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Centre-state consensus on service tax, finally
January, 10th 2012

Consensus has eluded the Centre and states on the proposed Goods and Services Tax (GST). But in a pre-Budget exercise, states on Monday gave their approval to the introduction of a list of areas to be exempted from the service tax planned to be introduced by the Centre from April 1, before the GST roll-out.

The nod, however, came with riders, with the Empowered Committee of state finance ministers (EC) asking the Centre not to venture into their territory by levying service tax in areas such as construction, entertainment, restaurants, transport of goods by road and inland waterways, beauty parlours, health and fitness, etc. If the Centre accepts, that may pave the way for the announcement of a negative list (of exempted areas) in the Budget. It would increase Central revenue from service tax by 20-25 per cent.

Prominent areas according to
The Centre's revised 
concept paper:
* Non-AC second-class passenger travel by the railways and any class by the metro
* Construction, renovation/repair of specified infra projects, single dwelling unit 
* Services by clinical establishments, except health and fitness
* Advertisements other than published in newspapers or broadcast by radio or television
* Betting and gambling
States wish list:
* Beauty parlours
* Other areas of construction
* Health and fitness
* AC restaurants
* Entertainment
Source: Union Ministry of Finance, state finance ministries

In a negative list approach, all services will be taxed by the government barring those specified in the list. That will be a shift from the existing system of a list of over 125 services that are taxed.

We have given our in-principle approval to the negative list for services. Service activities may be taxed based on the negative list after some amendments, with effect from April 1, said EC chairman and Bihars deputy chief minister Sushil Modi after the meeting on Monday. The meeting was held in Madhya Pradesh, which is most vocal about its opposition to the Centres GST proposals.

Owing to the upcoming assembly polls in five states, just eight state finance ministers of Bihar, Madhya Pradesh, Haryana, Jammu & Kashmir, Assam, Tamil Nadu, Delhi and Chhattisgarh attended. But, officials of other states were present and the consensus got their support as well.

Earlier, states had expressed reservations on the negative list. They had argued the Centre was levying service tax on several items within the states taxable jurisdiction. Now, they have proposed activities already taxed by the Central government or proposed to be taxed but under the state list in the Constitution be kept in the negative list.

States proposed the negative list include services within the ambit of the Centres residuary powers but critical for socio-economic reasons, such as social welfare and public utilities, agriculture, education and health. They argued if states were taxing certain activities, the Centre should not cover those under service tax, as it would not provide an additional tax base to state governments in the GST regime.

States also proposed changes in the definition of economic activity suggested by the Centre. They want the Centre to put it in the definition itself that items that can be taxed by states do not constitute service. The Centres concept paper has defined service as anything which does not constitute supply of goods, money or immovable property.

Currently, states do not impose any service tax and cannot do so unless the constitutional amendment Bill pending in Parliament for the GST roll-out is passed.

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