Budget Impact - Service Tax

Budget 2008-09 and Service Tax
By Dr. G. Gokul Kishore

The grand annual event of Budget on the nation’s financial theatre has been staged with a neat performance by the hero our F.M. The pre-budget expectations heavily leaned on populist theory due political factors and events on the horizon. Budget 2008-09 has turned out to be a mixed bag and a preliminary assessment can lead to terming it as fair. It has caused ripples in certain quarters but then economics is hardly a ‘please all’ matter. The upward revision of slabs in case of personal income tax has made the FM darling of the middle class though it has been battered by rising inflation. The backbone of the nation viz., the farming class increasingly dominated by preference to death over life has been taken note of. Leaving direct taxes and other macro issues aside, this article attempts to take stock of Budget 2008-09 changes in the case of Service Tax.

Small Scale Exemption hike – Is it too little?

Small Scale Service Providers enjoy value-based exemption upto Rs. 8 lakhs. In the last Budget this exemption limit was raised from Rs. 4 lakhs to Rs. 8 lakhs i.e. 100% hike. This year it has been increased to Rs. 10 lakhs, effective from 1st April 2008. Such threshold limits would have made some sense when the number of services taxed was less and sundry services were also brought under the levy. Today, you can hardly have a Works Contract with such meagre amounts. With the proposal to tax cash-rich IT industry by bring new entry in this budget, the nature of taxable services has become diverse with several services involving huge stakes. The limit is not in consonance with industry transactions and it certainly merits far more. But then, the government hurriedly taxes but holds up exemptions on some pretext or the other. Anyhow, a hike in such petty threshold limit shall do a world of good for administration too. It need not waste resources on surveys for netting potential assessees or those outside the net and collection cost should come down further.

No rate change but Works Contract bears the brunt

The fear over rate increase for eventual merger with GST rate in 2010 (GST rate is widely believed to be around 20%) can abate for now. The general rate of Service tax remains unchanged at 12% and with no new Cess proposed/imposed, it remains at 12.36%. But the Works Contract industry has been hit with a 100% hike. Many opted for Composition Scheme as it provided a profitable rate of 2%. With the increase in 4% from 1st March 2008 and with absence of clarification on applicability of new rate to on-going contracts, such optees are certain to experience nightmares now. A sovereign pledge by the FM on the floor of the Parliament to bring WC under the net last year like 2% rate is breached now. Such changes midway do not inspire confidence among the honest tax payers over the designs of the government.
For more pl. see 1st March 2008 Service Tax Review (S.T.R.)