NEED FOR A TAX ON SERVICES

In any Welfare State, it is the prime responsibility of the Government to fulfill the increasing
developmental needs of the country and its people by way of public expenditure. India, being
a developing economy, has been striving to fulfill the obligations of a Welfare State with its
limited resources. The Government's primary sources of revenue are direct and indirect taxes.
Central excise duty on the goods manufactured/produced in India and customs duties on
imported goods constitute the two major sources of indirect taxes in India. However, revenue
receipts from customs & excise have been declining due to World Trade Commitments and
rationalization of commodity duties.


On the other hand, service sector has been growing phenomenally all over the world, though it
may vary in degree and magnitude among the various countries. The growing importance of
this sector can be gauged from the ever increasing contribution made by the service sector to
GDP, thereby pushing back the contribution of traditional contributors like agriculture and
manufacturing sectors. India is also not an exception to this changed phenomenon. In 2002,
the service sector accounted for 49.2% of GDP while agriculture accounted for 25% and
industry 25.8% of GDP. Continued growth in GDP accompanied by higher rate of growth in
service sector promises new and wider avenues of taxation to the Government.