WILL THE NEGATIVE LIST PASS MUSTER?

“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.