Certainty is a key requirement of any taxation policy. This can only be achieved at the policy as well as implementation level, when the boundaries of taxation — what is taxable and what is not taxable — is clearly laid down.
We currently follow a ‘selective basis’ of taxation for service tax purposes. However with the gradual increase in the number of services being brought under the service tax net, the boundaries of taxable and non-taxable services are getting hazier.
Many of the newer services are broadly defined using expressions that are not commonly understood. Thus, in the present context, a clearly set out negative list would be useful in crystallising the boundaries of taxable and non-taxable services and thus also curtailing unnecessary service tax litigation.
A well articulated negative list will clearly bring out the intention of the policy makers as to what precisely is outside of the tax net. The list could include social as well as strategic sectors like education, health, defence and infrastructure. This would improve the existing situation where sectors such as infrastructure are exempted for select services only, leaving room for interpretations and disputes.
In this regard, it is illustrative to take note of the experience in implementation of VAT in India. In all the VAT statutes, a negative list of goods, the sale of which is not taxable, is specified and all other goods are leviable to VAT on their sale (albeit at differential rates).
This approach has minimised unnecessary disputes regarding taxability of particular goods. Further, when services will be taxed on a comprehensive basis (under the proposed GST regime or otherwise), the negative list is an inevitability. Thus, under the present scenario as well as going forward, it would be a prudent policy measure to prescribe a negative list of services for tax purposes.
However, utmost care needs to be exercised, in framing a negative list in the present service tax framework. The negative list should not disrupt any chain of credit flow for any sector as that would unnecessarily add to the tax costs of that sector and ultimately defeat the very purpose.
In India, service tax was introduced in 1994 and levied on three services, to begin with. Over the years, the list of taxable services has gradually increased and at present 97 services attract the 12% tax. It has also been seen that a few services such as banking, other financial services and business auxiliary services are so widely defined that they include a number of other services too.
When the government of India has the intention of expanding the scope of the service tax to cover almost all services, with a few exceptions such as those services which are in the nature of basic amenities, it would make eminent sense to have a negative list of services that would be exempt from tax, instead of going on expanding the list incrementally every year during the budget exercise. That way, other than those in the negative list, all other services can become taxable at one stroke.
Should the central government decide to come out with a negative list of services on which no service tax is payable, it would become easy for all service providers to work out their tax liability. More importantly, it will reduce the dispute of classification and prevailing confusion regarding tax liability of the service provider. The government will also stand to gain as its revenues from service tax will increase substantially when all services are brought into the tax net.
That apart, the existence of an exempt list would help prevent the recurrence of instances where a non-governmental organisation such as Sulabh International Social Service Organisation, which provides civic facilities in the country, is asked to pay service tax.
In a recent development, state governments agreed not to levy service tax on education and health services although under the present scheme of service tax law, service tax on education is levied if the degree/diploma is not recognised under the law.
A negative list of services on which taxes would not be imposed makes the government policy on service tax very clear and unambiguous. It is a move that the government should make soon.
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