The concept paper on the negative list for service tax circulated by the government on August 29 has much to its credit. The paper provides a good background of the approach to service tax as a part of the Goods and Services Tax (GST). So a comment on it can go beyond the negative list.
To start with the “negative list”’ is not legal language. It only means that, first, it is a list of services that “will not be taxed” and, second, that all other services will be taxed. The second point is correct. But the first point is inexact. “Will not be taxed” includes two types of services: those exempted and those that are not taxable at all. The paper does not distinguish between them. They are not taxable when they are not services at all. There are certain activities, such as the sovereign functions of the state, which are not services. Nor are the Indian Foreign Service, Indian Administrative Service, Indian Revenue Service, Indian Defence Service, Indian Judicial Service, maintenance of law and order, or the Reserve Bank of India. The government carries on activities within the powers entrusted with Parliament and Legislatures and such exercise of power cannot be the subject matter of service tax because they are not commercial functions. So the position is that there are three aspects of government functions:
a) Sovereign functions: not leviable to service tax.
b) The government’s other functions supplied on a fee: leviable to tax.
c) Commercial functions of the state: squarely leviable to service tax.
The charging section has to be drafted to clarify this issue. What is leviable is not goods but the sale of goods, both manufactured and un-manufactured. Similarly, what is leviable to tax is not service but the supply of service. So the charging section should ideally be worded in the following manner:
- Tax will be leviable on the sale of goods (defined separately) and supply of services (defined separately).
- Proviso — Any supply of service of government in discharge of sovereign functions is not leviable to service tax. Government here means the central and the state governments.
It is important to note that this definition of government is different from the definition of government given in the negative list that includes even local self-governments. Government might even mean government undertakings, depending on the shareholding by the government. Therefore, whenever the expression government is used, there must be a separate definition clarifying what government means. This will steer clear of controversies.
The negative list should, therefore, be termed an exempted list because that is the legal language. The first item in this list namely “notified services provided by the Government” should be replaced by the expression “Services supplied by Union or State Government on fee or invoice”. This will be conceptually the correct position. The amount may be exempted since the amount is very small. The present way of writing to include the government, the judiciary and the Reserve Bank of India (RBI) in the negative list gives the wrong impression that these services are basically leviable to tax.
So far as the other exemptions in the negative list are concerned, theoretically the best option is that there should be no exemptions (as in New Zealand) since that will make it a neutral tax, which economists adore. But the best is often the enemy of the good. Therefore, I can only suggest that many of the exemptions mentioned in the negative list should be deleted and only a few should continue. Regarding education, the exemption proposed for pre-school, school and recognised education, etc suggested by the government is justifiable except that the definition of recognised education is vague. It should exclude coaching classes. Regarding health, the first option of exempting services by a clinical establishment with a turnover below Rs 4 crore in the previous year is proper but government (properly defined here) hospitals should be specifically exempted.
There should be no exemptions for copyright services, services provided by independent journalists, PTI & UNI, sportsmen, by religious services, by a political party, trade unions, representational services provided by an advocate, tolls and betting and gambling. All these exemptions are only to appease certain pressure groups or lobbies.
The definition of service given in the paper is “anything which does not constitute supply of goods, money or immovable property”. This is good enough. Then the definition includes six items and excludes three items. There should be no inclusions or exclusions. The exclusion “B” is in reality an exemption for some authorities. It should be transparently given in the exemption list. Including an exemption in the concept of service will distort the definition conceptually. The exclusion “C” is totally unnecessary since it is debarred by the concept of service. Conceptually, the service tax definition should be the same as in Canada, South Africa, Singapore, France, Ireland, Netherlands and the UK, where they have no inclusions or exclusions.
In conclusion:
(a) The negative list should be termed the exemption list. It should not contain services that are not taxable at all.
(b) The charging section should clarify what is not leviable to tax.
(c) The definition of government should be different for different purposes.
(d) The definition of service should not have exclusions and inclusions. It should not contain something that is fundamentally an exemption.
(e) Exemptions to accommodate pressure groups should go.
The author is former member of Central Board of Excise and Customs
smukher2000@yahoo.com
