The government widened the tax net further on Friday by bringing within its ambit four new services including the popular unit linked insurance products (ULIP) and customised software bringing them on par with mutual funds and packaged software respectively.
Analysts felt that this could raise insurance premium marginally as companies pass on the tax component to subscribers. The other services included in the tax net are stock and commodity exchanges and clearing houses and right to use goods.
The government has also proposed to increase the threshold limit of exemption for small service providers to Rs 10 lakh from the existing Rs 8 lakh resulting in about 65,000 small service providers going out of the tax net.
Finance Minister P Chidambaram said that 55 per cent of gross domestic product is contributed by the services sector, “which is a growing sector and must contribute its legitimate share to the exchequer".
Service tax was first imposed in 1994 and has emerged a major source of revenue for the government. The government is expecting a 28 per cent increase in service tax collections in 2008-09 to Rs 64,460 crore from Rs 50,603 crore.
Tax analysts said that widening the service tax net is a logical first step before rolling out a comprehensive GST.
Currently, the Centre government imposes a tax of 12 per cent on 100 services. Under the existing Centre-states revenue-sharing arrangement, states receive 30.5 per cent share from 67 services, while the entire tax revenue of the remaining 33 services would go to states from 2007-08.
Analysts said export-oriented software companies were unlikely to be affected by the service tax, as they would be able to avail input credit. “For those companies that earn their revenues mostly from domestic markets, the measure could have a negative impact,” said S Harishanker of financial advisory firm KPMG.