| There is a raging controversy now in the industry circle about the desirability of a negative list for services for the purpose of tax. The idea is that a negative list will eliminate controversy about what is not taxable. The government has not allowed it so far, but is continuing with the system of naming and defining a service in positive terms before notifying it as taxable. The issue that needs to be discussed is whether the system of negative list is better than the present system of positive list of services.
The present system is known in literature on economics as selective approach. Selective approach is to first identify the service, define exactly what shall be the taxable event and levy the tax on it. Selective approach has been followed in Finland, Norway, Sweden, Indonesia, Argentina, Brazil, Colombia, Equator, Peru, Costa Rica, Dominion Republic, Nicaragua, Algeria and Senegal.
This has advantages of eliminating services not yielding much revenue and also defining the taxable event to begin with so as to ward off controversy about what should be taxed and what not. The approach is more suitable in developing countries where the predominant amount of services are provided by small firms, which are under the threshold any way.
The alternative theory of having a negative list is called the comprehensive approach. This is based on the thesis that individual services are indistinguishable from goods. No satisfactory borderline can (or should) be drawn between goods and services on economic grounds. Both kinds of commodities satisfy wants. Often, services are readily substitutable for goods and vice-versa. Compliance and administration are greatly eased if both are taxed at the same rate. Taxing services comprehensively, like taxing all goods, obviates the need for fine legal distinctions that add to administrative complexity, keep numerous people busy, but generate no revenue. The preferred approach, according to this school of economists, is to tax services comprehensively, rather than selectively.
The problem with the comprehensive approach is that once a negative list is notified, everything else becomes taxable. Then it becomes the responsibility of the government officials, almost at the lowest level of inspectors, to go and identify which is a taxable service. They may tumble upon such services, which have traditionally defied definition and identification such as financial services and even services rendered while distributing goods.
There has been always a controversy about distinguishing between goods and services, trade and services and so on. It is only in those countries where there is a comprehensive goods and services tax that a negative list is practicable. For in such countries, there is no need to distinguish between goods and services. India is not such a country.
There is also a lot of confusion amongst the writers in India about identifying what is taxable. In the Kelkar Report itself, there was a discussion that services rendered by military and civil personnel should be exempted. This is a complete misunderstanding about what military and civil services are. The sovereign functions of a government is to collect taxes, do administration including administering the judicial system, conduct foreign affairs and maintain military to defend the country. There is no question of taxing these services as they are not bought and sold in commerce.
Unless there is an invoice, there is no question of imposing a tax on it. If something is not taxable, then there is no question of issuing exemption for this. If there is so much of misunderstanding at the highest level of economists, one can imagine what the inspectors in the service tax (Central Excise) department will interpret some activities as a service. It will simply be a havoc let loose on the economy.
Conclusion is that the present system of identifying a service, giving a proper definition to it, is the only practicable proposition in India so long as the comprehensive goods and services tax is not introduced.
Sukumar Mukhopadhyay
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