As the nation prepares itself for the goods and service tax, the government is in the process of fine-tuning different aspects of the proposed GST structure. For taxation of services under the GST regime, the issue of whether it is beneficial to have a negative list instead of the current model of an exhaustive positive list has been debated extensively. The government has also invited public feedback on the viability of having a negative list of services and popular opinion is in favour of a well-articulated negative list.
The Indian services sector, which accounts for over half of the country’s GDP, holds significant potential for generating revenue for the government. Despite this potential and the government?s growing vigilance on the collection of service tax revenues, the tax collection from services remains less than satisfactory. Having a negative list would mean barring the specified services listed and making everything else liable to taxes. On the other hand, the extant method of having an exhaustive list of taxable services entails levy of tax only on those services that are specifically covered within the list.
The present model of having an exhaustive list of taxable services has come under criticism for some reasons. Foremost, there is a lack of clarity regarding the coverage and classification of a given service within the enlisted categories of taxable services. The problem is compounded with the recently introduced service categories that include services that already existed within the definition of taxable services. Assesses are often faced with the need to re-examine positions adopted in the light of changes. This not only leads to a lot of administrative inconvenience but also increases compliance cost for assesses and is the cause of litigation.
Introduction of a negative list of services, which would not be subject to tax, can be a significant step towards reduction of ambiguity and promotion of transparency. A well-articulated negative list will clearly bring out the intention of the policymakers as to what precisely is outside the tax net. The list could include social as well as strategic sectors like education, health, defence and infrastructure. Moreover, a negative list provides flexibility to the government allowing it to bring many untapped sectors within the tax net thereby generating higher revenue. The inclusion of targeted services under the negative list also serves the purpose of augmenting growth in certain sectors including promotion of services that are rendered for public good.
Successful GST models operating across the world have opted for a broad base of taxable services with modest tax rates. On the other hand, a negative list has its limitations and whether it is advisable to have such a list for India is still an open issue. Negative list may not be good news for the public because it essentially implies levy of tax on a broad base of services, which in turn would increase the costs and the end price of products and services. This would also impose additional compliance burden on virtually every entity that renders such services. With the vast number of unorganised service providers in India, administering the levy of service tax on this group may be challenging.
Notwithstanding the downsides of a negative list, having a GST imbibing selective service tax with a positive list will only retain the fallacies of the present system. GST, with a negative list of services, can show us the way to simplification of tax regime coupled with modernisation of tax administration and lead to greater transparency. Policymakers will need to weigh these against the challenges of expanding the base of taxable services through a more severely articulated negative list. Care will also have to be exercised in framing such a negative list that it does not create any unwarranted disruption in the credit chain for any sector thereby ultimately defeating the very purpose of introducing the GST.
(Rajeev Dimri is a founding partner of BMR Advisors.
Views expressed are personal.)
