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Govt's choice of sectors exempt from service tax is wrong
September, 02nd 2011

The finance ministry has proposed a list of service providers who will be not be taxed under the goods and services tax regime. A negative list - where some services will be exempt and others will be taxed - is a good idea. It will bring many untapped sectors under the net, reduce disputes and make tax collections easy. Ideally, the negative list should be a small common list.

However, the finance ministry has erred in proposing a service tax waiver to as many as 27 sectors including agriculture and animal husbandry, finance, real estate and construction, charitable institutions and NGOs. The selection is arbitrary and devoid of any logic. Soon, other sectors will demand tax breaks. The model goods and services tax, recommended by the Thirteenth Finance Commission (TFC) and accepted by the Centre in principle, allows for no exemptions other than a small list that includes health and education.

The government should implement the TFC recommendations in concurrence with the states. The rising costs of healthcare and education as well as their utmost importance as public goods for the poor, make a strong case to bring them under the negative list, but just exemption from GST won't do. Healthcare and education must be treated like exports that would be zero-rated under GST. This means service providers will be refunded all taxes paid on inputs, while the final product will be spared of tax.

Today, service tax revenues account for less than 1% of GDP, though services contribute to over 60% of the economy . The government should expand the net to cover all other services including railway passenger fares. The Centre can adopt the negative list even before the roll out of GST. This will help states to assess the tax base under GST. Area-based exemptions must also end as it would be difficult to subsume such schemes under GST. Exemptions spell patronage and kill the spirit of simplification that has been guiding the path of indirect tax reform. The government should make the tax system clutter-free and withdraw exemptions if it's serious about implementing GST from April next year.

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