Negative List – Need to re-visit business transactions
By Kapil Sharma and Narendra Kumar Singhvi
There is a paradigm shift in the way services will be taxed from this month (July, 2012) onwards. Under the new regime, all services, which are not included in what is popularly known as ‘negative list of services’, will be taxed. The negative list approach to levy service tax has substantially altered service tax law impacting transactions involving supply of service. The introduction of negative list prior to the introduction of GST has also created significant gaps in the availability and use of tax credits. This situation will no doubt add to the cost of services in India.
Businesses have to comply with the new provisions introduced by Finance Act, 2012, but this might not be as easy as it initially appeared. This can be understood from the structural changes discussed hereinafter. It is likely to pose many problems which can no doubt, be resolved with some care and caution.
A negative list, as the term suggests, means all services except those specified in the list will be taxable. Now, service tax is payable on all services which come within the purview of the definition of ‘service’, except those specified in the negative list and excluding those which are exempted through notifications issued by the Central Government.
Unlike goods, which are tangible and therefore can be described fairly accurately, defining services poses formidable problems to the law-makers. Though the definition of ‘service’ appears simplistic there are many surprises and causes for concern to taxpayers and the department alike, which may lead to increase in the number of court cases in the near future. The term ‘service’ has been defined to mean any activity for consideration. However the term ‘declared service’ includes an act of forbearance also.
With the introduction of the concept of ‘declared services’ wherein certain specified services have been included within the definition of taxable services, one cannot rule out the possibility of over-lapping levies on a particular transaction. The number of taxable levies which stood at 116 (approx), in the positive list regime, will now increase tremendously. This increase in the scope of service tax will also impact the manufacturing sector.
Another area of concern for assessees in the all pervading new regime relates to the shifting of onus. Existing litigation on issues such as classification, valuation, abatement and exemptions is already very high in the positive list regime. However, with the coming into force of the negative list regime, the assessee is now required to prove that there is no liability to pay service tax. As the spread of the levy is all pervasive, such a levy is likely to intensify the tussle between the department and the assessees over issues of taxability of services.
The domain of reverse charge mechanism has also been widened by introducing a new mechanism for certain specified classes of assessees and services. The scheme has been amended by fastening the liability to pay service tax on reverse charge basis, partly on the service provider and partly on the service receiver. This will now require affected businesses to ascertain the services which will create a shift in liability on them. The same assumes more importance owing to the fact that even payment of service tax in full by the provider in these specified cases will not absolve recipient of service from the liability.
As part of the negative list regime, the Government has introduced a new set of rules for determining the place of supply of service, known as the Place of Provision of Services Rules, 2012. These rules contain principles on the basis of which the jurisdiction to tax a service gets determined. These rules also supersede the existing Export of Services Rules, 2005 and the Taxation of Services (Provided from outside India and Received in India) Rules, 2006, which will now require businesses to the re-visit their practices relating to export and import of services.
Implementation of GST in the developed economies of the world shows that a clear lead time of 18 months was provided to various stakeholders for them to transit to the new tax regime, whereas the negative list regime has no transition provisions to determine the status of on-going contracts such as services already provided and not invoiced.
Businesses also need to take stock of the compliance requirements in respect of services which shall become taxable for the first time and to address tax planning options available, as these issues have to be tackled at this stage itself. It is crucial for all service providers to re-visit all the decisions taken earlier and to review the business model in order to gain from the new provisions.
[The first author and second author are respectively Principal Associate and Associate in Lakshmikumaran & Sridharan, New Delhi]