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Budget may levy service tax on everything - coaching classes to gyms
March, 14th 2012

The Union budget is days away, and the government faces the challenge of stimulating growth and reducing the fiscal deficit by increasing revenue. The government is also keen to be on the road to implementation of the Goods and Services Tax (GST).

Sources in finance ministry have indicated that the budget will unveil a 'negative list' of services, covering the only services which will not be subject to service tax. All the rest will be taxed. This will be different from the current scenario, where only 107 specified services are covered by the tax net and the rest are outside the ambit of service tax.

This is going to be a key change and it will help the government mobilise about Rs 20,000 crore of additional revenue and reduce the fiscal deficit. This will also help in accelerating the transition to the GST regime. For us as consumers, this will mean that we will bear tax on all services. This will also increase the input costs for all industries that will not be able to pass on that extra tax cost to consumers.

The government proposes to define service as "anything that does not constitute the supply of goods, money or immovable property." Therefore, every transaction other than the sale of goods or money will be considered a service. Then, there will be a negative list setting out excluded services.

The 'negative list' basis of exclusion/taxation is prevalent globally in most regimes that levy a value-added tax. The tax is levied on all services with a few specified exclusions.

The European Union (EU), which is the leader in VAT, defines service as 'any transaction that does not constitute supply of goods'. The negative list includes services related to health, education, insurance, banking, transportation, etc. Each member of the EU has its own negative list specific to that country.
New Zealand, similarly, defines service as that 'which means anything which is not goods or money'. The negative list of services of New Zealand includes exports, certain financial services, etc.

India's proposed GST regime is similar to the VAT regime that Canada has. Canada has VAT on transactions of goods and services.

It also defines service as 'anything other than property, money and that which is supplied to an employer by an employee'. The list of exempted services includes healthcare, education, real estate, legal aid, exports of financial services, inbound and outbound transportation, etc.

Nearer home, Singapore defines service as 'anything which is not a supply of goods....' with a limited list of excluded services.

It is interesting to note that Singapore and Canada have classified their negative list of services into two categories, one which allows credit of VAT and another which does not. Service providers can choose not to avail themselves of exemption and pay tax. This allows the recipient to take credit and not break the tax chain.
The UK and countries in South America such as Chile follow a negative list approach with all other services being taxable.

Gathering this experience of taxation of services, the government has decided to adopt this best practice and tax all services with just a short negative list.

A concept paper on taxation of services based on a negative list was released in August 2011. This paper was widely circulated and after receiving considerable positive feedback, in November 2011 the 'Revised concept paper on taxation of service based on negative List ' was released.
As per this revised concept paper:

"There shall be levied a tax (hereinafter referred to as service tax) at the rate of X percent of the value of services provided, or to be provided, by a taxable person to another person and collected in such manner as may be prescribed."

Taxable person has been defined as 'any person who independently carries out any economic activity, whether or not for pecuniary profit '.

The tax on services will be on all 'transactions in service carried out with another person by a person engaged in an economic activity on his own account'.

Thus a consideration will be necessary to attract the tax. Services carried out for free will not come under the charging section.

The paper also revised the negative list considerably. The suggested negative list of services are services by:
1. The government, except activities specified such as business promotion, construction, insurance, port and airport services, postal services, renting of property, security, trade fairs, transportation, warehousing. (These are activities where the government and the private sector compete).
2. International bodies and diplomatic missions.

3. Social welfare and public utilities like funeral, burial, mortuary services.

4. Financial sector - Dividends on investments, sale and purchase of securities, debts, mutual funds, foreign exchange sold by authorised dealers. Interest on discounting of cheques, promissory notes, bills of exchange or debt instruments.

5. Transport sector - metered cabs, auto rickshaws, non-AC railways or metro, public transport buses and ships with conditions.

6. Construction and real estate sector - for specified infrastructure projects, single unit residential premises and renting of personal dwellings up to a rent of Rs 1 lakh per month.
7. Education and health sector - excluding coaching centres, gyms, weight loss centres, health checkups and cosmetic and plastic surgery.

Certain other services such as copyrights, services by sportsmen, artists, trade unions, representational services by advocates to individuals, services to own members, tolls, betting, gambling and certain advertisements that are not on print and electronic media are also exempted.

We all will now have to get ready to bear service tax on almost all services we consume at the existing rate of 10.3 percent. I can already see my bill from the landlord or the tailor increasing.

The current threshold of Rs 10 lakh per annum as a minimum threshold to be exigible to service tax needs to change as the government would face difficulty monitoring such a large increase in the number of taxpayers with the introduction of the 'negative list'.

The 'point of taxation rules' introduced in July 2011 has been a pain point for the service providers because of its complex wordings. The government needs to simplify its applicability to achieve greater compliance by a large number of 'first time' service tax payers.

The Cenvat credit rules also need to be streamlined to ensure that there are no bottlenecks and the increased taxpayer base can seamlessly take credit.

The revised concept paper mentions that to operationalise the 'negative list' it would be necessary to move towards a codified 'Place of taxation/supply rules'. These are to be released for feedback soon.

The export and import of services rules will also need to be amended to accommodate the 'negative list' structure.
There is also a need for greater clarity on transactions that are a mix of service and supply of goods. An overlap on right to tax certain services, such as software, between states and centre also exists and the same needs sorting out.
The implementation of a dual GST will address these issues. However, if the service tax on all services with just a negative list is implemented before the rollout of GST , then the government will have to take due care to ensure that these areas are attended to in the budget.

To conclude, if the budget announces this radical shift to taxation of all services with a specified negative list, it will be a step in the right direction towards GST and hopefully the increased Central Government revenue will tempt the states who are opposing GST on narrow political grounds to fall in line.

Amrita Mitra is Indirect Tax Partner, Grant Thornton India LLP. The views expressed are personal and not necessarily that of the firm.

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