Untitled Document

MARCH 11, 2012

Negative list of services can be implemented in India with clarification on certain issues

By Monarch Bhatt, Advocate

FALLING growth, low business sentiments and corruption scandals have made it difficult situation for finance minister Mr. Pranab Mukherjee and his team to come up with a “win win finance budget 2012-2013”. The projection shows the shortfall of Rs 40,000 crore in collection of tax revenue compared to 2011-2012 budgeted projections. In this scenario, it seems difficult to implement “Direct Tax Code” and implementation of “Goods and Service Tax (GST)” is far away. Hence, government may first frame basic structure of GST in the existing taxes itself and then they will merge all such taxes and introduce the GST all over India.

The Central Board of Excise and Customs, Ministry of Finance has introduced a revised concept paper for a public discussion on taxation of services based on “negative list of services” wherein, twenty two services were listed from eight different sectors, which will be kept out from the payment of service tax. These services are generally includes the services provided by the government, International bodies, Diplomatic missions, social welfare and public utilities services, transport of passengers through metered cab or auto rickshaw, construction services, educational services, Health services, representational services by advocate, etc. While proposing these twenty two services under the negative list of services it has been considered that these are the services of basic necessity of human being so implementation of service tax on it will enhance the burden on general public. Further, many of the services are provided by the government and if service tax is introduced on such services, it will increase the administration cost of the government. Hence, it has been proposed to keep these twenty two listed services under negative list of services which will not attract the service tax levy.

Now, the meeting which was held on 03rd March 2012 between state and central governments, wherein committee of state government has given their consent on introduction of negative list of services under service tax. However, state has mentioned that 35 items approved by the state committee must be kept in negative list of services as these are the services listed under list II of schedule VII under the Constitution of India on which only state has the right to collect the taxes. The services proposed to be kept under the negatives list of services by state committee includes ambulance, beauty parlours, marriage halls, interest on bank deposits, leasing of vehicles, etc.

The concept of keeping certain services out of the tax levy and imposing the tax on rest of supply is there in certain developed countries like Singapore and Australia. The major services which are kept out of the tax levy and reasons of keeping it under negative list of services in various countries are discussed below.

In Singapore the services which do not attract the GST are very few such as transfer of business as going concern and private transactions. When there was a debate for inclusion of basic and essential services under the exempted category of Singapore GST, government denied such inclusion under the negative list of services. While denying such exemption to the basic and essential services the reason stated by them was that in fact upper class people are spending more on the services of basic necessity either these are healthcare services or educational services. They also noticed that out of entire tax collection only 10-15% is recovered from the below lower class. Further, it was also stated that giving exemptions to such services will break the chain of set-off. Hence in Singapore, GST is imposed on all services of essential nature. This helped Singapore to introduce GST @ 3% in the year 1994 and in 2007 it was increased to 7%. In short there is no exemption to any specific services or goods having basic and essential character in people’s day to day life.

With these basic understanding of other countries general tax structure, coming to the discussion of introduction of negative list of services in India, first question come up for a consideration is; whether India should adopt the same principle where only few services to be kept out of service tax by introduction of negative list of services? The countries which have adopted the same principal based on negative list of services are all developed countries. Singapore is one of the richest countries of world and Australia is also developed country. However, India is developing country. But I feel that it does not matter as far as basic and essential supply of services are not covered under the tax levy. As in India almost 75% of the population is of middle class and poor class whereas, in developed country like Singapore only 20% of the population is of middle class and lower middle class. The tax structure of India should be moderate tax structure wherein it is to be kept in mind that 67% people are living below the poverty line and in such situation if tax is imposed on essential and basic services such as education, health, etc. then such large population will not be able to avail such basic and essential services. Therefore, it is possible in India to come up with negative list of services just, to be cautious that it shall not deprive the people below the poverty line from availing the basic and essential services.

Further, I feel that once services provided by the government bodies are kept out from the levy of service tax there is no need to keep all pre-school, Schools, recognized education and healthcare services out from the service tax net. As lower class people will always use education and medical services provided by the government bodies and services provided by the government are already included in negative list of services. Hence, there is no need to include all pre-school, Schools, recognized education and healthcare services in negative list. In fact service tax is to be imposed on such services as such services will always be used by upper class people and they can afford to pay tax on it. If government wants to give some relief to middle class, it is to be included in negative list but with a specified fees slab. I feel that Government may introduce some fees slab under education and heath sector wherein all service providers rendering services below such specified slab will get shelter under the negative list of services. This will increase the government revenue as such services will not be eligible for CENVAT credit also. On the other hand this will help the government to reduce the tax rates.

In the proposed negative list in certain sectors such as transport sector, construction sector, etc. they have just mention “the nature of services” covered under the negative list. It is advisable to introduce detailed list mentioning the service providers under each specific sector who are covered under negative list of services. This will provide clarity to the service providers.

The definition of the important term which has not been provided till now under the service tax provisions shall be provided. The definition of Education, Health, Transport, School, personal dwelling and many other term which is very general but having wide meaning in it shall be defined under the statute itself to avoid conflicting views.

Further, the clarification shall also be provided on valuation of such services to be provided under the negative list.

I have already written our suggestion to the committee for incorporation of it. Now, let us hope for the introduction of clear negative list of services in this budget 2012-2013 under the service tax.