Budget 2012: Service Tax- Negative? List!
Itís been more than 15 years since service tax was introduced in India. Every year, more services are brought under the tax net and yet to date only an estimated of 16% of the sector is being taxed. The services sector contributes 60% to GDP, but tax revenues contribute less than 10%. In an attempt to bring all, but a few services under the tax net, the Central Board of Excise and Customs released a revised negative list concept paper in November last year.
The list proposes that besides 22 categories of services such as government services, pre-school education, clinical services and the like. Revenue from all other services must be taxed. Many argue that the introduction of a negative list must be done at the time of introducing GST, but the government may counter that by saying that an early introduction of a negative list will pave the way for a smooth transition to a goods and services tax.
Vivek Mishra of PwC, S Nageswari of TATA Communications and Rohan Shah of ELP discuss the topic of service tax, the moot question being will Pranab Mukherjee introduce a negative list in this Budget 2012? While all three of them here hope it doesn't happen, but two out of three believe that Pranab Mukherjee will bring in a service tax negative list this Budget in an attempt to bring more services under the tax net and to shore up revenues.
Below is the edited transcript of the interview. Also watch the accompanying videos.
Q: With the desperate need to raise revenue, is Pranab Mukherjee going to use this Budget as the reason for introducing a negative list, considering that that is already been out and under debate for the last several months?
Shah: That is very likely. Though personally, I think he ought not to and the reason for that is bringing in a negative list preceding the introduction of a GST will have several very negative consequences for industry at large.
Q: Such as?
Shah: The key factor is you are really not going to get a clear definition of what is taxable and what isnít. So today, we donít have a definition of services. So our perception is what constitutes a service and we see the taxing entries in relation to that.
A negative list will effectively tax every transaction for money other than the supply of goods, immovable property and money itself. So several things, which common sensically are serviced potentially could get taxed - for example, if you pay for a Right of First Refusal or if you pay in relation to exercise of option. If you have certain other transactions in the nature of licenses, all of this today in nobodyís perception as the services, going forward with a negative list all of this will be taxable.
Q: Why canít all of this be included in that negative list or come under the list of so called perceived services that are not meant to be taxed?
Shah: What you effectively have is a situation of saying this is service and this is now taxable and then they have certain exclusions. Now the exclusions donít exclude any of this nature of transactions. So your risk is, the moment you give a license to tax, which is this large, you have a very small list of what is excluded.
So potentially depending on the interpretation of the tax collector, anything which is a transaction for money could be taxed. Now your problem there is, you already have this constitutional debate in terms of what the state can tax, what the centre can tax.
You have several issues where both of them tax and you have to pay tax literally twice over, the scope for that will increase immensely. You will have a problem in terms of valuation because when you have transactions, goods and services - both or composite services, you donít have to value it. You will have credit-related issues because for credit you categorize services, the whole import and export of services is again based on a categorization.
So the moment you give such a wide license, you create a whole realm of uncertainty and the world over negative as a stealth tax. You donít know what will get taxed. So on day one it doesnít hit you, but the interpretation of it over a period of time brings more things to tax.
Q: Rohan says the finance minister shouldn't but he will? Do you agree?
Mishra: I partly agree with the first part that he shouldn't because I think he should bring in a negative list at the time of GST where this dual taxation of goods versus services is a question that will largely go away. It won't entirely go away for some technical reasons but largely it will go away. But I don't think he will.
Q: What makes you think that Pranab Mukherjee may not bring in that negative list this year?
Mishra: There are two or three sectors which the previous finance minister attempted to bring under the service tax law under the current positive list approach, if I can call it that.
An example is railways, another example is certain types of medical care, third example is going back many years transport of goods by road. These were withdrawn. These were a couple of high profile examples which were withdrawn due to lot of resistance from the affected sector.
Just to add to that, goods transport by road is taxable but it is a reverse charge. It is on a corporate who pays for it - it is not the service provider who is taxable. There is no reason to think that these sectors would in the interest of there being simplicity in tax say that this negative list is a part of larger movement and subject themselves to tax. They will probably again protest and then you are taking on 2-3 very powerful sectors at the same time so I think it is unlikely.
Q: You are saying there are political reasons for why he may choose not to bring in that negative list - is it because of the potential protest against it? This is the only year he has that opportunity because next year and the year after would be too close to national election?
Mishra: Yes, so then that is also a political point.
Q: Why do you believe that he will bring it in despite all the reasons that Vivek believes it won't come in?
