service tax trends in india

8/2/2019 Service Tax Trends in India

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NATIONAL LAW SCHOOL OF INDIA UNIVERSITY

SERVICE TAX TRENDS IN INDIA

Taxes arewhat we payfor civilized society

OLLIVER WENDELL HOLMES

Mr.Parth Singh

ID. No. 1903

Ist year BA LLB Hons.


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NATIONAL LAW SCHOOL OF INDIA UNIVERSITY PAGE 1

INTRODUCTION

Indias service sector is renowned for its size and dynamism. The services sector has

witnessed massive and continuous growth, especially over the last 2 decades, and today

stands at a monumental 64.4% of the GDP (2011-12).1

The Economic survey of India (2011-

2012) reflects the role played by services in helping the economy navigate the turbulence

caused by the Eurozone crisis and the recession in economies world over.2

The Finance Act of 1994, envisaged the growing role of services in the Indian economy and

introduced a levy on services to create an additional source of revenue to fulfil therequirements of our fiscal policy. The indirect tax introduced was ideal to meet the dual

objective of fiscal management without hampering economic growth and productivity. Our

country adopted a selective approach wherein they taxed only specific services to allow for

the services sector to continue growing while simultaneously increasing the revenue

generation for the government. The list of taxable services continued to grow as the

robustness of our service sector grew but despite the frequent revision of the list of taxable

services, revenue from service tax was barely 0.3 per cent of the GDP and 3 per cent of the

tax revenue of the union,3

which considering the state of our Fiscal deficit, India can ill

afford.

Recent trends in service tax policy have dovetailed India fiscal policy. India expanded the

positive list continuously and finally bit the bullet and shifted to a comprehensive tax regime

for service tax in the Finance Act of 2012, to curtail the fiscal deficit which now stands at

5.6%.4

The paper provides a brief overview of the antecedents and the existing service tax

framework in India. The paper delves into the positive list system of the service tax regime

and continuous expansion of the same and the fluctuations in rate of taxation. The paper

1Concept Paper on Taxation of Services based on a Negative List, Central Board of Excise and Customs,

Ministry of Finance, Government of India (2011), available athttp://www.cbec.gov.in/draft-circ/taxservices-

negativelst.pdf, (last accessed on 4th

April, 2012).2

Chapter 10, Economic survey of India 2011-2012, available athttp://indiabudget.nic.in/survey.asp, (last

accessed on 4

th

April, 2012).3Supra note 1.

4Supra note 2.
http://www.cbec.gov.in/draft-circ/taxservices-negativelst.pdfhttp://www.cbec.gov.in/draft-circ/taxservices-negativelst.pdfhttp://www.cbec.gov.in/draft-circ/taxservices-negativelst.pdfhttp://www.cbec.gov.in/draft-circ/taxservices-negativelst.pdfhttp://indiabudget.nic.in/survey.asphttp://indiabudget.nic.in/survey.asphttp://indiabudget.nic.in/survey.asphttp://indiabudget.nic.in/survey.asphttp://www.cbec.gov.in/draft-circ/taxservices-negativelst.pdfhttp://www.cbec.gov.in/draft-circ/taxservices-negativelst.pdf


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establishes the economic rationale behind the aforementioned trends in service tax, and

service tax itself. The Introduction of the negative list system by the Finance Act, 2012 has

been analysed. The stated policy of the government to introduce GST5

which will incorporate

service tax in India has again been studied as one of the major trends in the policy fortaxation of services. The paper essentially describes the service tax trends and analyses the

rationale behind them.

