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Service tax Act soon

Hema Ramakrishnan

States have been pressing for the enactment of a legislation that would enable them to tax services. The demand was reiterated at a recent meeting of the high-powered committee of Finance Ministers to assess the fiscal situation of the States.

NEW DELHI, Aug. 18

A SEPARATE Service Tax Act is on the anvil, with the Law Ministry giving its nod to the Finance Ministry's proposal to have a comprehensive law on taxation of services.

With States scheduled to switch over to the value added tax (VAT) regime by April 1, 2003, the proposed legislation will help in evolving a coordinated system of taxation of goods and services.

The Finance Ministry is planning to pilot a note to the Cabinet proposing amendments to certain provisions of the Constitution.

This may include amendments to Article 269 of the Constitution (taxes levied and collected by the Union, but assigned to States) and entry 92 of the Union List, said official sources.

States have, in fact, been pressing for the enactment of a legislation that would enable them to tax services. The demand was reiterated at a recent meeting of the high-powered committee of Finance Ministers to assess the fiscal situation of the States.

Currently, services, in general, are excluded from the purview of State taxation.

Only a few services are taxable by States under certain specific provisions of the Constitution i.e., taxes on goods and passengers carried by road and inland ways, taxes on amusements and taxes on betting and gambling.

Under the Constitution, the Centre has the powers to levy taxes only on railway fares and freights and on airway services.

However, Entry 97 of the Union List (residuary clause) empowers the Centre to levy taxes on all items not mentioned either in the State or Central lists.

By virtue of this entry, the Centre has been levying taxes on select services since 1994. The service tax has, however, not been merged with Cenvat.

The need to evolve a suitable mechanism to provide input tax relief on the tax paid on services has been underlined by expert committees on reforms in inter-State taxation.

The National Institute of Public Finance and Policy (NIPFP) had, for instance, recommended that the Centre should legislate and levy tax on services and delegate the power to States to administer and collect the levy.

The Partho Shome Committee, which examined the issue of taxation of services, endorsed this recommendation (which can be implemented without a Constitutional amendment).

It further held that the Centre and States should arrive at a consensus on the list of services that can be administered by States.

The Finance Ministry is, however, planning to make out a case for a Constitutional amendment that will enable the Centre to levy and collect service tax and assign the proceeds to the States.

Realisation from service tax topped Rs 3,600 crore in the revised estimates for 2002-03.

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