States Prefer Turnover Tax

States are planning to impose a presumptive turnover tax in place of the proposed 5 per cent services tax on around 51 services, following their transition to the value-added tax (VAT) regime from April 1, 2003.

Most state governments had decided in favour of imposing a presumptive turnover tax in the light of administrative problems in documentation and scrutiny of the levy of a 5 per cent tax on service enterprises, said a senior government official involved in the exercise of firming up the VAT model.

"Instead, a presumptive turnover tax will be levied on the projected turnover of service enterprises. That will be arrived at based on the turnover of a company over time, after factoring in growth projections of the enterprises. While registration of the service enterprises will have to be carried out, the state administration will be saved the task of scrutiny of returns on a regular basis," the official said.

 

The list of services on which states are likely to impose a tax include tailoring, beauty parlours, health clubs, and tutorials. The difference between service tax and presumptive turnover tax concerns whom the tax is levied on.

While the retailer was to collect service tax from consumers and pass it on, in case of the presumptive turnover tax proposal, the retailer will hike profits and pay the authorities directly.

The incidence of the tax cannot be transferred to a consumer if presumptive turnover tax is levied, according to S Madhavan, Pricewaterhouse Coopers partner.

A number of states, including Maharashtra, Andhra Pradesh, Karnataka, West Bengal and Delhi, have favoured taking the presumptive turnover tax route. Highlighting the possible difficulties faced by the states in monitoring service tax collection, officials said even in a small state like Delhi, there were over 40,000 new units which would have to be registered. Bigger states like Maharashtra has over 500,000 units and monitoring returns filed by these enterprises every year would be an onerous task, officials said.

Scrutiny was already a problem with respect to the collection of sales and commercial taxes by the states, government officials said, adding that states were not ready to take on the added responsibility of scrutinising returns from service enterprises.