A question of service

THE government has, in the recent past, levied service tax on a number of financial services and intermediaries. Industry participants have mostly resisted such levies. However, not all such resistance is based on selfinterest. There indeed is a need to seriously evaluate the economic rationale and the purpose served by imposing service tax on financial services. This has to be done from the perspective of the investor, borrower and saver, as also from the viewpoint of maximising access to cheap, organised and regulated financial services. There is also the need to figure out the impact such levies have on existing regulations. The situation, especially in the mutual fund sector, underscores the need for such an exercise. Service tax has, over a period of time, been levied on various services used by funds. The tax is, therefore, paid for asset management, services rendered by the registrar and by the custodian. The imposition of service tax on fund distributor commissions had kicked up a storm. While that particular tax was compensated through an increase in the load, funds have been requesting the government to keep sovereign levies such as service tax out of the limits on expenses imposed on them by regulation. Reports, in the case of insurance, indicate that there still are some issues to be resolved vis-a-vis service tax on the risk component of premium and on insurance agent commissions. The imposition of service tax on interest, too, has reportedly been explored.
The impact of service tax on organisations and intermediaries is only one aspect. The increased cost of financial services is another. There is a need to evaluate the extent to which such taxation raises the cost of financial intermediation. Considering the low yields and spreads in the case of various financial instruments, such an evaluation becomes even more pertinent. This will also help bring further clarity on implementation of the integrated goods and services tax.

--The Economic Times Editorial dated 31st May 06.