In India, from the beginning of the 1990s, the concept of socialism has been slowly given up as state mechanism though Indian Constitution still stamps socialism as one of the features of Indian Federalism. When present Indian PM Manmohan Singh was the then Finance Minister, he introduced new jargon in its state mechanism- more liberalization, more privatization and reforms in economy orienting it more to market economy.
After few years, the concept of service tax was also introduced vide Finance Bill of 1994 where three kinds of services were made liable to service tax at the rate of 5%. From then, the taxable services have always expanded in the span of these 14 years and the kitty of government is always swelling. Today, the service sector constitutes 54 per cent of the gross domestic product (GDP) and is hugely important to the economy.
The service tax which is imposed on the services is same as excise duty (Anat Sulk in Nepali) which is imposed on manufacture of goods. It is a tax paid on particular event of providing services when it originates from one person (service provider) to another person (Service Receiver/recipient).
The concept of service tax is different from Income tax as income tax is a direct tax and the person who earns his income has to pay tax on this income if it crosses stipulated threshold limit after permissible exemptions and deductions. But, service tax is paid as and when there is a provision of service from one person to another and if the total amount of service in a year crosses stipulated threshold amount. Service tax is an indirect tax in the sense that the burden of paying tax is passed on to the subsequent customers though payment is done by service provider itself.
Therefore, if Mr. A provides a taxable service to Mr. B for Rs. 100, then, Mr. A will charge Rs. 100 as consideration for service and Rs. 10 as service tax assuming the rate of service tax is @ 10%. Then, the invoice issued by Mr. A to Mr. B will show total of 110 Rs. And here the burden of paying tax has been shifted to Mr. B, who is a service receiver/recipient and a final customer but law generally fixes the liability of payment on service provider which is Mr. A. So, Mr. A will have to deposit that Rs.10 as service tax in government’s coffer though it is actually collected from Mr. B. That’s how all the indirect tax (Customs. Excise duty, sales tax/VAT, Entry Tax etc.) work.
After this little background about service tax and little history about service tax in India, I enjoin here in my this small note that Nepal is moving towards a stage where we need to impose service tax slowly but steadily. This debate is raised here after a recent decision of Government of Nepal imposing service tax in private educational institutions.
As I have already said elsewhere that the modalities are not completely known yet and the first step towards service tax itself is on the wrong service sector, the government must have received some flak from so called “intellectuals” and “protagonists of education-as-fundamental-rights” but these hue and cry here and there should not deter government from imposing service tax on other promising sectors.
I have mentioned the case of India at the start of this note to suggest that our close neighbor who has lots of similarities with our country in different indices is gaining revenue from service sector and if we learn from them how they have traversed a long path in as many as 14 years, then, it can be a great learning experience for our government before it puts its foot over another service sector.
The taxable services today can include, at its start, the services of chartered accountants, courier, transport of goods except agricultural products, advertisement sectors except print media, insurance services, home construction services and even banking services to cite a few examples.
When any indirect tax is imposed, the first thing needs to be carefully considered is there should not be any double taxation. There should not be any tax on taxes. In indirect tax language, it is called ‘cascading effects’ and the tax legislators should be very careful to avoid this ‘cascading effects’; to avoid this tax on the taxes. Generally, the government world over, succeeds this-removal of cascading effects by making a provision of credit where taxes already paid will be given as credit to the party who has paid tax but unfortunately, this does not benefit the common man who doesnot provide any taxable output services. This becomes the cost for the party which can not utilize any credit which is inherent fault imbibed in indirect tax jurisprudence.
One of the significant aspects of tax imposition is revenue administration by the government. The incompetent and those thriving on bribes must be thrown to jail without mercy, at the same time; the raj of big and powerful businesspeople should end. I have still vivid memories of those incidents where big and powerful business people shut down their shops in New Road, Bishal Bazar, when revenue administration from commercial tax (for Value Added Tax Administration) visited to inspect. These kinds of raj by business mafias must be dealt sternly and let all of them know that government does not plead them anymore to engage in business but government is there to create a business friendly environment.
In the conclusion, I feel that there is a need of service tax in Nepal, not in education sector or medical hospital sectors but in other sectors like tourism services, travel agent and tour operators, mobile telephony services, ringtone and value added services, advertisement services etc. Government can pitch the initiative keeping tax rate very low @ around 5% in its trial and wait and see the responses.