Indian Merchant’s Chambers

Negative List Based Taxation of Services (Declared List )

19 October 2012

Negative List Regime – A Primer

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Rationale for Negative List

First Concept Paper for Public Debate (August 2011) “There are advantages in moving towards negative list at an earlier time in order to gain useful

experience in its implementation and minimize the impact of the mammoth changes that GST may usher”.

Revised Concept Paper on Taxation of Services based on Negative List (November 2011) “Introduction of Negative List at an earlier stage will pave the way for the smooth transition to the

GST, and significantly ease the challenges arising out of implementing the GST.”

FM’s speech (2012): “At the end of June this year, this tax will attain adulthood by completing 18 years. It is therefore

time to shift gears and accelerate ahead. However, service tax needs to confront two important challenges to sustain the journey. These are:

a) The share of services in taxes remains far below its potential. There is a need to widen the tax base and strengthen its enforcement;

b) Service Tax law is complex and sometimes avoidably different from Central Excise. We need to bring the two as close as possible in the light of our eventual goal of transition to GST.”

3Widening the tax base

Negative List Based Taxation of Services aims at:

Remove the avoidable ambiguity (eg classification)

Stepping stone towards introduction of GST

(CGST)

Approach - Selective vs Negative

Selective Approach - Taxing only Specified Services

All Services

Service tax levied only on 116

specified services

Negative List Based Taxation - Taxing all Services except few

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Taxable Service

Negative List

Exempted

Widening the tax base - Potential Revenue

Effective percentage of entire service sector that is covered under the tax net = 20-25% (First Concept Paper)

Estimated net revenue gain consequent to changes in the Union Budget 2012-13, relating to Indirect Taxes, estimated at Rs. 45,940 crores (Budget Speech 2012-13) Service tax changes – Rs. 18,660 crores additional revenue

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Covered under Negative List/ Exemption

60% 40% 60% 40%

Under Tax Net Under Tax Net Informal Sector (eg Below

Threshold limit)20%-25% effective

Negative List Approach

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Charging Section

Under Section 66

“There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. of the value of taxable services referred to in sub-clauses of clause (105) of section 65 and collected in such manner as may be prescribed.”

Applicable up to: 30th June, 2012.Notification No. 22/2012-ST, dated 05.06.2012

Under Section 66B

“There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent. on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed.”

Applicable from: 1st July, 2012.Notification No. 19/2012-ST, dated 05.06.2012

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Services – Now defined

Means Includes Excludes

Any activity

Carried out by a person for another

For a consideration

Declared Services

Transfer in title of goods or immovable property by way of sale, gift or in any other manner;

Deemed Sale of Goods as per Article 366 (29A) of the Constitution of India;

A transaction in money or actionable claim;

Any service provided by an employee to an employer in the course of or in relation to his employment;

Fees taken in any Court or a tribunal established under any law for the time being in force

Declared Services (#9)

‘Declared Service’ is defined in Section 65B (22) Means any activity carried out by a person for another person for consideration and declared as

such under Section 66E

Section 66E – The following constitutes declared services

# Declared Services # Declared Services

1 Renting of immovable property 2 Service portion in the execution of ‘Works Contract’

3 Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer (subject to certain specified exceptions)

4 Transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods

5 Temporary transfer or permitting the use or enjoyment of any IPR

6 Activities in relation to delivery of goods on hire purchase or any system of payment by installments

7 Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software

8 Service portion in an activity wherein goods, being food or any other article of human consumption

9 Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act

Renting of Immovable Property

Section 65B(41) of the Act defines "renting" to mean allowing, permitting, or granting access, entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or without the transfer of possession or control of the said immovable property and includes letting, leasing, licensing or other similar arrangements in respect of immovable property,

Activities which are either exempted or prescribed in negative list

Renting of vacant land with or without structure incidental to its use, relating to agriculture/ agricultural produce

Access to road or a bridge on payment of toll charges

Renting of residential dwelling for use as residence

Renting of precincts of a religious place meant for general public or conduct of any religious ceremony

Renting service provided to or by an educational institution in respect of education

Renting of hotels, inn, etc for residential use and having declared tariff of below Rs 1,000 per day

Service by way of vehicle parking to general public excluding leasing of space to an entity for providing such parking facility 10

Renting of Immovable Property

Activities which were earlier litigious/ not taxed are now specifically included

Granting access, entry or occupation in respect of immovable property Renting by theatre owner to the film distributor

Permitting use of immoveable property for placing vending/dispensing machines

Allowing erection of a telecommunication towers on a building for consideration

Renting of vacant land

Land used for sports, circus, and entertainment purpose. Except where services are provided by a recognised sports body to another recognised sports body

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Challenge to Constitutional validity in Home Solutions Retail (India) Limited of the Center’s

power to tax renting of immovable property is pending before the Supreme Court

Construction of Complex

As per section 66E (b) of the Act, declared services includes 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 completion-certificate by the competent authority.

