Budget 2012: Shift in service tax regime leads to heavier tax burden

Last week’s budget proposes a major shift in country’s service tax regime with a negative list that has just 17 items, but the government can keep more items outside the ambit of this levy by including them in so called ‘exempt’ categories.

Such an “exemptions list” will be politically easier to manage as they can be changed through notifications, whereas any change in the composition of the formal negative list would require changes in the law through a parliamentary process. This will give the government flexibility to keep more services out of the tax net in the event of opposition.

“There is a separate list of exemptions apart from the negative list of services that is completely out of the tax ambit. The government can issue a notification later to keep any service in or out of the exemption list,” a finance ministry official said.

At present there are 88 services that are exempt from tax under this list, which the government wants to reduce to 10. This would mean that several services that now escape tax will soon come under the tax net. Experts also see a reduction in exemptions going forward.

“We are gradually becoming a services economy and it the clear that ambit of the Service tax will increase substantially,” said Pratik Jain, partner in accounting firm KPMG. The list of 17 services mentioned in the negative list in the budget for 2012/13 and spared of taxes include interest payments from the financial sector, services such as funerals, education and healthcare.