The Central Board of Excise and Customs (CBEC) has proposed to introduce a Tax Deducted at Source (TDS) mechanism in collecting service tax.

TDS has been successfully used for direct taxes like the income tax. Although the proposal is at initial stage, the board has set up a study group to examine its feasibility and how to implement it.

It is learnt this may be introduced in a phased manner in the current year itself. The Union finance ministry has set a target of collecting Rs 82,000 crore this year from service tax. A TDS on service tax would substantially help.

The opinion of industry organisations has been sought. The study group is considering whether certain services to the common citizen such as electricity and telecom could be kept outside the TDS method, as could small service providers and receivers.

They could continue to pay service tax as at present. It is most likely the new mechanism would be made applicable in a phased manner. From the point of view of service receivers, the new method would increase the burden of administration.

However, the CBEC feels many of them may be doing the same work on paying income tax, where the TDS method has been successful in guaranteeing more revenue.

Shailesh Sheth, advocate and member, Indian Merchants Chambers indirect tax committee, said: A TDS on service tax may turn out to be Terror at your Door Step for service recipients, as it will result in several complications and administrative burden for them.

He said as the payment of service tax had moved from a receipt to an accrual basis from April, there was no justification for introducing TDS in service tax. He contended the Cenvat credit mechanism prevailing under service tax would mean great turmoil if a TDS system for collection was introduced.

Sheths suggested alternative: Rather than introducing TDS in service tax, the government may expand the list of services where a reverse charge mechanism is applicable.

At present, reverse charge applies in case of import of services, goods transport service and a very few selected others where payment of service tax is required to be made by the recipient or the designated person but not by the service provider.