The fact that the growth in service tax (ST) revenues is not commensurate with growth in the service sector GDP has been a matter of concern.
The service sector contributes 64.4% (at current prices) to GDP, however, the ST contribution is merely 11.51% of the gross tax revenues. The growth in ST revenues from Rs. 51,301 crore (actuals) in 2007-08 to Rs. 124,000 crore (budget) for the current year represents a CAGR of 28%. This compares favourably with excise (CAGR 11%) and customs (16%) collections during the same period, but falls short of expectations when compared to the growth in service sector GDP.
In the past, the government added new service categories in every budget in order to expand the service tax coverage. The introduction of the negative list system of service taxation was primarily to expand the service tax base by taxing all services except those that are specified in the negative list.
The negative list comprises of 17 areas. In addition, exemption has been granted to another 39 broad service areas.
When compared to other countries, it does appear that there are too many exemptions.
For instance, there are several conditional exemptions relating to transportation and construction activities. Large numbers of conditional exemptions are not considered desirable since they lead to interpretational issues and litigation and are also susceptible to misuse.
In countries such as Brazil and Canada and even in the EU, the list of exemptions is kept small and most of them are service-level exemptions as opposed to the conditional exemptions.
The objective behind the exemption is to ensure that no service tax is charged on certain services such as:
a) provided to the government or its agencies
b) required for specified infrastructure projects
c) in relation to education and sports and
d) certain services used by lesser privileged sections.
In case of large infrastructure projects such as metro or monorail, the project cost rises due to addition of service tax.
In these cases, while the provision of the services would be counted for GDP purposes, the absence of any service tax on such services could lead to an incorrect picture when comparing the growth in collection with the service sector GDP growth.
There is undoubtedly a need to prune unnecessary exemptions and review them from time to time. These would certainly provide a fillip to the service tax collection, however, the increase in service tax revenues may still not be commensurate with the service sector GDP growth, which in itself, should not be a cause for undue worry.