NEGITIVE LIST OF SERVICES

1. NEGITIVE LIST OF SERVICES Introduction Meaning and reasons for Negative list? New charging section? What is service? Place of Provision of Services Rules, 2012? Definition of Service (list of declared services)? Exemptions from service tax? Valuation Conclusion CA Lovekesh Sethi

2. Introduction • Words of Finance Minister, while presenting the Union Budget 2011. “Many experts have argued that it will be desirable to tax services based on a small negative list, so that many untapped sectors are brought into the tax net. Such an approach will be very conducive for a nationwide GST. I propose to initiate an informed public debate on the subject to help us finalize the approach to GST” Continued… CA Lovekesh Sethi

3. The new service tax regime of levy of service tax is to be implemented soon. On its implementation following major changes can be seen:- • Section 66A of the Finance Act, 1994 (levy of service tax) will cease to exist. • Export of Services Rules, 2005 will extinguish. • Taxation of services (Provided from outside India and received in India) Rules, 2006 will also extinguish. • New charging Section 66B will come into force • new set of rules namely, Place of provision of services rules, 2012 will be implemented CA Lovekesh Sethi

4. Meaning of Negative list:- • A negative list of services implies two things: • First, a List of Services which will not be subject to service tax which is Mega Exemption List; • Second, other than the services mentioned in the negative list, all other services will become taxable which fall within the definition of the ‘Supply of Services’. (Under new service tax regime the Negative list of services is contained in section 66D of the Act.) CA Lovekesh Sethi

5. Reason for Negative list:- • Earlier the Selective Taxation of Services method being implemented. • The list of taxable services expanded by way of incremental additions of the new levy over the years. • Many practitioners of the subject believe that incremental approach to taxation is not suitable for providing a stable system for taxation of services that is at the threshold of getting subsumed into a comprehensive GST. • The proposed new service tax regime based on negative list of services will help widening the tax base. CA Lovekesh Sethi

6. New charging section:-Section 66B “There shall be levied a tax (service 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.” • In other words, the new charging section implies that all services provided or to be provided in the “TAXABLE TERRITORY” will be taxable unless the service is specified in the negative list or under mega exemption notification. • The word “taxable territory” means the whole of INDIA except Jammu and Kashmir. CA Lovekesh Sethi

7. What is service? As per clause (44) of the new Section 65B “Service” means:- • Any *activity • for **consideration • carried out by a person for another • and includes a declared service. Further provides that ‘Service’ does not include – • Any activity that constitutes only a transfer in title of i) goods or ii) Immovable property by way of sale, gift or in any other manner iii) A transfer, delivery or supply of goods which is deemed to be a sale of goods. Continued… CA Lovekesh Sethi

8. Within the meaning of clause (29A) of article 366 of the Constitution i) A transaction only in (iv) money or (v) actionable claim ii) a service provided by an employee to an employer in the course of the employment. iii) fees payable to a court or a tribunal set up under a law for the time being in force Note:- *Activity has not been defined in the Act. Generally an activity would include an act done, a work done, a deed done, an operation carried out, execution of an act, provision of a facility etc. **Consideration’ has not been defined in the Act. ”As per Explanation (a) to section 67 of the Act “consideration” includes any amount that is payable for the taxable services provided or to be provided.” (consideration may be monetary or non-monetary form) CA Lovekesh Sethi

9. Place of Provision of Services Rules, 2012 • These rules specifies the manner to determine the taxing jurisdiction for a service. The task of identifying the taxing jurisdiction was largely limited in the context of import or export of services. • These will determine the place where a service shall be deemed to be provided, in terms of section 66C of the Finance Act, 2012. • Thus, the taxability of a service will be determined based on the “place of its provision”. • The ‘Place of Provision of Services Rules, 2012’ will replace the ‘Export of Services, Rules, 2005’ and ‘Taxation of Services (Provided from outside India and received in India) Rules, 2006. Continued… CA Lovekesh Sethi

10. Where the Service is provided? • The new charging section says that the services provided outside taxable territory will not be chargeable to tax in India unless otherwise provided. • Now, where the services are actually provided is the key determinant of the taxability of a service. There may be cases where the provision of service may be deemed at the place of service provider as well as at the place of service recipient. • In order to meet these ambiguities and to determine the place of providing the service, the Place of Provision of Services Rules, 2012 have been proposed. Continued.. CA Lovekesh Sethi

11. Intermediary services and Place of provision of services Rules, 2012:- • Rule 9 provides that the place of providing of service will be deemed as location of service provider in case of services specified under this rule. This rule reads as follows:- • “Place of provision of specified services.-  The place of provision of following services shall be the location of the service provider:- a) Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders; b) Telecommunication services provided to subscribers; c) Online information and database access or retrieval services; d) Intermediary services; e) Service consisting of hiring of means of transport, upto a period of one month. CA Lovekesh Sethi

12. Definition of Service (list of declared services) • As per clause (44) of Section 65B of the Act it has also been stated that service includes a declared service. The phrase ‘declared service’ is also defined in the said section as an activity carried out by a person for another for consideration and specified in section 66E of the Act. • Section 66E specifies following services:- • Renting of immovable property; • 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 certificate of completion by a competent authority. • Temporary transfer or permitting the use or enjoyment of any intellectual property right; Continued… CA Lovekesh Sethi

13. Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software; • Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act; • Transfer of goods by way of hiring, leasing, licensing or 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 instalments; • Service portion in execution of a works contract; • 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 part of the activity. The above activities when carried out by a person for another for consideration would amount to provision of service. CA Lovekesh Sethi

14. Exemptions from service tax (list of exempted services) • In present system there are 88 exemption notifications. Some existing exemptions have been built into the negative list, others, wherever necessary, have been retained as exemptions. In addition some new exemptions are also proposed to be introduced. • For ease of reference and simplicity most of the exemptions are now a part of one single Mega Exemption Notification 25/2012-ST dated 20june, 2012. (Exemptions under Mega Notification or Services under the negative list having is also enclosed herewith) CA Lovekesh Sethi

15. Valuation • There has been no fundamental change in the manner of valuation of service for the purpose of payment of service tax. The broad scheme remains the same barring some marginal changes carried out to align the scheme of valuation of taxable services and the Service Tax (Determination of Value) Rules, 2006 with the new system of taxation. Broadly these changes in the Valuation Rules are as follows:- • As compared to the existing two schemes for valuation of works contract services – • one under the rule 2A of the Valuation Rules and second under the Works Contract (Composition Scheme for Payment of Service Tax) Rules 2007 has been replaced with a unified scheme under the new rule 2A of Service Tax (Determination of Value) Rules, 2006. Continued… CA Lovekesh Sethi

16. A new Rule 2C has been inserted for determining the value of service involved in supply of food or any other article of human consumption or any drinks in a restaurant or as outdoor catering. The existing scheme of determination of value of such services through prescribed abatements in various exemption notifications has been done away with. • There are certain changes in rule 6 of the Service Tax (Determination of Value) Rules, 2006. • All notifications that prescribed the abatements for working out the taxable value from the gross amount charged have been merged into one single exemption notification i.e., notification no. 26/2012- ST dated 20june, 2012. CA Lovekesh Sethi

17. Conclusion • To Conclude our country is about to embrace the new system of taxation of services by way of the introduction of negative list. These changes ushered as a part of budget 2012 mark a paradigm shift in the taxation of services. • Besides providing for the comprehensive taxation of the entire service sector the new changes will help to mitigate litigation and prepare both the department as well as the taxpayers for the eventful transition towards the goods and services tax (GST). CA Lovekesh Sethi