Taxation on negative list of services

By: Venkat

Introduction:Finally the ministry of finance in India is moving ahead in reducing ambiguous and unnecessary litigation in the field of service tax.

Service tax is the major source of revenue to the government which is contributing nearly more than 9% (appr.) with a target in collection an amount of Rs.82,000 crore for financial year 2011 – 12. The concept of taxing of services based on negative list of services is not new, as the system already exists in many countries like United Kingdom, New Zealand, Singapore and Australia. Further implementation of this would give substantial increase in the revenues to the government.

The main reason behind implementation of the concept of taxing of services based on negative list would be increasing scope to tax on service industry and to have better tax administration and could be helping out successful implementation of GST.

Sushil kumar modi said service tax is imposed on 120 services at present and hoped that the negative list will help in further widening the tax base. He said a Parliamentary panel was examining the Constitutional amendment required to implement GST.

Concept of Negative List of Taxation

The concept is very simple to understand, Instead of taxing services individually and defining the scope of taxability under that category under positive list of services here only the term service would be defined in a specified manner and few services are listed as non taxable services. Thus an activity which can be called or included within the meaning of the term “Service” is taxable, and if the activity is not covered in the list of “non taxable” is also would be taxable.

Definition of service

In the proposed article issued for public debate and feedback thereupon the term “service” can be classified in three ways, lets understand in table format in detail

The term “Service includes

Means part of definition	Inclusion part of definition	Exclusion part of definition
A “service” means anything which does not constitute supply of goods, money or immovable property	A “Service” includes A. right to use an immovable property B. 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 C. temporary transfer or permitting the use or enjoyment of any intellectual property right D. obligation to refrain from an act, or to tolerate an act or a situation, or to do an act E. service in relation to lease or hire of goods F. right to enter any premises	A “Service” excludes a supply A.by an employee to an employer in the course of or in relation to the employment of the person B.by a constitutional authority under the Indian Constitution or a member of an Indian legislature or a local self-government in that capacity C.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

Explanation of some of the important terms in the definition “Goods”

According to the Sale of Goods Act 1930, “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.

Where the contract includes both i.e supply of goods and service included in the contract then the principle of “dominant nature test” has to be applied for ascertaining the mind or intention of the parties in the contract to separate the rights arising out of the sale of goods as held in the land mark decision of Bharat Sanchar Nigam Ltd. Vs UOI [2006(2) STR 161 (SC) para 43].

“Immovable property”

According to the General Clauses Act, 1897 “Immovable property” shall include land, benefits arising out of land and things attached to the earth, or permanently fastened to anything attached to the earth.”

“Money”

The expression “Money” is meant to capture transactions where Indian legal tender is exchanged from one form to another.

Clarification on certain aspects in exclusion part of the definition

1. In case of immovable property things done before issuance of completion certificate would be construe as supply of service whereas things done after the completion of issuance of completion certificate can be constituted as sale

2. The word “Person" shall include any company or association or body of individuals, whether incorporated or not (section 2(42) of the General Clauses Act, 1897) and hence services by or to unincorporated associations and joint ventures will constitute a valid transaction.

3. For constituting as service the essential condition to be satisfied i.e not existing of employee and employer relationship. If the same is existing, then the same may not fall under the ambit of service tax.

4. Finally, any supply that amounts to manufacture or includable in the value of goods under Central Excise Act 1944 is also kept out of the purview of service tax.

Clarification on certain aspects in Inclusion part of the definition

A new definition of “service” can be called as revenue oriented definition as it uses the word “service means anything” so, the scope of this definition is more helpful in collecting more revenue to government.

1. Tax would be imposed on supply of services which took place between two persons for consideration and should be for economic activity.

2. Right to use immovable property is constituted as service. Hence is taxable (So by virtue of this new definition ambiguity and litigation on Renting is no more valid as Renting is clearly taxable activity )

3. Temporary transfer, permitting to use and enjoyment of any intellectual property will constitute supply of service.

4. The obligation of refrain from an act, or to tolerate an act or a situation, or to do an act will constitute as a service

5. Delivery of goods by way of hire purchase or installments is declared by the Constitution to be deemed sale of goods but services provided in relation to lease or hire of goods would be constituted as supply of service as held in case of Association of leasing & financial services companies VS UOI (2010-TOIL-87-SC-SERVICE TAX-LB)

6. Right to enter any premises would constitute as supply of service i.e fee collected by  Museums, Art galleries, Zoos, parks and gardens would be within the meaning of this inclusive definition of service

7. Supplies of electricity, power, heat, refrigeration and ventilation would not constitute as supply of service

8. Sale of SIM card with talk time, downloadable on – site software and similar supplies through internet would construe as supply of service. The same is also confirmed in case of (Idea Mobile Communication Ltd Vs CCEC, Cochin (2011-TIOL-71-SC-ST)

9. Service element in respect of Works contract, restaurants, outdoor catering would be taxable as supply of service (in this particular aspect there can be possible scope for litigation by way of interpreting what is service element in respect of the said avenues)  

Services excluded from taxation

The following are the proposed list of activities which are kept out of the purview of service tax.

Negative list	Excluding activity of service	Including activity of service
Services by government	Services provided by government without a specific charge on end user is not liable	Services are provided by government at a market rate, provided at concessional rate to compete with private agencies and services that are provided exclusively and pre – dominantly could be out of the negative list.
Services by international institutions	Services provided and received by international institutions or missions would be covered under the ambit of negative list of services under a contractual obligation
Services by financial sector	Activities relating to sale and purchase of securities and debts would be included in negative list.	However stock broking would be liable to service tax
Construction and real estate services	Services provided in relation to construction of public good dams, reservoirs and roads would be covered under negative list	Renting activity would be covered under the ambit of service tax
Services provided by health sector	Only the basic or public health services would be covered under negative list. Further, Services provided by pubic clinical establishments would be covered under negative list.	High – end medical services provided by private enterprises would be liable for service tax. Further Health checkup, weight reduction programmes and plastic surgery would be liable for service tax
Services provided by Education sector	Services provided by pre – schools and public schools would be covered under negative list	Services provided by international schools and charges recovered by them for facilitating in various field to the students would be covered under service tax
Others	1)Copyright services of original literary, dramatic, musical and artistic works. 2)Services provided by independent journalists, PTI & UNI for providing news 3)Services provided by sportspersons, as a player, coach or referee/umpire and performing artists in that capacity (excluding as brand ambassadors) 4) Religious services provided by any person. 5) Services provided by a political party recognized by Election Commission of India 6) Services provided by a trade union to its members 7) Representational services provided by an advocate to individuals 8) National or international prize/award in recognition of achievement in the field of art, literature, science, sport, economics or public life 9) Tolls except services in relation to collection of tolls 10) Betting and gambling except services in relation to promoting, marketing or organizing games of chance, including lottery services

Conclusion: The efforts of the government would be appreciated, as they are trying to streamline indirect tax basket for successful implementation of GST.

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