The government reportedly wants to hike the service tax rate in the coming Budget to boost revenues. Services are taxed at 14.5 per cent and the ostensible reason for raising the service tax rate is to bring it closer to the standard goods and services tax (GST) rate of about 18 per cent.
However, an increase will only widen the gap between the service tax rate and the excise duty rate of 12.5 per cent. Instead, the government must integrate all the central taxes and make them fully vatable ahead of GST. Manufacturers and service providers must be allowed to claim credit for all the taxes that are paid on inputs. Service tax revenues are a mere 2 per cent of GDP. To raise them, the government must ease the stringent rules for claiming tax credits in India.
Capital goods attract excise duties and state value-added tax, but input tax credits are not available seamlessly. It is absurd that input tax credit is limited to manufacturing plant and equipment, and no tax credits are allowed on the excise duties charged on capital equipment bought for use in transportation, infrastructure, distribution, or construction sectors.
Credit is also not allowed for the state VAT on capital goods acquired by the service sector. It discourages investment. Blocked input taxes amounted to about 75 per cent of total investment in 2014-15. Rightly, the Arvind Subramaniam panel wants an efficient and seamless crediting of taxes paid on capital goods. This, in turn, will lower capital goods prices and raise investment.
Similarly, tax paid on petroleum products cannot be availed as input credit. State VAT Acts also list out “input tax credit blocked goods”. This is regressive, leads to the cascading of taxes and causes economic distortion. The government should prepare the ground to bring petroleum under GST. These are the changes the Budget should look at.