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The 2012-13 Budget introduced the ‘negative list’ based taxation of services. The shift from positive to negative list was meant to enlarge the taxpayers’ base, and shift to a simpler system ahead of GST (Goods and Services Tax) implementation.
The negative list regime primarily intended to simplify legislation by taxing all services except those specifically exempted. It was also meant to simplify compliance. Accordingly, with the introduction of the negative list, taxable service categories were removed and a single tax code introduced for registrations, tax payment and other uses.
Issues with ‘other services’
However, a recent development seems to have halted progress. The Central Board of Excise and Customs has reintroduced taxable service categories that existed under the positive list regime for registrations and tax payments. An additional ‘other services’ category has been introduced to capture services not covered under the specific service categories. The Government says it has restored the earlier list for statistical analysis.
The move may seem small, but it has a considerable effect on an assessee. Now every assessee will have to classify services under a taxable service category and undertake compliances. Furthermore, even though the service categories have been restored under their previous names, they are not defined in the service tax legislation, as the definitions were deleted when the negative list was introduced. In the absence of a definite scope for each service category, the classification of various services could well be a challenge.
Problems faced by assessees
Additionally, assessees who aligned their IT systems with the negative list regime could face a hard time after the restoration of the service categories, as another system update would involve additional cost.
A first-time taxpayer would also face the hassle of referring to the old law to decide on the service category.
The question is whether there are enough safeguards in the legislation to identify and penalise assesses who obtain registration and pay the entire tax under a code that is for ‘other services’. If the answer is “no”, then the purpose behind the restoration of service categories is defeated. This is because it would be easy for a service provider to pay under the residual category without inviting sanctions.
Seamless taxation system
The Government has introduced the negative list regime to give itself enough time to address inefficiencies before the introduction of GST.
However, it appears reluctant to give up on certain checkpoints in the positive list regime, which is proving a hindrance to the full-fledged implementation of the negative list. An efficient system of taxation of services will be one where the principle of taxation and compliance is simple. Eventually, when GST is introduced, there should be seamless taxation of goods and services, and there should be no need for classifications.
Bipin Sapra is Tax Partner, Ernst & Young
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