What is Taxation of services

The objectives of levying a service tax are: (i) shrinking of the tax base as the share of industry in GDP decreases while that of services expands; (ii) failure to tax services distorts consumer choices and encourages spending on services at the expense of goods; (iii) untaxed service traders are unable to claim VAT on service inputs, which encourages businesses to develop in-house services, creating further distortions; and (iv) most of the services that are likely to become taxable are positively correlated with expenditure of high-income households and, therefore, service tax improves equity. In the Indian context, taxation of services assumes importance in the wake of the need for improving the revenue system, ensuring a measure of neutrality in taxation between goods and services and eventually helping to evolve an efficient system of domestic trade taxes, both at the Central and the State levels. The service tax was levied in India on the basis of the recommendations made by the Tax Reforms Committee (Chairman: Dr. Raja Chelliah), the provisions of which were brought into force with effect from July 1, 1994.

The coverage has progressively widened over the years. At present, service tax is levied on 58 items. The Union Budget, 2004–05 proposes to extend the service tax to 13 additional services. The service tax is applicable to all parts of India except the State of Jammu and Kashmir and is livable on the gross amount charged by the service provider from the client.

The rate of service tax TAXATION OF SERVICES:

Taxation of services improves the revenue system, ensuring a measure of neutrality in taxation between goods and services l The service tax is applicable to all parts of India except the State of Jammu and Kashmir l The inclusion of all value added services in the tax net would yield a larger amount of revenue has been increased from 5 per cent to 8 per cent on all the taxable services with effect from May 14, 2003. The Union 8udget, 2004–05 proposes to increase the service tax rate to 10 per cent. Collections from the service tax have shown a steady rise from Rs.410 crore in 1994–95 to Rs.8,300 crore in 2003–0~ (RE); however, they accounted for only 4.4 per cent of the total tax receipts of the Centre (0.3 per cent of GDP) in 2003–04. The service tax is envisaged as the tax of the future. The inclusion of all value-added services in the tax net would yield a larger amount of revenue and make the existing tax structure more elastic. The increase in the share of the services sector in GDP holds the key to larger revenue generation. Further Readings: Ncbi

Originally published at https://www.mohanmekap.com on August 15, 2020.