Service tax: A growing revenue source, but not expectedly

Some Vital Statistics:

Service tax has now emerged as a significant contributor to tax revenue over the last 19 years. Even compared to 2007-08, its share as a percentage of gross tax revenue has increased more, compared with that in excise and Customs. In 2007-08 the share of indirect tax revenue as a per cent of gross tax revenue was 47.0 per cent, which is now 46.8 per cent (BE) in 2012-13. Figures are taken from Economic Survey 2012-13. The share of Customs revenue during this period has fallen from 17.6 per cent to 17.3 per cent. The share of excise has gone down from 20.8 per cent to 18.0 per cent. Service tax has gone up from 8.6 per cent to 11.5 per cent. Thus it appears that the loss in Customs and excise revenue (particularly excise) has been made up by gain in service tax. In plain terms, it means that the tax from manufacturing has gone down relatively during this period. But it does not mean that the manufacturing sector is slowing down. The fact is that the collection rate has gone down. For Customs, it was 10 per cent in 2006-07 and 2007-08, whereas it was 6 per cent in 2011-12 for import. A major reason for the fall in Customs collection rate is the fall in the collection rate of petroleum, oil and lubricants (POL) from 6 per cent to 3 per cent. For capital goods, it has fallen from 16 per cent to 12 per cent. The revenue from service tax has grown substantially between 2004-05 and 2012-13. The following table is very relevant for the purpose of analysis of the growth.

The growth of 33 per cent in 2012-13 is over the corresponding period of the previous year. If we project this growth for 2012-13 on a purely proportionate basis, then the collection of service tax will be Rs 1,08,000 crore. However, the collection in the last quarter is usually 25 per cent more than the average of first three quarters. So, predictably, it should be Rs 1,20,000 crore which will be more than the collection in 2011-12 by about 25 per cent only and 33 per cent, as estimated in the Economic Survey for nine months. So the trend is not encouraging.

The reasons for this uninspiring growth of revenue are as below. The number of exemptions which have been given, apart from the items which are on the negative list, is very large. One had expected in Budget 2012-13 many of the exemptions would be withdrawn. But that has not happened. This has dampened the collection rate of service tax, though there is no calculation so far given in the Economic Survey. In India, the share of services as a percentage of GDP has increased from 50.1 in 2001 to 56.8 in 2010 and 58.2 in 2011.

This is a good growth compared to China where the corresponding figures are 40.6, 40.9 and 41.7. In the US, the figures for the corresponding periods are 77.0, 78.3 and 78.4.

The growth of the service sector in India is impressive compared with other BRICS countries - Brazil, Russia, China and South Africa. A break-up of the services in India shows that public administration and defence is 6.1 per cent in 2011-12 which is not taxed. Construction is 8.2 per cent which is not much taxed. Financing and the real estate sector, which is 16.6 per cent, enjoy substantial exemption.

Another reason for lack of growth of revenue from service tax is the threshold of Rs 10 lakh, under which all small services fall. Tax revenue from service tax in 2007-08 as a percentage of gross domestic product was 1.0 and in 2012-13 it stands at 1.2 per cent. It is hardly any substantial improvement.

The conclusion is that the only way to improve the revenue from service tax is to remove exemption and to bring the whole service sector under the tax net, though I do not recommend the increase in the threshold limit.