It is one of the rare occasions when a negative policy of the Government has been more welcome than the positive policy. Negative policy here refers to the policy about the Negative List for service tax. Positive Policy refers to the policy of having Positive List of services as we are having now. It is the time to assess the virtue of negative list since the Government has hinted about such a possibility. The welcome has been sounded by trade and industry with the only concern about implementation, that is, working out the proper list.
Fundamentally, why the negative list of services is essential for Goods and Services Tax (GST) is that the goods tax, that is, excise will be a comprehensive tax with a negative list. So the service tax also has to be comprehensive with a negative list. Otherwise there will be mismatch.
It will not be a goods and services tax if the goods tax (excise) is comprehensive and the service tax is enumerative. If it is not done that way, it will be like keeping the same distinction between goods and services as it is now. The conceptual disadvantage of distinguishing goods and services which now exists would disappear when the goods and services are taxed together. The so called 'aspect theory' that has drawn controversy and judicial interpretation would vanish if GST is made comprehensively, that is to say, by making all goods and services taxable excepting those in the lists. So not only there will be a negative list for services but there will also be a negative list for goods. This will also enable the whole long tariff of Central Excise (running in more than 639 pages) and the long list of 120 services to vanish for simply one expression, 'all goods and services'. This is if there is only one rate of duty. If there are two rates, there may be another sub-classification, which will be undesirable.
Conceptually there should not be any doubt about a comprehensive GST working with two negative lists. The naysayers only emphasise on the so called practical problem of implementation. The right policy for the government will be to float the tentative negative list in the website and in the media. Then the trade, industry, research institutions and the analysts will also point out what the problems are in the list.
Let us see what the problems could be:
(a) Designing a proper negative list for services - This is not so difficult as it seems. The Government can begin with those which are presently exempted and then withdraw several of them after examining each case. Primary education should be in the list but not commercial education at a higher stage. Commercial health services should not be exempted in spite of all the high decibel noise that the private hospitals may be able to trumpet. Financial services may be exempted where ever the taxable amount is difficult to determine. There is some confusion about exempting sovereign functions of the State. The solution is simple. Wherever the State provides services commercially for payment (like railway wagons) or provides service even for a fee (like supplying Police force to guard the Custom House), tax should be leviable. Each item can be opened up for debate. There are enough international experiences which can guide us.
(b) Designing a proper negative list for goods – Here also the Government can make a list of existing exemptions and then decide to withdraw so many of them after individually examining each one.
Conclusion – Switching over from a huge excise tariff of 639 pages and 120 services to a simple and generic expression of 'goods and services' with two negative lists, one for goods and one for services, will be a Herculean task.
It involves the redrafting the law, rules, regulations, notifications and finally the negative lists. But our civil servants are capable of doing it in six months once the Government makes the intention clear.
It will be advisable to bring in the comprehensive service tax with a negative list in the next Budget of 2012. If the GST comes in 2013, there will be one year period for the negative list to get chiselled.