This document summarizes how goods and services taxation (GST) will impact pure service providers and the service sector in India. Some key points: 1) Under GST, the definition of "service" will be very broad, covering anything other than goods. Most current services taxed will continue to be taxed, and some additional services will now be taxed. 2) Threshold limits for registration will be increased to Rs. 20 lakh annually except for some northeastern states where it remains Rs. 10 lakh. Composition schemes are not available for services. 3) The expected GST rate on services of 18% would increase taxes on services by 3% from the current effective 15% rate

1. Volume XVIII Part 4 February 25, 2017 13 Business Advisor
Future of services and service providers
Dr Sanjiv Agarwal
Introduction
The services sector is not only the dominant sector in
India‘s GDP, but has also attracted significant foreign
investment flows, contributed significantly to exports
as well as provided large scale employment. India‘s
services sector covers a wide variety of activities, such
as trade, hotel and restaurants, transport, storage and
communication, banking & financing, insurance, real
estate, business services, community, social and
personal services, education, health care, construction, infrastructure,
telecom and other host of services associated with industrial development.
Services contribute over 57 per cent to the Indian economy (GDP) which is
the highest, followed by industry and agriculture. Services have been
growing at the rate of 9-11 per cent since last few years which is higher
than the GDP growth itself which is growing at 7-7.9 per cent.
The tax on services was introduced in India in 1994 with the levy of service
tax @ 5% on just three services which grew to over 120 services by 2012. It
was in July 2012 that India moved to negative list approach to levy service
tax on all services except those which are covered in negative list or are
specifically exempt. The present rate of service tax is 15 % including cesses.
The revenue from service tax has been growing significantly year by year
from just Rs 426 crore in 1994 to Rs 2,47,500 crore in 2016-17.
At present, services are defined very comprehensively under section 65B(44)
of the Finance Act, 1994. Accordingly, the term ‗service‘ w.e.f. 1.7.2012
means –
 any activity
 for consideration
 carried out by a person for another
 and includes a declared service.
This is, however, subject to certain exclusions.
How GST will impact pure service providers/ service sector is discussed in the
following paragraphs:
What is service?

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Scope of ‗service‘ in the GST regime is going to be very wide; it has been
defined thus - ‗anything other than goods is service‘. If it is not a ‗good‘, it is
a service. ‗Goods‘ is defined in section 2(49) of the GST Model Law (version-
II) as every kind of movable property other than money and securities but
includes actionable claim, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before supply or
under a contract of supply.
Thus, it would not include money and securities but transactions therein
shall be covered. Actionable claims are treated as goods and not services.
Territorial jurisdiction
GST law shall extend to the whole of India and SGST law would apply to the
respective States. Presently, service tax law extends to whole of India except
the State of Jammu & Kashmir. Therefore, rendition of services in the State
Jammu and Kashmir would also be covered under the term ‗supply‘ and
accordingly, provisions of GST shall be applied to whole of India including
the State of Jammu and Kashmir (J & K).
Threshold exemption
Currently, in service tax, there is a threshold exemption of Rs 10 lakh based
on the aggregate turnover limit of Rs 10 lakh, and no service tax is payable
in such cases. In the GST regime, the limit of threshold exemption will be
enhanced to Rs 20 lakh on all-India basis, except in the case of the North-
Eastern and the hilly States (total 11 States) where it will be Rs 10 lakh.
These States are Arunachal Pradesh, Assam, Manipur, Meghalaya,
Mizoram, Nagaland, Tripura, Sikkim, Himachal Pradesh, Jammu &
Kashmir, and Uttarakhand. For this purpose, definition of ‗aggregate
turnover‘ has been provided in section 2(6) of the Model GST Law (version-II)
which is different from the existing one.
GST rate
In the existing taxation of service tax, services are taxed at the rate of 14%
along with 0.50 % each, for Swachh Bharat Cess (SBC) and Krishi Kalyan
Cess (KKC), making it a total of 15%.
In the GST regime, GST Council has recommended a four-tier rate
structure, i.e., 5%, 12%, 18% and 28%, with two standard rates of 12% and
18%. The GST rate is likely to be higher, widely speculated at 18%. This
means that there will be an impact on the services which will become
costlier by the differential tax amount from the current levels. As a result,
services will become expensive and all the continuing/ ongoing contracts

