The Hindu Business Line : Ministry defends hike in service tax rate

THE Finance Ministry has defended the Budget proposal seeking to hike the service tax rate, stating that the effective rate would only be 6 per cent if one were to factor in the benefit of `cross-vatability' that is also being provided in the Budget.

The United Progressive Alliance (UPA) Government proposes to hike the service tax rate from the existing 8 per cent to 10 per cent, besides expanding the service tax net to include 13 more services. Currently, 58 services are taxable.

Under `cross-vatability,' manufacturers paying services tax on input services (telephone and insurance, among others) would be able to adjust this service tax against the Cenvat duty payable on their finished goods.

The Finance Minister, Mr P. Chidambaram, had in his Budget speech said that he proposes to extend credit of service tax and excise duty across goods and services.

"The proposals on service tax are not intended to increase the burden. In fact, the effective rate would be 6 per cent if one factors in the benefit of credit of service tax and excise duty across goods and services. The proposals should be seen as a beneficial measure rather than as a burdensome measure," Mr S.K. Bhardwaj, Member (Budget), Central Board of Excise and Customs (CBEC), told members of the PHD Chamber Of Commerce and Industry (PHDCCI) at a post-Budget meeting here.

The UPA Government has budgeted service tax collection of Rs 14,150 crore during 2004-05, including Rs 3,990 crore from the 13 new services and Rs 150 crore from the education cess. The National Democratic Alliance (NDA) Government had, in its Interim Budget this January, budgeted service tax collections at Rs 13,500 crore for 2004-05.

In fact, the UPA Government's Budget estimates for 2004-05 in a number of existing taxable services such as telephones, insurance, brokerage and advertising, are much lower than those estimated by the NDA Government for similar services in the same period.