Why was the Bill introduced?
The Statement of Objects and Reasons for the Bill states:
At present, the item relating to "taxes on services" is not specifically mentioned in any entry either in the Union List or in the State List of the Seventh Schedule of the Constitution. Parliament has the exclusive power to make laws with respect to entry 97 of the Union List for any other matters not enumerated in List II or List III including any tax not mentioned in either of those Lists. In exercise of this power, the Central Government has periodically taxed certain services at the rate of five per cent. ad valorem.
2. The States have taken a unanimous decision to replace their existing sales tax system with the system of Value Added Tax (VAT) from the 1st April, 2003. In this context, with a view to widening their tax base, the States have suggested that they should be enabled to collect and appropriate tax on services.
3. The "service" sector accounted for 48.5% of the country's Gross Domestic Product (GDP) in the financial year 2000-2001. The role of this sector in the economy is quite significant. Expert Committees set up by the Central Government have repeatedly recommended taxation of services. On the basis of the deliberations between the State Governments and the Central Government and in view of the recommendations of various Expert Committees, it is proposed to suitably amend the Constitution to provide, (i) tax on services as a specific entry in the Union List, (ii) insertion of a new article, namely, article 268A and (iii) consequential amendment to article 270, to enable Parliament to formulate by law principles for determining the modalities of levying the said tax by the Central Government and collection of the proceeds thereof by the Central Government and the States.
4. The proposed amendment would help in significant augmentation of revenues of the States in accordance with the proposed law, and pave the way for eventual inclusion of services within the purview of State level VAT.
5. The Bill seeks to achieve the above objects.
Introducing the Bill on 6th May 2003, the Finance Minister Jaswant Singh said,
The service sector has grown rapidly all over the world, India being no exception to that global trend. The service sector encompasses wide-ranging economic activities like management, banking, insurance, hospitality, administration, communication, entertainment, travel, wholesale distribution, retailing, research and development activities, professional activities, etc. In 2001-02 the service sector accounted for 48.45 per cent of the country's GDP.
In most developed countries goods and services are traded and taxed together. Taxation of services in India was started through the Union Budget of 1994-95 when it was levied with effect from July 1, 1994 on stockbrokers, general insurance and telephone services.
The power to levy tax on service is, however, not specifically mentioned either in the Union List or in the State List or in the Seventh Schedule of the Constitution. Entry 97 of the Union List gives power to the Centre for levy and collection of any tax not mentioned in either List II or List III. At present, therefore, the Parliament has the power to levy and collect tax on services only as a residual taxation matter. In exercise of this power, the Central Government had periodically taxed selected services.
Sir, the role of this sector being significant and on the basis of deliberations between the State Governments and the Central Government also in accordance with the views and the recommendations of the Expert Committees, it has been proposed to suitably amend Constitution. (i) To introduce a new entry, 92C, ‘Taxes on services', in the Union List, that is List I of the Seventh Schedule of the Constitution. (ii) To insert a new article 268 (a) in the Constitution to provide for levy of taxes on services by the Union and collection and appropriation of the proceeds thereof by the Union and by the States in accordance with the principles to be laid down by a new law to be made by the Parliament. (iii) After the proposed amendments to the Constitution are effected, to enact a suitable Central legislation to provide for all modalities, including levy of tax on services by the Union Government and collection and appropriation of the proceeds of this tax, up to the prescribed ad valorem limits, by the Union and the States respectively.
After this proposed amendment to the Constitution is considered and adopted by the Parliament, it has to be ratified by the State legislatures. A suitable Central legislation will then be enacted to provide for all necessary modalities including collection and appropriation of the proceeds of the taxes on services by the Union and the States respectively.
The proposed amendment will facilitate reforms in the domestic trade system and widen the tax base of the States as and when they consider the VAT.
With these few words, I commend the Bill for the consideration of the House.
Replying to the Debate, the Finance Minister said,
May I clarify at the very beginning that this amendment to the Constitution is an enabling amendment? Details of service, which services to be taxed and what services to be included will be part of the Service Tax Bill which is yet to be presented to Parliament. It will be taken up at that occasion, and that would be a fitter occasion. This is a provision to include a tax measure in the Union List so that both the Centre and the States can collect it. The duty and the responsibility of levying the tax remains of the Union Government.
A number of points came up and I will answer them briefly. For example, that there are minor services and why bring in minor services into the net of Service Tax. This is abundantly clear. This has been made clear on several occasions that the threshold of taxation, annual taxation based on annual turnover will be part of the Service Tax Bill. That Bill will define what the threshold is and minor services, which are the services that are to be excluded from it, will also be part of the Service Tax Bill.
The other theory which a number of Members, particularly the hon. Member from AIADMK Party, raised related to the respective division of the Service Tax between the States and the Centre. Now, the Bill is yet to be presented. It is entirely possible that when the Bill is presented we have that of the Service Tax which say eight per cent, a certain percentage is shared by the States. Now, that should very clearly answer the hon. Members' viewpoint whether it will enhance the revenue of the State or not. Of course, it will enhance the revenue of the States. It is self-evident that if what is not currently being taxed becomes available as a tax resource, then certainly it adds to the revenue. When we discuss as to what percentage of this eight is to be shared between the Centre and the States, what percentage is to be shared, it is entirely possible that certain services which are of a particular nature, those services remain the exclusive preserve of the States. But it is necessary here to understand that when it comes to the Service Tax Bill, we will be considering what is it that should be shared. Should it be the tax that is shared or should it be the service that is shared? What it will eventually amount to is that certain services will fall in the purview of the States.
But I am sure that the hon. members recognise and understand that all the States of the Union do not have a uniform spread of services. For example, certain States are small in size or are geographically located in such a fashion that they do not have such services and it is the responsibility of the Centre to ensure as much equality as possible. These are all issues which will be considered when the Parliament considers the Service Tax Bill as such.
After all, it is an emerging tax which we are considering. All taxes are listed in the Lists and therefore, on this new provision, it is a Constitution (Amendment) Bill that we are considering, which is really an enabling provision.
Nothing happened for the next 11 years and today we are trying to get another amendment to the Constitution passed by the Parliament and the States.
But why was it not notified?