In continuation of our discussion in the previous articles on the Negative List regime, this article seeks to highlight the different “declared services” which are deemed to be services for the purpose of service tax. The concept of declared services, which supplements the definition of service as introduced under the Negative List regime has received limited attention, which might be a mistake.
Service taxation of renting of immovable property, design and development of information technology software, works contracts, civil construction contracts, intellectual property rights, etc, have been longstanding matters of debate and dispute. The narrated logic behind introduction of the concept of declared services is to reduce any possibility of confusion about the existence of a service element in these transactions.
In relation to information technology software, licensing of intellectual property rights and transfer of goods by way of hiring, leasing or licensing, there are cases where the transaction suffers double taxation (VAT and service tax), which could have been addressed by the lawmakers in the service tax law.
To explain this further, transfer of goods by way of hiring, leasing or licensing is a declared service. However, the definition excludes transactions where the transfer of the right to use such goods takes place. As readers would know, a transfer of right to use is the taxable event that creates a liability to VAT. Therefore, this provision effectively means that there would be no double taxation in this case. Where there is a transfer of right to use the goods (which are leased out) there would be a VAT, but no service tax. Where there is no transfer of right to use the goods, the transaction would be a declared service and attract service tax.
This approach has not been followed in the case of information technology software and intellectual property rights. Therefore, the declared service relating to information technology software includes “implementation” of software. It is not clear whether a transaction of implementation of software would include licensing of the software. Taxpayers would doubtless take the view that the contract for implementation alone would attract service tax and licensing of the software would not. However, the licensing of software constitutes a transfer of the right to use software. This would attract VAT. Given that this entry includes implementation of software and does not have language excluding cases where there is transfer of right to use software, double taxation seems inevitable.
Similarly, there would be many instances where permitting the enjoyment of intellectual property rights results in a VAT liability. The declared service definition does not exclude such transactions from the ambit of service tax.
There is also clause (e) of section 66E declared services under Finance Act 1994 where the act of agreeing to the obligation to refrain from an act or to tolerate an act has been declared as service liable to tax. It is worthwhile here to note that this provision goes beyond the definition of service. Refraining from act itself means that there would no activity to be performed and performance of an activity is an essential ingredient to qualify as service.
As long as the interpretation of this “service” is limited to transactions such as a non-compete agreement, we would have a well-defined application of a service. However, there are payments of many kinds in business, with are without either and attendant transaction in goods or services. Examples of these include a payment in settlement of a dispute. A payment in settlement of a dispute is not a payment for an activity; therefore it does not fall under the definition of service. However, it may not be “agreeing to the obligation to refrain from an act or to tolerate an act or situation”.
It remains to be seen whether the revenue authorities have a narrow interpretation of section 66E(e) or whether they bring all conceivable payments within its purview.
Finally, having widened the basis of charge of service tax, it would seem logical that the eligibility to Cenvat credit should also be similarly widened. For example, someone may make a non-compete payment to a potential competitor. This would clearly be taxable under clause (e) of declared services. However, it seems very unlikely that the payer would get Cenvat credit for the payment. Therefore, while the approach of the tax has changed to a comprehensive one (where everything is taxable unless it is specifically excluded), the Cenvat credit rules retain the old approach. Only the services specifically mentioned are eligible as input services to Cenvat credit.
All in all, the Negative List continues to throw up issues and areas of concern, and will probably take 1-2 years to stabilise.
The author is Leader, Indirect Tax Practice PricewaterhouseCoopers pwctls.nd@in.pwc.com.
Supported by Tajinder Singh
