Negative list approach in Service Tax: Is it Proper to Introduce it Before GST?

Aishwarya Rai Bachchan once remarked I generally avoid the temptation to have chocolates unless I can't resist it. Succumbing to, or resisting such weaknesses, may now be chargeable to service tax, since the negative list of services issued by the Government includes a clause obligation to refrain from an act, or to tolerate an act or a situation, or to do an act under the definition of service. Proper Definition If the intention is to tax non-compete fees and other similar payments, the wording of the clause does not give even an inkling of that. A lot of ink has been exhausted in attempting to define what constitutes a service. A long-winded definition offers additional scope for interpretational innovation, leading to disputes. One of the opinions is that : As the definitions of manufacture and sale have evolved with time and are fairly clear now, it would have probably be a simpler solution to negatively define a service as anything which is not a manufacture or a sale. The negative list can take care of services the Government intends to exempt from the levy.

Hello & Good Afternoon .

Rationale behind Negative List In order to explain the rationale behind Negative List and it coming prior to introduction of GST, I would like to quote the following First Concept Paper for Public Debate (August 2011) There are advantages in moving towards negative list at an earlier time in order to gain useful experience in its implementation and minimize the impact of the mammoth changes that GST may usher Revised Concept Paper on Taxation of Services based on Negative List (November 2011) Introduction of Negative List at an earlier stage will pave the way for the smooth transition to the GST, and significantly ease the challenges arising out of implementing the GST.

FMs speech (2012): At the end of June this year, this tax will attain adulthood by completing 18 years. It is therefore time to shift gears and accelerate ahead. However, service tax needs to confront two important challenges to sustain the journey. These are: The share of services in taxes remains far below its potential. There is a need to widen the tax base and strengthen its enforcement; Service Tax law is complex and sometimes avoidably different from Central Excise. We need to bring the two as close as possible in the light of our eventual goal of transition to GST.

Negative List vis a vis Erstwile system Comparing Negative List vis a vis Erstwile system, both the lists have their own merits and demerits. The present Positive List of Services comprises of 117 taxable service categories. There cannot be much disagreement on the fact that the present system of regularly adding items to a positive list has made the law lengthy and litigious. Habitually, the Government included items in a positive list and later inserted a few negative lists within the positive list. A Positive List of services leaves a wide variety of service sectors untapped thus causing a revenue loss for the Government. India has amongst the lowest Tax GDP ratios even amongst the moderately developed Asian economies. This surely needs to move upwards if we need to generate resources for our development. Past experience shows that having a Positive list also causes a problem for the tax payers. Vexed questions such as whether a service is taxable and if yes, under what taxable category have caused numerous litigations. The Negative List on the other hand has a fewer number of entries and therefore would result in lesser interpretational problems. The compliance for the assesses would also become easy. For example an assessee who currently provides taxable output services in five service categories and is required to obtain a registration under all five, will have to obtain a single registration and disclose a single turnover under the regime containing a Negative List. The return format consequently becomes simpler and easier to fill. The record keeping will become much friendlier. Given the fact that services constitute nearly 60% of Indias GDP, its about time that more services were brought under the tax net and the best way forward was to have a Negative List. The million dollar question however was as to whether such a Negative List of Services can be short as desired by the Finance Minister. Countries such as Canada, Singapore, Australia and

New Zealand have ensured that their Negative List is indeed very short and India should follow the same example. The trick is to have a short Negative List but each entry in the Negative List will have to be elaborately defined. The definition of Financial Transactions which are part of the Negative Lists in the GST of some countries runs into a number of pages. Such lists have worked very efficiently in their respective GST regimes and there is no reason as to why it should not work for us in India. If this Negative List is not kept short, we might be again plagued by similar interpretational issues as we currently face vis a vis the Positive List. These countries have also ensured that services essential for their economies such as Financial Transactions and Insurance Sector etc. as well as the services which effect everyday life of the aam admi such as medical treatment, education, housing rents, services of a public body etc. also find a place in the Negative List. In India, the negative list has been organized into 9 sectors and comprises twenty-seven items. The attempt to include some items from all sectors is apparent. The sectors comprise specified persons, social welfare and public utilities, agriculture and animal husbandry, financial sector, transport, construction and real estate, education, health and others.

Link with GST An instant reaction to the publication of a negative list would be that Goods and Service Tax (GST) will come at some point in the future, since it would be difficult to undo the knots in the present service tax legislation with a negative list, which could lead to plenty of transition issues. Though exemptions are a detestation to GST, an important tool employed by various countries for exempting the services of some assesses is zero rating of their services (examples being services used in relation to export of goods , those provided by an SEZ) . Having a separate list of zero-rated items provides the Government the flexibility to tax them when felt necessary. This would seemingly work better than removing an item from the negative list. However, in India the government has continued to go with the exemption system instead of a zero rated list. Since India is choosing to go in for a Dual GST, one at the Centre and the other at the State level, issues such as separate Negative Lists for both, uniformity in both these Negative Lists and insistence of certain States for inclusion of certain goods and services, vital for its economy, in the Negative List, will have to be grappled with. The objective of the Government, to increase the tax base and hence better the existing Tax-GDP ratio also cannot be fulfilled without a strong Enforcement Wing of the Department. Given the fact that the level of voluntary compliance in India is still very low, the Government will have to

do all within its means to ensure that new assesses are brought within the tax net. Lessons learnt from introduction of service tax are sure to become handy once again. Lastly, implementation of GST in the developed economies of the world shows that a clear lead time of 18 months is required to be given to various stakeholders for them to transit to the new tax regime. Given the fact that we would have been transiting from a Positive to a Negative list along with the GST and given the systems in our country, this lead time requirement may have been much longer and hence introduction of negative list can just be said to be the Phase 1 to introduction of GST. Thus, prima facie there seems to be case in favor of the Negative List and therefore the experts can said to be correct in considering substituting the present Positive List with a Negative List, albeit.