GST Council plans three-rate service tax structure

Luxury, standard and basic tax slabs to replace current uniform rate on services

Just as for goods, the goods and services tax (GST) Council is planning to bring different rates of tax for services as well. The highest rate would be for “luxury” services.

This means, instead of a uniform rate of tax on all services, including cess and surcharge, there would possibly be three rates: luxury, standard and basic. It will be the first time since tax on services was introduced in July 1994 that there would be more than one rate for the tax.

The topic has been debated in the committee of secretaries set up by the GST Council that comprises finance secretaries of nine states besides the Union Revenue Secretary Hasmukh Adhia.

While the GST Council is almost certain to approve the three-rate structure for services for the tax system that would roll out from July 1, 2017, the central government’s Budget is also likely to introduce elements of the new tax structure for services. Other than a possible change of rates for income tax, this could be the biggest tax proposal that Finance Minister Arun Jaitley may bring in.

At present, despite the uniform rates, there is an abatement provided for some services, because of which the effective rate on them is close to 12 per cent. But the headline rate remains unchanged at 14 per cent plus cess and surcharges.

“We expect that about 15 per cent of the value of services taxed now would be included in the luxury grade,” said a government source. Since service tax comprises almost 30 per cent of the total indirect tax corpus and is also the fastest-growing component within it, breaking up the flat rate is an attractive proposition for both the Centre and the states.

However, if it happens, the rate could be the same as the highest one proposed for goods at 28 per cent — a steep climb for several types of services. It would make life easier for the Union finance ministry, scrambling to provide money to pay as compensation for states for an expected revenue loss, when they switchover to GST.

Anita Rastogi, partner-indirect tax at PricewaterhouseCoopers said she had heard about the proposal. “There is a discussion happening that the luxury services be taxed at a higher rate and essential at a lower. This may not be the best scenario, as few slab rates are ideal under GST.”

What tax experts are concerned about is how the revenue department at the Centre and at the states would work out the difference between a luxury service and a plebeian one. For goods, the governments depend on a detailed classification structure known as the harmonised system of classification and numbering an international protocol maintained by the World Customs Organization.

It allows tax officials to drill down into goods to decide its rate. It is periodically revised.

There is no such system for service tax at present. Rastogi said this makes it difficult to decide what luxury is and what an essential service is.

But, quietly within the government, work on such a classification of services is racing to completion. A committee of officials was tasked with completing the task at the prodding of the United Nations (UN). The UN procures a lot of services from member-nations and has often been embroiled in disputes over whether those are the cheapest possible since there is no global system to classify those services. The trigger for classification has emerged because of this problem. It has given the Indian revenue department the option to revise the service tax basket.

Once in place, the proposed different rates for service tax can be set against the standards to ensure there is no dispute with the taxpayers. The states will be particularly benefited since they have no experience in handling service tax. A flat tax like the one currently in force helps since the tax department has to only prove that a service was provided. Since 2012, all services - except the ones mentioned in the ‘negative list’ of services - have become taxable. The concept of a negative list was introduced when service tax was rung in the year 1994.