India: Negative list of services – a pre-cursor to GST?
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India: Negative list of services – a pre-cursor to GST?


The concept of having a negative list of services, taxing all services comprehensively with a small list of exempt services, has been a frequent subject matter of discussion in recent past especially since India is on a cusp of undertaking sweeping reforms of its taxation regime with the advent of the Direct Taxes Code and unified GST, explains Sachin Menon, head of indirect tax at KPMG India.

The Finance Minister announced his intention to introduce the concept of negative list of services in Budget 2011 as against the specified list of taxable services at present in India. Taking this forward, the Central Board of Excise and Customs (CBEC / Board) released the first concept paper for taxing services based on negative list in August 2011 and invited discussions and suggestions from the public.

Subsequently, the Board released the revised concept paper in November 2011 incorporating various responses.


Taking cue from the taxation regime prevailing in the EU, New Zealand and various other countries and modified to suit Indian context, “service” has been defined to mean anything which is not a supply of goods, money or immovable property. The definition also lays down specific inclusions and exclusions.

Inclusions in the definition are right to use immovable property; construction of buildings intended for sale; temporary transfer or permitting the use of intellectual property right; obligation to refrain from an act, or to tolerate, act; lease or hire of goods; and right to enter any premises. Exclusions are services provided by an employee in the course of employment, those provided by a constitutional authority, a local self-government; and activities that amount to manufacture of excisable goods. It is also envisaged that certain supplies which are deemed to be sales for the purpose of levy of state-level VAT would also be excluded.

Negative List of Services

The proposed negative list of services which would be exempt from payment of service tax include notified services when provided by the government, services provided by international bodies and diplomatic missions, social welfare and public utilities, some financial services in the nature of securities, debts, mutual funds, interest, dividends and foreign exchange, specified transport, construction, real estate, education, healthcare and few others.

While the proposed negative list enumerates various services, it is expected that there could be challenges in relation to scope and classification of certain services, as well as on valuation and exclusions.


Despite its inherent advantages, there are several issues such as exemptions and abatements from taxable value and classification of services as export and import for exemption or levy of tax on the recipient. These are required to be dealt with before implementation of taxation by negative list of services by introducing place of taxation / supply rules. While it is easier to identify and exempt specific services and specify place of taxation / supply rules in the current regime, the negative list of services may face challenges to implement as it involves identifying specific service transactions for granting exemption or abatement or for classification of place of taxation / supply.

It is pertinent to note that services in relation to agriculture, horticulture and animal husbandry have not been included in the negative list on the grounds that these could be prone to wider interpretation and abuse. The government is expected to neutralise the impact through other means, which need to be appropriately provided / framed.

Another important area is the taxation of government projects which continue to be taxed when services are provided by independent service providers to such projects. The levy would continue to add to the cost of such projects.

While there would be scope for including many more important services in the negative list, policy makers and business will have to work together during this evolution phase to finalise the negative list based on socio-economic ramifications.

Timing of introduction

While the taxation by negative list of services was intended to be introduced alongside GST, introducing it before GST is under discussion. This has the advantage of identifying various complications which may arise, instead of addressing them at the time of introduction of GST.

With the increasing pressure to augment tax revenues in these fiscally challenging times, the dice are loaded in favour of bringing additional services within the fold of taxation, which hitherto have been untouched. However, an important aspect to be highlighted is the restrictions placed on claim of input tax credits with effect from April 1 2011, continuity of which would be undesirable under the expanded scope of taxation. Strong representation from the business in respect of ironing out such shortcomings of the present tax regime as well as the proposed changes is the need of the hour.

Sachin Menon (, KPMG India 

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