In conformity with the international principle of ‘taxed unless exempt’, the Government of India has amended service tax law to follow a ‘negative list’ of services approach. This approach, which has universal taxation of services, other than a small ‘negative list’ will radically change the taxation of services.
There has been talk, off and on, of enacting a stand alone service tax code but this is not happened as yet. For the first time, an attempt has been made by the Government to define the term ‘service’. As per the new definition of service, it means, ’Any activity carried out by a person for another for consideration and includes declared services.’ The definition of ‘service’ itself would replace the existing 120 definitions in the positive list. The intent behind introducing the new definition is to comprehensively tax every activity, and thereby generate additional revenue for the Government.
The definition has two parts. The first part of the definition has a wide coverage encompassing almost every economic activity including an obligation to refrain from engaging in a particular activity. The second part of the definition envisages a deeming fiction, which further extends the definition of service to some transactions that may not otherwise fall within the definition of service. Therefore, declared services include permitting the use of intellectual property rights, work contracts and a few others. Some of the declared services are contracts which involve both the supply of goods and the provision of services. This is one aspect of indirect taxation which has caused numerous problems to industry, due to double taxation. The Government has tried to resolve this problem to a large extent by providing options so as to ensure that service tax is paid on the services element of such contracts alone and is not even inadvertently paid on the non-services or material portion of the contract. However, this objective is not achieved in contracts of IPR transactions and software.
The new definition would impact several currently non-taxable B2B and B2C transactions. As regards B2B transactions, there would be tax on grants with counter obligations, cost sharing arrangements, non-compete agreements, corporate guarantees, support services by Government etc. To understand the taxability of services in the new regime, we discuss one of the activities. Generally, research grants are given by companies, particularly pharmaceutical companies for development of new products. In terms of the new definition, service tax would be applicable in case the research grant is given with counter obligation on the researcher to provide IPR rights on the outcome of research undertaken with the help of such grants. In this scenario, grant would be construed as a consideration for provision of service of research. It can be seen from this example that a shift in approach is required to analyse any activity from a service tax perspective.
From a B2C perspective, services of astrologers, marriage-makers, private tutors, rail travel services, hotel accommodation etc. will attract service tax.
It is expected that the action of codifying the law by defining ‘Service’ would bring down the quantum of disputes and litigation pertaining to classification of services, overlap amongst definitions etc. Now, the courts would no longer be required to rely on dictionary meanings of key terms used in various definitions or judicial pronouncements under sister legislations to confirm taxability or otherwise of any activity under service tax law. The introduction of this new definition would truly be a welcome change if such sort of expansion is also done in the existing definition of input service in the CENVAT Credit Rules. It is important that a service rendered by a person to another should be considered as an input service for the recipient, with exceptions.
In the present regime where service tax is paid only on 120 services, companies do not get credit of service tax paid on procurement of essential services due to restrictive scope of the definition ‘input service’. As service tax would be paid on almost all the services, it is crucial to redefine the term ‘input service’. Such realignment is warranted to keep the cascading effect of service tax and excise duty at minimum as the fundamental principle underlying all indirect taxes, including service tax, is to ensure that the tax is paid only on “value addition”.
The Government has recently issued a series of notifications but it has not brought any changes in this regard. There is therefore an urgent need to address the matter in a holistic manner and to ensure that the provisions are so harmonized that credit is allowed to service providers/ manufacturer for services legitimately procured for running the business.For a successful implementation of the national level GST, it was of paramount importance that the term ‘service’ be defined.
The Government has taken a significant step in this regard by introducing the definition and it is expected that associated changes in the CENVAT Credit provisions would be made at the earliest.
The Author is Leader Indirect Tax Practice , PwC India
supported by Indu Amar and Rishika Arya