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A better goods and services tax
January, 19th 2012

The Empowered Committee of State Finance Ministers' endorsement to the concept of a negative list for services, albeit with some riders, paves the way for its possible introduction in the coming Budget. With the widening fiscal deficit and the urgent need to generate revenues, the Centre has released two concept papers, signalling its intent to widen the service tax base.

The papers reckon that the concept of a negative list - services that would be exempt from tax - is a precursor and an interim step towards implementing the goods and services tax (GST) in the near future. Although a negative list would enable a simplified GST design, its timing has led to apprehensions over double taxation.

States have endorsed the negative list, but with a contentious rider -- the Centre should refrain from taxing areas that are within states domain such as construction, entertainment, meals in air-conditioned restaurants and so on. It will be interesting to see the Centre's reaction when the concept is finally unveiled.

However, it underlines the serious issue of overlap of taxation powers between the Centre and states. This has led to many areas of double taxation (telecom, construction and so on), resulting in litigation, harassment and uncertainty for the industry.

Going by the concept papers, the negative list will only compound the issue of double taxation. However, both the Centre and the state are equally responsible as their aggressive actions in the recent past have led to the vexed issue of double taxation. So, an early implementation of GST seems to be the only solution.

This is one of the key reasons why industry believes that the concept of a negative list would be in order it is aligned with GST implementation. One only hopes that the concept is introduced as an interim step to GST.

The introduction of a negative list should also desirably bring along with it equitable changes in many other areas of service tax law. These include a clear definition of "service", place of supply rules and credit rules. Service tax law, since its evolution, has been a victim of misinterpretation, partly on account of lack of clarity in law making and understanding the business of intangibles.

This has led to plethora of litigation and uncertainty for the industry, raise compliance cost for the taxpayer and the cost of doing business. With the experience of over a decade, the hope is this time round is that policy and law makers come out with a concept that is fairly unambiguous in its intent and language. This will provide some degree of certainty about taxes.

A negative list will increase the tax base, but it is equally important for policy makers to take a closer look at credit rules. Efforts should be to provide a fair credit chain in the system to avoid the cascading of taxes and increasing cost of business. Over the last few years, far too much of tinkering has happened in this area. Some of it was welcome, but several of them were highly debatable, increasing areas of cascading of taxes. The negative list offers a chance for policy makers to have a holistic relook and provide more equitable Cenvat credit in the chain.

Place of supply rules is another key area of drafting. Here again, the hope is that policy makers use all their past experience to bring out clear and unambiguous rules that provide a fair degree of certainty. We all are well aware of issues relating to export of service rules that the industry has faced in the recent past. It has led to unnecessary and prolonged litigation and also stalled service tax refunds, hurting cash flows of the industry. The issue generally is never about taxability, but its certainty and an expeditious resolution of refunds.

Conceptually, a negative list is welcome, but what is debatable is the timing of its introduction. We still live in an indirect tax environment where the aggressive stance of Centre and State has created a serious issue of overlap, leading to double taxation and impacting the competitiveness of Indian industry in these uncertain times.

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