Competent authority includes Government of India, if any law requires such completion certificate; or

Architect,

Chartered Engineer,

Licensed surveyor

Construction includes addition, alternation, replacement or remodeling of existing civil structure

Earlier ‘construction of complex services’ excluded levy of service tax on Complex having less than 12 dwelling units, [which is now taxable post 1.7.2012]

Complex whose layout need not be approved by an authority under any law for the time being in force [now such exclusion is removed w.e.f. 1.7.2012]

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Bombay High Court has upheld the Constitutional Validity of levying service tax on the Construction of complex services - Maharashtra Chamber of Housing Industry (25 STR

35). The Special Leave Petition challenging the constitutional validity has been admitted by Supreme Court (SLP (C) 9313/2012)

Construction of Complex

Opportunities available to rationalise the tax cost

The said service continues to be taxed on 25% of the total consideration received

CENVAT credit, now allowed on capital goods and input service used in provision of services. Developers are permitted to avail and utilised CENVAT credit on input services and capital goods to

discharge output Service tax liability.

Input services such as works contract services, architect services, security services, etc shall be used to set-off output Service tax liability.

Can preferential location charges be taxed at an abated rate? Applicability of provision of ‘Bundled services’ (ie Section 66F) to be examined

Historic treatment of preferential location charges also needs to be considered.

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Construction of Complex

Open issues

Applicability of Bundle Services provisions for existing agreement/ arrangements agreed prior to 1 July 2012

Availment of CENVAT credit for capital goods Procured and put to use prior to 1 July 2012 [ie existing machines]

Procured prior to 1 July 2012 but put to use after 1 July 2012

Availment of CENVAT Credit on input services

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Activity Scenario 1 Scenario 2 Scenario 3 Scenario 4

Raising the Invoice Post Prior Prior Post

Provision of Services Post Post Prior Prior

Subsequent Payments Post Post Post Post

Temporary transfer/ permitting the use of IPR

Section 66E (c) of the Act prescribes temporary transfer or permitting the use or enjoyment of any intellectual property right (‘IPRs’) as declared services

Such services were erstwhile taxed under intellectual property right services (u/s 65(55b)) Restriction that IPRs should be registered in India, is removed.

Any temporary transfer of IPRs registered outside India shall also be subjected to service tax. Determination of place of provision of service, in accordance with Place of Provision of Service Rules,

2012 (‘POPSR’), shall be relevant to determine the taxability of the service

As per Rule 3 of POPSR, location of recipient shall be the relevant place of provision of services

Accordingly, if the Assessee is located in taxable territory (ie India other than Jammu & Kashmir) and receives the services of temporary transfer of IPRs, the transaction shall be liable to service tax.

If the service provider does not have presence in India, the service recipient shall be liable to pay service tax under the reverse charge

Temporary transfer of copyrights relating to original literary, dramatic, musical, artistic works, or cinematograph films is exempted from levy of service tax.

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Transfer of right to use IPRs are also subjected to VAT in various states. Accordingly, the said levy has been litigious. A writ petition is pending before Bombay High Court

challenging constitutional validity for levy of service tax on Copyrights

Development, design... software

Section 66E(d) of the Act prescribes activity of development, design, programming, customization, adaptation, upgradation, enhancement, implementation of information technology software as declared services

Copyrights to use any information technology software is not subject to service tax.

Understanding of Supreme Court Case in Tata Consultancy Services [178 ELT 22]

As per the Apex Court software can be considered as goods, provided it has the attributes thereof having regard to

a) It’s utility;

b) it’s capable of being bought and sold; and

c) capable of being transmitted, transferred, delivered, stored and possessed.

If a software, whether customised or pre-packed/ canned, satisfies these attributes, the same would be goods.

Accordingly, the same shall be governed by the provision of Article 366(29A) of the Constitution of India and shall be subjected to VAT

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Development, design... software

The definition of ‘service’ excludes transactions governed by Article 366(29A) and hence, applying the ratio of Apex Court, transfer of certain software (packaged or customized) should not be subjected to Service tax. This creates a situation wherein a transaction is first included as ‘declared services’ and then excluded

as the same is governed by Article 366(29A) of the Constitution.

