India: Negative List Of Services - A New Service Tax Regime

Last Updated: 28 November 2012
Article by Manoj K. Singh and Megha Kapoor

Service tax was initially introduced in the year 1994, when service tax was made applicable on only three services. The scope of applicability of service tax has been widened over the years, covering almost 119 services under the ambit of taxability by 2012. However, the concept was based on the positive list of services, wherein the services specified under Section 65(105) of the Finance Act, 1994 (as amended) were taxable. Under this scenario, one had to analyze the various services and to seek whether the service provided is covered under any of the taxable service under the list.

A new service tax regime has been introduced with the announcement of budget 2012 wherein all services will be taxed unless they are specified under the negative list entry or are otherwise exempted. Under the new system, the services will be taxed comprehensively, except the few ones which have been specified under the negative list. The Central Board of Excise and Customs [CBEC] has further issued "Mega Exemption Notification" vide Notification No. 25/2012-Service Tax dated 20th June, 2012, enlisting the services which shall be exempt from the payment of service tax with effect from 1st July, 2012.

With the enforcement of Finance Act 2012, Section 65 relating to the "definitions" of the various terms relating to the service tax has been omitted. However, two important sections which have been introduced defining the new service tax code are Section 65B which provides for a whole new set of definitions in context of taxable services under the head "Interpretations" and Section 66D which states the "Negative list of service".

Further, for the purpose of payment of service tax under the new approach, a new Minor Head- "All taxable Services" has been allotted under the Major Head "0044-Service Tax".1

Need for the new system

There have always been disputes about taxability of a particular activity and also its classification in a particular taxable head. The provisions of the Chapter V of the Finance Act, for levying service tax on various activities had been challenged under different grounds before the Courts in India. Some of the major grounds upon which the validity had been challenged includes violation of Article 14 of the Constitution of India, noncompetency of the Parliament to levy tax on the activity within the domain of the State power, discriminatory nature of the provisions etc. Also, the definitions of each service as provided under Chapter V were often vague and broad.

In order to mitigate the administrative difficulties in defining a service and administering the service tax, the concept based on negative list of service was first floated last year. However, the final set of notifications has come out on 20th June, 2012. This new approach towards the service tax applicability has simplified and resolved the issue relating to whether any particular service is liable to be taxed.

New concepts

The new concepts introduced under the new Service Tax Regime based are being discussed below.

1. Meaning of Service

Earlier the word "Service" was not defined anywhere in Chapter V of the Finance Act, 1994. In order to ensure wide coverage of services under the ambid of service tax, the term 'Service' has been defined under the new inserted section 65B(44) in the Finance Act, 2012, which reads as follows-

"Service" means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include—

a) an activity which constitutes merely,––

i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or

ii) such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution; or

iii) a transaction in money or actionable claim.

b) a provision of service by an employee to the employer in the course of or in relation to his employment;

c) fees taken in any Court or tribunal established under any law for the time being in force."2

The definition prescribes the following three essential ingredients that must be present in order to call an activity as 'service'-

a) it must be an activity;

b) it must be performed by a person for another person;

c) the activity is performed for a consideration.

In the absence of any of these essential ingredients, the activity will be not be considered as service. Also, the activities which are covered under the declared service category will automatically become service.

Thereafter, the definition expressly excludes the activities from the provision of "Service". Thus, except for the activities as mentioned in the definition of the term "Service", all other activities shall be covered which involves the above three essential ingredients.

2. Meaning of Declared Services

As per the definition of "Service" as contained under Section 65B (44) of the Finance Act, the term service includes declared services. The phrase "Declared Service" has also been defined under section 66E as "an activity carried out by a person for another for consideration". Further, the section specifically mentions the following nine services as 'declared services':

a) renting of immovable property

b) 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.

c) temporary transfer or permitting the use or enjoyment of any intellectual property right.

d) development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software.

e) agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act. f) transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods.

g) activities in relation to delivery of goods on hire purchase or any system of payment by installments. h) service portion in the execution of a works contract.

i) service portion in an activity wherein goods, being food or any other article of human consumption or any drink (whether or not intoxicating) is supplied in any manner as a part of the activity.

3. Negative List

Negative list of services means that all services, excluding those specified in negative list will be subject to service tax. However, in addition to items included in negative list, there will be exemptions, abatements and composition schemes as issued by the CBEC from time to time.

The Mega Exemption Notification issued by the CBEC and the issuance of guidance paper on the new approach to service tax has mentioned 38 services on which service tax shall be exempt. All the other services, i.e. which are not mentioned in the negative list, will attract service tax liability.

Some of the services covered in the negative list category are as follows:

i) Health care services by a clinical establishment, an authorised medical practitioner or para-medics

ii) Services provided by an individual as an advocate or a partnership firm of advocates by way of legal services to ;

a) an advocate or partnership firm of advocates providing legal services

b) any person other than a business entity;

c) a business entity with a turnover up to rupees ten lakh in the preceding financial year

iii) Services provided to a recognised sports body bya) an individual as a player, referee, umpire, coach or team manager for participation in a sporting event organized by a recognized sports body;

b) another recognised sports body

iv) auxiliary educational services and renting of immovable property by educational institutions in respect of education

v) Services by way of training or coaching in recreational activities relating to arts, culture or sports

vi) Temporary transfer or permitting the use or enjoyment of a copyright covered under section 13 of the Indian Copyright Act, 1957 relating to original literary, dramatic, musical, artistic works or cinematograph films

vii) Services provided in relation to serving of food or beverages by a restaurant, eating joint or a mess, other than those having (i) the facility of airconditioning or central air-heating in any part of the establishment, at any time during the year, and (ii) a licence to serve alcoholic beverages

Therefore, with the exception of 38 services as specifically provided by the CBEC under negative list, all other services will come under the 12%3 service tax bracket.

Chargeability under the new approach

The taxability of services or the charge of service tax has been specified in section 66B of the Finance Act which reads as follows:

"There shall be levied a 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."

From the analysis of the above definition, it can be said that following conditions needs to be fulfilled in order to make an activity chargeable to tax under the new provisions:

a) a service should be not be specified in the negative list or as covered under the exempted list of services as issued under the Mega Notification;

b) provided or agreed to be provided in the taxable territory; and c) by a person to another.

Conclusion

The new approach to taxation of services will benefit the service provider in order to understand the law and the applicability of the tax on the services to be provided. Also, the "negative approach" is a lot simpler as compared to the earlier "positive approach" based system of taxation. The expansion of the service tax base by covering most of the sectors will help in moving towards the adoption of Goods and Service Tax Code. In this way, the new system shows a remarkable shift from the old system by way of introducing comprehensive taxation system which avoids the complex issues and without getting involved into the classification of services.

Footnotes

1 Central Board of Excise & Customs vide Circular No. 161/12/2012-ST dated 6th July, 2012

2 As introduced by the Finance Act, 2012

3 Exclusive of Education Cess (2%) and Secondary and Higher Education Cess (1%)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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