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Finance ministry seeks to widen service tax net

Posted on 19 November 2011,    
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Revised paper has 22 items in negative list of services that won’t be taxed, a reduction from 28 in the original one

All government services that compete with the private sector, construction of more than one house and even air-conditioned train travel may come under the service tax net if a revised concept paper released by the finance ministry on Friday is adopted in its current form.

The revised paper has 22 items in a so-called negative list of services that won’t be taxed, a reduction from 28 in the original list. Non-air-conditioned travel, construction of a single house and some specified infrastructure services have been included in the list.

“We have deliberately kept the definition of infrastructure vague. It could include public roads, bridges, highways,” said S.K. Goel, chairman of the Central Board of Excise and Customs. “But we want to get industry feedback before taking a final call”.

The objective of the negative list is to bring untapped sectors into the service tax net; services not mentioned in the list will become taxable. At present, services are taxed based on a positive list, where a description for each taxable service is specified and those not mentioned are not liable to be taxed.

The set of 117 services subject to tax include air travel and construction for commercial purposes.

Services, including construction, contribute nearly 63% of India’s gross domestic product. Less than one-fourth of total indirect tax collections, however, come from services.

Feedback on the revised concept paper has been invited by the finance ministry until 15 December. Finance minister Pranab Mukherjee in this year’s budget announcement had sought a debate on taxing services based on a small negative list, arguing that such an approach will be conducive for a nationwide goods and services tax (GST).

The finance ministry subsequently released the first concept paper on 29 August and invited comment from all stakeholders.

Industry feedback went into the preparation of the revised concept paper, which is aimed at providing more clarity in the definition of services.

The paper states that “services” should be confined to economic activity, removing the ambiguity in the previous draft.

“With this, we have clarified that all hobbies and recreational activities, religious activities, political party activities will be out of the tax net,” Goel said.

All healthcare services, other than services such as cosmetic surgery and weight-reduction programmes, are also part of the revised negative list.

While services provided by the government are under the negative list, services where the government competes with the private sector may be taxed.

“Ports, airports and hotels run by the government, security services such as CISF (Central Industrial Security force) provided to private parties, trade fairs and other business promotion activities may attract service tax if the negative list comes into force,” Goel said.

Other services in the revised negative list include education—pre-school, school and recognized education and vocational training, with the exception of donations and placement services.

In the financial sector, the sale and purchase of securities, mutual funds and foreign currency, bills of exchange, and dividend on investments will also not attract any service tax.

Rail freight has not been included in the negative list. At present, freight is on the positive list, but has been given an exemption since 2009.

“The revised concept paper settles a number of anomalies in the earlier draft,” said Bipin Sapra, tax partner at audit and consulting firm Ernst and Young. “It has clarified that services will be confined to economic activity. Taxable persons and the charging sections (what the tax will be charged on) have also been clearly defined.”

The government is yet to decide on the timeline for the introduction of the negative list. While the industry wants the list to come with GST, it is possible that the government implements it earlier.

“The government is yet to take a final decision,” said Goel.

Remya Nair


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