The Union finance ministry’s plan to introduce a negative list for services before the much-awaited Goods & Services Tax (GST) may hit rough water. Some states have strongly opposed the idea of coming out with the list next year, without waiting for a GST agreement.
Though services are taxed only by the Centre in the current regime, some states have argued that the Centre levies service tax under its residuary powers and, thus, it would not be appropriate to switch to different mechanism of taxation without making suitable amendments under the Constitution. Contrary to the existing system where the Centre has defined 117 services which are taxed, the negative list will define services which will be kept out of the tax net; everything else will be taxed.
The ministry may be forced to listen to the states, as it wants to avoid fresh hurdles in the GST rollout. Also, it may not want to stir another controversy by ignoring Opposition parties, specially the National Democratic Alliance, which is ruling in quite a few of the states and holds the key to a smooth transition to GST.
“The Centre wanted to take their views on introducing the negative list as part of the next Budget, but some of the states felt it would be unconstitutional to do so,” said a finance ministry official, adding a final call would be taken in the next few days, after receiving comments from all stakeholders.
Coming meet
A meeting of state commissioners has been convened on December 19 so that the states can unanimously take a call on their stand and convey it to the Centre in the next meeting of the Empowered Committee (EC) of State Finance Ministers on GST, slated to be hosted by the Madhya Pradesh government at Bhopal in January. In the previous EC meeting on November 28, Madhya Pradesh, West Bengal and Haryana, had opposed the idea.
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The Constitution distributes legislative powers between Parliament and state legislatures via lists of entries in the Seventh Schedule. Parliament is empowered to make laws for service tax under these, in the absence of an entry in the State List. In the GST proposal, the idea is that the Constitution would be amended to allow Centre and states to tax services.
However, the Bill proposing amendments to the Constitution is with a standing committee of Parliament and the states have expressed reservations on it.
Given the wide differences between on various aspects of the GST, it is not expected to come into force on the aimed-for date of April 1, 2012. This is why the finance ministry is considering the idea of announcing the negative list for services in the Budget in February and introducing it in July.
The ministry is of the view that moving towards a negative list by next year itself would prepare the government as well as businesses for a new system before the GST gets introduced. Industry has also told the government it is in favour of a negative list, but introducing it only at the central level would break the entire supply chain and defeat the purpose of tax reforms.
Last month, the finance ministry had released a revised discussion paper on the concept of a negative list for services. It had proposed to keep 22 categories of services out of the tax net, against 28 in the earlier list.
The new paper proposed to keep rail travel in non-AC second class, any class by metro and mono-rail, public transport in buses on a point-to-point basis, metered cabs and three-wheelers, health services, renting of vacant land and construction work in the negative list.
About 57 per cent of India’s gross domestic product comes from services. After including construction, the contribution from services will come to about 63 per cent. At current prices, the contribution from services during 2010-11 comes to about Rs 50 lakh crore. If the proposals are implemented, it will lead to 20 per cent jump in revenue from this sector.