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.

Must Read : Exemption from Filing ITR

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GST - Challenges & Opportunities

R Ganesh

CHANGING PHASE OF INDIRECT TAXES - CHALLENGES AND OPPORTUNITIES

In the era of the major reform and development taking place in our country, India, the tax reforms is and has been the key to have the change of track in the economic growth of the country. The various stake holders for these happenings are keenly awaiting the tax reforms namely, the introduction of Goods and Services Tax "GST". This phase of transition poses challenges for the stake holders viz., Government both Centre and States, the various industries involved in the mining and manufacturing and the now fast tracked service industry.

To bring in place a unified indirect tax that enables a standardized pricing of the product and services without any cascading effect of all the indirect taxes, the GST is the answer that is much awaited. GST is a well designed value added tax on all goods and services eliminating distortions and taxing consumption. Under this structure, all different stages of production and distribution can be interpreted as a mere tax pass-through, and the tax essentially sticks on final consumption within the taxing jurisdiction.

GST comprises of the following elements:

1. It should be a dual levy concurrently by the Centre and States, but independently to promote cooperative federalism.

2. Both the Central Goods and Services Tax (CGST) and the State Goods and Services Tax (SGST) should be levied on a common and identical base.

3. The Centre and the States should adopt a consumption-type GST, that is, there should be no distinction between raw materials and capital goods in allowing input tax credit.

4. The tax base should comprehensively extend over all goods and services upto the final consumer point.

5. There should be no classification between goods and services in law so as to ensure that there is no classification of dispute. 

6. The GST should be structured on the destination principle. As a result, the tax base will shift from production to consumption whereby imports will be liable to both CGST and SGST and exports should be relieved of the burden of goods and service tax by zero rating.

7. The computation of the CGST and SGST liability should be based on the invoice credit method i.e. allow credit for tax paid on all intermediate goods or services on the basis of invoices issued by the supplier. This will facilitate elimination of the cascading effect at various stages of production and distribution.

8. The CGST and SGST should be credited to the accounts of the Centre and the States separately. Since the CGST and SGST are to be treated separately, taxes paid against the CGST should be allowed to be taken as input tax credit (ITC) for the CGST and could be utilized against the payment of CGST. The same principle will be applicable for the SGST. Cross utilization of ITC between the CGST and SGST should not be allowed.

9. Full and immediate input credit should be allowed for tax paid (both CGST and SGST) on all purchases of capital goods (including GST on capital goods) in the year in which the capital goods are acquired. Similarly, any kind of transfer of the capital goods at a later stage should also attract GST liability like all other goods and services.

10. The consignment sales and branch transfers across States should be subject to treatment in the same manner as if it was a inter-state transaction in the nature of sale between two independent dealers.

To put straight in a simplified note, before a final product and service in put in place, there are various stages and value addition in the production of the manufactured goods and also need professional service coming within the ambit of service tax. As the tax is on an advelorem basis, the costing of the value addition at each stage has to be derived in a professional and standardized manner based on the technology, size of operation and the price of the basic raw material. This standardized working of the value addition at each stage before it passes on to the next level of value addition in the chain of operations is to be done in a professionalized manner so that consistency and uniformity is maintained. The industry forums like the CII, FICCI and professional bodies like Chartered Accountants, Cost Accountants are gearing up to get the derived advantage of the GST Regime.

The Government would want that there are no revenue leakages in the GST regime. The need is therefore to have the enabling agents who can ensure that all these are done in the correct manner. Here lies the opportunity for the Finance Professionals to rise and be the change Manager.

GST - ROLE AND SCOPE FOR FINANCE PROFESSIONALS

GST implementation will lead to immense scope for FINANCE PROFESSIONALS who with expert knowledge about manufacturing, costing and pricing can play an important role once GST is implemented. For Industry:

1. with their good knowledge on manufacturing, costing and pricing can educate the suppliers/vendors about GST and ensure input tax credit is availed correctly.

2. Help in arriving at the cost of the product correctly by considering/availing input tax credit as per the provisions of GST.

3. with their expert knowledge on manufacture can ensure tax compliance, monthly returns, e-filing, availing of credit and payment of taxes.

4. can ensure tax planning and interpretation of the Act correctly and educating the various departments like strategic sourcing, payables, supply chain management, marketing etc.

5. There will be dual structure for GST, there will be levy by the Central Government known as CGST and levy by the State Government known as SGST. CST rate at present is 2% against Form C and CST will be phased out once GST is implemented and there will be another levy on stock transfers and consignment transfers known as IGST. The set-off against these CGST, SGST and IGST will be a complex model which is not clearly spelt out by the Government. Once the same is implemented, Finance professionals with their vast knowledge on Costing, Finance and indirect taxation can ensure proper set-off against these three levies namely CGST, SGST and IGST.

6. CGST will be levied by Central Government and every State will have its own SGST. To understand the complexity of each model of SGST, only Finance Professionals can guide the industry.

