Please Mr FM, don't pack your budget with just higher taxes

Starting from April, get ready to pay more for a whole host of services because the central government is planning to widen the tax net quite significantly.

According to a report in Business Standard, the central government is putting the finishing touches on a proposal to introduce a ’negative’ list for services in the forthcoming Union Budget.

On the list will be 20-22 categories of services ranging from construction and healthcare to entertainment, non-A/C rail fares and restaurants that will be exempt from service tax - outside that list, every service will be taxable, the report said.

The move is expected to boost tax collections by as much as 25 percent (and increase prices of these services as well).Services account for 60 percent of India’s gross domestic product, but taxes from services currently account for less than 10 percent of gross tax revenues for the central government.

For the financial year ending March 2012, total service tax collections have been pencilled in at Rs 82,000 crore (against customs and excise collections of Rs 1,51,700 crore and Rs 1,64,115 crore, respectively).

While the step to widen the service tax net is logical, predictably, not everyone is happy with the idea. The movie industry has already called for a nationwide strike on 23 Februaryto protest the imposition of a service tax, according to a report in the_The Times of India_.

Nevertheless, it has to be noted that the more-encompassing avatar of the service tax is part of a much wider tax reform, which will eventually see the introduction of the Goods and Services Tax (GST).

As Firstpost has already mentioned before , GST, when introduced, will replace a multiplicity of taxes at the central and state levels on goods and services - excise, service tax, value-added tax, entry tax, purchase tax - with one single consolidated GST.

Boosting govt finances is key focus

Of course, the plan to cast the service tax net far and wide, arguably, does not stem from the government’s desire to introduce tax reforms; rather, it’s being driven by the need to boost its shaky finances with a higher tax take. As Deputy Chairman of the Planning Commission Montek Singh Ahluwalia recently told CNBC TV18, the finance ministry’s focus would be on fiscal consolidation in the coming budget.

The government is expected to present a budget in mid-March for the fiscal year that begins on April 1, amid slowing economic growth and mounting concerns about public finances.

The government had targeted a fiscal deficit (gap between government revenues and expenditure) at 4.6 percent for the year ending March 2012. Now, it seems like it could come in at a full percentage point above that.

Indeed, the poor state of its finances could limit Finance Minister Pranab Mukherjee from offering too many goodies to different segments of the economy.According to a Financial Chronicle report , there might be no cuts in tax exemption limits for salary earners or in corporate taxes.

There are also fears that both excise and service taxes (which were cut in 2008-2009, and only partially restored in 2010-11) will be hiked to raise more revenues.

One can only hope that in the quest for fiscal consolidation, the finance minister will not pack the budget with only revenue-generating measures (read higher taxes). Some growth-inducing measures are badly needed as well.