Service Tax Trends in India
affiliation not provided to SSRN
April 15, 2012
India’s service sector is renowned for its size and dynamism. The services sector has witnessed massive and continuous growth, especially over the last 2 decades, and today stands at a monumental 64.4% of the GDP (2011-12). The Economic survey of India (2011-2012) reflects the role played by services in helping the economy navigate the turbulence caused by the Eurozone crisis and the recession in economies world over.
The Finance Act of 1994, envisaged the growing role of services in the Indian economy and introduced a levy on services to create an additional source of revenue to fulfil the requirements of our fiscal policy. The indirect tax introduced was ideal to meet the dual objective of fiscal management without hampering economic growth and productivity. Our country adopted a selective approach wherein they taxed only specific services to allow for the services sector to continue growing while simultaneously increasing the revenue generation for the government. The list of taxable services continued to grow as the robustness of our service sector grew but despite the frequent revision of the list of taxable services, revenue from service tax was barely 0.3 per cent of the GDP and 3 per cent of the tax revenue of the union, which considering the state of our Fiscal deficit, India can ill afford. Recent trends in service tax policy have dovetailed India’ fiscal policy. India expanded the positive list continuously and finally bit the bullet and shifted to a comprehensive tax regime for service tax in the Finance Act of 2012, to curtail the fiscal deficit which now stands at 5.6%.
The paper provides a brief overview of the antecedents and the existing service tax framework in India. The paper delves into the positive list system of the service tax regime and continuous expansion of the same and the fluctuations in rate of taxation. The paper establishes the economic rationale behind the aforementioned trends in service tax, and service tax itself. The Introduction of the negative list system by the Finance Act, 2012 has been analysed. The stated policy of the government to introduce GST which will incorporate service tax in India has again been studied as one of the major trends in the policy for taxation of services. The paper essentially describes the service tax trends and analyses the rationale behind them.
Keywords: Service Tax, Negative List, GST, Revenue growth
JEL Classification: H4, H6
Date posted: April 16, 2012