Prof. (Dr. ACS, CWA) PRADEEP KUMAR AGGARWAL
             1/27 Lalita Park, III Floor; Laxmi Nagar, Delhi -110092
                    Contact No. - 9716103478; 011- 22455721


To,                                                                                Date – 04/12/10

Prof. Bhupender Kr. Soam
ACCMAN- Journal of Management
46 A/2 Knowledge Park –III,
Greater Noida – 201 308

Subject – Paper for Publication in your GYANPRATHA – Journal of
Dear sir,

I do hereby authorize “ ACCMAN Institute of Management” to publish the

paper entitled “Indirect Tax Reforms in India – An implication of Service Tax on
various services” and declare as under:
  1.   That the paper submitted is our original contribution and the same is neither
plagiarized nor contain any libelous or unlawful statement. It is further declared that all
the references have been duly acknowledged at the appropriate places

  2.     That the paper submitted is neither previously published nor submitted elsewhere.

  3.     That in case of publication of our paper, the copyright of the same will vest with the

Thanking you,

(Dr. P.K.Aggarwal)
Encl- As stated above

Indirect Tax Reforms in India – An implication of Service Tax on various services
*Prof. (Dr. ACS, CWA) Pradeep Kumar Aggarwal,                                   **Dr. Sunil Kumar,
*** Dr. M.K Gupta,
Tax is the contribution made by the citizen for the welfare of the state. The taxation is not only a means
to collect revenue for public expenditure, but it is also an important instrument of economic planning. In
a good tax system, the canons of equity, certainty, convenience, economy, productivity, elasticity and
diversity should be followed. There have been major changes in tax systems in several countries over
the last two decades for a variety of reasons.The tax system should not be discriminatory in any respect
between individuals and groups. A good tax system should also conform to the principle of justice. The
taxes are broadly classified as direct and indirect. A direct tax is one, which the Government demands from
those very people who are expected to bear its burden eventually. Whereas, indirect tax is one which is
demanded from the people who can shift its burden to others. Income tax is a direct tax while sales tax or
service tax is an indirect tax. In India, the tax structure has been evolved on the basis of the ability to pay
principle and the tax structure of the country is progressive. The present paper attempts to examine the
implications of taxation on various services covered under the ambit of service tax.
Key words: Taxation, Public Revenue, Public Expenditure, Income tax, Direct Tax, Indirect
Tax, Service tax

* Professor - College of Management Studies, IILM, NOIDA (m) 9716103478
** Faculty, SOMS, IGNOU, Maidan Garhi, New Delhi-110068, (m) 9891693917
***Associate Professor, Deptt. of Commerce, J.L .N. Govt. College, Faridabad.

Indirect Tax Reforms in India – An implication of Service Tax on various services

Introduction of Indirect Tax in India

The indirect tax in India constitutes a group of tax laws and regulations. The indirect taxes in
India are enforced upon different activities including manufacturing, trading and imports.
Indirect taxes influence all the business lines in India. Charge levied by the State on
consumption, expenditure, privilege, or right but not on income or property. The indirect tax
system in India has undergone extensive reforms for more than two decades. One of the most
important reasons for recent tax reforms in many developing and transitional economies has been
to evolve a tax system to meet the requirements of international competition

Indirect Tax System in India

In general, the Indirect Tax in India is a complex system of interconnecting laws and
regulations, which includes specific laws of different states. For this there are many reliable
organizations in India, which employs efficient Indirect Tax professionals to help their clients.
These tax professionals with their in-depth knowledge and wide-ranging experience offers
effective planning methods to their clients in order to help in their cost minimization. The
Indirect Taxation regime encompasses various types of taxes like Sales Tax, Service Tax,
Custom and Excise Duties, VAT and Anti-Dumping Duties, and the organizations provide
services in all these related fields.
In the recent year, the Indian government has undertaken significant reform of indirect taxation
system. This includes the initiation of a region-based and state-level VAT on goods. However, it
should be noted that as taxes still forms a barrier to inter-state trading in order to attain a secured
market for the activities related to services and goods more reform is needed. Some of the
reforms that can be introduced for a better indirect taxation system in India are -

       The serialized set of Indirect Taxes so far activated at the central and state levels should
        be amalgamated and treated as a single tax.

