MARCH 27, 2012

Transitional arrangement for implementation of Negative List of Services

By S Thirumalai, Former President, FAPCCI

THE "top of mind" concern for trade and industry after the introduction of the proposed movement towards taxation of Services by adopting a "Negative List" is with respect to double taxation both under VAT and Service tax. The concept seems to be to bring about unification of the Central excise and Service tax and wait for the States to agree to the shift to the GST system which should hopefully bring about an end to this dual taxation process.  To elaborate, it is clear from the proposed changes that to qualify for Service tax an activity may not necessarily have to be on revenue account but could also be   on capital account. To illustrate know how in exchange for allotment of shares in kind at the incorporation of a Joint venture limited company may invite service tax and possibly VAT if the State concerned decides to tax this as right to use goods. Already the software industry is a classic case where both VAT and service tax is charged on the same transaction.

It is understandable that in the absence of consensus at this point in time a GST system, which should unify the tax on goods and services, cannot be put in place for sometime now. Unification at the Central level of the Excise and Service tax has to recongnise the fact that the States could take a view on whether an activity is a Service or Sale including deemed sale of goods independent of such central unification of excise and service tax. This conflict would result in simultaneous assessments under VAT and Service tax. Therefore, there cannot be any meaningful unification without an institutional commitment by way of setting up of a dispute resolution mechanism, which should be empowered to decide whether it is the Central or state legislation, which will apply to any activity, in question. Further, the unification at the Central level should also address the issue of excise and service tax for purposes of valuation under the respective laws. This issue becomes apparent in the case of Composite contracts involving supply erection and installation. The erection and installation charges in a composite contract could be subject to excise and service tax independently. While there could be a set off arrangement as between excise and service tax, however since VAT is levied on excise and/or service tax there is a cascading effect that should be avoided. Therefore, a   DRP (Dispute Resolution Panel as under Income tax Law) blessed by the Empowered Committee of State Finance Ministers would to a large extent allay concerns regarding dual levy. Therefore, pending the larger Constitutional changes and the model legislation for GST what is required is this commitment, which would show that both the Centre and States are in the same direction. This body will decide whether it is VAT or Service Tax or parts of one or the other with respect to a transaction or activity that will apply.

2. The second concern in the same context is what logical steps should an entity undertake to comprehensively conclude that all transactions from the past of a continuing nature and indeed future transactions are to be roped in for tax under the negative list scheme. A simplified advance ruling authority specifically to cover Service tax Negative list cases that does not impose any pre condition whether the activity is a new or existing activity is necessary to usher in the unification at the central level of excise and service tax and also to carry the transition into the GST system as and when this takes place.

The period of waiting and uncertainty should be addressed in terms of these support institutions to deal with the honest taxpayers who are willing to comply.