The finance ministry is exploring the option of introducing tax deduction at source, or TDS, in the services sector to stem tax evasion, though some experts say the move could raise transaction costs and lock up working capital. 

The proposed tax regime will be similar to the one in place for income tax, where employers deduct tax before paying out salaries. It will mainly affect business-to-business service providers such as IT majors TCS, Infosys and Wipro, BPOs and consultancy services, as it will lock up their working capital. 

North Block hopes the system will give a one-time kicker to revenue by collecting taxes that may have to be refunded later, allowing the government to create a float of thousands of crores of rupees that could come handy in the current fiscal. 

"We are examining if such a system can be replicated in service tax," Central Board of Excise and Customs (CBEC) chairman S Dutt Majumder told ET. 

Data from the Directorate General of Central Excise Intelligence (DGCEI), the intelligence wing of the indirect taxes body, shows that there has been a 70% increase in evasion cases over the past two years, he added. 

The services sector contributes nearly 60% to the overall economy. CBEC has set up a study group to examine the modalities of the TDS method for the sector and also sought comments from stakeholders. The group is expected to give its report next month. 

The study group will also examine whether the TDS method can be applied uniformly to all taxable services or only to certain specific or sensitive taxable services. Service tax is levied at the rate of 10%. 

The department feels this is a neater way of collecting service tax, which contributes 20% to indirect tax collections. "The TDS system followed by the income tax (department) is a very neat and efficient way of collecting tax," Majumder said. 

But his assessment is not shared by those likely to be affected.