Service tax role in indian economy
This query is : Resolved
23 August 2012
pls provide me some main points related with the service tax role in indian economy.urgently needed THANKS AYUSH JI PLS TELL ME RELATED SITES OF THIS QUESTION URGENTLY NEEDED
23 August 2012
Introduction
Service sector in India has been the sunrise area of taxation since its inception. It has shown phenomenal growth by leaving traditional sectors like agriculture and industry far behind. This sector has been playing a predominant role in Indian economy and contributing more than 50 percent to the GDP of the country. It has proved that service sector is more vibrant sector in the economy and acting as the trigger for the development of the country from developing nation to developed nation in the direction of vision 2020. Therefore, the government has seen that this sector as one, which can be used to boost revenues through the taxation in order to meet its expenditure targets. In view of the revenue need, the Government of India has introduced the service tax in 1994 through the Finance Act, at the rate of 5 percent only on three services. With modest beginning, its scope has enhanced every year by either bringing new services under the tax net or increasing tax rate. In the span of 16 years, it has been progressing faster in all the fronts of the economy and emerged as one of the chief sources of government revenue. It is now overwhelming importance for economic development of the country. Hence, the present study assumes importance to examine the major aspects of growth and progress of service tax in India on the face of its subsuming into Goods and Services Tax (GST), which is to be implementing in April 2012.
An insight into the service tax law
Service tax is a form of indirect taxation levied on specified services called “Taxable Services”. Thus, the service tax is not charge on any service, which is not included in the list of taxable services. Over the last sixteen years, service tax has expanded to cover new services. The prime objective behind charging service tax is to reduce the degree of intensity of taxation on manufacturing and trade without forcing the Government to compromise on the revenue needs. The intention of the Government is to increase gradually the list of taxable services until most of the services covered under the tax net. For levying service tax, the value of any taxable service should be the gross amount charged by the service provider for service rendered by him. Thus, it levied on the transaction of certain services, which have specified by the Central Government under the Finance Act, 1994 from time to time. it has to be paid by the service provider and service provider recovers it from service receiver.
Service tax was first, brought into force w.e.f. July 1, 1994 through the Finance Act, 1994 on the recommendations made in early 1990s by Tax Reform Committee headed by Dr. Raja Chelliah. It is applicable to whole India except the State of Jammu & Kashmir. By this enactment, Government of India has made a step to move towards full-fledged Goods and Services Tax (GST). Initially service tax levied only on three services at the rate of 5%. Gradually, more services came under the scope of service tax, the rate of tax has also enhanced from 5% to 8% in 2003, and from September 2004, it has enhanced to 10.30% (including education cesses). Further, it has increased from 10.30 % to 12.36% (including education cesses). However, the rate of service tax has reduced to 10.30% (including education cesses) in 2009 in order to give a relief to the industry reeling under the impact of economic recession.
Central Excise Commissionerates working under the Central Board of Excise and Customs, Department of Revenue, Ministry of Finance, Government of India administer the service tax. The unique feature of service tax is reliance on collection of tax, primarily through voluntary compliance. Government from the very beginning has adopted a flexible approach relating to service tax administration in order to achieve one of the main objectives of the citizen charter i.e. the assessees and the general public gain faith and trust in the tax measures and voluntary compliance. For this purpose, substantive and procedural liberalization measures have adopted by the Government over the years in order to have clear manifestations of the above said approach.
Performance of service tax
Service tax introduced for the first time in 1994, since then, its scope has gradually increased in view of its revenue earning potential. During the span of 16 years, it has turned out as an important and buoyant source of revenue to the Central Government and its progress has been pushing the revenue of the country. Thus, service tax is a tax of recent origin and envisaged as the tax of the future in the form GST. In this view, the performance of service tax in India has analyzed by using certain indicators such as revenue collection, taxable services, service tax assessees and tax-GDP ratio of service tax.
