Service tax negative list regime

SERVICE TAX -
NEGATIVE LIST REGIME

By
Jigar Shah Advocate
© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS

NEED FOR CHANGE?

 Facilitate launch of GST in a more familiar environment

 Simplicity and certainty in tax processes

 Neutrality of tax to business

 Encouraging exports

 Optimizing compliances

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 3

PARADIGM SHIFT IN
REGIME


NEW LEVY

 Section 66B:
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.


SERVICE-DEFINED

 Explanation 2:
• Unincorporated association or a body of persons and a
member thereof, to be treated as distinct persons
• Establishment of a person in a taxable territory and a non-
taxable territory to be treated as distinct persons
 Explanation 3:
• A person carrying business through a branch or agency in
any territory shall be treated as having an establishment in
that territory.


IMPORTANT ELEMENTS

 Tax levied on all services,

 Except those specified in negative list,

 Provided or agreed to be provided,

 In the taxable territory, and

 By a person to another


PHRASE – AGREED TO BE PROVIDED

 Not defined in the Act

 Guidance Note:
• Services taxable on agreement even before
actual provisioning
• Advances retained on cancellation of
contract taxable


TAXABLE TERRITORY

 Defined as “the territory to which the Act
applies”.

 Section 64 : The Act extends to whole of India
except State of Jammu & Kashmir

 Jammu & Kashmir considered as non-taxable
territory

 ‘India’ defined.


SERVICE-DEFINED

 Section 65B(44) defines ‘Service’ as:
• any activity carried out by a person for another for
consideration
 And includes Declared Services
 Not to include:
• Mere Transfer of title in:
o Goods or Immovable property
By way of sale/gift or in any other manner
• "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.“


SERVICE-DEFINED
Not to include Continued…
• Mere transaction in Money or Actionable claim

• Services in the course of employment provided by an
employee to employer

• Fees payable in a court/ tribunal


ACTIVITY


 Guidance Note:
• Meaning as understood in common parlance
should be given
• Activity could be active or passive so to include
act of forbearance etc


CONSIDERATION

 Guidance Note:
• Definition of consideration from Indian Contract Act,
1872 could be borrowed
• Anything which the receiver does or abstain from
doing for receiving the service
• Would include both monetary as well as non-
monetary
• Section 67 to determine value of non-monetary
consideration
 Whether direct nexus with activity required?

WHETHER – CONSIDERATION ?

 Advance forfeited for cancellation of
agreement to provide service

 Excess payment made by mistake

 Security deposit forfeited for
damages/faulty action of receiver


DECLARED SERVICES


DECLARED SERVICES :
IMMOVABLE PROPERTY RELATED

 Renting of immovable property,

 Construction of complex, building, civil structure or
a part thereof, including a complex or a 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.


DECLARED SERVICES :
TAXED EARLIER

 Temporary transfer or permitting the use or
enjoyment of any intellectual property right,

 Development, design, programming, customization,
adaptation, up gradation, enhancement,
implementation of information technology software.


DECLARED SERVICES : DEEMED SALE

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

 Activities in relation to delivery of goods on hire
purchase or any system of payment by installment,

 Service portion in execution of a works contract,

 Service portion in any activity wherein goods, being
foods or any other article of human consumption or
drink is supplied in any manner as a part of the activity.


DECLARED SERVICES : RENTING

 Renting defined in Section 65B(41) 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 or other similar arrangements in respect of
immovable property.”
 Types of renting in exemption list:
• Renting of vacant land, with or without a structure incidental to its use,
relating to agriculture,
• Renting of residential dwellings for use as a residence
• Renting of a hotel, inn, guest house, campsite or other similar places meant
for residential or lodging purposes, having declared tariff of < Rs. 1,000/-
per day


COMPARISON

Earlier Position Current Position w.e.f
01.07.2012
When such premise is for use Renting is taxable in general
in the course of furtherance with some specific exclusion
of business or commerce. mentioned in negative list.

