Taxation of Services in India: An Overview

Abstract

Service sector is very wide in its range. It includes, inter alia, health care, education, social security, leasing, entertainment, credit rating agencies, telecommunications, transport, publicity and advertising, insurance, banking, legal and financial services. From equity point of view, services should be taxed in the same way as goods. Taxation of goods and exclusion of services distorts the relative prices of goods vis-à-vis services, encouraging artificially the demand for services. In the process, the allocation of resources is also distorted. If tax is imposed on goods and not on services, a relatively high rate of tax would be required on goods to generate a given amount of revenue. If tax is imposed both on goods and services, a moderate tax rate can yield the given revenue. Administratively, taxation of both goods and services is desirable because it would reduce disputes pertaining to distinction between goods and services. Like goods, services can also be classified into two broad categories: essential services (e.g. health and education) and luxury services (e.g. entertainment and tourism). The rationale for exemption/lenient tax treatment of essential services is the same as for essential goods. Similarly, luxury services should be taxed at a high rate like luxury goods. This paper explains and examines the functioning of service tax in India