The government today agreed to make changes in the definition of ‘services’ in the Negative List to address states’ concern on the levy of service tax on activities already taxed by States. It can also be seen as a strategy to secure the support of states for introduction of the Goods & Services Tax (GST).

As per Business Standard: “Some states, through the empowered committee of state finance ministers, have expressed concern. I have decided to address their concern by making changes in the definition of ‘service’, which would exclude activities, specified in the Constitution as ‘deemed sale of goods’,” Finance Minister Pranab Mukherjee said, while initiating a discussion on the Finance Bill.

The definition of ‘works contract’ has been enlarged to include movable properties. Exemption for specified services relating to agriculture in the Negative List has been extended to agricultural produce, enlarging the scope of the entry.

A negative list for taxation of services was announced in the Budget in March as a step towards the proposed GST. It contained a list of 17 services to be exempted from service tax, while everything else was proposed to be taxed. This was a shift from the current system, in which only 119 services are taxed.

States had expressed concern that some activities listed under the States’ List in the Constitution were proposed to be taxed by the Centre under its residuary powers, and this could lead to double taxation. These had asked the government to include those items in the Negative List till the GST was introduced.

These activities included the transportation of goods by a goods transportation, or courier, agency; renting of immovable property or construction of complexes; sales through hire-purchase or an installment-payment basis, supply of food or drink as part of service; provision of entertainment through cable network or DTH or by means of downloadable entertainments like games, videos, audios and the provision of accommodation in hotels or guest houses.

Currently, states don’t have the power to tax services, while the Centre can’t tax goods under the States’ List. The Constitution would be amended to give powers to both the Centre and the states to share a common taxpayer base.