I. Progress of service tax in terms of revenue generation, assessee base and taxable services
Table No.1 indicates progress of service tax in terms of revenue generation, assessee base and taxable services. The tax revenue from taxable services has grown manifolds since 2004-05 i.e. from Rs. 14196 crore in 2004-05 to Rs. 58422 crore in 2009-10. However, its growth rate has steadily declined over the period and has recorded negatively at 2.91 percent in 2009-10 due to declined in the revenue of service tax. There is a substantial increase in number of assessees and taxable services but their growth rates have not consistently increased so far. Further, the average service tax per assessee and per service (as shown in the Table No. 2), both are also increased from 93.75 percent and 147.42 percent to 254.10 percent and 436.79 percent respectively during the period 2004-05 to 2008-09 and thereafter they have declined to 228.72 percent and 373.33 percent. In short, the service tax is progressing faster in terms of revenue generation from taxable services, assessee base and even service tax collection per assessee and per service. However, the growth in service tax revenue has decreased in the 2009-10 even though there is larger growth in number of service tax assessees and taxable services. This may be due to reduction in rate of tax by 2 percent and impacts of global slowdown on the economy.
Table No.1
Progress of service tax in terms of revenue generation, assessee base and taxable services
Financial Year
Revenue (Rs. Crore)
Growth
Rate (%)
No of Assessees
Growth
Rate (%)
Taxable services
Growth
Rate (%)
2004-05
14196
79.90
774988
91.90
72
16.13
2005-06
23053
62.40
806585
4.08
81
12.50
2006-07
37598
63.08
918746
13.91
96
18.52
2007-08
51113
35.95
1048684
14.14
97
1.04
2008-09
60176
17.73
1212928
15.58
106
9.29
2009-10
58422
-2.91
1307286
7.86
117
10.38
Table No. 2
Growth in average service tax per assessee and per service
Financial year
Average service tax per assessee ( Rs. crore)
Index (%)
Average service tax per service ( Rs. crore)
Index (%)
2004-05
183170
93.75
197.17
147.42
2005-06
285835
146.29
284.63
212.81
2006-07
409232
209.44
391.65
292.82
2007-08
487401
249.45
526.94
393.97
2008-09
496490
254.10
567.70
436.79
2009-10
446895
228.72
499.33
373.33
II. Contribution of Service tax in total tax Basket of India
Table No.3 represents the share of different taxes in total tax revenue of central government of India. It can infer from the table that the service tax is growing very faster in terms of revenue but its amount of revenue is much lower than the other major taxes of central government. All indirect taxes contributing nearly 40 percent of the total tax revenue of India but the contribution of service tax to the same is comparatively very low i.e. service tax is contributing just more than 9 percent of the total tax revenue.
Table No.3
Share of different taxes in total tax revenue of India
Type of tax
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Personal Income tax
49269
( 16.22)
60756
(16.80)
75093
(16.31)
102644
(17.8)
122600
(19.73)
132315
(21.24)
Corporate Income tax
82680
27.22)
101277
(28.00)
143318
(31.14)
192911
(33. 45)
222000
(35.72)
244735
(39.29)
Other Direct taxes
823
( 0.27)
307
(0. 08)
315
(0.07)
382
(0.07)
405
(0.07)
506
(0.08)
Total direct taxes
132772
(43.72)
162340
(44.88)
218726
(47.52)
295937
(51.32)
345005
(55.51)
377556
(60.61)
Excise Duty
99125
(32.64)
111326
(30.75)
117613
(25,55)
125514
(21.77)
108359
(17.30)
83324
(13.39)
Customs Duty
57611
(18.97)
65067
(18.00)
86327
(18.76)
104091
(18.05)
108000
(17.24)
103631
(16.64)
Service Tax
14196
(4.67)
23053
(6.37)
37598
(8.17)
51113
(8.86)
60176
(9.68)
58422
(9.38)
Total Indirect taxes
170932
(56.29)
199348
(55.12)
241538
(52.48)
280718
(48.68)
276535
(44.48)
245377
(39.39)
Total tax revenue
303704
(100)
361688
(100)
460284
(100)
576655
(100)
621640
(100)
622933
(100)
(Figures in parentheses refers to percentages to total revenue)
III. Contribution of Service sector and service tax in the country
Table No. 4 shows the contribution of service sector in GDP and service tax to GDP and total tax revenue of India. Although the average contribution of service sector in GDP of the country has nearly 55 percent during the period of study , the average contribution of service tax in total tax revenue and its average percentage to GDP both are very small i.e. 1.00 percent and 7.86 percent respectively. In short, it is to say that the service tax is generating negligible revenue from the service sector and contributing small percentage to total tax revenue of the country. This fact attracts the attention and hence, the government proposed to broaden the service tax base in order to garner much tax revenue under the Goods and Services Tax (GST) Regime.
