According to the Economic Survey, the healthy growth rate of 10% registered by services sector has insulated India from the global slowdown. The sector, which contributes almost 60% of the GDP, was a late entrant to the tax net, with the introduction of service tax in 1994. What started as a modest 5% tax on three services has today assumed enormous proportions, with 117 services taxed at 10.3%, and the revenue going up from Rs. 410 crore to almost Rs. 71,000 crore in 2010-11. In this context, the introduction of the negative list is a welcome measure.

Ad-hoc changes in legislation, retrospective amendments to nullify favourable court decisions, new categories included in every budget, definitions of taxable services so broad to provide ample scope for extension, are perhaps the biggest challenges that the services sector faces.The CESTAT is the first appellate forum where one can expect a reasoned order to be passed. Introduction of the negative list alone will not solve this problem; there has to be some element of stability in legislation, and judicial pronouncements, if against the revenue, must be graciously accepted. 

Double taxation is another bane of the services sector. While the theory recognises that both VAT and service tax can be charged on the goods and services aspects of any transaction, the manner in which the service tax exemption in respect of time and material contracts is granted, makes it virtually impossible for assessees to claim the exemption on the portion of the turnover which is offered to VAT. The solution, perhaps, lies in bringing in a comprehensive GST. 

The single largest problem faced by exporters of services is in relation to refund of input CENVAT credit. One hopes that the measures announced by the finance minister will alleviate the woes of service exporters.

Krupa Venkatesh, Senior Director, Deloitte in India