 Status of :
• Renting of property to educational institutions,
• Renting of property to hospitals,
• Renting of land or building for sports and
entertainment purposes

DECLARED SERVICES : IT SOFTWARE

 IT Software defined as ‘any representation of instructions, data, sound
or image, including source code and object code, recorded in a machine
readable form, and capable of being manipulated or providing interactivity
to a user, be means of a computer or an automatic data processing
machine or any other device or equipment’.
 Guidance Note :
• On site development covered
• Providing advice and consultancy covered
 Guidance Note on pre-packaged software:
• Sale of pre-packaged software not covered
• Taxability of License to use such software – Depends upon
whether TRUG or not


DECLARED SERVICES : TRANSFER BY
WAY OF HIRE, LEASING, LICENSING ETC

 Transfer of goods without transfer of right to use goods
is taxable

 All kinds of transfer of goods (which are not TRUG)
covered

 Guidance note :
• Transaction needs to be analyzed to see if it is
TRUG or not.


DECLARED SERVICES : SUPPLY OF
FOOD AND BEVERAGE

 Taxable transaction:
Service portion in an activity of supply of food or other
article of human consumption or beverage (whether
alcoholic or not).
 Guidance note – Items covered:
• Supply of food in a restaurant
• Supply of food and drinks by an outdoor caterer
 Abatement prescribed to compute service portion


DECLARED SERVICES : TEMPORARY
TRANSFER OF IPR
 Temporary transfer or permitting the use or enjoyment of
any IPR,
 IPR not defined
 Guidance Note:
• Phrase ‘IPR’ is to be understood as done in normal trade
parlance
• IPR to include:
• Copyrights,
• Patents,
• Trademarks,
• Design,
• Any other similar right to intangible property

COMPARISON

Earlier Position Current position w.e.f.
01.07.2012
IPR covers only those All types of IPR are
intellectual property right covered.
which are recognized in
India for time being in force.

 Status of :
• Technical know-how.
• Undisclosed information,
• Trade secrets etc.

DECLARED SERVICES : SERVICE
PORTION IN A WORKS CONTRACT

 Works contract defined:
“a contract wherein transfer of property in goods involved in the
execution of such contract is leviable to tax as sale of goods and
such contract is for the purpose of carrying out construction,
erection, commissioning, installation, completion, fitting-out,
improvement, repair, renovation, alteration of any movable or
immovable property or for carrying out any other similar activity or
a part thereof in relation to such property."

 Works contract definition amended to include both movable and
immovable property.

 Pure labour contracts not covered here


DECLARED SERVICES : WORKS
CONTRACT

 Deletion of Notification
No.12/2003-ST


DECLARED SERVICES :
REFRAIN FROM AN ACT ETC.

 Entry covers:
• Agreeing to an obligation to refrain from an act,
• Agreeing to an obligation to tolerate an act or a situation,
• Agreeing to the obligation to do an act

 Non-compete fees etc taxable

 Amount charged for non-lifting desired quantity?


NEGATIVE LIST OF SERVICES


BASIS FOR FRAMING THE NEGATIVE
LIST

Administrative
Reasons

Explicit
Activities

Negative List Contractual
(Basis) Obligations
Economic
Reasons

Welfare Reasons


NEGATIVE LIST :
ADMINSTRATIVE REASONS
 Activities in the negative list owing to Administrative Reasons are:
 Services by Government or a local authority excluding the
following services to the extent they are not covered elsewhere :
• Service by Department of Post by way of speed post, express
parcel post life insurance and agency services provided to a
person other than Government
• Service in relation to an aircraft or a vessel, inside or outside
the precincts of a port or an airport,
• Transport of goods or passengers, or
• Support services, other than covered under clauses (i) and (iii)
above, provided to an business entity.
 Services by Reserve Bank of India,


NEGATIVE LIST : CONTRACTUAL
OBLIGATIONS

 Activities in the negative list owing to
Contractual obligations are :

 Services by a foreign diplomatic mission located
in India


NEGATIVE LIST : WELFARE REASONS

 Activities in the negative list owing to Welfare Reasons
are :

 Service by way of:
• Pre-school education and education upto higher
secondary education or equivalent,
• Education as a part of a curriculum for obtaining a
qualification recognized by any law for the time being in
force,
• Education as a part of approved vocational education
course.

