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In June 2000, an expert group headed by NIPFP director M Govinda Rao observed that the ‘selective approach to taxation of services is undesirable for this violates neutrality in taxation, leads to inadequate coverage in addition to raising several avoidable procedural and legal complications’. The group recommended that the Centre should move towards a ‘general and comprehensive extension of the tax to cover all services with a small and clearly defined exemption list’.

It identified six categories of services to be put in the negative list, and that included all public services of government, all public utility services of essential nature and all school education.

The Advisory Group on Tax Policy and Tax Administration for the Tenth Plan, headed by Parthasathi Shome, in May 2001 also criticised the ‘sporadic efforts of the Centre (to add services on a gradual basis)’ as it remained ‘far below the revenue potential from this sector’. The advisory group advocated a comprehensive base of taxation though it viewed that the states were in a better position to collect this tax.

In its report in November 2002, a task force headed by Vijay Kelkar recommended that while ‘it would be in order to identify certain services, which are not to be subjected to service tax’, service tax should be comprehensive and there should be no selectivity of item’. The empowered committee of state finance ministers has also agreed for a comprehensive coverage.

While this is history, it is almost fashionable now to be on the side of a broad-based taxation. Economists seem to feel it is already too late. Tax administrators perceive it as expansion of their kingdom. Industry see this as an opportunity to lobby for a moderation in tax rates — to remove the distortions of the present tax regime.

There can be no denying that a comprehensive base, barring a negative list, of taxability would undoubtedly boost the revenues from the service sector. Importantly, it would also virtually put an end to the disputes on interpretation of individual taxable services which, unfortunately, has seriously undermined the effective and efficient administration of service tax.

That said, it may not be prudent to ignore that tax policy is not necessarily dictated entirely by sound economic principles. It has several other dimensions as well — political judgment being an important one. Taxation of services is linked to GST. The political debate over the design and structure of GST is not yet conclusive. At this stage, when GST is knocking at the door, if the Centre alone decides to collect tax on all services, it might lead to some apprehensions and complications. In any event, taxing all services at 10% when inflation is worrisome does not seem feasible. The economy is not fully liberated from the global slowdown. Discontinuation of the stimulus packages at this juncture appears doubtful.

Overall, it seems that though taxing all services, except a negative list, is no doubt desirable, there are serious doubts about its practicability at the present.


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July 2024