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Negative list for taxing services – Moving forward

By Kapil Sharma and Shivam Mehta
Recently, the Ministry of Finance, Government of India, unveiled the revised Concept Paper on taxation of services based on negative list after considering feedback from stakeholders on the Concept Paper released a few months ago. The revised Concept Paper has reduced the categories of services which would be out of purview of tax net as compared to the proposals contained in the earlier list. It is presumed that taxation of services under a negative list would lead to expansion of tax base for Service Tax in comparison to charging Service Tax on selectively defined services as is in vogue. As suggested in the revised Concept Paper, the feedback received from industry and other stake holders is indeed motivating for the beginning of paradigm shift towards negative list based taxation. However, there is an eminent need to identify various sectors which should justifiably find place in the negative list of services and should be outside the purview of tax net. This article is intended to analyze the essential features of newly ushered revised Concept Paper vis-à-vis various issues which need due attention while implementing the new regime based on negative list of services.

Salient features of the revised Concept Paper

Definition of ‘service’

The revised Concept Paper has retained the definition of the term ‘service’ to mean anything which does not constitute supply of goods, money or immovable property. This definition indicates ‘services’ would have included transactions even when the essential feature of quid pro quo was absent. This lack of economic consideration in the definition of service has been taken note of in the revised Concept Paper which proposes a new charging provision to restrict the levy only to services provided by the taxable persons. It is further provided that the term ‘taxable person’ would cover any individual who carries out any economic activity and these changes would automatically take care of the need of quid pro quo without amending the definition of service.

An easier route to put an end to this debate would have been to place the expression ‘consideration’ in the definition of service where the definition would have read:- “Service means anything which does not constitute supply of goods, money or immoveable property but is provided for a consideration.”  By this inclusion the definition of service would have made life easier by automatically taking out all the activities done gratuitously or for free of charge from the ambit of tax net.

In so far as the charging provision is concerned, the revised Concept Paper has retained the characteristics and influence of existing provisions. This proposed provision seeks to impose a tax on all transactions undertaken by a taxable person. A strict construction of this proposal would indicate that there is no bifurcation of the transactions undertaken in different capacity by a taxable person. For instance, a musician playing music in a hotel for a consideration is a taxable person. Nevertheless, when the same musician plays music in public without any obligation to do so, he might not be construed as taxable person for reason of absence of quid pro quo. The legal provisions should clearly accommodate and provide for such situations where a taxable person also undertakes the activity in the capacity of non-taxable person.

In addition, the proposed charging provision continues to retain the conspicuous absence of taxable event i.e. the event leading to applicability of Service Tax - a concept which still awaits clarity for the triggering event whether it will be rendition of service or receipt of advance towards rendering of service.     

Components of negative list
One of the crucial exclusions from the tax net as highlighted in revised the Concept Paper pertains to ‘statutory fines and penalty’. In this context it has been clarified that commercial demurrages/damages for the extended use of service will be considered taxable. Historically, the demurrages/damages paid or charged for the failure to meet the agreed condition has been considered to be in the nature of damages for failure and not as consideration for any service. However the revised Concept Paper has not dwelled upon the treatment of demurrages/damages arising out of failure to meet the contractual obligations and are not in nature of extended use of service. In the absence of specific exclusion for demurrages other than those owing to the extended use of service, the proposed regime may impose tax in both the situations (i.e. demurrages for extended use of service as well as demurrages for failure to meet contractual obligations). This would be in contrast with the practice prevailing in current regime as well as adopted and accepted internationally.

Let us take an illustration of a tenant who has been served with a notice to vacate the property within one month and who failing to do so is saddled with damages after due process of law. The issue which would now arise is whether the amount of demurrage/damage paid for not vacating the property will be considered as consideration for services or the said amount will be treated as damages for failure as the tenant will not be enjoying the lawful possession of property as a tenant.

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[The authors are Chartered Accountants and Consultants, Lakshmikumaran & Sridharan, New Delhi]

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