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India not ready for negative list to tax services
April, 06th 2010

India has proposed a small but significant change in its service tax law in the budget for 2010-11. The change indicates the direction of the service tax regime as the country pursues a unified goods and service tax regime. The budget proposes to tax all services provided at port and airports.

"The definition of airport and port services includes all services provided within the physical jurisdiction of the airport and port, respectively, irrespective of whether or not they are defined as a taxable service under any other sub heading in the service tax legislation. The definition becomes ambiguous and all-encompassing as the word 'service' alone has not been defined in the service tax law, said Bipin Sapra, partner, Ernst & Young.

Strictly interpreted, this mean any service provided at an airport or port will be levied service tax even if that service in itself may not be taxable. In other words, an otherwise exempt service becomes taxable if the same is provided at a port or an airport.

This is a departure from the positive list approach the government follows while taxing services. Only those services that are to be taxed are mentioned in the tax laws. By taxing all services at ports and airports, the finance ministry effectively wants to experiment with the negative list approach for service tax as is the global practice. In a negative list approach only the services exempt from tax are mentioned explicitly and the rest face tax.

The same approach has been outlined in the draft discussion paper on the goods and services tax or GST prepared by the expert group set up by the empowered committee to prepare a framework for the new tax and also many tax experts.

The changes in the budget provide an excellent test case for the negative list approach to taxing services. Such a system not only helps the state collect maximum revenues but also makes administration of the tax easy and clean.

Services account for a majority of the countrys output, but India began taxing services only in 1994, beginning with a few select ones. The approach since then has been one of slow and steady expansion of the tax net to include more and more services.

The process has, however, been marred by litigation with stakeholders challenging the very logic behind imposition of tax on a number of services. For Indians to embrace a tax on a service that they have availed of so far without paying one is not easy. The negative list approach may thus lead to further increase in litigation.

The government can increase acceptance by carving out for essential services, but such an omission will invite demand for more exemptions. For instance, going by the international definition of service any business activity which is not supply of goods is service makes services such as a funeral service also taxable in an extreme case.

Therefore, to make more acceptable, the government should continue with the positive list approach of taxing services. A switchover over to negative list can happen at a later date in the second phase of GST.

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