Almost all services, except a few considered sensitive for social reasons, would come under the tax net in the next Budget. As a prelude to this, finance ministry would soon float a discussion paper suggesting a negative list of services. Under the present scheme of things, only a few services, 119 to be precise, are taxed.
According to a ministry official, there is a consensus between the revenue department and the industry on the negative list of services.
?To get a feedback from the public and other stakeholders, we would float a discussion paper in a month?s time,? an official said.
The services sector contributes more than 50% of the GDP but its representation in revenue is relatively low. For the current financial year, the government has estimated to raise R82,000 crore from the tax on services, out of the total indirect tax collection target of R3.92 lakh crore.
The rate of growth of service tax revenue had been the highest among all tax heads until a couple of years ago, and it seems that to push the revenue growth, the system should move towards one where only select services are taxed to the universal practice of taxing services comprehensively with very few exceptions.
The practice of adding more services every year to the tax net has also led to definitional issues and litigation. Also, once the Goods and Services Tax (GST) comes into force, there would be seamless input tax credit across the supply chain that would comprise both goods and services, often the service element embedded in goods being sold. At present, under the Cenvat system, input tax credit is available for both excise and service taxes, but GST would bring other taxes like state VAT under it.
In May this year, the finance ministry initiated a public debate on the issue of a negative list for taxation of services as announced by finance minister Pranab Mukherjee in his 2011 Budget. Major industry federations and confederations 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 by June 15.
?The industry has supported the view that there should be a negative list. They want that sectors like education, healthcare and infrastructure should be kept out of the purview of the tax net,? another official added. By incorporating the suggestions of the industry and views of the ministry and tax experts, a discussion paper would be floated.
Thereafter, a negative list would be prepared for services so that most of the services can be taxed.
?From the next Budget, we would have a such a list,? the official said. The finance ministry expects share of service tax in the indirect tax collection to rise after this negative list.
?With the negative list, it will be easy to administer taxes. The industry would know if a particular service is taxed or not. However, the increase in share of service tax in revenue collection would depend on how big the negative list is,? Ernst & Young tax partner Harishanker Subramanium said.
The demand for the negative list grew as it would be essential for rolling out GST. Under the proposed indirect tax regime, taxes would be levied on most of the services. The government introduced the Constitution Amendment Bill in the Lok Sabha which seeks to pave the way for the Goods and Services Tax in the budget session.