It's been more than 15 years since service tax was introduced in India. Every year, more services are brought under the tax net and yet to date only an estimated of 16% of the sector is being taxed. The services sector contributes 60% to GDP, but tax revenues contribute less than 10%. In an attempt to bring all, but a few services under the tax net, the Central Board of Excise and Customs released a revised negative list concept paper in November last year.
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The list proposes that besides 22 categories of services such as government services, pre-school education, clinical services and the like. Revenue from all other services must be taxed. Many argue that the introduction of a negative list must be done at the time of introducing GST, but the government may counter that by saying that an early introduction of a negative list will pave the way for a smooth transition to a goods and services tax.

Vivek Mishra of PwC, S Nageswari of TATA Communications and Rohan Shah of ELP discuss the topic of service tax, the moot question being will Pranab Mukherjee introduce a negative list in this Budget 2012? While all three of them here hope it doesn't happen, but two out of three believe that Pranab Mukherjee will bring in a service tax negative list this Budget in an attempt to bring more services under the tax net and to shore up revenues.

Below is the edited transcript of the interview. Also watch the accompanying videos.

Q: With the desperate need to raise revenue, is Pranab Mukherjee going to use this Budget as the reason for introducing a negative list, considering that that is already been out and under debate for the last several months?
Shah: That is very likely. Though personally, I think he ought not to and the reason for that is bringing in a negative list preceding the introduction of a GST will have several very negative consequences for industry at large.
Q: Such as?

Shah: The key factor is you are really not going to get a clear definition of what is taxable and what isn't. So today, we don't have a definition of services. So our perception is what constitutes a service and we see the taxing entries in relation to that.

A negative list will effectively tax every transaction for money other than the supply of goods, immovable property and money itself. So several things, which common sensically are serviced potentially could get taxed - for example, if you pay for a Right of First Refusal or if you pay in relation to exercise of option. If you have certain other transactions in the nature of licenses, all of this today in nobody's perception as the services, going forward with a negative list all of this will be taxable.

Q: Why can't all of this be included in that negative list or come under the list of so called perceived services that are not meant to be taxed?

Shah: What you effectively have is a situation of saying this is service and this is now taxable and then they have certain exclusions. Now the exclusions don't exclude any of this nature of transactions. So your risk is, the moment you give a license to tax, which is this large, you have a very small list of what is excluded.
So potentially depending on the interpretation of the tax collector, anything which is a transaction for money could be taxed. Now your problem there is, you already have this constitutional debate in terms of what the state can tax, what the centre can tax.

You have several issues where both of them tax and you have to pay tax literally twice over, the scope for that will increase immensely. You will have a problem in terms of valuation because when you have transactions, goods and services - both or composite services, you don't have to value it. You will have credit-related issues because for credit you categorize services, the whole import and export of services is again based on a categorization.
So the moment you give such a wide license, you create a whole realm of uncertainty and the world over negative as a stealth tax. You don't know what will get taxed. So on day one it doesn't hit you, but the interpretation of it over a period of time brings more things to tax.

Q: Rohan says the finance minister shouldn't but he will? Do you agree?
Mishra: I partly agree with the first part that he shouldn't because I think he should bring in a negative list at the time of GST where this dual taxation of goods versus services is a question that will largely go away. It won't entirely go away for some technical reasons but largely it will go away. But I don't think he will.

Q: What makes you think that Pranab Mukherjee may not bring in that negative list this year?
Mishra: There are two or three sectors which the previous finance minister attempted to bring under the service tax law under the current positive list approach, if I can call it that.

An example is railways, another example is certain types of medical care, third example is going back many years transport of goods by road. These were withdrawn. These were a couple of high profile examples which were withdrawn due to lot of resistance from the affected sector.

Just to add to that, goods transport by road is taxable but it is a reverse charge. It is on a corporate who pays for it - it is not the service provider who is taxable. There is no reason to think that these sectors would in the interest of there being simplicity in tax say that this negative list is a part of larger movement and subject themselves to tax. They will probably again protest and then you are taking on 2-3 very powerful sectors at the same time so I think it is unlikely.
Q: You are saying there are political reasons for why he may choose not to bring in that negative list - is it because of the potential protest against it? This is the only year he has that opportunity because next year and the year after would be too close to national election?

Mishra: Yes, so then that is also a political point.

Q: Why do you believe that he will bring it in despite all the reasons that Vivek believes it won't come in?

Shah: Two reasons. One, quite clearly is that there is a compulsion to try and generate more revenue. Secondly, they have consistently said that there are several steps that we are taking towards GST. So last year, they brought in several exempted items from excise to tax. They say this is another of those preparatory moves. Now your situation is the moment you see this as a preparatory move but the date for GST is uncertain. What you are doing is your harvesting all your negative stuff bringing it in saying I will bring in GST but you don't have definite date for GST.

Earlier the apex court had given the judgment on a petition filed by Janata Party president Subramanian Swamy. In his petition, Subramanian Swamy said that the PMO took 16 months to sanction the prosecution of A Raja in the 2G scam.