       The integrated Indirect Tax should be neutral at all levels such that chances of
        fraudulence would be minimized

       The Central Sales Tax, which obstructs easy trading between different states, is being
        under the process of termination that would help to abolish the control measures on the
        inter-state trade

Indirect Taxes during Pre Reforms

The indirect tax structure was extremely irrational between the reforms. The Constitution gives
the permission to levy a multitude of indirect taxes. But the most important ones are customs and
excise duties charged by the Central government and sales tax excepting inter state sales tax to
be charged by the state government. The indirect taxes levied by the centre like customs, excise
and central sales tax and the major indirect taxes levied by the states and civic bodies like
passenger and goods tax, electricity duty and octroi when taken together did not present a
rational system.
Indirect Taxes in Post Reforms

      Even post reforms, the indirect tax regime in India is still in the early stages of growth.
       Both the Central and State governments charge a multitude of indirect taxes. The central
       government charges tax on goods at the point of import (Customs duty), manufacture
       (Excise duty), inter state sales (Central sales tax or CST) and on provision of services
       (Service tax).

      The state governments charge tax on goods sold within the state (Sales tax/Value Added
       Tax or VAT), and on the goods that enter the state (Entry tax).

      In the present scenario corporate would have to analyze the tax cost involved in a
       transaction, have enough backup documentation to support their tax positions and keep
       looking for ways for tax maximization.

Service Tax- An Introduction
Service tax is levied on services provided by the businessman, professional or any
other service provider. It is an indirect tax. Service tax was first introduced by the former
Finance Minister Dr. Manmohan Singh, in his budget of 1994-95. The then Narasimha Rao
government went by the recommendations of the Raja Chelliah Panel on tax reforms. Perhaps,
it had to first ensrue the acceptance of the concept of service tax. It was initially levied on three
services-telephones, non-life insurance and stock-broking. The rate of tax was pegged at a
modest of 5 %. It was increased from 5 % in 1995 to 8 % in 2003. It was revised to 10 % with
effect from September 2004. At present the rate of service tax is 12 %. The tax came into effect on
July 1, 1994.

Need for Service Tax
The government decided to tax services with the aim of raising resources and increasing
the tax-GDP ratio. The service sector has emerged as an important, area of economic

activity. Its share in the country's Gross Domestic Product (GDP) has increased from about 28 % in
1951 to about 54 % today. Over the years, major services have been brought under the net.
Presently 99 services are covered under the tax net. Major services that are currently taxed include,
telephone, insurance, brokerage, banking financial services, courier, port services etc. Some
of the minor activities on which service tax has been recently imposed include beauty
parlors, pandals, tent house, dry cleaning and cable-operators.

Service Tax Collections
Service tax collection which was Rs. 862 crore in 1995-96, soon after its introduction, crossed
the Rs.10, 000 crore mark in 2004-05. It was the fifth largest contributor to the exchequer
after excise duty. Telephone services yield the maximum amount in terms of service tax. It
yielded Rs. 4,470 crore during the year 2004-05. Insurance is the second important service
followed by banking, financial services and courier services. The service tax collections
were Rs. 23,000 crore in 2005-06, Rs 34,500 crore in 2006-07, Rs. 50603 crore in 2007-08 and the
government expects to collect around Rs. 65,000 crore in the current year 2008-09 accounting
for around 10 % of the total tax of Rs.6.5. 1akh crores.

Implications of Service Tax
Selective taxation of services had created chaos. It has resulted into distortions and
classification disputes. It has also resulted into increase in corruption. However, the burden
of service tax has to be borne by consumers via the chain of service providers. The
government had to first ensure the acceptance of the concept of service tax. The tax reforms
committee had recommended expanding the basket of services to be taxed and the eventual
integration of service tax with value added tax. A task-force chaired by former finance secretary
Mr. Vijay Kelkar, stated that stand-alone taxation of services was inconsistent with the scheme of
input tax credit across goods and services. Other experts, Parthasarthy Shome and Govinda
Rao also endorsed this broad principle to address the problem of cascading of taxes at the
central level. Over the years, major services have been brought under the service tax net. While
services are taxed at 12 %, the effective incidence of tax on goods is much higher at around 22
percent at the retail level after factoring in cenvat and state level VAT. Therefore, the core budget
team has to take a decision to either lower the cenvat rate or raise the service tax rate to bridge
this gap. A hike in service tax rate will pinch consumers which is inevitable. Consumers with
higher purchasing power pay more as they use more services. A common man cannot be spared if
he uses a service. There is not much scope for expanding existing services. An indiscriminate

expansion of the list of services could lead to more litigation and prove to be counter productive.

