When sovereignty used to reside in kings, and the realm ran into its customary financial troubles, it was decided that producers would pay a tax on production. In due course, this came to be known as excise duty and, with the growth in the share of manufacturing, this tax became major contributor to national exchequers. Over the last two decades, however, the share of manufacturing in GDP has tended to decline and its place has been taken by the service sector, known until a few years ago as the tertiary sector. The output of this sector was not taxed except when it became income in the hands of producers. But with the steady expansion of the service industry "" it accounts for around 40 per cent of India's GDP and more in the developed countries "" it was thus only a matter of time before finance ministers turned their gaze towards the new pagoda tree.
In India, the process began a few years ago and has been carried forward in the 1997-98 Budget. Henceforth, the transportation of goods by road (i.e trucking companies), consulting engineers, clearing and forwarding agents, all air travel agents and tour operators and car rental agencies, outdoor caterers, pandal contractors and mandap keepers, manpower recruitment agencies will be have to pay their equivalent of the excise duty. The finance minister thinks he will manage to squeeze out around Rs 900 crore this year, but that the figure could be more at Rs 1,200 crore. The output of the service industries which he has chosen to target is mainly consumed by the rich. He perhaps hopes that in this way the new tax will not be regressive. Also, exigencies of collection would have also had bearing on the choice. It should be easy to collect from these service providers, thus making the tax quite efficient.
One cannot help wondering, however, why the real estate business has been left out of the net. If there is one business which generates enormous amounts of black money, it is the real estate business. This is because the cost of conveyance is 4 per cent "" 2 per cent each from the buyer and the seller "" of the sum actually paid, not the sum shown as having been paid for purposes of registration. Since stamp duties are very high most sellers prefer to show the sale price at around half the real price. The result is a tidal wave of black money which stays permanently in the black economy. A useful way of diverting some of this into the national coffers would have been to impose a service tax on real estate brokers. Collection, too, need not have been problem if a simple requirement were made that at the time of the registration the name of the broker must be disclosed.
Even now it is not too late and it must be hoped that the finance minister will bring the real estate business in general, and agents and brokers in particular, into the service tax net. The potential takings are huge and that factor alone ought to influence the speed with which the decision is taken.