5First Discussion Paper On Goods and Services Tax In India, The Empowered Committee Of State Finance

Ministers, available athttp://finmin.nic.in/GST/Empowered%20Committee%20of%20SFM%20%20First%20Discussion%20paper.pdf,

(last accessed on 4th

April, 2012).
http://finmin.nic.in/GST/Empowered%20Committee%20of%20SFM%20%20First%20Discussion%20paper.pdfhttp://finmin.nic.in/GST/Empowered%20Committee%20of%20SFM%20%20First%20Discussion%20paper.pdfhttp://finmin.nic.in/GST/Empowered%20Committee%20of%20SFM%20%20First%20Discussion%20paper.pdf


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Contents

Introduction ................................................................................................................................ 1

Framework ................................................................................................................................. 4

Legal and Administrative Trends in service tax ........................................................................ 6

Trends dovetailing Fiscal Policy:............................................................................................... 8

Negative List ............................................................................................................................ 10

Future Trends In Service Tax Policy ....................................................................................... 13

Conclusion ............................................................................................................................... 15

Bibliography ............................................................................................................................ 16


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FRAMEWORK

With the increasing importance of services in the domestic economy, Service tax was

introduced in 1994 as a levy on services and the provisions of the same are mentioned in

Chapter V of the Finance Act of 1994. It is an indirect form of taxation, which is levied on

goods and services and not on income and profits, thus, carrying the tax to the point of

consumption; hence the burden of the tax is on the consumer and not on the business.6

It has

helped raise the tax revenue for the government so as to fuel economic growth and

productivity without damaging the rate of savings in the economy, a key outcome of its

indirect nature. A planned growth of service tax will reduce the tax burden on international

trade (Customs duty) and domestic manufacturing sector (Excise duty),

commensurate with

the goals of economic liberalization and globalization.7

Moreover, it has an inbuilt ease of collection and safeguards against tax evasion.8

Since it is

levied at the point of consumption, it allows the government the flexibility to influence

patterns of production and reduce consumption of luxury goods through service tax rates. The

bit-by-bit nature, unlike the lump sum paid in direct taxes, cushions the impact on taxpayers

and does not prompt them to cut down savings, a vital requirement for a developing

economy.9

The point of taxation being point of consumption, it has brought under its ambit

people who do not pay direct taxes but avail of the services being taxed.

The service tax regime was one of Positive Listing. Under this approach, each service is first

identified, the taxable event is then defined for each identified service and then tax is levied

on the occurrence of the event.10

S. 65(105) of the Finance Act, 1994 lists the services that

qualify for service tax.

11

The positive list system has a significant advantage for a nationexperiencing an initial boom in its services sector as it helps nascent services avoid the

burden of taxation and generates revenue through components of the service sector which are

6All India Federation of Tax Practitioners vs Union Of India, [2007] 10 STT 166 (SC) (Supreme Court of India).

7Challenges before the Service Tax Administration in India, available at

http://www.servicetax.gov.in/ovw/ovw5_challenges.htm,(last accessed on 5th

April, 2012).8

Sanjiv Aggarwal, TREATISE ON SERVICE TAX,Vol.1, 223, (Snowwhite Publications, 9th

edn., 2011).9

MichealTodero & Stephen Smith, ECONOMIC DEVELOPMENT, 751, (Pearson Publications, 8th edition, 2003).10 S Mukhopadhyay,Is a negative list for service tax desirable?, BUSINESS STANDARD,AUG.7,2006,available

athttp://www.business-standard.com/india/news/isnegative-list-for-service-tax-desirable/259045/, ( lastaccessed on 4

thApril, 2012).

11 S. 65(105), Finance Act, 1994.
http://www.servicetax.gov.in/ovw/ovw5_challenges.htmhttp://www.business-standard.com/india/news/isnegative-list-for-service-tax-desirable/259045/http://www.business-standard.com/india/news/isnegative-list-for-service-tax-desirable/259045/http://www.business-standard.com/india/news/isnegative-list-for-service-tax-desirable/259045/http://www.business-standard.com/india/news/isnegative-list-for-service-tax-desirable/259045/http://www.servicetax.gov.in/ovw/ovw5_challenges.htm


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firmly established. Initially when Service Tax was levied, most services were furnished by

small units which would not have yielded high revenue12

and would have lagged in growth

due to the tax burden; hence it was correct to eliminate these services. The definition of the

taxable event and the situation in which tax liability arises, both inherent in the positive listapproach are extremely important for a developing economy.

