Taxing issue

INDIRECT TAXES/ DEBATE

Why is a selective approach in service tax better?

Frequently now controversy is raised amongst economists if it is desirable to declare that all services are taxable and then have a negative list for services for the purpose of not taxing them. The idea is that a negative list will eliminate controversy about what is not taxable.

The Government has not allowed it so far, but continues with the system of naming and defining a service in positive terms before notifying it as taxable.

The present system is known as the selective approach, which is followed in Finland, Norway, Sweden, Indonesia, Argentina, Brazil, Colombia, Equator, Peru, Costa Rica, Dominion Republic, Nicaragua, Algeria and Senegal.

This has advantages of eliminating services not yielding much revenue and it helps in defining the taxable event and in warding off controversy about what should be taxed and what not. The approach is more suitable in developing countries where predominant amount of services is provided by small firms.

Alternatively, the comprehensive approach is based on the idea that individual services are indistinguishable from goods. No satisfactory borderline can be drawn between goods and services on economic grounds. Both kinds of commodities satisfy wants. Compliance and administration are greatly eased if both are taxed at the same rate.

Taxing services comprehensively, like taxing all goods, obviates the need for fine legal distinctions that add to administrative complexity, which keeps numerous people busy, but generates no revenue.

Comprehensive approach works with a negative list. Once a negative list is notified, everything else becomes taxable. Then it becomes the responsibility of the government officials, almost at the lowest level of inspectors, to go and identify which is a taxable service. They may tumble upon such services, which have traditionally defied definition and identification, such as financial services and even services rendered while distributing goods.

There's always a controversy about distinguishing between goods and services, trade and services and so on. It is only in those countries where there is a comprehensive goods and services tax that a negative list is practicable. As there is no need to distinguish between goods and services. India is not such a country. There is also a lot of confusion amongst the writers here about identifying what is taxable.

In the Kelkar Report itself there was a discussion that services rendered by military and civil personnel should be exempted. This is a complete misunderstanding about what military and civil services are. The sovereign functions of a government is to collect taxes, do administration including administering the judicial system, conduct foreign affairs and maintain military to defend the country.

There is no question of taxing these services as they are not bought and sold in commerce. Unless there is an invoice, there is no question of imposing a tax on it. If something is not taxable, then there is no question of issuing exemption for this. If there is so much of misunderstanding at the highest level of economists, one can imagine what the inspectors in the service tax (Central Excise) department will interpret some activities as a service. It will simply be a havoc let loose on the economy.

Therefore, it is better to opt for a system, which has settled down and is giving good returns. In course of time all services where substantial revenue will be available will be covered under the tax net. Rather than chasing the chimera of a theory of comprehensive approach, the selective approach is more practicable alternative.

The writer is former member, Central Board of Excise & Customs.