Fresh Service Tax May Be Politically Unwise, Say States

State governments have said they are unwilling to depend only on revenues from taxation of services to make up for the losses arising from the transition to the value added tax (VAT) regime from April 1 next year, as they feel imposing fresh taxes on services will be a politically sensitive issue.

They have instead renewed their demand for cash compensation by the Centre.

The objection by the state governments has apparently delayed the firming up of the list of services to be brought under the tax net, which a committee of finance secretaries was working on.

A senior state government official involved in the VAT exercise said: "Despite the concessions granted by the Centre to allow states to tax select services, most state administrations are not comfortable with the idea as it will be politically unpopular."

 

The problem is expected to be more serious in states facing polls next year which include Uttar Pradesh, Punjab and Uttranchal. As per the empowered committee's recommendations, states will be allowed to levy a five per cent tax on 25 select local services in line with the central rates to address the concern of state governments following the shift to VAT. The Centre had also proposed to permit the states to directly tax the three items, on which the Centre levies an additional excise duty (AED) currently.

The states have found support from different sections of the industry against the move to tax services, which was also imposed for the first time in the Union Budget 2000-01.

Industry has already termed the possibility of fresh impost on services like those of transporters and local couriers as an additional burden. Their objection stems from the fact that the envisaged state-level service tax will be outside the VAT structure and so they would not be eligible for set-offs.

The ultimate aim should be to accomodate service tax in the VAT regime so that the industry gets set-offs for taxes already paid, a CII representative said.

While the Union finance ministry is naturally averse to the idea of any cash compensation to states for shifting to VAT, because of the persistant demands for fiscal sops from the states, it has asked the GC Srivastava committee to re-examine the possibility of a monetary compensation to the 12 states shifting to VAT.