Prof. (Dr.

ACS, CWA) PRADEEP KUMAR AGGARWAL 1/27 Lalita Park, III Floor; Laxmi Nagar, Delhi -110092 Contact No. - 9716103478; 011- 22455721
drpkafin@yahoo.com; pk.aggarwal@iilmcms.ac.in

To, Prof. Bhupender Kr. Soam (Editor-in-Chief), ACCMAN- Journal of Management 46 A/2 Knowledge Park III, Greater Noida 201 308

Date 04/12/10

Subject Paper for Publication in your GYANPRATHA Journal of Management

Dear sir, I do hereby authorize ACCMAN Institute of Management to publish the paper entitled Indirect Tax Reforms in India An implication of Service Tax on various services and declare as under:
1.

That the paper submitted is our original contribution and the same is neither

plagiarized nor contain any libelous or unlawful statement. It is further declared that all the references have been duly acknowledged at the appropriate places 2. 3. That the paper submitted is neither previously published nor submitted elsewhere. That in case of publication of our paper, the copyright of the same will vest with the publisher. Thanking you,
(Dr. P.K.Aggarwal) Encl- As stated above

Indirect Tax Reforms in India An implication of Service Tax on various services

*Prof. (Dr. ACS, CWA) Pradeep Kumar Aggarwal, *** Dr. M.K Gupta, **Dr. Sunil Kumar,

Abstract
Tax is the contribution made by the citizen for the welfare of the state. The taxation is not only a means to collect revenue for public expenditure, but it is also an important instrument of economic planning. In a good tax system, the canons of equity, certainty, convenience, economy, productivity, elasticity and diversity should be followed. There have been major changes in tax systems in several countries over the last two decades for a variety of reasons.The tax system should not be discriminatory in any respect between individuals and groups. A good tax system should also conform to the principle of justice. The taxes are broadly classified as direct and indirect. A direct tax is one, which the Government demands from those very people who are expected to bear its burden eventually. Whereas, indirect tax is one which is demanded from the people who can shift its burden to others. Income tax is a direct tax while sales tax or service tax is an indirect tax. In India, the tax structure has been evolved on the basis of the ability to pay principle and the tax structure of the country is progressive. The present paper attempts to examine the implications of taxation on various services covered under the ambit of service tax.

Key words: Taxation, Public Revenue, Public Expenditure, Income tax, Direct Tax, Indirect Tax, Service tax
* Professor - College of Management Studies, IILM, NOIDA (m) 9716103478

** Faculty, SOMS, IGNOU, Maidan Garhi, New Delhi-110068, (m) 9891693917 ***Associate Professor, Deptt. of Commerce, J.L .N. Govt. College, Faridabad.

Indirect Tax Reforms in India An implication of Service Tax on various services

Introduction of Indirect Tax in India

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The indirect tax in India constitutes a group of tax laws and regulations. The indirect taxes in India are enforced upon different activities including manufacturing, trading and imports. Indirect taxes influence all the business lines in India. Charge levied by the State on consumption, expenditure, privilege, or right but not on income or property. The indirect tax
system in India has undergone extensive reforms for more than two decades. One of the most

important reasons for recent tax reforms in many developing and transitional economies has been to evolve a tax system to meet the requirements of international competition Indirect Tax System in India In general, the Indirect Tax in India is a complex system of interconnecting laws and regulations, which includes specific laws of different states. For this there are many reliable organizations in India, which employs efficient Indirect Tax professionals to help their clients. These tax professionals with their in-depth knowledge and wide-ranging experience offers effective planning methods to their clients in order to help in their cost minimization. The Indirect Taxation regime encompasses various types of taxes like Sales Tax, Service Tax, Custom and Excise Duties, VAT and Anti-Dumping Duties, and the organizations provide services in all these related fields. In the recent year, the Indian government has undertaken significant reform of indirect taxation system. This includes the initiation of a region-based and state-level VAT on goods. However, it should be noted that as taxes still forms a barrier to inter-state trading in order to attain a secured market for the activities related to services and goods more reform is needed. Some of the reforms that can be introduced for a better indirect taxation system in India are

The serialized set of Indirect Taxes so far activated at the central and state levels should be amalgamated and treated as a single tax.

