Disputes cast shadow on service tax collections

Govt may lose over Rs 500 crore in service tax this year

The government may lose over Rs 500 crore in service tax this year, as its decision to impose tax on eight new services and amend some existing ones has been challenged in three cases — copyright, immovable property and health check-up services provided by insurance companies.

This is about half of the total revenue it had expected from taxing new services. A finance ministry official said it would lose another Rs 800 crore due to deferment in tax on transportation of goods by rail. Builders may also challenge the imposition of service tax on flats under construction.

The revenue department of the finance ministry is expecting about Rs 200 crore and Rs 150 crore from levy of tax on copyright and health services, respectively. The revenue will be collected for a period of nine months as the service tax came into effect from June. Out of Rs 1,000 crore it projected from amendments to existing services, Rs 200 crore was expected from renting of immovable property.

In the Finance Bill 2010, amendments were made in the definition of renting of immovable property to provide explicitly that the activity of renting itself is a taxable service. The change was given retrospective effect from June 1, 2007. This was likely to get the government another Rs 1,000 crore. But the levy of service tax on renting has been challenged on various grounds before the courts.

The ministry had also brought copyright on cinematographic films and sound recording under the scope of existing taxable service ‘Intellectual Property Right’. This has also been challenged in various courts by film producers on the grounds that states were already taxing copyright.

The department was expecting Rs 800 crore from service tax on transportation of goods by rail. The levy was to be introduced in April, but was later deferred to June and then to January 2011. This will leave the finance ministry with only Rs 200 crore from the service. The tax may be further deferred, as Railway Minister Mamata Banerjee will have Assembly elections in West Bengal next year.

The increase in litigation has become a cause for concern for the finance ministry, with Finance Minister Pranab Mukherjee constituting a Standing Committee to identify systematic causes for service litigation, prepare a road map for reducing the existing cases, and to avoid it in future.

Low growth in service tax collections has increased the worries of the finance ministry. Service tax collections grew by 11.8 per cent in April-July, against 70.8 per cent and 40.8 per cent growth recorded in Customs and excise duty collections, respectively, in the same period.

“I fail to understand why the growth of service tax should be so small. It is an acknowledged fact that the service sector in the country is also growing substantially. I would like those of you concerned with the service tax collection to ponder over this, and find ways and means to increase it,” Mukherjee had told revenue officials at a recent review meeting in Mumbai.