Directions: Read the following passage carefully and answer the questions given below it. Certain words/phrases are printed in bold to help you to locate them while answering some of the questions.

The genesis of service tax emanates from the ongoing structural transformation of the Indian economy, whereby presently more than one-half of GDP originates from the services sector. Despite the growing presence of the services sector in the Indian economy, it remained out of the tax net prior to 1994-95, leading to a steady deterioration in tax-GDP ratio. The service tax was introduced in 1994-95 on a select category of services at a low rate of five per cent. While the service tax rate and the coverage of services being taxed have increased ever since, the combined tax-GDP ratio of the Centre and States, nevertheless, deteriorated from 16.4 per cent in 1985-86 to 14.1 per cent in 1999-2000. It may be noted that between 1990-91 and 1998-99, the share of industrial sector in GDP dropped by 6.4 percentage points whereas almost 64 per cent of the tax revenue was generated by indirect taxes for which industrial sector continues-to be the principal tax base. On the other hand, during the same period, the share of services sector in GDP has increased by 10 percentage points and this sector has still remained poorly taxed.

The rationale for service tax, therefore lies riot only in arresting the falling tax-GDP ratio but also in ipso facto improving a locative efficiency in the economy as well as promoting equity. Against this back-drop, the service tax needs to be designed taking into account the fact that (i) the share of services in GDP is expanding; (ii) failure to tax services distorts consumer choices and encourages spending on services at the expense of goods; (iii) untaxed service traders are unable to claim value added tax (VAT) on service inputs, which encourages businesses to develop in-house services, creating further distortions; and (iv) most’ services that are likely to become taxable are positively correlated with expenditure of high income households and, therefore, service tax improves equity.

In the Indian context taxation of services assumes importance in the wake of the need for improving the revenue system, ensuring a measure of neutrality in taxation between goods and services and eventually helping to evolve: an efficient system of domestic trade taxes, both at the Central and the State levels.

The coverage of services under tax net has been progressively widened over the years. With effect of the Finance Act, 2004, 71 service are presently contributing to the service tax collections. The services tax is applicable to II parts ofIndia except the State of Jammu and Kashmir and is leviable on the gross amount charged by the service provider from the client. The rate of service tax was increased from 5 per cent since September 10,2004. With the increase in tax rate and base of service tax, the collections from the service tax have shown a steady rise from Rs. 410 crores in 1994-95 tc. Rs. 8,300 crores in 2003-04; however, they accounted for only 4.4 per cent of the total tax receipts of the Centre (0.3 percent of GDP) in 2003-04. Service’ tax is envisaged as the tax of the future. The inclusion of all value added services in the tax net would yield a larger amount of revenue and make the existing tax structure more elastic. Once the service sector is adequately covered under tax net, the buoyant services sector will enable the reversal of declining trend in tax buoyancy. Besides raising the revenue buoyancy, appropriate taxation of services sector would also provide equity, efficiency and consistency in the tax administration as well as neutrality for various economic activities. Integration of services sector to the tax net would be the prelude to the introduction of a full-fledged VAT system.

1. What, according to the passage, was the impact of exclusion of service tax till the first half of the last decade of the past century?

(a) There was no impact as there was no service tax
(b) There was a steady deterioration in the GDP
(c) Tax-GDP ratio had steadily and gradually aggravated
(d) Service sector used to flourish exorbitantly
(e) None of these

2. The origin of service tax is attributed to—-

(a) Increase in Gross Domestic Products (GDP)
(b) Existence of service sector
(c) Tax of the future
(d) Metamorphosis of our country’s economy
(e) Enormous growth potential of industrial sector

3. Which of the following is MOST likely to provide neutrality to various economic activities?

(a) Increase in revenue buoyancy
(b) Fairness in tax administration
(c) Equity and efficiency in various activities
(d) Consistency in tax structure and revenue buoyancy
(e) None of these

4. What is the probable impact of bringing all value added services under the tax net?

(1) It will yield a larger revenue.
(2) It will provide flexibility to the present tax structure.
(3) It will progressively decrease tax buoyancy.

(a) (1) and (3) only
(b) (2) and (3) only
(c) (1) and (2) only
(d) All the three
(e) None of these

5. When the author mentions that the service taxes constitute 0-3 per cent of GDP, he implies that-

(a) It is a substantially high amount
(b) The service taxes show a very progressive trend
(c) It is a very small amount
(d) There is no scope for further increase
(e) None of these

SBI Clerk Exam (Preliminary) Printed Study Notes

ANSWER:
1. (b) 2. (d) 3. (a) 4. (a) 5. (c)