Service taxation in India is relatively new as it has been in vogue for the past seventeen years, as opposed to goods taxation which has been in operation for many decades. Given that the share of services in the national economy has been steadily rising, the revenues from the service tax have also kept commensurate pace. However, a significant proportion of services is exported and hence while services, in aggregate, amount to around 56% of the economy, domestic consumption thereof would be less than half the figure. In other words, domestic consumption of services would be approximately one fourth of the Gross Domestic Product (GDP). Thus, domestic consumption is still heavily weighted in favour of goods, as is only to be expected in a developing economy, and accordingly consumption tax in India has been predicated on this basis. As a possible corollary to this reality, India has adopted a selective approach to taxation of services which has led to a gradual increase in the taxation base with the result that currently approximately 120 separately and individually identified services have been brought within the ambit of the tax.
Given the forthcoming GST, two questions are moot in relation to taxation of services under the GST regime. The first is as to what should be the appropriate way to identify the base of service taxation and the second is to do with the appropriate rate of the service tax. This article is limited to the first question of determining the base of the tax given the approach that we have adopted in India of a broad based tax with a relatively moderate rate.
By way of context, it is interesting to note that out of the groups of services that are internationally categorized as per the Central Product Classification published by the United Nations, only about 2/3rd of such services are currently subject to the service tax. Given this position, as also the advent of the GST, it is apposite to consider the question of introducing a negative list of services, under the GST, as opposed to the present approach, which is based on a positive list requiring definitions of each individual category of service that is brought into the tax net. Just to state the obvious, the negative list method of taxation of services envisages an appropriate definition of the term “service” and for the statute to thereafter tax all such services, with the exception of the negative list which would comprise a limited set of services, identified on the basis of socio-economic and similar objectives, to be kept outside of the ambit of the tax.
Leading on from this background, the Finance Minister, in his Budget Speech 2011, introduced the subject by way of the following quote:-
“Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an appraoch will be very conducive for a nationwide GST. I propose to initiate an informed public debate on the subject to help us finalise the appraoch to GST”.
Subsequent to this announcement, the Ministry of Finance, Government of India has, vide Press Note dated 6th May, 2011, initiatiated a public debate on the subject of the negative list. The Press Note states that the main issues that need to be deliberated in this regard are as follows:-
# The advantages and disadvantages of a negative viz a viz a positive list of services
# The right approach that India should take
# The international experience of taxation of services based on a negative list
# The important issues/challenges that arise in transiting service taxation based on a negative list
# Definition of the term “service”, which is critical to a satisfactory implementation of the negative list
# The possible services that ought to be included in the negative list
# The services that would need to be exempted from tax even after implementation of the negative list and finally
# The revenue implications in moving from the present positive list to a negative list.
The Press Note has invited comments and suggestions from major industry associations and academic institutions by mid June.
It is perhaps true to state that most expert groups, advisory groups and task forces on tax reforms have recommended the adoption of a negative list in order to comprehensively tax services. The major advantages of having a negative list, which essentially stem from the disadvantages of having a positive list, are:-
a) removal of distortions
b) reduced exemptions and hence the broadbasing of the tax.
c) certainty in the levy of the tax.
d) reduced disputes on classification / categorization of services; and
e) reduced compliance costs
On the other hand, the primary disadvantage of having a negative list is the possibility of the levy of the tax on a particular service which was not intended to be taxed. In other words, the challenge is that a particular service was never intended to be taxed but for want of its inclusion in the negative list, for whatever reason, the tax automatically applies thereto given the fact of taxation of all services on a generic basis. This challenge is particularly relevant for a developing economy and it is therefore imperative that the negative list is carefully thought through and drawn up. Another challenge, which is again particularly true of India, in view of its political compulsions, is to keep the negative list manageable and not allow it to expand through a proliferation of the services incorporated therein.
However, it is important to note that since in the dual GST, the State Governments would also collect the tax on services, besides the Central Government, it is imperative that a pan India approach to services taxation be adopted. This is more easily brought about through the negative list approach since, in a positive list approach, the probability of different State GST administrations interpreting differently the various definitions of services is very high. This could potentially lead to chaos and uncertainty in services taxation. Generally, a positive list approach to service taxation is adopted by tax administrations whenever a tax is sought to be newly introduced. An eventual switch over to a negative list is expected as the tax system/experience matures. Given that, in India, the service tax has been in vogue for more than a decade and a half and looking at the significant number of disputes that have arisen in all these years, the time is perhaps opportune to consider having a negative list for services in a manner that services which further broad socio-economic goals and those which are typically consumed by the poorer sections of the society are alone incorporated thereunder and all other services are brought within the ambit of the tax.
The next article will consider the international experience of the negative list of services taxation, among others.
The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd.
Supported by Rahul Renavikar and Abhishek A. Rastogi
