Service tax - a promising source of revenue
The gradual expansion of the service tax, introduced in 1994-95 to redress the asymmetric and distortionary treatment of goods and services in the tax regime, has been a buoyant source of revenue in recent years. The number of services liable for taxation was raised from 3 in 1994-95 to 6 in 1996-97, and then gradually to 100 in 2007-08. Simultaneously, the rate of tax was raised from 8 per cent to 10 per cent in 2004-05 and further to 12 per cent in 2006-07. Revenue from service tax, as the combined outcome of expanding tax net, creeping rate, and buoyant service sector growth, increased rapidly from a paltry Rs. 407 crore in 1994-95 to Rs. 38,169 crore in 2006-07 (RE)
Table 3. Service Tax : A Growing Revenue Source
Year | No. of services | Number of assessees | Tax rate | Revenue | Growth |
|---|---|---|---|---|---|
per cent | (Rs. in crore) | per cent | |||
1994-95 | 3 | 3,943 | 5.00 | 407 | ... |
1995-96 | 3 | 4,866 | 5.00 | 862 | 111.8 |
1996-97 | 6 | 13,982 | 5.00 | 1,059 | 22.9 |
1997-98 | 15 | 45,991 | 5.00 | 1,586 | 49.8 |
1998-99 | 26 | 107,479 | 5.00 | 1,957 | 23.4 |
1999-00 | 26 | 115,495 | 5.00 | 2,128 | 8.7 |
2000-01 | 26 | 122,326 | 5.00 | 2,613 | 22.8 |
2001-02 | 41 | 187,577 | 5.00 | 3,302 | 26.4 |
2002-03 | 52 | 232,048 | 5.00 | 4,122 | 24.8 |
2003-04(with effect from May 14,2003) | 60 | 403,856 | 8.00 | 7,891 | 91.4 |
2004-05 (with effect from September 10, 2004) | 75 | 740,267 | 10.00 | 14,200 | 80.0 |
2005-06 | 84 | 805,591 | 10.00 | 23,055 | 62.4 |
2006-07 (RE) (with effect from April 18, 2006) | 99 | ... | 12.00 | 38,169 | 65.6 |
2007-08 (BE) | 100 | ... | 12.00 | 50,200 | 31.5 |
Service tax indeed is a promising source of revenue, but five caveats are in order. First, 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. Second, the preponderance of small service providers below the taxable limit on turnover constrains the scope of revenue mobilization beyond a certain level. Third, 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. Fourth, service tax was introduced under the residuary entry No. 97, List I 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 of the Central Sales Tax. Any sharing of the tax base with the States will diminish the Centre's available resources to finance the plan. Fifth, with the declared goal of introducing a unified goods and services tax (GST) by April 1, 2010, there is considerable uncertainty about the rates, base, and setting off (that is input tax credit) mechanism with implications for revenue collection.