This is the last and the concluding article in this series on the Concept Paper on the negative list of service taxation (Paper) released by the Central Board of Excise and Customs for public debate. The previous two articles in this column had highlighted the salient features of the Paper and had focused on the various services that have been listed out therein for possible inclusion in the negative list. As indicated earlier, these services have been grouped into eight specified categories with the ninth being a residual one wherein as many as ten individual services have been identified. The earlier article had discussed the first six categories of services.

The seventh and eighth categories of exclusions are the perennials relating to Education and Health. On education, the Paper limits the exclusions to pre-school, school and recognised education (i.e. education leading to the award of a certificate or a degree recognised by a body established under Indian law) and vocational training of a particular kind, except for those where capitation fees, donations or similar charges in relation to admissions are received. The attempt here appears to be to exclude large parts of education from the tax. Given that the right to education is a fundamental right as per the Indian Constitution, as it is in most other countries, keeping education out of the levy of the tax is certainly in line with both public policy as well as global best practice. It is however imperative that the exclusions be as broad as possible and also that the principle of zero rating is made applicable. The rationale for excluding capitation fees and donations from the purview of the negative list, even if they are in regard to the excluded categories of education, as above, appears in order since such charges are typically recovered by high end educational institutions and/or from students who can afford to bear the tax.

The next category of service is that of Health. It is obvious that India has very poor public health indicators, when compared to global benchmarks and even when compared to many other developing countries. So, the case for universal healthcare is well made. The question is however moot as to how fiscal policy ought to be used in furtherance of this objective, if at all.

Consequently, the Paper devotes an entire paragraph to elaborating the manner in which healthcare is sought to be included in the negative list. Two options are envisaged. Under the first, all healthcare services provided by clinical establishments with a turnover below Rs 4 crore in the previous year would stand excluded. Further, services provided by such establishments to the economically weaker sections, as notified, as well as all services provided by hospitals could be exempted from the tax. The second option envisages that all healthcare services provided by hospitals as well as all diagnostic and paramedical services would be outside the tax and only preventive health check ups carried out in a clinical establishment, cosmetic or plastic surgery would be within the purview. However, this option does not accord with the discussion in the Paper which envisages that only basic and public health services ought to be in the negative list, with all other services being part of the tax chain, so that input taxes paid at the previous stage are allowed to be offset in the consequent stages of consumption. Clearly, further debate is required in this regard and the Paper does recognise this fact.

The Others category, being the residual one, contains a diverse range of services. Copyright services relating to original literary, dramatic, musical and artistic works, services relating to news gathering, sports and the performing arts, religion, trade unions, political parties, national and international prizes/awards in specified areas have all been sought to be excluded from the tax. These are all quite straightforward and do not admit of much discussion. On legal services, the exclusion is limited only to representational services provided by advocates to individuals and all other legal services will be taxed. This seems in order. The penultimate exclusion is with regard to tolls, except services in relation to collections of such tolls. The final exclusion relates to betting and gambling, as these are activities which are charged to entertainment taxes and the like, most of which are quite steep and the idea appears to be to avoid double taxation.

It can thus be seen that the Paper has enumerated a fairly detailed list of exclusions from the imposition of the service tax. As has been elaborated in this article and earlier ones, there are several aspects of these exclusions which would need to be debated and discussed, not only from the point of view of whether certain services ought to be part of the exclusions at all but also from the point of whether the restrictive definitions pertaining to certain exclusions would pose both interpretation challenges as well as difficulties in implementation. Further, there is no one right answer to many of these questions and international experience and tax treatment, relative to the negative list, do vary across jurisdictions. Further, as indicated earlier, the negative list is also part of the larger debate on how best to introduce the GST from a philosophical standpoint of broadbasing of the tax and hence moderating the tax rates, with the corollary of necessarily limiting the exemptions and exclusions from the tax to a small and finite set of economic activities. Hence, while it is indeed now the accepted best practice to tax all services, with the exclusion of a negative list, as opposed to a positive basis of service taxation, through definitions of specified services, it is very necessary to have an informed and wide ranging debate on the nature of this negative list. An extremely important point, which has been made earlier but which merits reiteration, is the one on zero rating. The distinction between zero rating and exemptions is well known but critical, since the benefit of recouping of input taxes, in regard to a situation of zero rating, is likely to be significant for several sectors forming part of the negative list. It is thus imperative that zero rating be explicitly incorporated in the negative list, wherever appropriate.

The broad recommendation would be to form a small core group of Government officials which will be mandated with carrying out extensive consultations and to thereafter make recommendations on the negative list which ought to be considered by the Government in much the same way as recommendations of a Parliamentary Standing Committee are treated.

Finally, there is also the discussion as to the timing of the introduction of the negative list and as to whether it should be introduced at the time of implementation of the GST or whether it should be introduced prior thereto. There are evidently pros and cons of either option. Some key considerations that ought to weigh in this regard are that the States do not currently tax services, whereas they would do so under the GST, as also that several major sectors such as retail, upstream oil exploration etc. are unable to offset input service taxes in the absence of relevant output taxes and the like. On balance, it does appear that the better option is to introduce the negative list of service taxation co-terminus of the introduction of the GST. That would be the recommendation on timing.