In this regard, it would be relevant to understand the interpretation which CBEC is likely to adopt (i.e. reference may be drawn from Education Guide released by CBEC)

Implication suggested by Education Guide released by CBEC

Supreme Court ruling in case of Tata Consultancy Services shall apply only to Pre-packed or Canned Software and accordingly transfer of same should not be liable to service tax

Although, TCS judgment applies even to customized software transferred in media, considering the predominant nature, service tax should be payable Exclusion should apply ‘only’ to transfer of property in goods

Customization has service element and applying dominant nature test, service tax would be payable

Software, transferred electronically (whether packaged/ customized) should be subjected to service tax, since Supreme court’s ruling of TCS is applicable only to software on media

If license to use the software has certain restriction to use the same, the same shall also be subjected to service tax.

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Development, design... software

Open issues

Dual levy of taxes (ie VAT and Service tax) continues to exist

CBEC has unambiguously quoted that if the license to use software has any restriction, then such license shall not be governed by Article 366(29A). If rights to use the software is restricted, it is likely to result in dual taxation

Software transferred electronically contains all the characteristics of goods as prescribed by Apex Court Absence of situs of sale, the same have not been successfully taxed by the State Government

Accordingly, does it permit Central Government to levy service tax on the same?

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Software industry have been discharging VAT and Service tax on same transaction value. Although, it permits them to avail CENVAT and VAT credits, the transaction cost has substantially increased. The transaction to GST is likely to reduce the transaction cost to the customers of the IT industry.

Refrain from an act

Section 66E(e) states agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act, to be a declared services

Accordingly, consideration received for following shall be subject to service tax Agreeing to the obligation to refrain from an act,

Agreeing to tolerate an act or a situation,

Agreeing to the obligation to do an act

Non-compete agreements shall be included in the declared services

Non-compete fee arrangement comes into existence at the time of transfer of business between two independent business group. However, service by way of transfer of going concern, as a whole or an independent part thereof shall

be exempted (as per Sr no 37 of Notification No 25/ 2012 dated 20.06.2012)

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Wet Lease

Section 66E(f) provides that transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods, shall be a declared services

The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited vs Union of India [2006 (2) STR 161 SC] to determine whether a transaction involves transfer of right to use goods, are as follows:

a) There must be goods available for delivery;

b) There must be a consensus ad idem as to the identity of the goods;

c) The transferee should have a legal right to use the goods-consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;

d) For the period during which the transferee has such legal right, it has to be to the exclusion of the transferor this is the necessary concomitant of the plain language of the statute - viz. a “transfer of the right to use” and not merely a licence to use the goods;

e) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.

In cases where the vendor identifies goods to be used for its client by retaining the possession and control over the goods, the rights to use such goods is not transferred by vendor to its client. Accordingly, such transactions are not subjected to VAT.

Service by way of giving on hire (a) to a state transport undertaking, a motor vehicle meant to carry more than 12 passenger; or (b) to goods transport agency, a means of transportation of goods is exempted from levy of service tax. 20

Service element in Deemed Sale

Article 366(29A) of the Constitution list specific transaction wherein the State Government have right to tax the value attributable to the ‘goods’ deemed to be transferred.

Under the declared list, the service elements in the deemed sales is identified to be taxed eg Financing charges, processing fees on transactions of lease, hire purchase etc

Service portion in the execution of works contact

Service portion in an activity wherein goods, being food or other article for human consumption

Central Government has prescribed various abatement to tax only the service portion in aforesaid service namely:

Deemed valuation has resulted in duality of taxes applicable on a portion of total consideration received

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Services Taxable Value

Remarks

In relation to financial leasing including hire purchase

10% Abetment only to Interest cost

Works Contract 40% - 70% CENVAT credit of Capital goods, Input Services is available

Catering Services 70% CENVAT credit on any goods classified under Chapter 1 to 22 of Central Excise Tariff Act, 1985 is not available.

The greater the time gap between the introduction of

Negative List (July 1, 2012) and the introduction of GST, the

greater the burden for industry and consumers

Mumbai1502, A Wing, Dalamal Towers, Nariman Point, Mumbai 400 021

Phone: + 91 22 6636 7000, Fax: + 91 22 6636 7172

Delhi405-406, 4th floor, World Trade Centre, Barakhamba Lane, New Delhi 110 001

Phone: + 91 11 4152 8400, Fax: + 91 11 4152 8404

Ahmedabad801, Abhijeet III, Mithakali Six Roads, Ellisbridge, Ahmedabad 380 006

Phone: +91 79 6605 4480 / 8, Fax: +91 79 6605 4482

Pune7th Floor, Suyog Fusion, 97, Dhole Patil Road, Pune 411001.

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