Table 4
Contribution of service sector and service tax in the economy of country
Financial year
Service sector in GDP (%)
Service tax to GDP
(%)
Service tax to total tax revenue (%)
2004-05
53
o.5
4.67
2005-06
54
0.6
6.37
2006-07
55
0.9
8.17
2007-08
54
1.1
8.86
2008-09
56
1.2
9.68
2009-10
55
1.2
9.38
Average Contribution
55
1.0
7.86
Conclusion
The ultimate aim of introducing service tax is to generate sufficient revenue from the service sector in order to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs. The analysis of data reveals that the service tax in India is progressing faster in terms of revenue growth, assessee base growth and even growth in service tax collection per assessee and per service. However, the service tax failed to meet the incredible growth of revenue generation from the service sector in such a manner to reduce the tax burden on manufacturing and international trade. Consequently, service tax is not contributing enough to the total tax basket of India. Hence, it is suggest that the government should consider this fact is an opportunity rather than a weakness and to implement the proposed broad based GST uniformly in the coming financial year.
References:
1. Annual Performance report of DGST, Mumbai (1999-00 to2005-06)
2. Financial Express (News), “Chidambaram should focus on tax administration.” Friday 4, 2007
3. http://www.equitymaster.com, “What is driving India’s Service Sector”, Sept. 24, 2008.
4. http://www.rediff.com, “service sector to drive India’s GDP Growth”, July 13, 2002
5. J.K. Mittal, “Law, Practice and procedure of Service Tax”, CCH – A Wolters Kluwer (India) Pvt. Ltd., New Delhi, 17th Ed., Vol. -01, (2009)
6. Reserve Bank of India, “Report on Currency and Finance”, 1998-99
7. Various issues of Economic Survey of India (2004-05 to 2008-09)
8. Vijay Kumar, “Service Sector in India Recent Policy Initiatives”, New Century Publication, New Delhi (2008)
9. www.servicetax.gov.in
Service sector in India has been the sunrise area of taxation since its inception. It has shown phenomenal growth by leaving traditional sectors like agriculture and industry far behind. This sector has been playing a predominant role in Indian economy and contributing more than 50 percent to the GDP of the country. It has proved that service sector is more vibrant sector in the economy and acting as the trigger for the development of the country from developing nation to developed nation in the direction of vision 2020. Therefore, the government has seen that this sector as one, which can be used to boost revenues through the taxation in order to meet its expenditure targets. In view of the revenue need, the Government of India has introduced the service tax in 1994 through the Finance Act, at the rate of 5 percent only on three services. With modest beginning, its scope has enhanced every year by either bringing new services under the tax net or increasing tax rate. In the span of 16 years, it has been progressing faster in all the fronts of the economy and emerged as one of the chief sources of government revenue. It is now overwhelming importance for economic development of the country. Hence, the present study assumes importance to examine the major aspects of growth and progress of service tax in India on the face of its subsuming into Goods and Services Tax (GST), which is to be implementing in April 2012.
An insight into the service tax law
Service tax is a form of indirect taxation levied on specified services called “Taxable Services”. Thus, the service tax is not charge on any service, which is not included in the list of taxable services. Over the last sixteen years, service tax has expanded to cover new services. The prime objective behind charging service tax is to reduce the degree of intensity of taxation on manufacturing and trade without forcing the Government to compromise on the revenue needs. The intention of the Government is to increase gradually the list of taxable services until most of the services covered under the tax net. For levying service tax, the value of any taxable service should be the gross amount charged by the service provider for service rendered by him. Thus, it levied on the transaction of certain services, which have specified by the Central Government under the Finance Act, 1994 from time to time. it has to be paid by the service provider and service provider recovers it from service receiver.