7. There are several Central Taxes which are not presently CENVATable viz., additional excise duty, countervailing duty etc and CGST would therefore subsume the following:

a) Central Excise Duty

b) Additional Excise Duty

c) Additional Excise Duty on medicinal and toilet preparations

d) Countervailing duty

e) Additional Duty under Section 3(5) of the Customs Tariff Act

f) Service Tax g) Cesses

h) Surcharges Finance Professionals can ensure set-off for all Central levies as per provisions of GST when implemented.

8. In the present system, Central Excise is levied at the manufacturing level whereas in the GST, tax will be levied on the value addition in the supply chain after the manufacturing level. Finance Professionals with their knowledge of Finance, Costing and SCM will be able to compute the taxes correctly under the GST.

9. In the present VAT system, there is no provision to levy VAT on services. However, GST proposes to levy SGST and CGST on services and Finance Professionals can ensure tax compliance on services both for Central and States.

10. In the present VAT system, even though input tax credit (ITC) is allowed, it does not include other taxes levied by the State Government viz., Luxury tax, Entertainment tax and Entry Tax not in lieu of octroi. Under GST, all these levies would be subsumed in the SGST. Finance Professionals can ensure set-off for all State levies as per provisions of GST when implemented.

11. In the present system, all inter-state transactions are covered by CST Act and administered by the respective State Government. The present rate is 2% CST against Form C or scheduled rate of VAT without Form C. The amount paid as CST is not available for set-off. Under the GST, IGST will be levied on all inter-state transactions like stock transfers and consignment transfers. The scope of IGST Model is that Centre would levy IGST which would be CGST plus SGST on all inter-State transactions of taxable goods and services. The inter-State seller will pay IGST on value addition after adjusting available credit of IGST, CGST and SGST on his purchases.

The major advantages of IGST Model are:

a) Maintenance of uninterrupted ITC claim on inter-State transactions.

b) No upfront payment of tax or substantial blockage of funds for the inter-State seller or buyer

c) No refund claim in exporting State, as ITC is used up while paying the tax

d) Self monitoring model

e) Model can take "Business to Business" as well as "Business to Consumer" transactions into account. The process of paying IGST and claiming set-off can only be done by a Finance professional with his immense knowledge on Finance & Accounting, computer and knowledge of GST.

12. In the present system, no VAT or excise duty is payable on imports. Under GST, SGST and CGST is payable on imports and set-off can be taken. This can be done by Finance Professionals.

13. Under GST, tax exemptions, remissions etc related to industrial incentives should be converted, if at all needed, into cash refund schemes after collection of tax, so that the GST scheme on the basis of a continuous chain of set-offs is not disturbed. In such cases, the Central and State Governments could provide reimbursement after collecting GST.

This scheme of payment of GST and reimbursement from Central or State Governments can be administered by Finance Professionals who are well versed with Finance & Accounting and indirect taxation.

For Government: Finance Professionals with their knowledge on Finance & Accounting and indirect taxation can ensure following:

1. Taxpayers under GST need to submit periodical returns, in common format as far as possible, to both the CGST authority and to the concerned State GST authorities. All registered dealers to make the payment by electronically furnishing the return, which would be a combined monthly payment and return form for all intra-state and inter-state transactions.

2. CGST and SGST should be credited to the accounts of the Centre and States separately. Since CGST and SGST are to be treated separately, taxes paid against the CGST should be allowed against the payment of CGST. The same principle will be applicable for the SGST. Cross of utilization of ITC between the CGST and the SGST will not be allowed.

3. Full and immediate input credit should be allowed for tax paid (both CGST and SGST) on all purchases of capital goods in the year in which the capital goods are acquired. Similarly, any kind of transfer of the capital goods at a later stage should also attract GST liability like all other goods and services.

4. Small dealers with annual aggregate turnover of goods and services between Rs.10 lakh to Rs.40 lakh may be allowed to opt for a compounded levy of one percent each towards CGST and SGST.

However, no input credit will be allowed against the compounded levy or purchases made from exempt dealers.

For Finance Professionals:

1. For practicing Finance Professionals there is immense potential in the form of tax compliance, filing of returns, interpretation of law, advising dealers about the correct procedure for availing ITC, annual audit etc.

2. There will be immense opportunities in the industry as they can ensure that all the complexity in GST can be understood and implemented in the industry where they are employed.

3. Under the GST, new sectors are likely to be covered like real estate sector, power sector, transportation by road, rail, air and sea which will have vast scope and opportunities.

The GST will be a word class model which will consist of the following:

1. The base should extend to all goods and service including immovable property

2. There should be a single low rate

3. The tax should be destination based

4. The tax should be designed on invoice-credit method

5. Full and immediate input tax credit in respect of capital goods

6. The GST must replace all transaction based taxes on goods and services and factors of production

7. There should be seamless flow of the tax through all stages of production and distribution so as to stock on "final" consumption

8. The exports should be zero rated and imports should be fully taxes

9. There should be a threshold exemption for small dealers

10. Full computerization of the compliance and administrative system GST will overcome all the present inefficiencies and inadequacies of the indirect taxes.

This will be a win situation for all the stake holders.