Shah: Two reasons. One, quite clearly is that there is a compulsion to try and generate more revenue. Secondly, they have consistently said that there are several steps that we are taking towards GST. So last year, they brought in several exempted items from excise to tax. They say this is another of those preparatory moves. Now your situation is the moment you see this as a preparatory move but the date for GST is uncertain. What you are doing is your harvesting all your negative stuff bringing it in saying I will bring in GST but you don't have definite date for GST.
The other issue that Vivek is making is, he says people will protest but that does not mean they won't bring it in. The question is if having brought it in how they would deal with protest. One of the issues, I think, which supports what they have done - we all had constitutional challenges on renting. We had constitutional challenges on IPR, constitutional challenges on this whole reversed charge of import of services.
The courts have struck down two of those challenges. They have said no, it is within the taxing domain to tax in relation to rent; it is within the taxing domain to tax for transactions even outside the country on reverse charge. So from that perspective again, you have to see courts are very hesitant to step in on constitutionality. That is again a message they take forward.
Q: As a representative of industry, I can't imagine that industry would want a negative list to come in yet it could be a reality facing you?
Nageswari: I wish it does not come but I am sure it will.
Q: Tell me your reasons for why you believe or are they any different from why Rohan believes so?
Nageswari: Not really. Because of increased revenue collections currently from the service tax, the government gets about 57% with the negative list the government envisages 63% of the revenue collections to come from service tax.
The second reason is it is a move towards GST. The government would envisage GST regulations to come in, to implement GST regulations far quicker and as an industry we would be wary of this negative list implementation because of two reasons.
As Rohan has said, we would not know what transactions are subject to service tax, and two, is that the fine print is not clear. While the negative list has been released which itself has lot of ambiguity, the fine print of negative list has not been released as yet.
For example - currently the export of services and import of services has been defined. Once the negative list comes we really don't know what will be the export of service, what will determine the export of service and in the absence of categorization of services that would make it far more complicated - abatement of services and then the valuation of service with respect to certain specific sectors.
Shah: Another apprehension is GST would ultimately mean what - every value addition is taxed but you get credit of the preceding transaction. The problem here is you bring a negative list so your tax footprint is wider but your credit footprint is not that wide so again your tax cost and cost of doing business goes up.
Q: All three of you have made strong arguments against the introduction of negative list this year. Despite the fact that services is what leads the economy and contributes roughly 60% of GDP, revenues from service tax accounts for less than 10% of GDP. What I understand only 16% of this sector is taxed. In a year when the need to raise revenue is that high or that desperate, what else can he do to be able to yield more taxes from this sector something that he desperately needs to do also in the context of the fact that this service sector has provided some buoyancy to the indirect tax collection over the course of the last 8-10 months despite the fact that the rest of the industry has been in a bit of a funk so what else can he do besides expand the number of services under tax and the best way to probably do that is bring in the negative list?
Mishra: Not necessarily. There are sectors which are identified which we know outside the service tax net. There is less revenue in these niche areas within the general corporate framework of business but there are sectors such as railway transport and healthcare so he could bring those in.
Q: You have pointed out that every time he has tried to introduce service tax in those sectors it has met with great degree of opposition from the Ďjantaí. So what is going to change his view on that; if he hasnít been able to introduce it for all these years then this year he might say I donít want to fight all those small individual battles, I will just bring in a negative list?
Mishra: So if he brings in a negative list, the affected sectors are not going to throw up their hands and say okay where do I file for a service tax registration, he will have those battles on his hand. What he could possibly do is pick one or two of those sectors, depending on what his sense is; in terms of the maturity of that sector and so on.
Q: So for instance what would you prescribe if he wants to substantially up the yield from service tax revenues?
Mishra: The word substantially is a problem, but one thing that I expect is that there was one item in the negative list that leasing of residential property with rent of over Rs 1 lakh. So I expect that to come in, whether it will or wonít, we will have to see, but thatís something, which is not a political football kind of thing.
Q: This is going to be piecemeal. He can keep doing this for this year and next year, keep bringing in a few more sectors or few more businesses under the service tax net, fight the opposition on that individually, maybe roll some back in the middle of the year, instead isnít it better for him to bring in a negative list, everyone is complaining, he canít roll it back for everybody, it just becomes an easier problem to manage?
Shah: The negative list is really his final outreach. He goes out and says everything is taxable except the limited number of items he chooses to exclude. If we are saying that continually, any situation of government deficit for whatsoever reason has to be met from tax then yes, he will reach out.
Q: But hasnít that always been the case?
Shah: It has. The question is he now plays his last card because if you have these issues on fiscal managements year after and year, what is going to happen, the only elasticity he now has Ė he has taxed everything he could if he brings in the negative list. He can reach out to what he has excluded or the rate effectively goes up or the credit reduces.
