MARCH 13, 2012

By CA Pradeep Jain, CA Preeti Parihar &  CA Nishit Shah

“THE best things in life are free, but sooner or later the government will find a way to tax them”. This is proved again and again by the government. This time also, government has found a new way in form of negative list of services whereby all the services will come under service tax net unless specifically excluded. CBEC issued a first concept paper for discussion on negative list of services in August 2011. Thereafter receiving feedback from stakeholders; Board issued another revised concept paper on November 18, 2011 making changes as per feedback received. The concept of taxing services based on negative list is a good concept, since the twin objective of widening the tax base and also base for introducing a comprehensive GST will be achieved. Government is positively mulling to introduce GST in the current budget; this article sets to find out what problems can be encountered and whether we are positively ready for the Taxation based on Negative List.

The following are the issues that need to be addressed before taking big leap towards GST:

Framework for Negative list

The first and foremost issue that needs to be addressed is the required framework for Negative list, the required framework in this context means the knowledge on the part of assessee as well as departmental officers, staff to compensate with the increase work, basic knowledge on part of assessee who will be required to register themselves. For eg. in the last budget, restaurant services (having permission to serve liquor) has been brought in to the net of taxation with abatement, in the negative list, it is also proposed to brought rail services and traveling by A/c under the service tax net, now if the food is served during that service who will be liable to pay service tax on the same i.e IRCTC or the contractor, will the abatement be available or not etc. are the issues to be answered. Moreover this is only an example of one service, there are numbers of untapped sectors in service which would be effectively brought in to the service tax net by way of introduction of Negative list, but the proper framework and knowledge on the part of departmental officers as well as assessee is required. There may be a case where assessee shall not be aware that he is liable to pay service tax but department will issue SCN and poor assessee will be required to pay the same with interest. Thus the idea here is to give proper knowledge and training to both department as well as assessee before moving towards negative list of taxation.

Classification

Under the existing system of taxation by way of positive list, each type of taxable service is separately classified and defined. Classification increases the certainty and removes ambiguity regarding the taxability or otherwise of a particular type of service. It is even easier to provide the exemption as the similar nature services are grouped under one head. Under present system, more than 100 services are classified separately.

In the proposed system, the service tax law is going to change drastically as except the services specifically excluded; all the others will come under the service tax net. In the draft paper, the negative list is provided under following six heads - (i) provided by specified persons, (ii) Social welfare and public utilities, (iii) Financial Sector, (iv) Transport, (v) Construction & Real Estate, (vi) Education, (vii) Health and (viii) Others. From this classification, it seems that the services are going to get classified under these eight heads. The services provided by specified persons as listed will not be taxable, however, if provided by any other person will be taxable unless it falls under any other head out of remaining 7 heads. The residual head is kept with the aim of covering all types of the services prevailing in the market. This classification is done perhaps for the purpose of determining the tax rates and for the purpose of granting the exemptions. But how beneficial will be this classification, it will depend on the implementation of the proposed system.

Different rates of taxes

Besides the basic rate of service tax, an option is being given to the assessees wherein they can pay the service tax at a different rate as prescribed in respect of certain services. Some of them are as follows -

++ WCS - For composite contract rate is 4% of the gross amount charged for works contract

++ For sale and purchase of foreign currency - 0.1% of gross amount exchanged

++ Life Insurance services - 1% of the gross amount of premium charged

The above different rates were prescribed by analyzing the needs of the particular service sector. These were introduced as an option to the service providers. It is worthwhile to mention here that though these rates are optional, most of the service providers have opted for it. Thus, these rates are proving more beneficial than standard rate to these service providers.

However, in the negative list released by the government, there is no mention of services for which different rates are prescribed. Implementation of negative list is a step towards betterment; as such it is necessary that the favourable things of the present system should be carried forward. So, the similar optional rates should also be prescribed by way of notification. If it is not done it will mean that all the services would be charged at the same rate. Thus, this aspect also needs to be addressed in the budget itself rather than issuing notification after 2 - 3 months, when it comes to the knowledge of the board.

Exemptions in services

In the current framework exemption has been provided to many services in their sub - head itself for eg. In commercial training or coaching service, exemption has been provided to vocational training / recreational institute, but in the negative list draft no specific exemption has been provided to it. Similarly in the business auxiliary services, vide notification no. 14/2004 - ST exemption has been to provided to a client by any other person in relation to the business auxiliary service, in so far as it relates to

++ Procurement of goods or services, which are input for client

++ Production or processing of goods for, or on behalf of, the client

++ Provision of service on behalf of the client

++ A service incidental or auxiliary to any activity specified in (a) to (c) above,

And provided in relation to agriculture, printing, textile processing or education, from the whole of service tax leviable.

However, in the proposed negative list, since the services are not defined individually; it is not possible to give the exemption in relation to it separately. Further, to redefine all the existing exemptions under one head is going to be difficult task as it is expected that the ongoing exemptions will find place in the new scheme. This expectation is fair also as the proposed scheme of negative list is widening the scope of service tax, so due place should be given to the existing exemptions also.

Abatement

There are a number of services where both material and service element is involved in the gross amount received from client. Since service tax is levied on the service component, government has given option to segregate the material component therefrom. If the invoice of material supplied is separately billed, the service provider can pay service tax on the service portion only as per notification no.12/2003-ST dated 20.6.2003. Where the segregation of material component is not possible, the service provider can claim abatement at prescribed rates as per notification no. 01/2006-ST dated 1.3.2006. However, the rates of abatement are different for different category of services, for eg. in GOODS TRANSPORT AGENCY rate of abatement is 75%, while in RESTAURANT SERVICES abatement is 70% and in HOTEL SERVICE abatement of 50% is available, and similarly construction service, rent - a -cab etc. different rates are prescribed. These rates are based upon the detailed analysis of each service sector. The difference in rates is due to the fact that material component used varies from service to service. These abatement rates are decided after considering this factor.

In the draft released, there is no mention of abatement scheme. Whether it will be available or not is not ascertainable. If the abatement will be available, how the rates will be decided? In the existing system, the different types of services were classified separately; so prescribing the abatement for it was an easy job. However, in the proposed system, since there will be no particular category for each type of service, how the abatement rates will be specified? The grouping of services for the purpose of abatement will be the only option and due care will be required for the same as the chances of ignoring some services will be high. The government shall have to curb this by way of notification at the time of introduction of negative list.

Import and export of services:-

Import and export of services have shown significant rise in the last few years. Government has also framed a no. of policies for the same. Under existing system, the export of services and import of services rules have been issued separately wherein all the taxable services have been grouped under three lists after considering their nature. Different criteria have been mentioned under each list. If the service falling under the respective list satisfies all the criteria mentioned therein, it will constitute the export or import of that service. Thus, all the taxable services have been classified in three lists with different criteria laid therein. But the proposed negative list system does not specify anything regarding the export and import of services. The negative list excludes certain services under eight classifications, so whether the new rules for import or export of services will be based upon these eight heads or in some other manner. In the existing system, this classification was quite simple as each service is specifically defined, so it was easy to lay down the conditions for the same. However, in absence of specific description of the nature of services taxable, framing the import-export rules for services is going to be a tough job for the government. This is an important factor that needs due attention as the role of import and export of services is showing a significant growth in previous few years.

Conclusion:

Thus, there are host of issues that needs to be tackled before moving forward with the negative list. It is indeed a good move on the part of government to go forward with the negative list of taxation but it needs to take precaution and move carefully in larger interest of both government itself and stakeholders.