1. Introduction of Indirect Tax in India
The indirect tax in India constitutes a group of tax laws and regulations. The indirect taxes in India are
enforced upon different activities including manufacturing, trading and imports. Indirect taxes
influence all the business lines in India. Charge levied by the State on consumption, expenditure,
privilege, or right but not on income or property. The indirect tax system in India has undergone
extensive reforms for more than two decades. One of the most important reasons for recent tax
reforms in many developing and transitional economies has been to evolve a tax system to meet the
requirements of international competition
Indirect Tax System in India
In general, the Indirect Tax in India is a complex system of interconnecting laws and regulations,
which includes specific laws of different states. For this there are many reliable organizations in India,
which employs efficient Indirect Tax professionals to help their clients. These tax professionals with
their in-depth knowledge and wide-ranging experience offers effective planning methods to their
clients in order to help in their cost minimization. The Indirect Taxation regime encompasses various
types of taxes like Sales Tax, Service Tax, Custom and Excise Duties, VAT and Anti-Dumping Duties,
and the organizations provide services in all these related fields.
In the recent year, the Indian government has undertaken significant reform of indirect taxation
system. This includes the initiation of a region-based and state-level VAT on goods. However, it
should be noted that as taxes still forms a barrier to inter-state trading in order to attain a secured
market for the activities related to services and goods more reform is needed. Some of the reforms
that can be introduced for a better indirect taxation system in India are –
The serialized set of Indirect Taxes so far activated at the central and state levels should be
amalgamated and treated as a single tax.
The integrated Indirect Tax should be neutral at all levels such that chances of fraudulence would be
minimized
The Central Sales Tax, which obstructs easy trading between different states, is being under the
process of termination that would help to abolish the control measures on the inter-state trade
Indirect Taxes during Pre Reforms
The indirect tax structure was extremely irrational between the reforms. The Constitution gives the
permission to levy a multitude of indirect taxes. But the most important ones are customs and excise
duties charged by the Central government and sales tax excepting inter state sales tax to be charged
by the state government. The indirect taxes levied by the center like customs, excise and central
sales tax and the major indirect taxes levied by the states and civic bodies like passenger and goods
tax, electricity duty and octroi when taken together did not present a rational system.
Indirect Taxes in Post Reforms
Even post reforms, the indirect tax regime in India is still in the early stages of growth. Both the
Central and State governments charge a multitude of indirect taxes. The central government charges
tax on goods at the point of import (Customs duty), manufacture (Excise duty), interstate sales
(Central sales tax or CST) and on provision of services (Service tax).
The state governments charge tax on goods sold within the state (Sales tax/Value Added Tax or
VAT), and on the goods that enter the state (Entry tax).
In the present scenario corporate would have to analyze the tax cost involved in a transaction, have
enough backup documentation to support their tax positions and keep looking for ways for tax
maximization.
Service Tax- An Introduction
2. Service tax is levied on services provided by the businessman, professional or any other service
provider. It is an indirect tax. Service tax was first introduced by the former Finance Minister Dr.
Manmohan Singh, in his budget of 1994-95. The then Narasimha Rao government went by the
recommendations of the Raja Chelliah Panel on tax reforms. Perhaps, it had to first ensure the
acceptance of the concept of service tax. It was initially levied on three services-telephones, non-life
insurance and stock-broking. The rate of tax was pegged at a modest of 5 %. It was increased from 5
% in 1995 to 8 % in 2003. It was revised to 10 % with effect from September 2004. At present the rate
of service tax is 12 %. The tax came into effect on July 1, 1994.
Need for Service Tax
The government decided to tax services with the aim of raising resources and increasing the tax-GDP
ratio. The service sector has emerged as an important, area of economic activity. Its share in the
country's Gross Domestic Product (GDP) has increased from about 28 % in 1951 to about 54 %
today. Over the years, major services have been brought under the net. Presently 99 services are
covered under the tax net. Major services that are currently taxed include, telephone, insurance,
brokerage, banking financial services, courier, port services etc. Some of the minor activities on which
service tax has been recently imposed include beauty parlors, pandals, tent house, dry cleaning and
cable-operators.
Service Tax Collections
Service tax collection which was Rs. 862 crore in 1995-96, soon after its introduction, crossed the
Rs.10, 000 crore mark in 2004-05. It was the fifth largest contributor to the exchequer after excise
duty. Telephone services yield the maximum amount in terms of service tax. It yielded Rs. 4,470 crore
during the year 2004-05. Insurance is the second important service followed by banking, financial
services and courier services. The service tax collections were Rs. 23,000 crore in 2005-06, Rs
34,500 crore in 2006-07, Rs. 50603 crore in 2007-08 and the government expects to collect around
Rs. 65,000 crore in the current year 2008-09 accounting for around 10 % of the total tax of Rs.6.5.
1akh crores.