The integrated Indirect Tax should be neutral at all levels such that chances of fraudulence would be minimized

The Central Sales Tax, which obstructs easy trading between different states, is being under the process of termination that would help to abolish the control measures on the inter-state trade

Indirect Taxes during Pre Reforms The indirect tax structure was extremely irrational between the reforms. The Constitution gives
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the permission to levy a multitude of indirect taxes. But the most important ones are customs and excise duties charged by the Central government and sales tax excepting inter state sales tax to be charged by the state government. The indirect taxes levied by the centre like customs, excise and central sales tax and the major indirect taxes levied by the states and civic bodies like passenger and goods tax, electricity duty and octroi when taken together did not present a rational system. Indirect Taxes in Post Reforms

Even post reforms, the indirect tax regime in India is still in the early stages of growth. Both the Central and State governments charge a multitude of indirect taxes. The central government charges tax on goods at the point of import (Customs duty), manufacture (Excise duty), inter state sales (Central sales tax or CST) and on provision of services (Service tax).

The state governments charge tax on goods sold within the state (Sales tax/Value Added Tax or VAT), and on the goods that enter the state (Entry tax).

In the present scenario corporate would have to analyze the tax cost involved in a transaction, have enough backup documentation to support their tax positions and keep looking for ways for tax maximization.

Service Tax- An Introduction Service tax is levied on services provided by the businessman, professional or any other service provider. It is an indirect tax. Service tax was first introduced by the former Finance Minister Dr. Manmohan Singh, in his budget of 1994-95. The then Narasimha Rao government went by the recommendations of the Raja Chelliah Panel on tax reforms. Perhaps, it had to first ensrue the acceptance of the concept of service tax. It was initially levied on three services-telephones, non-life insurance and stock-broking. The rate of tax was pegged at a modest of 5 %. It was increased from 5 % in 1995 to 8 % in 2003. It was revised to 10 % with effect from September 2004. At present the rate of service tax is 12 %. The tax came into effect on July 1, 1994. Need for Service Tax The government decided to tax services with the aim of raising resources and increasing the tax-GDP ratio. The service sector has emerged as an important, area of economic activity. Its share in the country's Gross Domestic Product (GDP) has increased from about 28 % in
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1951 to about 54 % today. Over the years, major services have been brought under the net. Presently 99 services are covered under the tax net. Major services that are currently taxed include, telephone, insurance, brokerage, banking financial services, courier, port services etc. Some of the minor activities on which service tax has been recently imposed include beauty parlors, pandals, tent house, dry cleaning and cable-operators. Service Tax Collections Service tax collection which was Rs. 862 crore in 1995-96, soon after its introduction, crossed the Rs.10, 000 crore mark in 2004-05. It was the fifth largest contributor to the exchequer after excise duty. Telephone services yield the maximum amount in terms of service tax. It yielded Rs. 4,470 crore during the year 2004-05. Insurance is the second important service followed by banking, financial services and courier services. The service tax collections were Rs. 23,000 crore in 2005-06, Rs 34,500 crore in 2006-07, Rs. 50603 crore in 2007-08 and the government expects to collect around Rs. 65,000 crore in the current year 2008-09 accounting for around 10 % of the total tax of Rs.6.5. 1akh crores. Implications of Service Tax Selective taxation of services had created chaos. It has resulted into distortions and classification disputes. It has also resulted into increase in corruption. However, the burden of service tax has to be borne by consumers via the chain of service providers. The government had to first ensure the acceptance of the concept of service tax. The tax reforms committee had recommended expanding the basket of services to be taxed and the eventual integration of service tax with value added tax. A task-force chaired by former finance secretary Mr. Vijay Kelkar, stated that stand-alone taxation of services was inconsistent with the scheme of input tax credit across goods and services. Other experts, Parthasarthy Shome and Govinda Rao also endorsed this broad principle to address the problem of cascading of taxes at the central level. Over the years, major services have been brought under the service tax net. While services are taxed at 12 %, the effective incidence of tax on goods is much higher at around 22 percent at the retail level after factoring in cenvat and state level VAT. Therefore, the core budget team has to take a decision to either lower the cenvat rate or raise the service tax rate to bridge this gap. A hike in service tax rate will pinch consumers which is inevitable. Consumers with higher purchasing power pay more as they use more services. A common man cannot be spared if he uses a service. There is not much scope for expanding existing services. An indiscriminate expansion of the list of services could lead to more litigation and prove to be counter productive.