12 S Acharya,Back to the Past?, 38(11) ECONOMIC AND POLITICAL WEEKLY 1011 (Mar. 15-21, 2003).


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LEGAL AND ADMINISTRATIVE TRENDS IN SERVICE TAX

The Union Government utilised the residuary powers vested in it through the Entry 97 of

Union List to impose service tax in India.13

Consequently, a slew of legislative interventions

by the central government, through constitutional amendments have been carried out to

enable the government to establish clear cut procedures and lay down rules for the imposition

of service tax in India.14

The constitutional validity of service tax has been challenged time

and again in the courts which have consistently held that the imposition of service tax is not

ultra-vires.15

Executive Response

Service tax is administered by the Central excise department which has been pro-active in its

attempts for ensuring high revenue collection through service tax coming out with a slew of

rules and notifications to provide clarity to the whole process. CBEC has set up multiple

commissionaires along with Large taxpayers units16

to accommodate the growing revenue

stream. The expanding positive list led to a trend of every service challenging their inclusion

and high rates of litigation which has been negotiated by the government through the

notification of Customs and Central Excise Appellate Tribunal (CESTATs) as the appellate

body.17

Anticipating further expansion, an office of director General of Service Tax (DGST)

has been set up, with an aim to centralise, streamline and fast-track processes with a view to

ensure effective implementation of Service Tax.18

A.C.E.S.

The biggest step forward in terms of the administrative aspect of service tax has been

Automation of Central Excise and Service Tax (ACES), an e-governance initiative by CBEC

which has a huge potential to enhance revenue collection by streamlining the whole process

13Entry 97, Union List, 7

thSchedule, Constitution of India.

1495

thConstitutional Amendment Bill, 2011 (India).

15Indian Institute of Architects Vs. Union of India, [2007] 6 STT 112 (MAD) (High Court of Madhya Pradesh).

16Supra note 8, at 204

17J.K. Mittal, LAW,PRACTICE AND PROCEDURE OF SERVICE TAX, Vol.II, (CCH Wolters Kluwers, 20

thedn., 2010).

18CAG Audit Report No. 25 of 2011-12 Union Government (Indirect Taxes) Central Excise & Service Tax,

available athttp://saiindia.gov.in/english/home/Public_Interface/In%20_Media/Report_25.pdf, (last accessedon 4

thApril, 2012).
http://www.taxmann.com/servicetaxlaw/Stonline_servicetax/Redirectpage.aspx?schc=y&Text=D%3a%2fTaxmannData%2fSTonlineData%2fRTF%2fST_H%2f%5b2007%5d006STT0112(MAD)_H.rtfhttp://saiindia.gov.in/english/home/Public_Interface/In%20_Media/Report_25.pdfhttp://saiindia.gov.in/english/home/Public_Interface/In%20_Media/Report_25.pdfhttp://saiindia.gov.in/english/home/Public_Interface/In%20_Media/Report_25.pdfhttp://saiindia.gov.in/english/home/Public_Interface/In%20_Media/Report_25.pdfhttp://www.taxmann.com/servicetaxlaw/Stonline_servicetax/Redirectpage.aspx?schc=y&Text=D%3a%2fTaxmannData%2fSTonlineData%2fRTF%2fST_H%2f%5b2007%5d006STT0112(MAD)_H.rtf


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into a user-friendly format.19

It is a software application which aims at improving tax-payer

services, transparency, accountability and efficiency in the indirect tax administration in

India.20

19What is ACES, available athttp://www.aces.gov.in/aboutaces.jsp(last accessed on 4

thApril, 2012)..

20Id.
http://www.aces.gov.in/aboutaces.jsphttp://www.aces.gov.in/aboutaces.jsphttp://www.aces.gov.in/aboutaces.jsphttp://www.aces.gov.in/aboutaces.jsp


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TRENDS DOVETAILING FISCAL POLICY:

The Indian government has manipulated the service tax regime to suit its fiscal policy as it

conceptualised the service tax as the bulwark against high rates of fiscal deficit. Along with

managing fiscal deficit, the Indian government did not want to stall the boom being

experienced by the services sector hence, it rolled out the service tax in a phased year-by-year

case by case manner through the expansion of services placed under the positive list.

