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As a step towards the proposed Goods and Services Tax (GST), the finance ministry plans to come up with a discussion paper on a negative list for services by the end of the next month.
The paper would list out the pros and cons of having a negative list rather than a positive list. It may also suggest the sectors or services that could be kept in the negative list.
The negative list would mean that barring the services listed there, everything else could be taxed. The positive list, on the other hand, will list out services that are to be taxed.
A debate on the issue was necessitated as there was a divide within the finance ministry itself whether a positive list or a negative list would be better for India.
"If we have a positive list, we will be sure what we are going to tax. The positive aspect of a negative list for the revenue department is that we will be able to tax everything apart from the services in the negative list," said a finance ministry official who did not wish to be identified.
The ministry may propose to keep in the negative list services which are provided by the government; which do not have a commercial angle; which are difficult to measure; and insignificant services.
Defence services, public services, municipal services, judicial services, religious or charitable activities, basic and elementary education, police services, agriculture services, trusts, blood banks, para medical services, road services (passengers travelling by auto rickshaw) may come under the negative list.
The finance ministry official said most other countries, including the United Kingdom, New Zealand, Singapore and Australia, have a negative list, which has only a few items.
A negative list would work for India only if the country was ready to tax everything, barring a small list of services.
"The question is whether we can go for a negative list in a developing economy where you do not want to comprehensively tax everything.
We have to see whether we can simply copy from other countries where the population is less and per capita income is more than us," the official explained.
Finance Minister Pranab Mukherjee, in his Budget speech, had proposed to initiate a public debate on the subject to help the government finalise its approach to the proposed GST.
Many experts had argued that it would be desirable to tax services based on a small negative list, so that many untapped sectors were brought into the tax net, Mukherjee had told Parliament.
Unlike goods, in services there is no international classification and it is for the government to decide whether something is a service or not.
For this purpose, the government will have to come up with a definition of service. As the issue of a negative list would also affect states in the GST regime, the finance ministry is planning to take their views on the discussion paper before making it public.
Service tax is a relatively new area for India. Services are contributing about 60 per cent of our gross domestic product GDP, but only 10 per cent of our tax receipts come from services.
The government began taxing four services in 1998 and today it has got 125 services in the tax net, including two new services proposed in the Budget.
Levying tax on services, however, has been an area of high litigation for the government. Every year when new services are introduced, the industry challenges the levy.
