The previous article in this column had highlighted the salient features of the Concept Paper on Services Taxation (Paper), which was recently released by the Central Board of Excise and Customs for public debate. This article will focus on the various services that have been listed out in the Paper for possible inclusion in the negative list. These services have been grouped into eight specified categories with the ninth being a residual one wherein as many as ten individual services have been identified.

The first category is that of services provided by specified persons and the three sub categories enumerated thereunder are:
notified services provided by: 

a. the Government and the judiciary;
. the RBI; and 
c. Government regulatory bodies

services provided by individuals to the Government in relation to their representation on any council, commission or similar body set up by the Government.

services provided by the UN, international bodies, diplomatic missions under diplomatic and consular arrangements as per laid down conditions (details to be specified).

Now, it can be seen that the aforesaid services, to the extent notified as per certain principles that would be laid down for the purpose, ought certainly to form part of the exclusions to the tax since they would typically qualify under the grounds of public policy, international agreements/obligations and the like. Hence, this first categorization of services for possible inclusion in the negative list appears in line with the prevalent practice elsewhere in the world. It is interesting to note here that regarding the services to be provided to the UN and others bodies, the Remarks Column in the relevant Table to the Paper states that such services will be exempt, as is currently the case. This would imply two things; one, that exempt services would not form part of the negative list and, second, that all services which will form part of the negative list would be zero rated, with the consequent ability to recoup input taxes. This point needs further elaboration and discussion since, as pointed out in the previous article, there is otherwise no explicit recognition of the principle of zero rating in the Paper.

The second categorization of services provided as part of social welfare and by public utilities is again in line with international practice, including the caveat contained in the Remarks Column that the above public and social welfare activities will be suitably defined/restricted. There is a further sub categorization relating to services connected with deaths and this is surely unexceptionable, since surely there ought not to be taxes attendant to such unfortunate events even though deaths and taxes are supposedly the only two constants in this world!

The third categorization is an unusual one relating to agriculture and animal husbandry notwithstanding that it is limited to those services that are directly used for growing, cultivation or harvesting of agricultural produce or in horticulture, forestry, poultry/dairy farming etc. It is moot as to whether all such services, notwithstanding the envisaged limited set of exclusions, should be in this list, especially given the overall philosophy of tax reform in general and of the GST in particular, of broadening the tax base and hence moderating the resultant tax rates. It is also India specific, given the countrys continued inability to tax agriculture to any meaningful degree. Here again, there is an interesting reference to exemption from tax of support services in regard to these areas, again leading to the possible interference of zero rating of services under the negative list.

The fourth categorization is an interesting one relating to the financial sector. As is well known, the financial sector has internationally been treated distinctly under the GST. This is both from the point that it is hard to tax financial services in many instances and also from a public policy standpoint given the primary role of the sector towards building financial inclusion and other socially relevant objectives. However, under this broad category, only four specific services have been listed out for possible inclusion in the negative list, namely sale or purchase of securities/debts on a principal to principal basis, interest, dividend and inter-bank sale and purchase of foreign currency. Surely, the just initiated debate on the appropriate taxation of the financial sector under the forthcoming GST is the appropriate and broader one and the negative list, insofar as this sector is concerned, will need to be considered in the light of this debate. It is also important to note that the report of the Task Force of the Thirteenth Finance Commission on the GST did recommend full taxation of the sector under the GST, with a corresponding complete offset of all input taxes on both goods and services used in the sector. This debate is very nascent and it is critical to bring international best practices to bear upon the discussion, so that indirect taxation of this important engine of economic growth is appropriately calibrated.

The next category is with regard to transportation. The sub categories are public transport of passengers by buses, metered taxis, three wheeler auto rickshaws, ships or vessels of specified tonnage, transportation of goods outside India by any means of transport and supply of goods carriage to a person engaged in goods transportation. It is interesting to note that public transportation of passengers by local rail, metro rail etc. is not part of this list and is hence apparently intended to be taxed. It is also moot as to why transportation to a destination outside India need at all to form part of the exclusion, notwithstanding that inland transportation up to the countrys borders could happen during such transportation. This is because the overall principle of zero rating of exportation from the country of both goods and services will, in any event, need to be observed, regardless of the inclusion of such transportation in the negative list.

The sixth categorization of services is in relation to specified construction and real estate related services, all of which can clubbed together as public works. Hence, the detailed itemization of such public works is entirely in order. In addition, there is an exclusion pertaining to construction activities relating to residential buildings comprising of a single dwelling unit. This is again unexceptionable. The point about zero rating however is an important one in relation to these public works, as without the benefit of input tax offsets/refunds, the resultant stranded tax costs could be significant, given the magnitude and the scale of such public works requiring the widespread use of tax paid goods and services. This is a very important point and requires substantial discussion and debate. The final sub categorization under this category relates to renting of residential houses below a defined monetary threshold (supposed to be finalized after debate) and when used otherwise as a hotel, inn, guest house, etc. This sub categorization appears problematic and would surely merit further discussion.

The next and last article in this series will focus on the other services contained in the Paper and conclude with some broad recommendations in regard to the proposed negative list.