Originally, only 3 services were taxed21

, but as the nations service sector grew, there was a

clear expansion in the number of services placed under the positive list by way of

amendments from time to time, to the Finance Act, 1994 and after the 2011 budget, services

taxed stood at 119.22

The constant addition year after year to the positive list reflects a clear

trend of expanding the tax base in a phased manner to meet the dual objective of controlling

fiscal deficit without stalling growth in nascent components of the services sector.

The fiscal policy of the nation is reflected in the rate of taxation levied by India as the

original levy of 5% in 1994 became 12% in 2006. Here again, the Indian policy of managing

fiscal deficit without stalling economic growth is apparent as the rates of taxation were

increased in a phased manner. There is a clear trend of manipulating the service tax rates to

meet the current fiscal objectives as the indirect nature of the service tax provides the

government with high levels of immediate flexibility.23 The tinkering with rates is clearly

reflected in the introduction of Education Cess and SAH education cess on service tax to

finance human resource development in the nation.24

The biggest example of the close links between the nations fiscal policy and service tax, and

in extensions the services sector itself, is reflected in the way the government used service tax

rates to tackle the effects of the economic recession in North America. As part of a financial

stimulus to the reeling economy, the Government of India rolled back the rate of service tax

to 10% in 2009,25

so that the services sector continues to grow optimally, fuelling the nations

21Supra note 8, at 206.

22Supra note 11.

23R. burgess and S. stern, Taxation and Development, XXXI, 2, JOURNAL OF ECONOMIC LITERATURE, 762-830

(1993).24

Supra note 17, at 2159-2161.25Sec.66B, Chapter V, Finance Bill, 2009, available athttp://indiabudget.nic.in/ub2009-10/ubmain.htm, (last

accessed on 4th

April, 2012).
http://indiabudget.nic.in/ub2009-10/ubmain.htmhttp://indiabudget.nic.in/ub2009-10/ubmain.htmhttp://indiabudget.nic.in/ub2009-10/ubmain.htmhttp://indiabudget.nic.in/ub2009-10/ubmain.htm


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growth. In the Finance Bill, 2012, GoI shifted its focus to fiscal consolidation, increasing the

rate of taxation to 12%.26

Service Tax falls predominantly on business to business (B2B) services and is thus highly

cascading in nature.27 Cascading taxes directly effect competitiveness in the international

market and create a bias in favour of imports, through hidden burden of taxes on production

inputs.28

To maintain competitiveness of the service sector, GOI introduced CENVAT credit

which allows credit on the service tax paid on the input-service.29

The allowance of

CENVAT credit and exemptions granted for export of services30

reflects the forward looking

outlook of the service tax regime.

CENVAT credit and export exemptions coupled with the dual manipulation of the positive

list and service tax rates to generate revenue without stalling growth of the services sector has

been a pivotal trend of the services sector in India. The trends in revenue collection, positive

list and rate of taxation can be clearly can be clearly seen from the graph below.

26Sec.66B, Chapter V, Finance bill 2012, available athttp://indiabudget.nic.in/bill.asp, (last accessed on 4

th

April, 2012).27

Gurcharan Das, The India Model, 85(4)FOREIGN AFFAIRS , 2, (2006).28

Auerbach, Alan J. & Hines, James Jr., "Taxation and economic efficiency, in: A. J. Auerbach & M. Feldstein

(ed.), Handbook of Public Economics, 1347-1421 , (edition 1, volume 3, 2002).29

Amaresh Bagchi, TAXING SERVICES:THE WAY FORWARD, 39(19), ECONOMIC AND POLITICAL WEEKLY , 1876, 200430

S Madhavan, Implications of service tax on export of services, BUSINESS STANDARD, (6th Nov. 2006), available at

http://business-standard.com/india/news/implicationsservice-taxexportservices/263827/, (last accessed on 4th

April, 2012).

1994-

94

1997-

98

2000-

2001

2003-

2004

2006-

2007

2009-

2010

2011-

2012

2012-

2013

Revenue 410 1515 2612 7890 37482 58319 71174 124000

Service Tax rates 5 5 5 8 12.24 10.3 10.3 12.36

No. of services under tax net 3 18 26 62 99 117 119 0

0

20000

40000

60000

80000

100000

120000

140000

Rs.

