more service tax as rentals for placing vending /dispensing machines in malls or erecting receiving towers on building would attract service tax.

The services provided by distributors / agents in relation to marketing of lottery tickets, services of authorized dealers in foreign currency and money changers, movers and packers have been brought within the service tax net.

The service transactions between associated companies would be subjected to service tax on accrual basis though for others the benefit of payment of service tax on receipt of consideration will continue. The existing service tax rate under the composition scheme for Works Contract service has been increased from 2% to 4%.

As a result composition scheme may not be attractive unless the service portion exceeds 1/3rd of the contract value.

The most positive amendment is that the Centre has now allowed the assessee to avail the input credit in the proportion of the taxable and exempt turnover, even if no separate input accounts are maintained.

Alternatively an option of utilising the entire input credit is allowed on payment of 8% of the value of exempted service.

This should be a boon to the industry which is reeling under the 20% restriction on utilisation of cenvat credit if it is not maintaining separate input consumption accounts for taxable and non-taxable services.

Another welcome change is that the recipient of transport agency service, paying tax under the reverse charge method is no more required to prove non- availment of cenvat credit by a transporter.

Overall, reducing excise duty to 14% is salutary despite cumulative customs duty declining by 2.43%. Let us appreciate that India is consolidating its position as a service economy and it is logical that service industry shall contribute maximum revenue to the exchequer.