3. Volume XVIII Part 4 February 25, 2017 15 Business Advisor
will have to suffer the increased rate in respect of work completed after
effective date, making B2B and B2C services dearer.
In the GST regime, the rate of GST on services could be 18 per cent which
will enhance the tax rate across the board by 3 per cent and is considered a
steep increase of 20 per cent from present tax rate of 15 per cent. This
additional 3 per cent increase of tax on supply of services will impact the
service users and offset the benefit accruing due to lower rate on goods. If
services are taxed at two different rates, say 12% and 18%, it may be some
relief. In such case, industrial and luxury services may be taxed at a higher
rate, while other services may be taxed at 12 per cent or a lower rate.
Relief from double taxation - sale vs service
Presently, service providers find it difficult to identify what is service and
what is a good, facing tax disputes with both the tax Departments i.e.,
service tax and VAT/ CST Departments. Service providers paying service tax
do receive notices from the VAT/ CST Department, and dealers who are
paying VAT/ CST get notices from the service tax Department in the case of
overlapping transactions.
With the introduction of one single tax, i.e., GST on supply of goods and/or
services including supplies as per Schedule-II of GST Model Law (version-II),
GST is likely to put an end to the double taxation of services like software,
supply of food, hire purchase, works contracts etc. which are presently
treated as goods and services, both.
At present, such services are largely covered under section 66E as declared
services. In the GST regime, it has been specified in Schedule-II itself as to
what transactions shall be considered as supply of goods and what as
supply of services. This would remove confusion as to the nature of
transactions, make out a clear-cut case for specific transactions and avoid
double taxation and cascading effect. It would also lead to better tax
compliance.
Taxable person/ composition scheme
‗Taxable person‘ means a person who is registered or liable to be registered
under Schedule-V of the Act.
According to Schedule-V, every supplier shall be liable to be registered
under the Act in the State from where he makes a taxable supply of goods
and/or services if his aggregate turnover in a financial year exceeds Rs 10
lakh in North-East States including Sikkim and hilly area and Rs 20 lakh
for other States. Therefore, threshold limits of aggregate turnover of Rs

4. Volume XVIII Part 4 February 25, 2017 16 Business Advisor
20/10 lakh in relation to taxable persons shall be considered for registration
under GST.
A person can opt for composition scheme, if his aggregate turnover is more
than Rs 20/10 lakh but less than Rs 50 lakh in a financial year. However,
composition scheme is not available to supply of services.
Place of registration/ centralised registration
In the present service tax regime, there is a concept of centralised
registration subject to fulfillment of certain conditions.
Under the GST regime, registration may be required in each State from
where supplies are being made. Hence, service provider may need to obtain
registration in each State with premises (including site office) from where
services are being provided. Centralised registration will no longer be
available which will increase the cost of compliance for the assessees. It
would become an unproductive exercise for multi-location enterprises such
as banks, insurance company etc.
Supply
‗Supply‘ means:
 All forms of supply of goods and/or services made or agreed to be made
for a consideration by a person in the course or furtherance of business,
 Importation of service for a consideration, and
 Services have been specified in Schedule-I; it shall be considered as a
supply even if made without consideration.
The present taxable event under service tax is rendition of services which
will no longer be relevant, and only one event, i.e., ‗supply‘ of service would
be the taxing event. Supply is defined in an inclusive manner. Tax is on
supply of service. Therefore, even the supply, as prescribed in Schedule-I,
made without consideration is taxable. In the present law, the services
provided without consideration, i.e., free services are not taxable.
Specific cases of supply of services
As per Schedule-II of Model GST law (version-II), in the following cases,
transactions or activities shall be considered as supply of services -
a) Retail
Any transfer of