Crore

Revenue from Service Tax
http://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://business-standard.com/india/news/implicationsservice-taxexportservices/263827/http://business-standard.com/india/news/implicationsservice-taxexportservices/263827/http://business-standard.com/india/news/implicationsservice-taxexportservices/263827/http://indiabudget.nic.in/bill.asp


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NEGATIVE LIST

In June 2000, an Expert Group headed by 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. It recommended,a general and comprehensive extension of the tax to cover

all services with a small and clearly-defined exemption list.31

Subsequently, CBEC in its Concept Paper on Taxation of Services based on a Negative List,

advocated a model of taxation based on a negative list approach arguing that the resilience of

Indias service sector today is high enough to allow for casting the tax net far and wide.32

The

Finance Bill, 2012 marked a major shift in government policy as the government with an eye

on fiscal consolidation changed the service tax regime to a negative list system.33

The ever

growing positive list, which last stood at 119,34

clearly showed the governments intent to tax

service sector comprehensively; it was only a matter of time when the switch to a negative

list would have occurred.

According to data released by the Reserve Bank of India, the sector-wise contribution of

services (as % of the service sector) to the Indian GDP is as follows:35

Out of the mentioned sectors, it can be said that barring community and social services, (a),

(b), (c) and personal services have been already brought into the taxation net under the

31 T. Rustagi and Bijal Ajinkya, Time for a negative list of services for taxation?, THE ECONOMIC TIMES,Feb. 4,

2010, (last accessed on 4th

April, 2012)..32

Supra note 1.33

Supra note 26.34

Analysis of Service Tax Revenue, Directorate of service tax, available athttp://www.servicetax.gov.in/, (last

accessed on 4th

April, 2012).

35 Data released by RBI for 2009-2010, available at

http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/3T_HBSE200910.pdf., (last accessed on 4th

April, 2012).

The sector-wise contribution of services to GDP

Construction-13.2%

Trade, hotels, transport and

communication-38.89%

Financing, insurance, real estate

and business services-25.78%

Community, social and personal

services-22.11%
http://www.servicetax.gov.in/http://www.servicetax.gov.in/http://www.servicetax.gov.in/http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/3T_HBSE200910.pdfhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/3T_HBSE200910.pdfhttp://rbidocs.rbi.org.in/rdocs/Publications/PDFs/3T_HBSE200910.pdfhttp://www.servicetax.gov.in/


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current policy. However, as per the specific classification of taxable services in the Finance

Act, 1994 as amended by subsequent Finance Acts, various sub-components of these services

are still not taxable, which leads to a significant revenue leakage for the government36

and

creation of unintended exemptions,

37

hampering revenue generation through the servicessector. A negative list would help to that extent by including within the scope of taxation all

the services which are able to escape the tax net currently. Ultimately, a negative list will help

in filling in the gaps in the selective system owing to which various service providers in these

sectors are able to escape tax liability, giving depth to the tax base. This is bound to boost

revenue for the exchequer as according to the Concept Paper, approximately 40% of the total

services will come into the tax net as a result of the proposed negative list, and after

excluding services provided by the informal sector, around 20-25% of the total service sector

contribution may be charged service tax.38

The existing system has been highly litigious as nearly every service which was added to the

positive list has challenged its inclusion and models of business have been created to avoid

service tax by exploiting the relative lack of clarity in defining the taxable services.39

.

A negative list simplifies the taxation regime heavily as it automatically addresses the

problem of lack of definitions of terms in the current system as a clearly set out negative list

would be useful in crystallizing the boundaries of taxable and non-taxable services and thus

also curtailing unnecessary service tax litigation.40

The negative list would provide immense

clarity to the service tax regime which is one of the canons of taxation policy, as laid out by

Adam smith.41

In November 2011, a revised concept paper was released by CBEC which organized the

negative list into 9 sectors comprising of twenty-two items.42

While formulating the negative

36Supra note 1.37 A Bagchi, Towards GST: Choices and Trade-offs, 41(14) ECONOMIC AND POLITICAL WEEKLY, 1314 (Apr. 8-

14, 2006).38

Supra note 1.39

Supra note 31.40 D Sikarwar,India not ready for negative list to tax services, THE ECONOMIC TIMES,(Apr. 6, 2010), available

at http://articles.economictimes.indiatimes.com/2010-04-06/news/27577607_1_taxable-service-service-tax-

exempt-service,(last accessed on 4th

April, 2012).