Now all of that ultimately we have to understand is making it so difficult to do business in this country because the cost of doing business here is now at an unprecedented high; you will take it higher and it isnít affecting industries. We are seeing some of the best and ablest in the Indian industry also choosing to invest outside. I think somewhere there has to be a reality, which matches up these issues. Your need for revenue versus what it is doing to people wanting to undertake commercial activity in this country.
Q: What is so peculiar about the imposition of service tax in this country that industry can argue against it, whereas it is actually a reality everywhere else in the world?
Nageswari: I wouldnít argue against the service tax.
Q: Expanding the net of service tax, bringing in the negative list, otherwise everything is piecemeal?
Shah: What you have to understand is world over, the situation is you only tax a value addition at each stage and you get full credit for all antecedent tax. You donít have that mechanism here today. Constitutionally, half your taxes are by the state, half are by the centre and both of them are continuously grabbing at each otherís pie and the moment you pay a VAT or the moment you pay a central tax, there is no fungibility in terms of tax credit.
Q: Will this get fixed when GST is introduced as a compulsion?
Shah: Hopefully, it will.
Q: Then he must logically wait for GST if he doesnít want to create a disenabling environment for business?
Nageswari: Just to add to what Rohan has said, as far as the scoping of services that are subjected to service tax is being broad-based, the availability of input credit is being narrowed down. So there is a dichotomy of approach there.
Q: Considering that all of you are arguing against service tax, is it then a foregone conclusion that if he is discouraged so heavily from bringing in a negative list, the only option he has in front of him is to raise the rate on the existing services that are taxed which is from 10% to 12%?
Mishra: That seems likely; that seems something which should not create the kind of fierce opposition that I anticipate these sectors might give him in terms of the negative list.
Q: Is that going to yield him the revenue he needs to be able to balance the books?
Shah: Two things, one is he could raise the rates and secondly there are a whole series of exempted items, for example, in excise. Last year, he brought in 130, this year I think he will bring 250 more. So, those issues will bring him the revenue, but this whole situation of how much revenue does the government need? The fact that there is a mismatch and therefore you will tax more or you will have more onerous interpretations. I think somewhere we just have to delink this. You canít tax based on the need of the government. You have to tax on the basis of the competitiveness in the industry.
Q: In the country we live right now, balancing the books is a really precarious job.
Shah: The situation is not what you and I live in, the question is for how long will the industry sustain in terms of this completely unpredictable tax costs? That is really the larger issue which will haunt us. Somewhere he has to address it. Yes, he has to balance his books, but he can do that if more people want to do more business in this country.
Q: So, in the face of all this opposition against the negative list, it seems that a raise or a rise in the tax rate is an easier one to digest and that will not lead to considerable amount of opposition if he is able to position it well, saying I didnít bring in a negative list, now you canít complain about 10% to 12%?
Nageswari: Absolutely, I completely agree, increase in interest rates on services from 10% to 12% is more or less a given thing, taking into consideration that the goods are being charged on an average about 20%, excise duty and VAT put together.
Q: Still none of you have been able to answer my question on whether that is going to bring in Ė the reality which is he needs revenue, that is going to bring in any substantial amount of revenue even if it is not the amount that he actually needs, is it?
Shah: It will, but it will not balance his books.
Sharma: 10% to 12% is a substantial increase.
Q: What options does that leave him on account of service tax? Is there anything else that he can do outside to bring in may be one or two new businesses in, raise the rates, are you expecting anything else that could substantially impact the amount of money he earns from service tax. Also, do you expect anything else that corporates should prepare to face?
Shah: I think you have pretty much pushed the envelope as far as you can after the negative list. If he brings that in, he has pretty much covered a lot of areas he can go. As I have said, there are only two issues, higher rates, lesser credits and all of those, to my mind, are negative.
Nageswari: Broad based service tax is increasing the scope of services and narrowing down the input credits, so that he can increase his service tax collections apart from increasing the service tax rate and he would try to implement the negative list.
Sharma: Letís look at it a little differently; letís say he brings in GST. There is nothing he can do, administratively at that stage other than look at buoyancy in the economy. So, may be we are reaching that stage on the service tax front, that there are some sectors that are outside, but for legitimate reasons or whatever we canít touch them yet and there is not much else he can do, he will get more money if the economy booms, that is what will happen at some stage under the GST regime.
Shah: I think fundamentally the question we have never asked and addressed is what will we do outside of taxes to ensure that people are encouraged to undertake more commercial activity more investment because that is what has a direct correlation to what tax he collects and repeatedly year after year we refuse to answer that question.