Advisory services may come under tax ambit

Some advisory services are on a list of up to 12 services that may be brought into the tax net in Budget 2011-12. Their possible inclusion is part of the finance ministry’s attempt to boost service tax collections without tinkering too much with tax rates. Service tax is currently levied on scientific, technical and legal consultancy services.

Advisory services are provided in a whole range of areas such as corporate finance, accounting, auditing, taxation, management and technology. At present, the government levies a tax on 117 services. Only three services were taxed when the levy was introduced in 1994-95.

“Some 10-12 services could be brought under the tax ambit in this Budget. We are seeing it as a transition towards the goods & services tax. The only way to bring down rates under GST is to include more services,” a finance ministry official, who did not wish to be named, told Business Standard.

Another official said the number of new services to be taxed could well be more than 12. He said the effort would be to gradually include all items listed in the United Nations Central Product Classification for goods and services. The CPC is intended as an international standard to organise and analyse data on industrial production, national accounts, trade and other aspects.

The CPC includes services in sectors like trading, hospitality, transport, communications, business, agriculture, mining & manufacturing, community and social. India does not use the classification, but it does levy tax on 60-70 per cent of these services.

“We look at international practices when levying tax on new goods and services. Still, there are many services in the CPC that are not yet taxed in India. All those will be gradually taxed. To begin with, advisory services can be included in the service tax,” said an official.

Official sources said services in electricity transmission, education and health were some big-ticket areas, but the finance ministry was in two minds about including them in the tax net.

Services contribute around 60 per cent to GDP, but they generate only 10 per cent to tax collections. The government’s service tax receipts grew 19 per cent to Rs 44,081 crore in April-December this fiscal. The growth was meagre, compared with the 68.1 per cent and 33.7 per cent recorded by Customs and excise collections, respectively, in the same period.

The finance ministry added eight more services in the tax net in the last Budget, while amendments were made with regard to some existing services. The proposal to levy a tax on some services was challenged in various courts and could result in some loss to the exchequer.

The government needs to raise additional resources to bring down the fiscal deficit from a projected 5.5 per cent of GDP this fiscal to 4.8 per cent in 2011-12. While it may not be in a position to raise tax rates because of high inflation, broadening the tax net and greater compliance may help it meet its fiscal consolidation targets.