“The State governments'
proposal to exclude certain services from the list targets the fundamental
issue of overlap in taxation by the Central and State governments.”
The
Union Budget 2012-13 is likely to witness a revolutionary shift in taxation of
services in India with the introduction of the negative list of services.
All non-considered biases
caused by the present tax system of services, which plays favourites by taxing
some services and leaving others out of the tax net, could be done away with
the introduction of this list. The present list is of over 125 taxable
services.
The Empowered Committee is
understood to have proposed a rider that the Centre will exclude areas or
activities which fall within the State's jurisdiction, such as construction,
entertainment, restaurants, transport of goods and inland waterways, beauty
parlours, health and fitness, etc.
They argued that if States
are taxing certain activities or propose to charge such services to tax under
the GST regime then the Centre should not cover those services for levy of
service tax under the negative list, as it would not provide an additional tax
base to State Governments in the GST regime.
The arguments of the state
governments to support their stand on carving out certain activities from the
Centre's ambit may sound reasonable. However, to what extent it gains support
under the present constitutional framework needs to be looked at. The State
governments' proposal targets the fundamental issue of overlap in taxation by
the Centre and the States, which has been a subject matter of intense debate
and litigation for a long time.
Given the way these taxes
are computed, the taxable value of the contract across the two taxes exceeds
the value of the contract. This is a typical example of double taxation due to
overlapping jurisdictions.
The negative list, if
introduced in the Budget, without consensus and the accompanying challenges,
would require humongous effort and a long time frame at a later date to guide
the legislation and taxation of service on to the right path and prove a costly
affair both to the assessee and the administrator.
The implementation of
point of taxation rules, proposed introduction of negative list with parallel
changes to the existing legislations and eventually the implementation of GST
are right steps in the direction of reshaping the indirect tax regime in India.
However, a clear consensus
on the scope of taxation between the Centre and State is a must before we
embark on this journey.