According to the Canon of Equity, the proportion of direct taxes should be more than indirect
taxes. However, in India, the situation was exactly opposite. The proportion of direct tax to
indirect tax was about 32:68 in the year 2004-05. But now the proportion of direct taxes to indirect taxes
is 55:45 in the year 2008-09 Direct taxes adversely affect ability to save and thus reduce capital
formation, while indirect taxes put a restraint on consumption and thereby increase savings.
Indirect taxes are paid by every body in the society and their incidence is widely diffused.
Moreover, since indirect taxes are levied on expenditure, they seldom discourage capital
formation. Both direct and indirect taxes are complementary to each other and therefore in any
rational tax structure both types of taxes should find a place. However, economists often analyze
their welfare implications, distribution effects and relevance for growth.
Indirect taxes in general violate the cannon of equity. Service tax, rate remains uniform for the
rich and the poor. It involves greater sacrifice on the part of the poor. When service tax is levied
on utilities like telephone, it is severely regressive in its nature and thus quite unjust.
Service tax is generally regressive in nature. Greater reliance on service tax (which government
is following today) for revenue collection inevitably results in greater economic disparities. This
can be avoided by the government by exempting of mass consumption services from service tax.
There is a high cost of collection of service tax. It requires more elaborate administrative
machinery. Thus, the cost of collection per unit of revenue raised is generally higher. There is no
economy, in tax collection. It also results into corruption and black money.

Service Tax on Web Bureaus
Marriage broker services and matrimonial advertisements are not covered under service tax.
However, web-based marriage bureaus are covered under service tax. The view taken by
Revenue Officials is that such web sites are offering online data-base access services. The
proposal to tax web-bureaus results in a differential tax treatment based on the mode of service
delivery. This is injustice to the web-bureaus. The matter is under litigation.

Service Tax on Air Tickets
The Government has subjected premium class air travel to service tax despite protests from the
industry. The revenue department wants all classes of fares, except the economy class tickets
to be brought under the service tax net. This type of tax is not levied by any other government in the
world. As of now, service tax is levied on the basic fare while there is no service tax on fuel
surcharge. Travel agents, who pay service tax on their commission, use the basic fare as the

benchmark to workout the-incidence of the levy. The Airlines have been raising the fuel surcharge
and keeping basic fare constant to avoid service tax. In view of the complex nature of airline
industry's operation and sale of tickets, the service tax should be scrapped or withdrawn.

Services of Company Secretary
The budget for 2007-08 provided service tax on the services provided by the company secretary to
the company. The company secretary has to advise the company on certain matters and
appear before the tribunal on behalf of the company. This service is included in service tax.
However, if the same service is provided by the Advocate, it is not taxed under the Service Tax
Act. There are many more services of this nature.

Service tax has emerged as an important source of revenue for the government. Over the
years, the total of services under tax net has increased to 99. However, selective taxation of
services has created chaos because it has led to distortions and classification of disputes. Services
tax is against the canon of equity. It is regressive in nature. Greater reliance on service tax for
revenue collection results into greater economic disparities. The cost of collection of service
tax is also higher and it violates the canon of economy. The experts have pointed out that
standalone taxation of services was inconsistent with the scheme of input tax credit across
goods and services. There is not much scope for expanding existing services. An indiscriminate
expansion of list of services could lead to more litigation and prove to be counter-productive.
There is a need for more clarity on service tax particularly about web-bureaus, Air Tickets and
Services of a Company Secretary. The problem of overlapping among services, which results in
classification disputes also, needs to be looked into.


Adam Smith, Wealth of Nations, BXV. Volume 11

E.R.A. Seligman, Essays in Taxation, New York, 1925.

Mishra & Puri, Business Economics

Lokasatta, April 3, 2006.

Singhania, V.K. Introduction to service tax, Bharat Law Publishing House, Delhi.

Service Tax- An Overview, Business Standard, January 17th 2009 pp.06.



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