NEGATIVE LIST OF SERVICES.

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

                        Nearly 57% of India GDP comes from services.   After the inclusion of construction in service net the contribution from services will come to about 63%.  Service tax collection has been increased with the last two months after the introduction of Point of Taxation Rules, 2011.   At present 117 services were included in the service tax net.   More number of services that may be included in future.   Since service sector is widening increasing the services in service tax arena is not considered to be good.  In the Parliament, while presenting the Union Budget 2011 the Financial Minister expressed his opinion to have a small negative list so that many untapped sectors are brought into the service tax net.   Since it became imperative to initiate an informed public debate on widening the tax base the Government introduced a concept paper for public debate on taxation of services based on a negative list and sought to ascertain whether the negative list was the right approach to implement service tax.  The whole world implemented the negative list in service tax.

CONSIDERATIONS FOR NEGATIVE LIST:

                        The concept paper indicated that while drawing the negative list some of the considerations found relevant as follows:

• Administrative considerations like taxation of Government, difficult to tax sectors e.g., margin based financial services;
• Under contractual obligations like specified international bodies and diplomatic missions;
• Welfare considerations like welfare of vulnerable sections of society, essential education, public health, public transport, services by non profit entities, religious services, promotion of art, culture and sports;
• Economic considerations like transport of export goods, services meant for agriculture, animal husbandry and infrastructure development;
• Explicit activities in the nature of services, which are within the taxing powers of states – betting and lotteries, tolls.

SECTORS IDENTIFIED FOR NEGATIVE LIST:

Negative list of services implies two things: one a list of services which will not be subject to service tax and the other is 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’. Nine sectors are identified for negative list in each sector negative lists are identified in the concept paper.  The following are the nine sectors:

• Services rendered by specified persons;
• Services rendered by Social welfare and public utilities;
• Services rendered by Agriculture & animal husbandry;
• Services rendered by Financial Sector;
• Services rendered by Transport;
• Services rendered by Construction and real estate;
• Services rendered by Education sector;
• Services rendered by Health Sector;
• Services rendered by others.

NEGATIVE LIST

The negative list in each sector is given below:

By Specified Persons:

• Notified services provided by Government and Judiciary, RBI and government regulatory bodies;
• Services provided by individuals to Government in relation to their representation on any council, commission or similar body set up by the Government;
• Service by UN, International bodies, diplomatic missions under diplomatic and consular arrangements as per laid down conditions.

Social Welfare and Public utilities:

• Services provided by organizations registered as non profit entities in matters relating to public and social welfare activities –excluding education and health and including charitable fund raising events, sponsorships to charitable events and voluntary donations to charity;
• Funeral, burial, crematorium and mortuary services.

Agriculture & Animal Husbandry:

                        Services directly used for growing cultivation, harvesting of the agricultural produce, horticulture, animal husbandry, forestry, dairy, poultry farming and pisiculture (including renting of vacant land exclusively or predominantly for any such purpose).

Financial Sector:

• Sale, purchase or acquisition of securities and debts on principal-to-principal basis;
• Interest;
• Dividend on investments;
• Inter-bank sale and purchase of foreign currency;

Transport:

• Transport of passengers by-

a)      Public transport buses on point-to-point basis (except tourist buses) and stage carriage basis;

b)      Public transport in ship or vessel of less than 15 net tonnage on a point-to-point basis;

c)      By metered taxis or three wheeler auto rickshaw plying within the precincts of a city;

• Transport of goods to a destination outside India by any means of transport;
• Supply of goods carriage to a person engaged in the business of transportation of goods;

Construction & Real Estate:

• Construction, works-contract, repair, alteration, renovation or restoration of-

a)      Roads, airports, railways, transport terminals, bridges, tunnels, dams, canals, irrigation and flood control waterworks including watershed development and water-bodies, water treatment plants and water supply pipelines;

b)      Buildings owned by Government, other than meant predominantly for industrial or commercial use, including government hospitals and educational institutions;

c)      Residential building comprising a single dwelling unit;

d)      Homeless shelter, orphanage, old-age home, rehabilitation & de-addiction centre, child day care home or place of worship.

