The Finance Minister clearly indicated that Union Budget 2012-13 is a precursor to the Goods and Services Tax by proposing to introduce the negative list of services, under which all services would be taxed barring the 17 specified services.

The list includes services provided by the Government with specified exceptions, pre-school/ school education, large parts of public transportation and so on.

Additionally, the Minister proposed an exempted services list that includes services provided by charities, sportspersons, performing artists in folk/ classical arts, individual advocates providing services to non-business entities and so on.

Though the budget proposed to levy service tax on all except specified services, it has been considerably well received by industry as it resonates somewhat with pre-budget anticipations and also because the negative-list regime takes the economy a step closer to GST.

However, there are certain aspects that may need deliberation before the draft of the Budget receives Presidential assent.

Services are incorporated in the negative/ exemption list with an intention to grant relief to the providers/ recipient from service tax. Nevertheless, some services that qualify as input services for the excluded/ exempted services may have missed the lawmakers' attention and are proposed to be taxed in the negative-list regime. Service tax on such input services will add to the cost of the excluded/ exempted services.

The negative list includes services provided by the Government while carrying out its constitutional obligations and in relation to social welfare/ public utility projects; but there is no clarity on whether the services provided by non-government entities entrusted with fulfilling the government's constitutional obligation and public utility/ social welfare responsibility would be included in the negative list.

Further, services by way of education are in the negative list; however, services provided to educational institutes have been kept out of the negative/ exemption list.

Attention can be drawn to the exemption granted to temporary transfer of copyright in cinematographic films, which would be upturned by the levy of service tax on professional fees earned by actors under the negative list regime. Actor fees are a major input for the entertainment industry and, in most cases, the input service tax on such fees would be a major input cost as most output services would not be taxable in view of the proposed exemption.

Furthermore, though several services relating to agriculture are included in the negative list, certain important activities including IPR services, are left out.

Such services are generally important input services for various companies in the agricultural sector.

These are just a few examples of the activities that merit consideration for inclusion in the negative/ exemption list as they are normally input services for the excluded/ exempted services.

If these are taxed in the negative-list regime, the cascading effect of indirect taxes will continue to trouble Indian industries and the purpose of excluding/ exempting specified output services from service tax may be defeated.

Thus, it is essential that lawmakers and industry join hands to address these concerns, so that amendments are made to the negative list/ exemption notification before the draft of the Budget becomes the law of the land.

The author is Partner, Indirect Tax, KPMG in India

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