The Centre is expected to increase the service tax rates from 5 per cent to 8 per cent in the Budget for 2003-04, alongside stiffer audit norms and penalties for not filing tax returns.

The rise will bring the service tax regime closer to the central value-added tax on goods at 16 per cent.

According to S Madhavan, adviser to the government on indirect taxes and partner of PricewaterhouseCoopers, the service tax regime will also be strengthened by the introduction of stiffer norms on filing returns and a general toning up of the tax administration.

The Centre had targeted a service tax collection of Rs 6,026 crore (Rs 60.26 billion) in the Budget for 2002-03, up from Rs 3,600 crore (Rs 36 billion) the year before.

Actual collection, however, was only Rs 4,200 crore (Rs 42 billion) till January.

While 10 new services were included in the taxable list this fiscal, none, including promising industries like rail and air cargo agents, storage and warehousing services and cable operators, yielded significant tax revenue.

The ministry, had, however modified the tax on insurance to exclude life insurance, which, officials said, brought estimates down at least Rs 1,200 crore (Rs 12 billion).

The higher rates will, naturally, be applicable only to services that remain under the Centre's tax ambit.

The government has begun a process of verification of returns that are supposed to be filed half-yearly, as well as stepping up the process of registration of more firms with the department.

The Kelkar task force report has also asked for aligning the rates with the Cenvat rates.

Madhavan said it was difficult to envisage a sharp escalation of rates at one go from 5 per cent to 16 per cent in the next fiscal, unless a parking rate was found in the Budget for 2003-04.

He said the government had managed to clean up the Customs and excise regimes in the past few Budgets, and now it was the turn of service tax.

Finance Minister Jaswant Singh has already announced a constitutional amendment to bring service taxation under taxable entities.

Subsequently, another legislation will demarcate the areas that will be taxed by the Centre and by the states.

Run-up to the Budget 2003