A re-look at negative services list

The Budget has proposed a major shift in the taxation of services. Under the present dispensation, only those services which are notified as such are being taxed. Upon the implementation of the so-called negative list, only those services which are listed will be exempted, while all the remaining services will be subject to tax.

The Finance Act, 1994, introduced the concept of service taxation, which began with just 3 services, and has since swelled to 119; this levy under the residuary Entry 97 of List 1 to the Seventh Schedule of the Constitution is expected to yield approximately Rs 95,000 crore by way of revenue during 2011-12. The proposed 2 per cent rate hike, coupled with the expansion of the tax base (consequent upon the implementation of the negative list approach), is expected to increase the revenue to Rs 1,24,000 crore in 2012-13.

THE NEGATIVE LIST

This revenue, though impressive, still isn't what one would expect, given the size of the service sector, and an important reason for this relatively low yield is the non-negative list-based approach; the base just isn't comprehensive enough.

While the negative list-based approach is a conceptually and internationally accepted way of taxation, there are certain misgivings regarding the content of, and the manner in which the negative list is being proposed to be introduced. The issue of taxation of services through a negative list was examined in detail by the Empowered Committee of State Finance Ministers (EC) and the views of the Committee were communicated to the Central Government.

The EC had endorsed the idea of taxation through a negative list, preferably with effect from April 1, 2012, with a view to gaining valuable experience before GST implementation, as also to getting a peek at the incremental base that may accrue, and the tax potential of the sector. Simultaneously, the EC impressed upon the Centre the need to respect the Lakshman Rekha drawn in the Constitution.

LEGISLATIVE DOMAIN

The three lists appended to the Seventh Schedule clearly demarcate the legislative space available to the Union and the States, and, in terms of settled law, no level of Government is to encroach upon the legislative territory exclusively earmarked for another level. It is this constitutional propriety that lies at the heart of the issue, and which underlies the views of the EC, as communicated to the Centre. Accordingly, activities that have been enumerated in the State List of the Seventh Schedule should form part of the negative list, at least till the advent of GST. A combined reading of the relevant provisions of the Finance Act, 2012, would reveal that the following activities which are within the exclusive jurisdiction of the State Legislatures are sought to be taxed as services under the residuary powers conferred upon the Union by Entry 97 of List I:

Transportation of goods by a goods transportation or courier agency (subject matter of Entry 56 of List II)

Renting of immovable property or construction of complexes (subject matter of Entry 49 of List II)

Sales through hire purchase or instalment payment basis (deemed to be a sale of goods vide Article 366(29A) (c))

Supply of food or drink as part of service (deemed lo be a sale of goods vide Article 366(29A) (f))

Provision of entertainment through cable networks or DTH or by means of downloadable entertainments such as games, videos, audios, etc. (subject matter of Entry 62 of List II)

Provision of accommodation in hotels or guest houses (subject matter of Entry 62 of List II).

These activities should have been put in the negative list in Section 66D. Taxing this under an entry conferring residuary jurisdiction further compounds the problem, since such taxation, despite specific entries relating to these activities conferring jurisdiction to another legislature doesn't find judicial sanction.

Even this list isn't exhaustive. During the course of implementation, it is entirely possible to come across activities which can be related to any of the matters enumerated in the State List, but which may, inadvertently, have been left out in the negative list.

This problem can be addressed efficiently by defining “services”, so as to exclude any activity enumerated in the State List. Such exclusion becomes automatic, and isn't limited by the power of imagination.

EXEMPTION OF SERVICES

The proposed mechanism of taxation through a negative list creates another level of complication through the proposal for exemption of certain services.

The Union Government proposes to exempt 34 categories of services, which shall be in addition to the negative list, comprising 17 main categories of services; such exemption is proposed to be effected through notification issued under Section 93 of the Finance Act, 1994. Such services are of a predominantly social or cultural nature, aimed generally at the welfare of people at large.

The intention of such a move may be laudable, but the way in which such a goal is sought to be achieved creates avoidable complications; a negative list and an exemption list don't generally go together.

It would have made much more sense to include the services in the negative list itself. Alternatively, the negative list could have been done away with and such services as are specified in the negative list could have been specified in the exempt list.

Taxation of activities enumerated in the State List isn't merely a matter of the rights of the States. It is as much, if not more, a matter of constitutional propriety and legality.

If a particular activity happens to fall within the exclusive domain of the State Legislature, then legislation by the Union on that subject is not only tantamount to encroachment in the territory reserved for the States, it is also without Constitutional sanction, and runs the risk of failing to meet judicial sanction.

Such a threat exists till the advent of GST. Under GST, the Centre and the States would have concurrent jurisdiction to tax goods and services, and the dispute on competence to tax is set to be resolved.

Hence, the appropriate and safe way to overcome the problem of conflicting jurisdictions would have been to define “services” in such a way as to exclude the activities that have been assigned to the States.

(The author is Deputy Chief Minister, Bihar, and Chairman, Empowered Committee of State Finance Ministers on GST.)

COMMENT NOW