Are we ready for GST?

The recent move of the Central Government to consider the implementation of the negative list of services is seen as good platform to smoothly move into the Goods and Services Tax (GST) regime.

This move to tax services comprehensively, except those in the negative list is viewed to be a better mechanism to tackle the mounting litigation in the area of service taxes, especially with regard to interpretation issues arising for levy of service tax.

This also seems to follow the recommendations of the ‘Expert Group on Service Taxation' in June 2000, followed by the views of the Advisory Group on Tax Policy and Tax Administration for the Tenth Plan, headed by Parthasarathi Shome, in May 2001.

These groups have criticised the levy of service tax on select services as the same violates neutrality in taxation of services and leads to inadequate coverage in addition to raising several avoidable procedural and legal complications.

The negative list

The introduction of negative list was expected to clarify what constitutes a ‘service' as distinct from ‘goods.' While the Central Board of Excise and Customs (CBEC) has made an attempt in the draft discussion paper to define the term ‘service' to be anything that does not constitute ‘supply of goods,' the inclusive portion of the definition states that the transactions in intangible property, lease, hire etc., still continue to be regarded as service for levy of service tax.

Thus, implementation of negative list does not seem to address in its entirety the problems of double taxation that trade is facing today.

However, the introduction of negative list could be taken as a step to reduce, if not eliminate, the double taxation which arises in view of the same activity being considered as a supply of goods for Value Added Tax (VAT) purposes and as a supply of services for service tax purposes.

It is seen that an exception has been provided for activities amounting to manufacture for Central Excise purposes, to be outside the purview of service tax, whereas a similar exception could also have been provided for activities that constitute sale of goods for the purposes of levy of VAT or Central Sales Tax.

Implementation

The timing of the discussion paper raises the important question i.e. the appropriate time for the implementation of negative list of services - whether the same should be implemented along with the introduction of GST or earlier.

Given the amount of political debate that is currently being discussed on the introduction of GST, it seems that the Government is attempting to make the taxation of services comprehensive, even before the introduction of GST.

This attempt is being viewed positively as well as negatively. While one section of trade feels that the success of taxing services based on a negative list could be directly translated into the GST, the other section feels the present system to tax services, which is in existence since its inception need not be disturbed till GST is introduced.

However, given the way in which the Government is making systemic changes in service tax administration by introducing Point of Taxation Rules and making substantial changes in CENVAT Credit Rules, the attempt to tax services based on negative list before introduction of GST is not ruled out.

The other important aspect for the introduction of the negative list is the changes that will be necessitated in the provisions relating to the CENVAT Credit, Export and Import of services, abatement in value of taxable services, Point of Taxation, among others, which are currently aligned to the selective taxation of services.

It is hoped that the Government would show the same amount of proactiveness in making available these changes as well for public comments well in advance.

Overall, it seems that though taxing all the services except the services mentioned in the negative list is no doubt desirable, the weaving of aligned rules into the comprehensive scheme of taxation of services should be well thought out before rushing into the implementation of the negative list.

(The authors work for Deloitte Touche Tohmatsu India Private Limited.)

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