The Hindu Business Line : Service tax `out-of-bounds' for States

CONSUMERS scared about the hike in the service tax rate from five per cent to eight per cent announced in the 2003-04 Union Budget need not fear that the Centre would empower States as well to mop up revenues from taxation of services.

In other words, there is no need for consumers to apprehend that services will go the manufactured goods way in terms of being subjected to multiple levies, beginning with excise at the Central level and sales tax, entry tax, octroi, etc, at the State level.

"There is no question of States imposing taxes on services over and above what is being levied by the Centre. The States can only collect and appropriate service tax revenues from within the eight per cent rate fixed by the Centre," the Revenue Secretary, Mr C.S. Rao, told Business Line.

He said that the Constitution (Ninety-Fifth Amendment) Bill, 2003, which was tabled last week in the Lok Sabha by the Finance Minister, Mr Jaswant Singh, seeks to allow States to only `collect' and `appropriate' taxes on services. The power to `levy' these taxes will lie solely with the Centre.

"It is for the Centre to decide whether the service tax rate should be five per cent or eight per cent. The States will only be entitled to collect revenues from a portion of the overall eight per cent rate. In fact, one of the main reasons for enhancing the general service tax rate from five to eight per cent in this Budget has been to allow States to appropriate, say, three out of the eight per cent levy and leave the rest to the Centre," Mr Rao noted.

The Bill proposes to bring tax on services specifically under the Union List of the Seventh Schedule. Even now, it is only the Centre that can tax services, though this item does not figure explicitly in either the Union or State List. The Centre has been taxing services using the residual powers conferred to it by Parliament under `entry 97' of the Union List, which relates to taxes not mentioned in either the State or Concurrent Lists.

For 2003-04, the Centre has budgeted total revenues of Rs 8,000 crore from service tax, of which Rs 2,360 crore or 29.5 per cent will devolve to the States as per the 11th Finance Commission's formula. Even after States are empowered to collect and appropriate revenues from, say, three out of the overall eight per cent service tax rate, they will still be entitled to 29.5 per cent of the Centre's balance five per cent collections under this head.

Mr Rao said that the issue of whether States would be allowed to collect and appropriate "two per cent or three per cent of the overall eight per cent service tax" is to be worked out in the proposed Services Tax legislation. "Parliament would through this law determine the modalities and principles of collection and appropriation by the Centre and the States," he added.

Of the budgeted Rs 8,000 crore to be realised through service tax in 2003-04, a major chunk is to come from telephone services (Rs 3,199 crore), insurance (Rs 1,018 crore), brokerage (Rs 440 crore), advertising (Rs 342 crore) and port services (Rs 345 crore).

The bitter taste of sugar & tobacco

WHILE the proposal to empower States to collect revenues from service tax may not add to the consumer's telephone or insurance premia bill, the same cannot, however, be said about Mr Jaswant Singh's move to permit States to levy sales tax on sugar, tobacco and textile products. In the case of these three commodities, the consumer would well have to bear the brunt of additional taxation.

Currently, there is no sales tax on sugar, tobacco and textile products. Instead, the Centre levies an additional excise duty (AED) on these items `in lieu of sales tax', the proceeds of which are meant to be passed on to the States. What the 2003-04 Budget proposes to do is to `empower' States to levy sales tax/value-added tax (VAT) of up to four per cent on these products, even while the Centre will continue to impose the AED.

"Both the levies will co-exist. The AED cannot go because States are given an additional 1.5 per cent of the Centre's shareable tax revenues, which is their entitlement from the levy as per the 11th Finance Commission's award," a Finance Ministry official confirmed.

In the process, it is the consumer who will have to cough up the extra amount. Sugar, for instance, attracts a total excise incidence of Rs 85 per quintal now, inclusive of a Rs 34 basic excise, a Rs 37 AED and a Rs 14 Sugar Development Fund (SDF) cess. If States impose a VAT/sales tax of four per cent on top of this, it would imply an additional Rs 48-50 per quintal burden.

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