The Telegraph
Since 1st March, 1999
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Service levy of states set for VAT tweak

New Delhi, Dec. 24: The government plans to allow states to levy vatable taxes on services. The proposed move will be an incentive for states to accept an all-India value-added tax (VAT) regime.

The Centre aims to bring all services under Cenvat, rather than continue with a separate structure of non-vatable taxes on select services that causes economic distortions.

The states have already obtained an in-principle nod for the proposal from the government. The states argued that this would allow them to make up for the loss caused by abolishing taxes on inter-state movement of goods.

The Centre wants states to impose tax on minor services and professions. North Block is believed to have agreed to let states collect taxes on about 70 services and retain the proceeds.

States now get 30.5 per cent of service tax collections, which is likely to continue since the Centre has shot down their proposal for a 50 per cent share.

The move to allow states tax a few minor services is believed to be a strategy to mollify the states which might otherwise have been irked by the Centre’s refusal to part with a higher share of the service taxes.

However, the states want greater powers of taxation, particularly on those activities that generate high revenues. This the Centre is unlikely to concede.

Bengal had demanded that states be allowed to impose taxes on insurance, banking and telecom, the biggest earners in the service tax net.

Banking and insurance account for nearly 7 per cent of the country's GDP and their contribution to the gross domestic product (GDP) is valued at about Rs 1,00,000 crore yearly. The telecom industry is estimated to generate revenues in excess of Rs 30,000 crore.

The service tax collections of the Centre increased 63.87 per cent between April 2006 and October 2006 to Rs 16,894.54 crore from Rs 10,310 crore in the same period last year.

Analysts consider it the fastest growing source of revenue.

The finance ministry wants the service VAT to be fully integrated into the VAT tax. The service VAT will be set off against VAT on goods where the service has gone into its manufacture.

Four years ago, the government introduced a limited scheme of input service tax credits. Despite modifications, this is still different from an integrated goods and service tax.

The government’s aim is to allow goods and services to be netted off against production of each other in an easy fungible way.

However, VAT credit will not be given to some items such as building material, paint, petrol, diesel, items used in the office such as cars and computers. Food products, drugs, pharma products and medical equipment would continue to be exempted from Cenvat.

The government will also continue to rationalise excise exemptions. Other exemptions will either be rationalised or merged.

Many exemptions were removed in the last budget but, sources said, others were likely to be rationalised.

The need to rationalise is for tax efficiency and to make the export incentives compatible with the WTO.

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

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