The concept paper on taxation of services released by the Central Board of Excise and Customs for public debate is an important initiative. The paper provides a way forward to expand the service tax base and make a transition to the Goods and Services Tax. The paper conforms to the finance minister?s statement in the budget speech that he would initiate an informed public debate on comprehensive coverage of services in the tax, with a small negative list. The paper is opportune and the CBEC, after taking into account the comments from various experts and trade and industry associations, can finalise its approach to comprehensive service taxation in the forthcoming budget. Comprehensive coverage with a small negative list and adoption of common threshold and rates for excise and service taxation would transform the existing consumption tax at the Centre into a GST at the manufacturing stage.

The recommendation in favour of general taxation of services was made as far back as 2001 in the report of the Expert Group on Service Taxation chaired by me. The report recommended, ?It is necessary to dispense with the present approach of selectivity in taxing in favour of a general taxation of all traded services with minimum exceptions? (page 3). According to the group, ?Selective taxation of services is undesirable for, it violates neutrality in taxation, leads to inadequate coverage in addition to raising several avoidable procedural/legal complications?. In fact, the expert group had recommended that after making the service tax general, the central government should move towards a common threshold and rates, and provide input tax credit to goods and services so that by 2004-05, the excise duty and the service taxes could be transformed into a general taxation of goods and services at the manufacturing stage. Of course, it is important to keep the negative list small.

There are a variety of reasons for preferring general taxation of services with a small negative list to the selective taxation prevailing at present. Even as the coverage of services has steadily increased to more than 110 services, the selective approach leaves out many identifiable and unidentifiable services, complicates administration? leading to a large number of litigations?and provides enormous scope for the special interest groups to lobby and keep some services out of the tax net. In the GST regime, the general approach helps to extend input tax credit comprehensively. Thus, from the point of view of broadening the base, ensuring greater neutrality and efficiency, general taxation of services is important. The general approach is preferred from the legal and administrative point of view as well. In this approach, it is necessary to define ?service? and not each of the individual services. In fact, defining each of the individual services has been a major cause of disputes and litigation.

Most countries define transactions in services as a residual?all transactions other than goods or money. Some countries exclude the services rendered by the employee to the employer in the definition as well, whereas some others put this under the list of exempted services. The concept paper defines ?service? as anything that does not constitute supply of goods, money or immovable property. It is useful to keep the definition simple and unambiguous and keep any specific item in the negative list.

For wider base and comprehensive input tax credit, it is extremely important to keep the negative list small. There will, of course, be pressures from various special interest groups to expand the list but it is important to keep the list to the minimum. The concept paper lists out nine categories of services in the negative list for administrative considerations, contractual obligations, welfare considerations, economic considerations and those that have been specified under the state list. The indicative categories of services in the negative list raise some issues of concern. First, there are too many items and it is necessary to prune the list in order to reap the advantages of general taxation.

Second, the list indicates that certain agencies other than the government such as RBI or the government regulatory bodies may have a list of exempted services. Indeed, the power to levy the tax or to exempt a service must be exercised by the taxation department and not any other agency. Third, it is clearly wrong to keep out the services based on their end use. Keeping the list based on end use will create a nightmare for administration and is a recipe for creating avenues for evasion of the tax. There is no need to keep the services used by agriculture, animal husbandry, forestry and fisheries out of the tax net. For the same reason, it is inappropriate to exempt the construction sector for infrastructure works, government buildings or for any other purposes, however philanthropic the purpose may be.

It must be noted that the tax policy should focus on raising revenues in equitable and efficient ways and objectives like infrastructure building and looking after the homeless, orphanages, old age homes or building religious structures should be addressed by other policy instruments.

The concept paper has avoided controversies by keeping all education leading to a degree or a diploma out of the tax net. This is surely questionable, with the education sector having become a major investment option. In the case of the health sector, the paper provides two options. The first is to keep the services provided by the establishment with a turnover of less than R4 crore out and the second is to include the basic health services. Indeed, fees are not charged on basic healthcare provided by the government and there will not be any tax payable on it. Healthcare has become a big business and those who spoke of ?misery tax? when the tax was selectively imposed do not think of the misery of the poor patients having to pay hefty fees for them! Nevertheless, it is important to tread carefully in dealing with this sector.

One notable omission in the negative list is the services rendered by non-profit entities undertaking research activities. In fact, there is a case for exempting research and training services sponsored by the government or its agencies. One has to make a distinction between consultancy services and genuine research. On the whole, this is an important concept paper and surely deserves to be discussed by all stakeholders.

The author is Director, NIPFP and Member, EAC to the Prime Minister. These are his personal views