The CBEC has suggested a switch from an ad hoc system of selecting services to tax, to a negative list in view of the impending GST regime.  Presently, the service sector contributes to over 60% of GDP, but service tax revenues account for less than 10% of GDP, since only 16% of the sector is being taxed despite having a list of almost 120 taxable services.  The implementation of a negative list removes any non- considered biases caused by the present system which plays favorites by taxing some services and leaving others out of the tax net.
The international community that has adopted the GST regime has adopted a negative list, both for the goods and services that come within the ambit of the tax.

The CBECs first concept paper dated August 29, 2011 read together with the revised one indicates that the plethora of services forming the definition of service have been retained, while stating that the Government can move these services to the list of notified services at its discretion. The CBEC has chosen to expressly include services like in relation to lease and hire of goods and the obligation to refrain from acting, services, which are weighed down with litigation in India and internationally.  The inclusion of such services in the negative list before the implementation of the GST will lead to multiplicity of taxes on the same transaction viz. entertainment tax, VAT and Service tax.
The revised paper adds a charging section, which defines a taxable person as one who engages in economic activity, providing further that such a person must render a service to any other person on his own account with or without a pecuniary motive.

The concept paper indicates that this provision seeks to limit the tax net to non-employees and also exclude those who work pro bono.  By adding this charging section, the CBEC has removed from its web political parties and religious organizations not engaged in economic activity, however non-profit organisations continue to be covered.
The charging section has been framed such that the terminologies used have a wide connotation which may lead to dispute.  The paper acknowledges that this section will change with the implementation of GST when taxable event may include supplies not covered in the present scheme of taxation. The concept paper uses threshold and classifications to decide which services are taxable and which are not.

The exclusion of healthcare services, originally limited by threshold amounts has been limited to clinical services in certain cases, which is less unwieldy than the original threshold limitations.
Taxability of the construction of personal dwellings with more than one single dwelling unit shall continue to be a source of dispute in case a part of the dwelling is subsequently sold off as an independent unit.
Owner occupied dwellings tend to be liable to GST on imputed income in the wealthier nations, exempt in countries like South Africa where ground realities are similar to India.  The present concept paper works with this logic, only levying service tax on rents of 1 lakh or more per home per month which is a good suggestion, brining in revenue without straining collection resources for small amounts. 

Government services have been added to the negative list on the grounds that service tax from this sector would be a revenue neutral collection, only increasing costs. The propositions for maintaining an equal footing in the original concept paper and the present are based on whether the Government competes with the private sector in the to-be excluded service areas, which is a sound policy move, seeking to avoid consumption distortions which would hurt competition.
The present paper specifies industries that will be considered to provide Government services.
Another interesting deletion to the negative list is the inclusion of services provided directly in relation to agriculture, horticulture and animal husbandry. The exclusion of earnings by sportspersons, performing artists, etc.; and copyrighted works puts the entire community of performers on an equal footing, which will lead to less conflict during assessment.

The revised concept paper reduces the number of entries on the negative list to 21 from 27 which is definitely a move in the right direction, since once room has been made on the negative list for non-essential services, there will be pressure from a variety of lobbies to include their services on the list for one excellent reason or another. The idea of having a negative list will be lost if, five years from now, the negative list includes 50 services and we wait on the day of the budget to see which of the services will be left out.
The CBEC may want to consider whether implementing a negative list at this time, before the introduction of GST, would serve any purpose.

The introduction of this list now would not reduce the cascading effects of taxes, but only increase it. The introduction of negative list would be accompanied by new place of supply rules and changes in credit rules. This will only increase the disputes and the transaction cost of doing business in India. Further, industry is still reeling under the changes brought about by the Point of Taxation Rules, 2011. Another substantive change in service tax would be an additional cost to the industry of aligning their business processes and systems. Since GST would be a major change where the states would be equal stakeholders, it makes sense to get the states involved in the discussion so that the potential change at the time of GST is limited. Taxing services through a negative list is a sound policy decision and its introduction is inevitable. What needs to be seen is whether this is the right time to introduce it or we need to get all the changes in along with the GST.