41 Adam Smith, Main Canons of Taxation inAN INQUIRY INTO THENATURE AND CAUSES OF THEWEALTH OFNATIONS,

(1776).

42Revised Concept Paper on Taxation of Services based on Negative List, Central Board of Excise and

Customs, Ministry of Finance, Government of India (2011), available at http://www.cbec.gov.in/draft-

circ/concpt-ppr-velst.pdf, (last accessed on 4th

April, 2012).
http://articles.economictimes.indiatimes.com/2010-04-06/news/27577607_1_taxable-service-service-tax-exempt-servicehttp://articles.economictimes.indiatimes.com/2010-04-06/news/27577607_1_taxable-service-service-tax-exempt-servicehttp://articles.economictimes.indiatimes.com/2010-04-06/news/27577607_1_taxable-service-service-tax-exempt-servicehttp://www.cbec.gov.in/draft-circ/concpt-ppr-velst.pdfhttp://www.cbec.gov.in/draft-circ/concpt-ppr-velst.pdfhttp://www.cbec.gov.in/draft-circ/concpt-ppr-velst.pdfhttp://www.cbec.gov.in/draft-circ/concpt-ppr-velst.pdfhttp://www.cbec.gov.in/draft-circ/concpt-ppr-velst.pdfhttp://articles.economictimes.indiatimes.com/2010-04-06/news/27577607_1_taxable-service-service-tax-exempt-servicehttp://articles.economictimes.indiatimes.com/2010-04-06/news/27577607_1_taxable-service-service-tax-exempt-service


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list of services, the Government has taken into consideration notions such as administrative

considerations, contractual obligations under international bodies and diplomatic missions,

welfare considerations and explicit activities in the nature of services which are within the

taxing powers of states.

43

A lucid but concrete definition of service needs to be established with exhaustive

descriptions for the type of exemptions provided so as to avoid the high rates of litigation

plaguing the positive list system and to prevent tax evasion by service providers who exploit

the loopholes present in the definition. Service has been defined in clause (44) of the new

section 65B and meansAny activity (or omission) carried out by one person for another in

lieu of any consideration.44

An examination of this definition shows that the government intends to considerably expand

its service tax collections by defining service in an expansive, overarching way and

excluding a very limited range of services. The definition specifically excludes

Any activity that constitutes only a transfer in title of (i) goods or (ii) immovable

property by way of sale,

Gift or in any other manner a transaction only in (iii) money or (iv) actionable claim,

Any service provided by an employee to an employer in the course of the

employment,

Fees payable to a court or a tribunal set up under a law for the time being in force

Services listed under the negative list which is enumerated in Sec 66 D.45

There are multiple doubts that such an overwhelming change would lead to major transitionalissues as the existing system has been in place for over sixteen years would have its own

43Sec.66D, Chapter V, Finance bill 2012, available at http://indiabudget.nic.in/bill.asp, (last accessed on 4

th

April, 2012).

The negative list includes services such as notified services provided by the Government, Judiciary, RBI and

certain governmental bodies; services provided by individuals to Government; services by UN, international

bodies, diplomatic missions; social welfare and public utility services; agricultural and animal husbandry

services; certain financial sector services; public transport services; certain educational and health services,

certain construction services.44

Sec.65B(44), Chapter V, Finance bill 2012, available athttp://indiabudget.nic.in/bill.asp, (last accessed on 4th

April, 2012).45

Sec.66D, Chapter V, Finance bill 2012,http://indiabudget.nic.in/bill.asp, (last accessed on 4th

April, 2012).
http://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asphttp://indiabudget.nic.in/bill.asp


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inertia against change.46

FUTURE TRENDS IN SERVICE TAX POLICY

The Indian Tax system is undergoing a process of constant reform as it slowly moves away

from the Musgraves early stage framework47

to the modern taxation system.

