High stakes for service tax

Indian Express, 30 July 2004

Better tax systems needed to lift service tax collections

It’s no surprise that the Kelkar Report attaches considerable importance to taxation of services. Half of India’s GDP is now in services. If the taxation efficiency found in manufacturing — which is known to be poor — is replicated in services, this would have given tax revenues of 3.8 per cent of GDP. This alone would have wiped out the revenue deficit of 2003-04.

But revenues from the Service Tax amounted to only Rs 8,300 crore in 2003-04. A good deal of services production is done by government, where it makes no sense to charge VAT. The unorganised sector is another major creator of services. It is innately difficult to achieve a sound tax administration which will reach out to all small establishments.

Recently there has been an improvement in information about services. First, several departmental undertakings of the government have been corporatised. Second, several activities that were outside the purview of the corporate world are now part of organised business.

The Kelkar report starts with a CMIE database of 51,651 public limited companies in the services sector. These are the larger (sales above Rs 10 lakh per annum) and well-organised enterprises that can be expected to pay a tax levied on them. This database accounts for roughly 22 per cent of the total value added by the services sector in India.

At a GST of 12 per cent, assuming that firms claim credit for all tax payments embedded in inputs and net of exports, this yields a tax estimate of Rs 28,335 crore. This figure has been then adjusted upwards by 90 per cent to reflect the very large number of proprietorships and partnership firms in services, which are generally not captured in the CMIE database. This gives an estimate of Rs 54,155 crore for 2003-04. It is projected to grow at roughly 15 per cent in the next few years.

Will these estimates work out? The answer depends on the quality of tax administration. There is no serious use of IT systems in service tax implementation. The administration has no experience in handling VAT and VAT credits.

The Task Force report recommends use of sophisticated IT systems — Tax Information Network and Risk Intelligence Network— in order to improve tax administration. Only if all this can be implemented correctly, can the FRBM targets be met.

Ila Patnaik