Service Tax - a promising revenue, but ....
The Report of the Working Group on Centre's Financial Resources for the Eleventh Plan (2007-2012), says that Service Tax is indeed a promising source of revenue, but five caveats are in order.
1.The scope for expanding the Service Tax net to more and more services gets narrower as the net is widened. The contribution of the expanding net will reduce with time.
2.The preponderance of small service providers below the taxable limit on turnover constraints the scope of revenue mobilization beyond a certain level.
3.With resurgence of industry and revitalization of agriculture, the rapid growth in the share of services in GDP may not continue in the medium to long run. This would have implications for Service Tax revenue as a proportion of GDP.
4.Service Tax was introduced under the residuary entry No. 9, List 1 in the Seventh Schedule of the constitution. There are already moves afoot for a sharing of the tax base between the Centre and the states, particularly in the context of phasing out the Central Sales Tax. Any sharing of the tax base with the States will diminish the Centre's available resources to finance the plan.
5.With the declared goal of introducing a unified Goods and Service Tax(GST) by April 2010, there is considerable uncertainty about the rates, base and setting off (that is input tax credit) mechanism with implications for revenue collection.