Service tax was first, brought into force w.e.f. July 1, 1994 through the Finance Act, 1994 on the recommendations made in early 1990s by Tax Reform Committee headed by Dr. Raja Chelliah. It is applicable to whole India except the State of Jammu & Kashmir. By this enactment, Government of India has made a step to move towards full-fledged Goods and Services Tax (GST). Initially service tax levied only on three services at the rate of 5%. Gradually, more services came under the scope of service tax, the rate of tax has also enhanced from 5% to 8% in 2003, and from September 2004, it has enhanced to 10.30% (including education cesses). Further, it has increased from 10.30 % to 12.36% (including education cesses). However, the rate of service tax has reduced to 10.30% (including education cesses) in 2009 in order to give a relief to the industry reeling under the impact of economic recession.
Central Excise Commissionerates working under the Central Board of Excise and Customs, Department of Revenue, Ministry of Finance, Government of India administer the service tax. The unique feature of service tax is reliance on collection of tax, primarily through voluntary compliance. Government from the very beginning has adopted a flexible approach relating to service tax administration in order to achieve one of the main objectives of the citizen charter i.e. the assessees and the general public gain faith and trust in the tax measures and voluntary compliance. For this purpose, substantive and procedural liberalization measures have adopted by the Government over the years in order to have clear manifestations of the above said approach.
Performance of service tax
Service tax introduced for the first time in 1994, since then, its scope has gradually increased in view of its revenue earning potential. During the span of 16 years, it has turned out as an important and buoyant source of revenue to the Central Government and its progress has been pushing the revenue of the country. Thus, service tax is a tax of recent origin and envisaged as the tax of the future in the form GST. In this view, the performance of service tax in India has analyzed by using certain indicators such as revenue collection, taxable services, service tax assessees and tax-GDP ratio of service tax.
I. Progress of service tax in terms of revenue generation, assessee base and taxable services
Table No.1 indicates progress of service tax in terms of revenue generation, assessee base and taxable services. The tax revenue from taxable services has grown manifolds since 2004-05 i.e. from Rs. 14196 crore in 2004-05 to Rs. 58422 crore in 2009-10. However, its growth rate has steadily declined over the period and has recorded negatively at 2.91 percent in 2009-10 due to declined in the revenue of service tax. There is a substantial increase in number of assessees and taxable services but their growth rates have not consistently increased so far. Further, the average service tax per assessee and per service (as shown in the Table No. 2), both are also increased from 93.75 percent and 147.42 percent to 254.10 percent and 436.79 percent respectively during the period 2004-05 to 2008-09 and thereafter they have declined to 228.72 percent and 373.33 percent. In short, the service tax is progressing faster in terms of revenue generation from taxable services, assessee base and even service tax collection per assessee and per service. However, the growth in service tax revenue has decreased in the 2009-10 even though there is larger growth in number of service tax assessees and taxable services. This may be due to reduction in rate of tax by 2 percent and impacts of global slowdown on the economy.
Table No.1
Progress of service tax in terms of revenue generation, assessee base and taxable services
Financial Year
Revenue (Rs. Crore)
Growth
Rate (%)
No of Assessees
Growth
Rate (%)
Taxable services
Growth
Rate (%)
2004-05
14196
79.90
774988
91.90
72
16.13
2005-06
23053
62.40
806585
4.08
81
12.50
2006-07
37598
63.08
918746
13.91
96
18.52
2007-08
51113
35.95
1048684
14.14
97
1.04
2008-09
60176
17.73
1212928
15.58
106
9.29
2009-10
58422
-2.91
1307286
7.86
117
10.38
Table No. 2
Growth in average service tax per assessee and per service
Financial year
Average service tax per assessee ( Rs. crore)
Index (%)
Average service tax per service ( Rs. crore)
Index (%)
2004-05
183170
93.75
197.17
147.42
2005-06
285835
146.29
284.63
212.81
2006-07
409232
209.44
391.65
292.82
2007-08
487401
249.45
526.94
393.97
2008-09
496490
254.10
567.70
436.79
2009-10
446895
228.72
499.33
373.33
II. Contribution of Service tax in total tax Basket of India
Table No.3 represents the share of different taxes in total tax revenue of central government of India. It can infer from the table that the service tax is growing very faster in terms of revenue but its amount of revenue is much lower than the other major taxes of central government. All indirect taxes contributing nearly 40 percent of the total tax revenue of India but the contribution of service tax to the same is comparatively very low i.e. service tax is contributing just more than 9 percent of the total tax revenue.
