NEW DELHI: A feared surge in service tax when the goods and services tax (GST) is rolled out may be mitigated to some extent. Worried about a potential backlash, both the Centre and the states want to rein in any such increase, perhaps by taxing only a part of the service.
The central government is hopeful of getting approval for the constitutional amendment that’s needed before GST can be implemented by April 1 next year.
Service tax, currently levied at 14 per cent, will be subsumed into GST. “If we raise it suddenly, there will be backlash — we are aware of that problem. The states are also aware of that problem,” a state finance minister said, adding that a decision on this will be made by the proposed GST Council that will oversee the levy’s operation.
In the last round of discussions involving the Centre and the states, the GST rate—or the revenue neutral rate -was pegged at 25-26 per cent. That’s a rise of more than 10 percentage points in the service tax rate, which was increased to 14 per cent in the February budget from 12.36 per cent as part of a plan to gradually raise the tax level. The revenue neutral rate is that at which there is no loss of tax revenue to either the states or the Centre.
Service tax is fastest growing among all central levies. Its share in gross tax revenue has risen to more than 14 per cent from less than 8 per cent in 2006-07. There is no similar worry about a possible spike when it comes to goods as excise and value added tax (VAT) will add up to a levy that’s close to the GST rate. In fact, tax on many goods could decline.
One way of keeping tax low is to provide an abatement, which means only a percentage of the entire amount is taxed. For instance, in the case of the railways, service tax is levied on 40 per cent of the value of the ticket.
Abatement usually works on the principle that it compensates for levies already paid and the mechanism helps avoid cascading of tax, or tax on tax.
The government also feels the GST rate could be lower than what was estimated earlier for two reasons. One, tobacco and alcohol have been kept out of GST. This means that the states will continue to get VAT while the Centre gets excise on the two items.