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 Goods, or
 right in goods, or
 undivided share in goods
without the transfer of title thereof.
b) Real-estate or Construction
(i) Any lease, tenancy, easement, licence to occupy land;
(ii) Any lease or letting out of the building including a commercial,
industrial or residential complex for business or commerce, either wholly or
partly;
(iii) 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 where the entire consideration has been received before issuance of
completion certificate or before its first occupation, whichever is earlier;
(iv) Works contract including transfer of property in goods (whether as
goods or in some other form) involved in the execution of a works contract.
c) Information technology sector
Development, design, programming, customisation, adaptation, up-
gradation, enhancement and implementation of information technology
software.
d) Hospitality
Supply of goods, being food or any other article for human consumption or
any drink (other than alcoholic liquor for human consumption), where such
supply or service is for cash, deferred payment or other valuable
consideration.
e) Job work
Job work will include any treatment or process which is being applied to
another person‘s goods.
f) Common for all services
(i) Renting of immovable property, i.e., telecommunication tower is
immovable property for telecom sector;

6. Volume XVIII Part 4 February 25, 2017 18 Business Advisor
(ii) Temporary transfer or permitting the use or enjoyment of any
intellectual property right;
(iii) Agreeing to the obligation to refrain from an act, or to tolerate an act or
a situation, or to do an act;
(iv) Transfer of the right to use any goods for any purpose (whether or not
for a specified period) for cash, deferred payment or other valuable
consideration.
g) Others
Where goods held or used for the purposes of the business are put to any
private use or are used, or made available to any person for use, for any
purpose other than a purpose of the business, whether or not for a
consideration, the usage or making available of such goods shall be
considered as a supply of services.
Most of the aforementioned services are taxed to service tax as a declared
service under section 66E of the Finance Act, 1994. In some services like
that of IPR or works contracts or restaurant sales, VAT is also payable. In
GST regime, only one tax, i.e., GST will be charged and, moreover, there will
be clarity on to the nature of service. Overall, tax rates are also likely to
come down which may benefit the consumers of these services.
Inter-State or Intra-State?
Any supply of services where the location of the supplier and the place of
supply are in different States shall be considered as inter-state supply and,
accordingly, provisions of IGST law will be applicable. On the other hand,
any supply where the location of the supplier and the place of supply are in
same State, then such supply shall be considered as intra-state supply and
only CGST/ SGST shall be levied.
Presently, all services are subject to central tax, i.e., service tax which
applies to whole of India except the State of Jammu & Kashmir. There are
no State boundaries and it applies uniformly to all services and service
providers. In the GST regime, tax treatment is different for inter-State and
intra–State activities. Services between two or more States will attract IGST
whereas intra-State services shall be subject to CGST and SGST which are
likely to be equally split.
Export of services
Exports are being zero-rated and, therefore, input taxes paid shall be
allowed as a refund. However, to determine whether the services qualify as

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export of service, it would be important to analyse the provisions and
conditions prescribed for ‗export of service‘.
The definition of ‗export of service‘ is similar to the present law, and no new
conditions are prescribed. However, place of supply rules would need to be
evaluated on a case-to-case basis to determine the tax applicability on such
services.
The default rule for place of supply for export of service shall be the location
of the service recipient, where the address on record of the recipient exists
with the exporter. Hence, it will be critical for exporters to ensure that the
address of service recipient on record can be established before the
authorities on request.
Import of services/ reverse charge
Import of services from outside India shall be taxed in the hands of recipient
of services under reverse charge mechanism. Central/ State Government
will also notify certain cases where tax shall be collected under reverse
charge mechanism as is presently done.
Further, any person receiving certain specified services for personal use of
value exceeding a specified amount will also be liable to pay GST under
reverse charge.
Transactions between head office and branch offices located outside/
inside India
Services provided to overseas branch would not be eligible as export of
services due to specific exclusion for such transactions in the definition of
‗export of service‘. This is similar to the existing provisions for export of
service to overseas branches.
An establishment of a person in India and any of his other establishments
outside India shall be treated as establishments of distinct persons.
Accordingly, supply of services to the branch would not be eligible as export
of services; therefore, benefits available to exporter would be restricted to
the supply of services to other persons. This could entail reversal of input
credits as such supply would be treated as non-taxable and not as zero-
rated.
However, definition of import of service does not specify such exclusion.
Logically, definition of import of service also excludes services imported from
overseas branch but clarity should be brought in for better understanding.
Supply made or to be made to domestic branch in other State shall be
considered as supply to distinct person. Accordingly, IGST would be leviable
on such supply.
(Dr Sanjiv Agarwal is Partner, Agarwal Sanjiv & Company, Jaipur.)