NEGATIVE LIST : WELFARE REASONS

 Services of transportation of goods :
• By road except the service of -
• A goods transportation agency, or
• A courier agency.
• By an aircraft or a vessel from a place outside India up to the
custom station of clearance in India, or
• By an inland waterways

 funeral, burial, crematorium or mortuary services
including transportation of deceased
 Services by way of renting of residential dwellings for
use as residence

NEGATIVE LIST : ECONOMIC
REASONS

 Economic Reasons are :

 Transmission or distribution of electricity by an electricity
transmission or distribution utility,


NEGATIVE LIST : EXPLICT ACTIVITIES

 Explicit activities are :

 Trading of goods

 Service by way of access to a road or a bridge on
payment of toll charges,

 Betting, gambling or lottery,



 Admission to entertainment event or access to
amusement facilities

 Selling or space or time slots for advertisements
other than advertisements broadcast by radio or
television
 Online advertisement ?



 Any process amounting to manufacture or
production of goods
 Process on which duties of excise leviable under Section 3 ; or
 Duties of excise leviable under any State Act;
 Any process amounting to manufacture of alcoholic liquor of human
consumption, opium, Indian hemp and other narcotics drugs and narcotics


NEGATIVE LIST : OTHER ITEMS

 Other activities mentioned in the negative list are :

 Service by way of:
• Extending deposit, loans or advances in so far as the
consideration is represented by way of interest or
discount,’
• Inter-se sale or purchase of foreign currency amongst
banks or authorized dealer of foreign exchange or
amongst banks and such dealers


RULES OF
INTERPRETATION


CLASSIFICATION OF SERVICES

 Section 66F replaces Section 65A

 1 - Reference to main service not to include reference to
service used for providing main service
• Sub-contractor to main Contractor?

 2 - Specific description to prevail over general


CLASSIFICATION continued….
 Bundled service means a bundle of provision of various
services wherein an element of provision of one service is
combined with an element or elements of provision of any other
service or services.

 Rule 3 - Bundled services
Nature Classification

(a) Naturally bundled in the Single Service giving its
ordinary course of business essential character
(b) Otherwise than (a) Single Service resulting in
highest liability of Service Tax


Classification of Services

• Draft Circular dated 27.09.2012
• Issued in the context of air lines services
• Charges which are directly relatable to journey will get abatement.
Therefore, charges like reconfirmatin fees, upgrade charges, date
change fees, preferred seat charges are differential ticket fare and
will get abatement
• Sky Meal On Order and escort charges are not directly related to
journey and therefore, will not get any abatement
• Excess baggage charges and pet charges will not get any
abatement
• Cancellation charges are also taxable without abatement


Classification of Services

• Some Important ECJ Rulings
• Card Protection Plan (Case No. C-349/1996)
• Societe Thermale d’Eugenie-les-Bains Vs. Ministere de
l’Economie, des Finances et del’Industrie (Case C-277/05)
• B.A.Z. Bausystem AG Vs. Finanzamt Munchen Fur
Korperschaften (1982) 3 CMLR 688


REVERSE CHARGE


REVERSE CHARGE

• Notification No.30/2012-ST replaces Notification
No.36/2004-ST for specifying person liable for payment
of service tax in respect of services provided or
agreed to be provided by:
• Insurance agent to person carrying on the insurance
business,
• Goods transportation agency in respect of transportation of
goods by road, where the person liable to pay freight is one
of the specified persons,
• Sponsorship service to body corporate or partnership firm in
taxable territory,


REVERSE CHARGE
• By arbitral tribunal or an individual advocate or a firm of advocates to a
business entity
• Support service provided by Government or local authority, to any
business entity located in taxable territory, excluding:
• Renting of immovable property,
• Speed post, transport services and services in relation to aircraft or vessel
in certain cases
• Service provided by way of :
• Renting of motor vehicle designed for carrying passengers to any person
not in similar line of business,
• Supply of manpower,
• Service portion of Works contract (Notified services)
By an individual, HUF, Partnership Firm or Association of persons to a business entity
registered as body corporate in a taxable territory