According to the Canon of Equity, the proportion of direct taxes should be more than indirect taxes. However, in India, the situation was exactly opposite. The proportion of direct tax to indirect tax was about 32:68 in the year 2004-05. But now the proportion of direct taxes to indirect taxes is 55:45 in the year 2008-09 Direct taxes adversely affect ability to save and thus reduce capital formation, while indirect taxes put a restraint on consumption and thereby increase savings. Indirect taxes are paid by every body in the society and their incidence is widely diffused. Moreover, since indirect taxes are levied on expenditure, they seldom discourage capital formation. Both direct and indirect taxes are complementary to each other and therefore in any rational tax structure both types of taxes should find a place. However, economists often analyze their welfare implications, distribution effects and relevance for growth. Indirect taxes in general violate the cannon of equity. Service tax, rate remains uniform for the rich and the poor. It involves greater sacrifice on the part of the poor. When service tax is levied on utilities like telephone, it is severely regressive in its nature and thus quite unjust. Service tax is generally regressive in nature. Greater reliance on service tax (which government is following today) for revenue collection inevitably results in greater economic disparities. This can be avoided by the government by exempting of mass consumption services from service tax. There is a high cost of collection of service tax. It requires more elaborate administrative machinery. Thus, the cost of collection per unit of revenue raised is generally higher. There is no economy, in tax collection. It also results into corruption and black money. Service Tax on Web Bureaus Marriage broker services and matrimonial advertisements are not covered under service tax. However, web-based marriage bureaus are covered under service tax. The view taken by Revenue Officials is that such web sites are offering online data-base access services. The proposal to tax web-bureaus results in a differential tax treatment based on the mode of service delivery. This is injustice to the web-bureaus. The matter is under litigation. Service Tax on Air Tickets The Government has subjected premium class air travel to service tax despite protests from the industry. The revenue department wants all classes of fares, except the economy class tickets to be brought under the service tax net. This type of tax is not levied by any other government in the world. As of now, service tax is levied on the basic fare while there is no service tax on fuel surcharge. Travel agents, who pay service tax on their commission, use the basic fare as the benchmark to workout the-incidence of the levy. The Airlines have been raising the fuel surcharge

and keeping basic fare constant to avoid service tax. In view of the complex nature of airline industry's operation and sale of tickets, the service tax should be scrapped or withdrawn. Services of Company Secretary The budget for 2007-08 provided service tax on the services provided by the company secretary to the company. The company secretary has to advise the company on certain matters and appear before the tribunal on behalf of the company. This service is included in service tax. However, if the same service is provided by the Advocate, it is not taxed under the Service Tax Act. There are many more services of this nature. Conclusions Service tax has emerged as an important source of revenue for the government. Over the years, the total of services under tax net has increased to 99. However, selective taxation of services has created chaos because it has led to distortions and classification of disputes. Services tax is against the canon of equity. It is regressive in nature. Greater reliance on service tax for revenue collection results into greater economic disparities. The cost of collection of service tax is also higher and it violates the canon of economy. The experts have pointed out that standalone taxation of services was inconsistent with the scheme of input tax credit across goods and services. There is not much scope for expanding existing services. An indiscriminate expansion of list of services could lead to more litigation and prove to be counter-productive. There is a need for more clarity on service tax particularly about web-bureaus, Air Tickets and Services of a Company Secretary. The problem of overlapping among services, which results in classification disputes also, needs to be looked into. References Adam Smith, Wealth of Nations, BXV. Volume 11 E.R.A. Seligman, Essays in Taxation, New York, 1925. Mishra & Puri, Business Economics Lokasatta, April 3, 2006. Singhania, V.K. Introduction to service tax, Bharat Law Publishing House, Delhi. Service Tax- An Overview, Business Standard, January 17th 2009 pp.06.

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