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Tax exemption for election funding among 27 services

At present,the Centre imposes a 10 per cent tax on 119 services.

Written by ENS Economic Bureau | New Delhi | Published: August 30, 2011 12:58:27 am

Fund raising by political parties recognised by the Election Commission,interest paid on deposits by banks,dividend on investments,transport of passengers in public transport,and funeral and burial agencies,will be exempt from paying tax if a draft negative list of services is approved by the government.

The finance ministry today released a concept paper on negative list of services – the services which will not be taxed – suggesting 27 services to be out of the tax net. At present,the Centre imposes a 10 per cent tax on 119 services.

The pros and cons of this negative list vis-a-vis a positive list and whether it should be implemented at the time of proposed Goods and Services Tax (GST),will be deliberated on.

The service sector contributes around 60 per cent to the country’s GDP. However,its contribution to the total indirect tax collection is only around 10 per cent. The proposed GST will allow states as well to tax services,a power hitherto vested only with the Centre.

The draft includes roughly around 40 per cent of the total services in the tax net. The potential for effective taxation of services is likely to be confined to about 20-25 per cent of the service sector contribution,the paper says adding it will add significant numbers to the revenue “though it may not sound astounding as some sections believe it to be.”

List should have been more comprehensive: Experts

Several services,hitherto not taxed,may come under tax net if the proposed negative list is implemented by the government. With the government announcing a list of services which may be kept out of tax net,services like non-compete services,transportation of passengers by railways,services provided by government for a fee and temporary transfer or permitting the use of any intellectual property will constitute supply of service and hence will be taxable.

However,experts say that the draft negative list should have been more comprehensive and the definition of services more concise. “Nothing new has been put in the list… these are broadly the same items which have been exempt from tax so far. There should have been a small negative list with broad categories,” Bipin Sapra,partner E&Y said.

He said the huge list will create confusion and will raise interpretation issues leading to litigation.

The finance ministry has also tried to bring in transportation by railways under the tax net,a service they have been trying for some time to tax. Services in relation to sale and purchase of securities like stock broking will come under the tax net.

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