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Negative List For Service Tax - Positive or Negative?
September, 08th 2011

The CBEC recently issued a Concept Paper for Public Debate laying out its thoughts on creating a negative list of services for taxation.   

The Concept Paper says that the negative list could be used in creating a basis for taxation of services under the forthcoming GST, or it could be implemented earlier, replacing the current mode of taxation of services through the Finance Act 1994.

The negative list approach is one that would define what a service is and tax all services, except for some tightly defined exempt services which would be kept outside the purview of the tax.  This way, taxation of services would be comprehensive, with some limited exceptions which are included for social or welfare reasons. 

However, service tax in India has not followed this approach.  Service tax in India, as most readers would be aware, consists of a number of specific services that are outlined in the Finance Act, 1994.  This was perhaps done as it was thought that it would be best to follow an incremental approach and bring specific services within the tax net over the years.  This approach has probably served its purpose.  Certainly under GST, one cannot imagine that there would be more than 100 services described, which would be brought under the tax net. 

In the Concept Paper, there is an indication that some of the sectors that are currently not taxed (because they are not specifically brought within the tax net under the Finance Act, 1994) would now be brought under the tax net. 

For example, in healthcare, only hospitals with a turnover of less than Rs 4 crores would be exempt.  In 2011, the Government attempted to tax a majority of health services.  However, several prominent experts in the medical field opposed this vigorously; pointing out that Indias spend on healthcare is extremely low when compared to more advanced countries.  It was contended that in addition to the ordinary citizen having to fend for himself when it comes to healthcare, that the Government is now proposing to tax these spends was extremely unfair.  The Government felt compelled to defer the taxation of hospitals, and issued an exemption notification.

There would no doubt be similar arguments advanced by many other sectors that are sought to be brought to tax under the proposed negative list service tax. One more example would be high-end housing.  The concept paper proposes to tax residential rentals over a threshold limit, which is not specified.  This would no doubt have the real estate industry up in arms, pointing out that it is already extremely heavily taxed and one that generates a large amount of employment of unskilled and semi skilled labour.

Therefore, the government may find that it has its work cut out for it in introducing service tax in these hitherto untapped sectors. 

In addition, replacing one tax law with another which is structured quite differently would invariably create a number of legal controversies, as industry finds ambiguities, contradictions and loopholes in the new law.

The Government may find that it is better to simply add these services to the Finance Act 1994, rather than take on these industries and at the same time find that it has to fight a number of legal battles to clarify issues unintentionally raked up by the new law. 

GST is therefore perhaps the appropriate vehicle to introduce a comprehensive taxation of services, with some limited exceptions through a negative list.

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