Service tax norms must be clearer

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The Hindu Business Line

Vivek Pachisia
Tax Director, EY India

The Finance Minister, in Budget 2011, had indicated the need for a directional shift in the taxation of services from taxation based on a ‘positive list' to taxation based on a ‘negative list' to help widen the service-tax base, reduce ambiguity and facilitate financial integration.

In keeping with the above agenda, the Government released a Concept Paper on ‘Taxation of Services based on Negative List' on August 31, 2011. Based on interim inputs received from stakeholders, the Government released a revised edition of the Concept Paper on November 18, 2011, which has now been placed in the public domain for feedback.

The first edition of the concept paper provides a sneak preview into the future of taxation of services based on a negative list of services as against a positive list of services that has been followed since the introduction of taxation on services in 1994.

The proposed concept would allow the Government to levy service tax on all services except those that are specifically exempted and notified under the negative list on which service tax would not be applicable.The concept paper has proposed the levy of service tax on all transactions except those that constitute supply of goods, money or immovable property. The levy is also proposed to be extended to cover certain specified transactions involving renting or construction of immovable property, use of Intellectual Property Rights (IPR), and leasing of goods which may otherwise also be covered under other indirect tax statutes such as the Value Added Tax (VAT) legislation.

The above approach to taxation has the inherent risk of overlapping jurisdiction, which would significantly enhance the risk of litigation in the absence of clarity on coverage under the respective legislations.

Taxable or not

The revised concept paper attempts to provide more clarity on the scope of services, the activities that would be charged to service tax and a revised list of negative (exempt) services, which now includes only 22 service categories as against 27 service categories in the original list.

The objective seems to be to tax only economic activities that are undertaken for a consideration and with the intent of either direct or indirect commercial advantage and to exclude activities that are outside the ambit of being an ‘independent economic activity' (e.g. employer to employee relation, activities of members of legislature and social welfare activities). However, it would be critical that the legislation carries clarity in definitions and terms such as ‘independently' and ‘economic activity' which, unless tightly defined, could engage the service community and the tax department in the quagmire of litigation. In addition to excluding non-economic activities from the purview of service tax, the Government has also reserved the right to deem or declare certain transactions as non-taxable irrespective of the fact that some of those transactions could be economic in nature and in the same manner, the Government can also tax certain activities as services notwithstanding anything contrary in the definition of service.


Accordingly, the revised list of exempt services now includes, amongst others, specified transactions of the financial sector, construction services for specified infrastructure projects, specified health services and education services, renting of residential dwellings with rent up to Rs 1 lakh, rail transport for non-AC IInd Class travel and specified public transport which would be exempt from service tax in the interest of the larger public benefit. The revised concept paper has also deleted the activities of service provided directly in relation to agriculture, horticulture and animal husbandry, service of transportation of goods outside India and services by religious parties and political parties from the earlier negative list of services; and has modified or contracted the scope of certain other services in the negative list, thereby making them liable to service tax.

Though the revised concept paper does not dwell on the details of the reasons for deletion or contraction of these services, the revision seems to be prompted by the possible wide range of interpretations, definitional issues and the possibility of misuse on classification to avail of the benefit of exemption. The revised concept paper concludes with an indication towards release of place of taxation/ supply rules to determine the principles for place of taxation of services.