Govt must tax services

Services like public administration, defence, community, domestic services generate nearly quarter of the GDP, but they are out of the tax net, writes DH Pai Panandiker.

The focus of the budget will be on agriculture and employment and will necessitate a substantial increase in expenditure. In any budget, nearly 90 per cent of the expenditure is carryover from the past and additional expenditure has to be funded through resource mobilisation.

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The sources of revenue, however, are rather limited. Agriculture, which generates nearly a quarter of the gross domestic product, does not pay any tax. The services sector is large but there are a number of services that cannot be taxed.

These include public administration, defence, community services, domestic services, etc, with a share of another quarter in GDP. Thus, about a half the GDP is out of the tax net and it is no wonder that the tax ratio is less than 9 per cent.

The one sector that pays nearly 80 per cent of the taxes is industry. It cannot be taxed any further without adverse consequences. The only additional source of revenue would be taxable services. Until 1994 the entire services sector was out of the tax net. In that year the first attempt was made with taxation of telephone services, stock brokerage and general insurance at 5 per cent.

Once that worked, the net was spread wider to include a variety of other services. Presently about 58 services are subject to tax at 8 per cent and, in the current year, are expected to yield a revenue of Rs.13,500 crore.

The revenue from service tax is only 4 per cent of the total tax revenue and only 2 per cent of value of taxable services. The reasons for the low yield are low tax compliance and the hesitation to tax sensitive services. If the 8 per cent tax had been collected from all taxable services the revenue should have been about Rs 54,000 crore..

Not all service providers pay taxes or correctly estimate the tax liability. Although there are penal provisions for offences there have been no cases of prosecution. The government relies on voluntary compliance. Of greater concern is exemption of some of the major services from tax possibly because of the sensitive character of these services.

Transportation and social housing alone would have yielded another Rs 15,000 crore. There is no reason why any service of commercial value should be left out once the principle that it is value addition that should be taxed, is accepted.

The author is president of RPG Foundation