Correspondingly, the future of service tax is the Goods and Services Tax. The

implementation of GST will lead to the abolition of other taxes such as octroi, Central Sales

Tax, State-level sales tax, entry tax, stamp duty, telecom licence fees, turnover tax, tax on

consumption or sale of electricity, taxes on transportation of goods and services, et cetera,thus avoiding multiple layers of taxation that currently exist in India.

48It is pretty apparent

that the introduction of the negative list has been carried out with an eye on introducing the

GST.49

Given the federal structure of India, India has proposed a dual GST system50

which

closely resembles the Canadian model51

which aims to demarcate separate services for

taxation by the centre and the state. Finance minister Pranab Mukherjee has proposed a multi-

slab structure for GST52

;

There is extreme controversy over GST with many states fearing for their fiscal

independence and inefficient tax administration due to lack of synergy between state and

46 P Ravindran, Carnival of the Tax Gods : Service Tax Concept Paper ahead of the Goods and Services Tax

Wide menu at the long table, available athttp://discover-decouvrir.cisti-icist.nrc-

cnrc.gc.ca/eng/article/?id=19293111, (last accessed on 4th

April, 2012).47

R.A. Musgrave, FISCAL SYSTEMS, (Yale University Press, 1969).48

Supra note 5.49

The CBEC Concept Paper statesthere are advantages in moving towards negative list at an earlier time in

order to gain useful experience in its implementation and minimize the impact of the mammoth changes that

GST may usher.Supra note 1.50

Supra note 5.51

RM Bird and Pierre-Pascal Gendron, Sales Tax in Canada: The GST-HST-QST-RST System, 63 Tax Law Review

517 (2010).52

Pranab Mukherjee moots three rates for rollout of GST, DNA, Jul 21, 2010, available athttp://www.dnaindia.com/money/report_three-rates-mooted-for-gst-rollout_1412772, (last accessed on 4

th

April, 2012).

Goods:20% Services:16%Essential

Items:12%
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central tax authorities.53

There has been debate over what comprises essential items and what

do not comprise essential items as various sections of the economy try and grapple with each

other to avoid GST.

53Supra note 46.


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CONCLUSION

The Service Tax policy of our nation has been of optimism checked by pragmatic principles.

India has been consistently optimistic about the growth in services sector and the subsequent

revenue it stands to gain but it has been pragmatic enough to apply a phased approach to]]in

expanding the service tax base and increasing the service tax, so as to not stall the explosive

growth enjoyed by Indias service sector. The dual objective has been the cornerstone of the

service tax policy defining the service tax trends in India.

Service tax trends have dovetailed Indias fiscal policy ambitions therefore the introduction

of the negative list system makes an attempt to widen the tax base and bring in more services

into the taxation net, to increase government revenue and rein in the fiscal deficit which has

taken a further hit due to the global economic slowdown and the recent weakening of the

rupee and stands at 5.6%. The negative list will not only widen the tax base but also provide

depth by plugging loopholes through its comprehensive nature. It is hoped that the definition

provided by the government clarifies and simplifies the framework and avoids the litigious

route the positive list had to undergo.

Now, that the Indian services sector has achieved critical mass and still continues to grow at

rapid rates, India has begun to shed its inhibitions regarding taxation of services. The

introduction of the negative list system in 2012 has been as much about fiscal consolidation

as it has been about facilitating an eventual shift towards the GST. GST is the future of the

service tax policy in India. India needs to ensure that the dual system to be followed under the

GST doesnt end up becoming as complex and laborious as the present archaic system. There

is also the burgeoning question of getting the states on board and establishing synergies

between the various taxation authorities in our country to effectively administer an uniform

taxation system.

The future trends in taxation of services and realisation of its true potential depends on how

well the government manages fiscal consolidation and the transition from the positive list to

negative list and subsequently the advent of GST.


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STATUTES

1. 95th Constitutional Amendment Bill, 2011 (India).

2. Finance Acts of 1994, 1997, 2000, 2003, 2006, 2009, 2011 (India).

3. Finance Bill, 2012(India).

REPORTS

1. Economic Survey of India (2011-2012)

2. CAG Audit Report No. 25 of 2011-12 Union Government (Indirect Taxes)Central

Excise & Service Tax
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