Decks have been cleared for the implementation of negative list of services from next fiscal with the empowered committee (EC) of state finance ministers on Monday giving its in-principle approval for the move with few riders. The negative list on services would replace the existing practice of having a positive list, where about 120 items are taxed. The list is being finalised to clear the road map for the introduction of goods and services tax that would subsume all central and state taxes and levies into uniform system of taxation.
The committee while endorsing the list finalised by union finance ministry has said that items where there is overlapping of taxes between the centre and states should be kept in the negative list. It has also favoured keeping agriculture, horticulture and dairies services in the negative list as there is a strong demand from the states for the same.
After the EC meeting, its chairman Sushil Modi said, ?The empowered committee has given in-principle approval for the negative list on services.? He, however, said that the approval is conditional upon centre keeping items where there is overlapping of taxes between the centre and states in the negative list. These services include construction services, entertainment tax, services on air-conditioned restaurants, among others.
Talking about professional tax, Modi said that the ceiling of R2500 on such taxes should be scrapped by amending the constitution. Under the constitution, states are empowered to levy tax on profession and employment. However, the cap was imposed in 1988 and since then it remain unchanged. The EC wants this ceiling to be removed so that each states can fix their own cap and amendment to constitution would not be neccessary each time.
The finance ministry is keen to introduce negative list on services. In the negative list, almost all services except a select few would under the tax net. Currently, 117 services are taxed at a rate of 10%. Service taxes are a high-growth revenue source for the government as the segment accounts for more than half of the country’s GDP. In November last year, the government issued a revised draft of the negative list of services and asked for feedback from various stakeholders by December 15. The first draft was released in August 2011. According to a finance ministry official, once the shift from the current practice of taxing services on a selective basis to the negative list is implemented, tax revenue would pick up by 20%.
According to the revised paper, 22 categories of services would figure in the negative list. The services added to the proposed negative list in the new draft compared to the previous one include some services relating to agriculture, horticulture and animal husbandry, services provided by freelance journalists, government news agencies and advertisements in media other than newspapers and TV. In the first draft, 27 services were kept outside the tax net.
Besides these, government services would be exempt. However those where they compete with the private sector would not be exempted. Hence, insurance services, port and airport services, posts, tradefairs and exhibitions, business promotion services, construction/work contract, renting of immovable property, security services etc. would be taxed.
In May last year, the finance ministry initiated a public debate on the issue of a negative list for taxation of services as announced by the finance minister in the Union Budget 2011-12. Major industry bodies like Ficci, Assocham, PHDCCI, CII and academic institutions like NIPFP were requested to participate and also anchor the public debate on the subject by sending their suggestions.