Table No.3
Share of different taxes in total tax revenue of India
Type of tax
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Personal Income tax
49269
( 16.22)
60756
(16.80)
75093
(16.31)
102644
(17.8)
122600
(19.73)
132315
(21.24)
Corporate Income tax
82680
27.22)
101277
(28.00)
143318
(31.14)
192911
(33. 45)
222000
(35.72)
244735
(39.29)
Other Direct taxes
823
( 0.27)
307
(0. 08)
315
(0.07)
382
(0.07)
405
(0.07)
506
(0.08)
Total direct taxes
132772
(43.72)
162340
(44.88)
218726
(47.52)
295937
(51.32)
345005
(55.51)
377556
(60.61)
Excise Duty
99125
(32.64)
111326
(30.75)
117613
(25,55)
125514
(21.77)
108359
(17.30)
83324
(13.39)
Customs Duty
57611
(18.97)
65067
(18.00)
86327
(18.76)
104091
(18.05)
108000
(17.24)
103631
(16.64)
Service Tax
14196
(4.67)
23053
(6.37)
37598
(8.17)
51113
(8.86)
60176
(9.68)
58422
(9.38)
Total Indirect taxes
170932
(56.29)
199348
(55.12)
241538
(52.48)
280718
(48.68)
276535
(44.48)
245377
(39.39)
Total tax revenue
303704
(100)
361688
(100)
460284
(100)
576655
(100)
621640
(100)
622933
(100)
(Figures in parentheses refers to percentages to total revenue)
III. Contribution of Service sector and service tax in the country
Table No. 4 shows the contribution of service sector in GDP and service tax to GDP and total tax revenue of India. Although the average contribution of service sector in GDP of the country has nearly 55 percent during the period of study , the average contribution of service tax in total tax revenue and its average percentage to GDP both are very small i.e. 1.00 percent and 7.86 percent respectively. In short, it is to say that the service tax is generating negligible revenue from the service sector and contributing small percentage to total tax revenue of the country. This fact attracts the attention and hence, the government proposed to broaden the service tax base in order to garner much tax revenue under the Goods and Services Tax (GST) Regime.
Table 4
Contribution of service sector and service tax in the economy of country
Financial year
Service sector in GDP (%)
Service tax to GDP
(%)
Service tax to total tax revenue (%)
2004-05
53
o.5
4.67
2005-06
54
0.6
6.37
2006-07
55
0.9
8.17
2007-08
54
1.1
8.86
2008-09
56
1.2
9.68
2009-10
55
1.2
9.38
Average Contribution
55
1.0
7.86
Conclusion
The ultimate aim of introducing service tax is to generate sufficient revenue from the service sector in order to reduce the degree of intensity of taxation on manufacturing and trade without forcing the government to compromise on the revenue needs. The analysis of data reveals that the service tax in India is progressing faster in terms of revenue growth, assessee base growth and even growth in service tax collection per assessee and per service. However, the service tax failed to meet the incredible growth of revenue generation from the service sector in such a manner to reduce the tax burden on manufacturing and international trade. Consequently, service tax is not contributing enough to the total tax basket of India. Hence, it is suggest that the government should consider this fact is an opportunity rather than a weakness and to implement the proposed broad based GST uniformly in the coming financial year.
References:
1. Annual Performance report of DGST, Mumbai (1999-00 to2005-06)
2. Financial Express (News), “Chidambaram should focus on tax administration.” Friday 4, 2007
3. http://www.equitymaster.com, “What is driving India’s Service Sector”, Sept. 24, 2008.
4. http://www.rediff.com, “service sector to drive India’s GDP Growth”, July 13, 2002
5. J.K. Mittal, “Law, Practice and procedure of Service Tax”, CCH – A Wolters Kluwer (India) Pvt. Ltd., New Delhi, 17th Ed., Vol. -01, (2009)
6. Reserve Bank of India, “Report on Currency and Finance”, 1998-99
7. Various issues of Economic Survey of India (2004-05 to 2008-09)
8. Vijay Kumar, “Service Sector in India Recent Policy Initiatives”, New Century Publication, New Delhi (2008)
9. www.servicetax.gov.in
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