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M&A advisory services may be target for service tax

Shaji Vikraman

Hema Ramakrishnan

NEW DELHI, Feb. 18

THE Finance Ministry is looking at increasingly targeting advisory services relating to merger and acquisition (M&A) activities as a potential area for service tax despite initial legal hurdles faced by it.

Officials said the Ministry had commissioned the Indian Institute of Management, Ahmedabad, to examine whether M&As formed a part of management consultancy services. This followed a petition filed by a leading investment banker contesting the Government' s contention that it was liable to pay service tax for providing consultancy services relating to M&A.

The Government sees M&A activities as a potential source of revenue, given the upswing in such activities in the country. M&A deals worth over Rs 16,000 crore were reported during 1998-1999. The magnitude of these deals surged to around Rs 37,000 crore i n 1999-2000. Services contribute to 52 per cent of the GDP.

Apart from M&A activities, the Ministry is also expected to include a host of new services under the service tax net in the ensuing Union Budget, based on the recommendations of the interim report of the Committee on Service Tax headed by Dr Govinda Rao.

The panel, which met here on Friday, will submit its final report after the Budget. ``As policy issues on service tax have by and large been covered in the interim report, the final report will contain recommendations on simplifying the administrative pr ocedures,'' officials said.

The Government has, however, received representations from several groups, including the information technology sector, seeking to be kept out of the purview of the service tax levy.

Sources said the Finance Ministry was not averse to accepting the panel's suggestion that the Government should specify a negative list of sectors including say, public utilities, which will be out of the ambit of service tax.

The Government is also open to the suggestion of fixing a threshold limit on the turnover so that the number of assesses become manageable. The limit might be pegged at around Rs 10 lakhs, they added.

The Committee has proposed close to 25 new services which could be brought under the net. The levy was clamped initially on three services -- telephone, insurance and stock brokerage in 1994. This was enlarged to cover three more services in 1994, 12 mor e in 1997 and 12 in the subsequent Budget. However, the Ministry had faced several hurdles in its implementation.

Currently, the realisation from tax on services is a modest Rs 2,200 crore -- barely one per cent of the budgeted aggregate tax collection of Rs 2,00,288 crore.