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Negative List basis of Service Taxation

S Madhavan 

Earlier articles in this column had addressed the pros and cons of having a negative list of services for service taxation and had also briefly discussed the international experience in implementing such a scheme of taxation.

As has been expected for sometime, the Central Board of Excise and Customs (‘CBEC’) has recently, on its website, uploaded a Concept Paper on Taxation & Services Based on a Negative List of Services, for public debate. The CBEC has solicited the widest possible consultation, debate and feedback from all stakeholders. This Concept Paper (‘Paper’) is an important milestone in the larger indirect tax reform process, a journey embarked upon by the Government several years ago in adopting a simplified tax structure and aligning with international best practices.

The Paper is a fairly detailed one and identifies the following questions that could possibly arise on a debate on the subject:- * Negative Versus Positive List – choice of scheme and timing of introduction of negative list

* Definition of ‘Services’

* Identification of services for inclusion in the Negative List

* Coverage of the Negative List

* Revenue implications

The Paper thereafter sets out in detail the discussion points for each of the above questions.

On the choice of the scheme of taxation of services, it lists out the benefits and the disadvantages of both a positive list and negative list and makes the basic case that the fundamental benefit of the negative list is the one time taxation of the sector, obviating the need for on-going periodic changes. On timing, it argues the case for both the introduction of negative list ahead of the implementation of the GST as well as the benefit in introducing the list at the same time as the GST. Since it is a discussion paper, there is no definitive recommendation and the Paper leaves it open for debate and discussion.

Coming to the more important questions, the Paper sets out the definition of a service, in line with global practice and experience in an inclusive manner in that a ‘service’ is meant to denote anything which does not constitute a supply of goods, money or immovable property. Besides defining ‘service’ in this manner, the Paper also incorporates both inclusions as well as exclusions thereto. The inclusions relate to the following: * right to use an immovable property;

* construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of certificate of completion by a competent authority;

* temporary transfer or permitting the use or enjoyment of any intellectual property right;

* obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

* service in relation to lease or hire of goods; and

* right to enter any premises

As opposed to this, the exclusions relate to the following supplies:-

* by an employee to an employer in the course of or in relation to the employment of the person;

* by a constitutional authority under the Indian Constitution or a member of an Indian legislature or a local self-government in that capacity;

* that amounts to manufacture of excisable goods or is chargeable as part of the value of goods to a duty in terms of the provisions of Central Excise Act, 1944

On the point of what constitute a supply of goods, the Paper refers to the definition of goods under the Sale of Goods Act, 1930 as follows:-

“Goods” means every kind of movable property other than actionable claims and money; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

It states also that supplies which are deemed as a sale of goods, in terms of Article 366(29A) of the Constitution, would stands excluded as well from the definition. On bundled/composite contracts, it states that under the negative list regime, the principle to be employed to determine taxability would be that laid down by the Supreme Court in the BSNL judgment [2006(2) STR 161(SC)] wherein the prescribed test was to determine the intent of the parties as to whether they had contracted for a sale of goods or for provision of a service and accordingly either the goods tax or the services tax would apply. It is interesting to note that the exclusions refer inter alia to the principle of manufacture as defined under the Central Excise Act. As is well known, under the GST regime, this principle will no longer determine taxation of goods and will instead be replaced by a definition of supply of goods. Evidently therefore, any reference to manufacture would be relevant only upto the time of introduction of the GST and not beyond.

Thereafter, the Paper approaches the core issue of the services that ought to legitimately form part of the negative list and hence be excluded from the purview of the tax. The considerations that were found relevant for determining the inclusion of specified services in this list are itemized in the Paper as follows:-

(i)Administrative considerations: taxation of Government, difficult to tax sectors e.g. margin-based financial services.

(ii)Under contractual obligations: Specified international bodies and diplomatic missions

(iii)Welfare considerations: welfare of vulnerable sections of society, essential education, public health; public transport, services by non-profit entities, religious services, promotion of art, culture and sports.

(iv)Economic considerations: transport of export goods, services meant for agriculture, animal husbandry and infrastructure development.

(v)Explicit activities in the nature of services, which are within the taxing powers of States: betting and lotteries, tolls.

Accordingly, the Paper lists out, in the annexure thereto, a set of 27 different services that could potentially qualify for the inclusion in the negative list. These various services have been grouped into 9 different categories, which are as follows:

(i)Services Provided by Specified Persons

(ii)Social Welfare and Public Utilities

(iii)Agriculture & Animal Husbandry

(iv)Financial Sector


(vi)Construction & Real Estate

(vii) Education


(ix)Others, wherein as many as 10 different services out of the total 27 services referred to above have been itemized.

The Paper states that the aforesaid list of services has been drawn up purely for the purpose of discussion and is, therefore, indicative in nature. Moreover, the five considerations referred to above have informed the choice of the possible services for exclusion from the tax. Interestingly, the discussion on the negative list appears not to have taken note of the fact that these services could potentially be either exempt from the tax and hence be not eligible for any input tax offset/refunds or alternatively be zero rated and hence be eligible for the offset/refund of input taxes. This is a significant distinction in tax treatment & needs to be debated at length.

On the final question of revenue impact, the Paper suggests that despite the fact that as much as 57 per cent of the country’s GDP comes from services, nevertheless the revenues from the sector, through the service tax, are still negligible.

The Paper asserts that even after the possible introduction of the negative list, the potential for effective taxation of services could be confined to around 25 per cent of the contribution of the sector. However, the Paper concludes by stating that this is still sizeable and will add significantly to Government revenues, implying that the exercise to move to services taxation based on the negative list is still worthwhile.

In the next article, the various possible services for inclusion in the negative list, as listed out in the Paper, will be discussed in detail.

The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd. 

Supported by Rahul Renavikar

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First Published: Mon, September 05 2011. 00:06 IST