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Service taxes to be dovetailed into VAT

New Delhi, Oct 28: The government plans to bring all services under the Cenvat scheme, rather than continue with a separate structure of non-vatable service taxes on a few select services that causes economic distortions.

The government has also decided to continue with the two-slab regime of Vatable excise duties that is currently in vogue — 8 per cent for goods considered essential or merit, and 16 per cent for other goods. Various transitory slabs that still exist, such as a 14 per cent rate for high-speed diesel, will be dispensed with.

The thinking is prompted by the Vijay Kelkar Committee on taxation, which has presented part of its report to the finance minister. The panel has been fine-tuning an earlier report on taxation, which has been the BJP government’s Bible on fiscal reforms — the Shome Committee report on direct and indirect taxation.

It also plans to allow states to levy Vatable taxes on services as an incentive to get them to eventually move to an all-India VAT (value-added tax) regime. States have already managed to wrangle an in-principle agreement on this from the Prime Minister recently. Their contention is that they lost out financially when they agreed to abolish taxes on inter-state movement of goods and this is one way of making good that loss.

Bengal has, in fact, raised a demand that states be allowed to impose a service tax on insurance, banking and telecom which are potentially the most paying sectors in the service tax net. Banking and insurance account for nearly 7 per cent of the country’s GDP and the contribution of this sector to the national GDP is valued at about Rs 1,00,000 crore a year. The telecom industry generates revenues in excess of Rs 30,000 crore.

Currently, the insurance industry and telecom companies are collecting a 5 per cent service tax from customers, which is being paid to the Centre. The Centre’s total earnings from service tax is estimated at Rs 6,000 crore. States could well earn up to Rs 3,000-5,000 crore if they are given powers to tax these growing sectors.

The finance ministry wants the services VAT to be fully integrated into the VAT tax; service VAT will be allowed to be set off against VAT on items used as inputs. It has also agreed to an earlier Shome Committee recommendation that capital goods should also be fully Vatable within a year against production of goods. This would imply that VAT paid on, say, capital goods needed in a biscuit plant would be set off in the very year of purchase of these machinery against VAT to be paid for final manufactured biscuits.

However, VAT credit will not be given for a select negative list of products such as building materials, paint, petrol, diesel, items used in the office such as car, computers, etc. Food products, drugs, pharmaceutical products and medical equipment will continue to be exempt from Cenvat.

But possibly one of the biggest reforms will be in the manner in which the government is planning to rationalise excise exemptions. Other exemptions will, however, either be rationalised or merged and allowed to remain.

A large number of exemptions were cut out in the last budget, but sources said several others that are still allowed are likely to be rationalised. The need to rationalise is not merely for tax efficiency, but because of the need for India’s export incentives to be WTO-compatible.

A separate committee comprising commerce and finance ministry officials have already made several recommendations in this connection, which are expected to be implemented in the next budget.

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