It is strange that while reducing peak rate of excise duty from 14% to 10%, central government did not reduce the peak rate of service tax from 12% to 10% or 8%.

Further it is first time that duty of excise is less than tax on services.

While increasing the rate of service tax from 10% to 12% in the Budget 2006, Mr. FM said that:

"…..Hence, we must progressively converge the service tax rate and the CENVAT rate. I propose to take one step this year and increase the service tax rate from 10 per cent to 12 per cent…."

Thus for the rate of service tax was 12% where as the rate of excise duty (CENVAT) was 16% during the period 2006-07 and 2007-08

In the Budget 2008, peak rate of excise duty was reduced to 14% from 16% but rate of service tax was kept intact.

Everyone knows that service sector is worst hit due to current financial crises. Further, it is beyond doubt that service sector is contributing a great role in brining the convertible foreign exchange earning. On the other side, service tax on various services, is ultimately passed on to the consumer, therefore, it must be pertinent for the central government to reduced the rate of service tax from 12% to 10% at least.

Here, we like to draw the attention of our netizens about major change made through the Budget 2008 with respect to service tax and excise duty on software.

Sale of Packaged software attracts excise duty while customized software attracts service tax.

In the budget 2008, Mr. FM has announced that the rate of Excise Duty (CENVAT) and Service Tax will be same as 12%.

After the reduction of excise duty with effect from 7-12-2008, now the rate of excise duty on packaged software will be 8% whereas rate of service tax on customized software will be 12%. [See excise notification no. 49/2006 CE dated 30/12/2006 as amended by notification no. 58/2008 CE dated 07/12/2008]

Therefore, it is extremely necessary for the central government to consider the reduction of rate of service tax on the taxable services.

 

Service tax disparity increases burden on service providers and calls for rate alignment with excise to restore parity. Central fiscal measures cut peak excise duty while leaving the service tax rate unchanged, creating a disparity where excise on goods is lower than tax on services; this note criticises the inconsistency, stresses the disproportionate burden on the service sector and its pass-through to consumers, and highlights unequal treatment of packaged versus customized software that results from differing excise and service tax rates.