Implications of Service Tax
Selective taxation of services had created chaos. It has resulted into distortions and classification
disputes. It has also resulted into increase in corruption. However, the burden of service tax has to be
borne by consumers via the chain of service providers. The government had to first ensure the
acceptance of the concept of service tax. The tax reforms committee had recommended expanding
the basket of services to be taxed and the eventual integration of service tax with value added tax. A
task-force chaired by former finance secretary Mr. Vijay Kelkar, stated that stand-alone taxation of
services was inconsistent with the scheme of input tax credit across goods and services. Other
experts, Parthasarthy Shome and Govinda Rao also endorsed this broad principle to address the
problem of cascading of taxes at the central level. Over the years, major services have been brought
under the service tax net. While services are taxed at 12 %, the effective incidence of tax on goods is
much higher at around 22 percent at the retail level after factoring in cenvat and state level VAT.
Therefore, the core budget team has to take a decision to either lower the cenvat rate or raise the
service tax rate to bridge this gap. A hike in service tax rate will pinch consumers which is inevitable.
Consumers with higher purchasing power pay more as they use more services. A common man
cannot be spared if he uses a service. There is not much scope for expanding existing services. An
indiscriminate expansion of the list of services could lead to more litigation and prove to be
counterproductive.
According to the Canon of Equity, the proportion of direct taxes should be more than indirect taxes.
However, in India, the situation was exactly opposite. The proportion of direct tax to indirect tax was
about 32:68 in the year 2004-05. But now the proportion of direct taxes to indirect taxes is 55:45 in the
year 2008-09 Direct taxes adversely affect ability to save and thus reduce capital formation, while
indirect taxes put a restraint on consumption and thereby increase savings. Indirect taxes are paid by
everybody in the society and their incidence is widely diffused. Moreover, since indirect taxes are
levied on expenditure, they seldom discourage capital formation. Both direct and indirect taxes are
complementary to each other and therefore in any rational tax structure both types of taxes should
3. find a place. However, economists often analyze their welfare implications, distribution effects and
relevance for growth.
Indirect taxes in general violate the cannon of equity. Service tax, rate remains uniform for the rich
and the poor. It involves greater sacrifice on the part of the poor. When service tax is levied on utilities
like telephone, it is severely regressive in its nature and thus quite unjust.
Service tax is generally regressive in nature. Greater reliance on service tax (which government is
following today) for revenue collection inevitably results in greater economic disparities. This can be
avoided by the government by exempting of mass consumption services from service tax.
There is a high cost of collection of service tax. It requires more elaborate administrative machinery.
Thus, the cost of collection per unit of revenue raised is generally higher. There is no economy, in tax
collection. It also results into corruption and black money.
Service Tax on Web Bureaus
Marriage broker services and matrimonial advertisements are not covered under service tax.
However, web-based marriage bureaus are covered under service tax. The view taken by Revenue
Officials is that such web sites are offering online data-base access services. The proposal to tax
web-bureaus results in a differential tax treatment based on the mode of service delivery. This is
injustice to the web--bureaus. The matter is under litigation.
Service Tax on Air Tickets
The Government has subjected premium class air travel to service tax despite protests from the
industry. The revenue department wants all classes of fares, except the economy class tickets to be
brought under the service tax net. This type of tax is not levied by any other government in the world.
As of now, service tax is levied on the basic fare while there is no service tax on fuel surcharge.
Travel agents, who pay service tax on their commission, use the basic fare as the benchmark to work
out the-incidence of the levy. The Airlines have been raising the fuel surcharge and keeping basic fare
constant to avoid service tax. In view of the complex nature of airline industry's operation and sale of
tickets, the service tax should be scrapped or withdrawn.
Services of Company Secretary
The budget for 2007-08 provided service tax on the services provided by the company secretary to
the company. The company secretary has to advise the company on certain matters and appear
before the tribunal on behalf of the company. This service is included in service tax. However, if the
same service is provided by the Advocate, it is not taxed under the Service Tax Act. There are many
more services of this nature.
Conclusions
Service tax has emerged as an important source of revenue for the government. Over the years, the
total of services under tax net has increased to 99. However, selective taxation of services has
created chaos because it has led to distortions and classification of disputes. Services tax is against
the canon of equity. It is regressive in nature. Greater reliance on service tax for revenue collection
results into greater economic disparities. The cost of collection of service tax is also higher and it
violates the canon of economy. The experts have pointed out that standalone taxation of services was
inconsistent with the scheme of input tax credit across goods and services. There is not much scope
for expanding existing services. An indiscriminate expansion of list of services could lead to more
litigation and prove to be counter-productive. There is a need for more clarity on service tax
particularly about web-bureaus, Air Tickets and Services of a Company Secretary. The problem of
overlapping among services, which results in classification disputes also, needs to be looked into.
References
Adam Smith, Wealth of Nations, BXV. Volume 11
E.R.A. Seligman, Essays in Taxation, New York, 1925.
Mishra & Puri, Business Economics
Lokasatta, April 3, 2006.
4. Singhania, V.K. Introduction to service tax, Bharat Law Publishing House, Delhi.
Service Tax- An Overview, Business Standard, January 17th 2009 pp.06.
