With an increasing anxiety to levy tax on more and more services, commercial rentals were brought within the ambit of service tax in 2007. However, this has been challenged in various high courts as unconstitutional. The Bombay High Court recently granted relief to various petitioners by staying the service authorities from proceeding against the petitioners for recovery of service tax. The question now concerns other entities that were not part of the court's order. If the Supreme Court, to which the matter has now been referred, calls it unconstitutional, assessees would proceed to claim refunds of tax already paid by them. How soon such refunds would be sanctioned is anyone's guess.

Policy issues
There are also certain policy-related issues that the government should address, the infrastructure sector being a case in point. Last year, the Finance Minister said that India needed an infrastructure investment of $475 billion over the next five years to sustain an annual growth rate of 9%. However, tax sops provided so far to infrastructure projects have not met the same standards as the government's stated intent to improve infrastructure.

While granting exemptions to basic infrastructure projects such as roads, airports and bridges, other projects such as construction of power plants, maintenance of roads and construction of hospitals were ignored. The government seems to have adopted a discretionary approach vis-a-vis tax incentives granted to the infrastructure sector, which is proving to be a hindrance in providing equal fillip to all infrastructure projects.

While there are avenues where service tax law can be simplified, successive governments have been proactive in making the tax regime more assessee-friendly. Among the important innovations is the set-off of excise duty paid on goods used to provide taxable services from September 2004. Prior to this date, only set-off of service tax paid on services used in providing taxable services was permitted.

This scheme has its own peculiarities, though. For service providers of taxable and non-taxable services, provisions governing the use of input tax credit require maintenance of separate accounts in respect of services consumed for providing taxable and non-taxable services. However, no clarifications have been forthcoming as to what constitutes `maintenance of separate accounts'. If the authorities refuse to accept scientific methods adopted by assessees for using such credit and, further, do not provide clarity on the manner of use, there is bound to be a stalemate for which a resolution appears distant.

In this context, the introduction of a unified Goods and Services Tax (GST) from 2010 appears imminent. And in the interim, while it may not be practical for the government to now introduce a separate legislation to govern service tax, it is important to remove the ambiguities that plague service tax law. More so since even after the introduction of GST, disputes pending before the authorities under the erstwhile regime would continue. Importantly, where the intention under GST is to allow some services to be taxed by states, the framework should be established immediately to avoid differing interpretations of the law by the states later. An important component of such a framework could be to tax all services and provide for a negative list specifying the exempted services.

Finally, although service tax has come a long way since its inception and successive governments have tried to iron out some of the inconsistencies, to ensure a smooth and seamless transition to the GST regime, it is imperative the major anomalies be addressed before 2010.