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The downside to service tax negative list
July, 06th 2012

Dr Samuel Johnson said Second marriages represent a triumph of hope over experience.

After a tumultuous 16 years, service tax laws in India have moved over to a new regime governed by a negative list with effect from July 1, 2012, in the hope that life in the new era would be less rocky.

What was conceived as a simple tax in 1994 by the then Finance Minister, Mr P. Chidambaram, has matched Central Excise law for complexity and litigation. The Government was not complaining since its coffers were being well-fed by service tax collections.

As always, hope is eternal, and one hopes that the negative list and the legislation that accompanies it do not tempt either the department or the taxpayer to rush to the courts at the earliest opportunity.

In exempting health-care services by a clinical establishment, an authorised medical practitioner or para-medics vide Notification 25/2012 and funeral, burial, crematorium or mortuary services, including transportation of the deceased by an entry in Section 66D of the Finance Act, 1994, the Government has ensured that service tax accompanies us between birth and death.


From first impression, it appears that the expectation that the tax would be easier in the new regime would be belied.

In the erstwhile service tax regime, it required a combination of mathematical skill and alphabetical knowledge to specify the number of services that were either taxed or exempt. Something similar appears to be happening with respect to the negative list.

While Section 66D which accompanied the Finance Bill 2012 stopped at the alphabet q) making the total number of services in the negative list 17, the mega exemption Notification 25/2012 decided to stop the habit of using alphabets and numbered 39 services which were exempt.

A separate Notification details the exemption for units in special economic zones.

There are only a few common services between the Notification and the Section, making the total number of exempt services exceed 50 within months of the Budget.

As in the erstwhile regime, the Government appears to be taking special pains to pick and choose services that would appear in the negative list represented by an entry in the negative list for making telephone calls from a departmentally-run telephone, guaranteed public telephone operating only for local calls or free telephone at airport and hospital where no bills are being issued.

Movers and shakers of the Government could be influenced by vested interests to keep adding to this list which, if permitted, would soon make the number of items in the negative list equal the number in the positive list previously 119 at the last count.

The Government should ensure that irrespective of representations and influences, it would not touch the negative list for at least two years. The law would have settled down by then as the tax-payers would have got used to the tax.


The very nature of service tax law gathers a lot of small and medium service providers into the tax net. The threshold exemption limit of Rs 10 lakh was brought in with the objective of excluding the marginal tax-payer. The limit translates into an earning of Rs 3,000 per day which looks appropriate to exclude marginal players. However, considering that this was probably the only tax that was initiated without any exemption limit, there appears to be a strong case for increasing the threshold limit. This would also ensure that the marginal players are cushioned against the levy for some period of time, instead of having to dig into the negative list time and again.

There are no two schools of thought on whether the rate of 12.36 per cent imposed on all services, save for those in the negative list, would contribute to the inflation monster. A two-slab rate of tax at 6 per cent and 12 per cent would ensure that revenues continue to flow, as tax history is witness to the fact that reasonable taxes improve collections.

The fact that the Government has a kind heart towards small enterprises is proved by the inclusion of services provided by incubates up to a turnover limit of Rs 50 lakh in the negative list and providing an option for entities with a turnover of up to Rs 50 lakh not to follow the Point of Taxation Rules and pay the tax on receipt basis. If at all the Government is keen on moving over to the Goods and Services Tax (GST), it should also minimise the abatements provided under Service Tax.

The new era under service tax provides a golden opportunity to the Government to focus more on implementing the law than on drafting elaborate exemption and abatement notifications.

(The author is a Bangalore-based chartered accountant.)

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