REVERSE CHARGE
 Service provided or agreed to be provided by a person located
in non-taxable territory and received by a person in a taxable
territory
 Notified services are as follows:
SL. No. Description of service Service Service
Recipient Provider
1. Renting of a motor vehicle
designed to carry passengers:
•With abatement 100% Nil
•Without abatement 40% 60%

2. Supply of manpower for any 75% 25%
purpose
3. Service portion in Works 50% 50%
contract service


REVERSE CHARGE

 Whether service provider to
charge full rate of tax?

 Payment of entire tax by service
provider:
- Service recipient absolved?

 Different options be exercised by
provider and receiver?


VALUATION


VALUATION : RULE 2A

 W.e.f. July 1, 2012

 Works Contract Service
• Rule 2A substituted
o Value of service = Gross amount charged less
actual value of goods transferred in execution

• Actual value of goods for VAT purposes to be
considered for determining material value


VALUATION: RULE 2A

 Where value is not determined then:
• Service value shall be computed as :
o Original work – 40% of total amount charged
o Contract for maintenance or repair, renovation or restoration of
any goods – 70%
o Other works – 60%
 Original works means:
• All new constructions
• All types of additions and alterations to abandoned or damaged
structures on land that are required to make them workable
• Erection, commissioning or installation of plant, machinery or
equipment or structures


VALUATION: RULE 2A

 ‘Total amount’ means:
Gross amount charged
Plus
FMV of all goods and services supplied in or in relation to the contract
whether or not supplied under the same contract
Less
The amount charged for such goods and services, and
Less
VAT or sales tax levied thereon

 Specific bar inserted for availing excise duty
credit in respect of inputs used in works contract
services


VALUATION : RULE 2C

• W.e.f. July 1, 2012

DESCRIPTION EARLIER CURRENT
TAXABLE TAXABLE
VALUE VALUE W.E.F.
01.07.2012
Supply of food 30% 40%
and beverages
at restaurant
Outdoor 50% 60%
Catering
• Value to be determined in the manner as discussed in Rule 2A
• Credit of inputs allowed except those specified in Chapter 1 to
22.

VALUATION : RULE 6

• Value to include:
• Amount realized as demurrage or by any other name for
provision of service beyond originally contracted period in any
manner relatable to service

• Value to exclude:
• Interest on deposits and delayed payment of any
consideration for the provision of service or sale of goods
• Accidental damages due to unforeseen actions not relatable to
provision of service
• Subsidies/grant by Govt. not effecting the value of service


NOTABLE ABATEMENTS
DESCRIPTION TAXABLE CONDITIONS
%
Bundled service by way of supply 70 Cenvat credit on any goods under
of food or any other article of Chapters 1 to 22 used for
human consumption or any drink, providing output service has not
in a premises, including hotel, been taken in terms of Cenvat
convention center, club, pandal, Credit Rules, 2004.
shamiana or any place specially
arranged for function together
with renting of such premises

Construction of a complex, 25 (i) Cenvat credit on inputs used
building, civil structure or a part for providing the taxable
thereof, intended for sale to a services has not been taken
buyer, wholly or partly except (ii) The value of land is included
where entire consideration is in the amount charged from
received after issuance of the service receiver.
completion certificate by the
competent authority.


Contact Details Our Knowledge Partner

Thank you
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Link Road, New Delhi - 110 018 Malleswaram,

Phone: +91 (11) 4129 9810/800 Bangalore - 560 055

Phone: +91 (080) 41717777

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Phone: +91 (44) 43961600, 28334700-2
Mumbai - 400 018

Phone: +91 (22) 2491 4382/84/86

AHMEDABAD
B-334 (3rd floor), SAKAR-VII, Nehru Bridge Corner,

Ashram Road, Ahmedabad-380 009
HYDERABAD
Phone: +91 (79) 4001 4500
‘Hastigiri’
© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS
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Service tax negative list regime

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