• Renting of personal dwelling for residential use of a person below a threshold (to be finalized after debate) and when used otherwise as a hotel, inn, guest house, club or campsite or similar accommodation.

Education:

                        Pre school, school and recognized education and vocational training recognized by NCVT except as capitation fee, donations or similar charges in relation to admission.

Health:

                        There are two options under this sector.   Under option 1 the services provided by a clinical establishment with a turnover below Rs. 4 crore in the previous year are covered.   Under Option 2 the hospital, medical care, diagnostic, para medical services except in relation to preventive health check-up within the precincts of a clinical establishment, cosmetic or plastic surgery are covered.

Others:

• Copy right services of original literary, dramatic, musical and artistic works;
• Services provided by independent journalists, PTI & UNI for providing news;
• Services provided by sportspersons, as a player, coach or referee/umpire and performing artists in that capacity (excluding as brand ambassadors);
• Religious services provided by any person;
• Services provided by a political party recognized by Election Commission of India;
• Services provided by a trade union to its members;
• Representational services provided by an advocate to individuals;
• National or international prize/award in recognition of achievement in the field of art, literature, science, sport, economics or public life;
• Tolls except services in relation to collection of tolls;
• Betting and gambling except services in relation to promoting, marketing or organizing games of chance including lottery services.

POINTS FOR NEGATIVE LIST:

                        The concept paper put forth the following points favorable to implement the negative list:

• Service tax has now gained considerable maturity and many practitioners of the subject believe that incremental approach to taxation is not suitable for providing a stable system for taxation of services;
• The positive list has the advantage of definitiveness, which is an essential pre-requisite for a good taxation law.   However this very advantage starts getting eroded as the number of services increase.   The possibilities of overlaps among definitions lead to innumerable administrative issues resulting in litigation and higher compliance costs;
• Some of the definitions in positive approach could be so wide that they lead to unintended taxation requiring either clarifications or exemptions.

PROPOSED DEFINITION OF ‘SERVICE’:

                        Para 5.2 of the concept paper gives the proposed definition of ‘service’ which means anything which does not constitute supply of goods, money or immoveable property-

and includes-

1. Right to use an immoveable property;
2. 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;
3. Temporary transfer or permitting the use or enjoyment of any intellectual property right;
4. Obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;
5. Service in relation to lease or hire of goods; and
6. Right to enter any premises

But excludes a supply-

1. By an employee to an employer in the course of or in relation to the employment of the person;
2. By a constitutional authority under the Indian Constitution or a member of an Indian legislature or a local self-government in that capacity;
3. That amounts to manufacture of excisable goods or is chargeable as part of the value of goods to a duty in terms of the provisions of Central Excise Act, 1944.

QUESTIONS FOR STAKEHOLDERS:

                  The concept paper framed the following questions for discussion and for suggestions:

• Negative Vs. positive list- should the country adopt a negative list?  What will be the proper timing: at the time of GST or even earlier?
• How to define ‘service’ for the purpose of taxation?
• What are the services which should be placed in the negative list?
• How comprehensive the coverage should be while drawing the negative list? What should therefore be the policy on taxation of important sectors e.g., education, health, public services, charitable and NGOs, infrastructure etc.,?
• What are the likely revenue implications?

An overwhelming majority in industry are in favor of negative list approach to service taxation.   But Confederation of Indian Industry wants this concept to be introduced only with the proposal of dual goods and service tax (GST) system.   The GST is likely to be introduced with effect from 01.04.2012.  Considering the suggestions and formulating the negative list will take for the Government atleast 2 months.   Therefore it may be implemented along with the GST system.

                        The proposed definition of ‘service’ has inclusive and exclusive clause which are exhaustive.   Such a definition will not be helpful.   Since a negative list is there the definition of service excludes only the negative list of services.   Further the definition should be on ‘supply of services’.   The definition should be properly done so that there will no cause for interpretation of the definition.

                        The revenue to the exchequer is expected to grow by 20 – 25% on the implementation of negative list.   The output service provider and the manufacturer of final products could able to avail and utilize more credit on service tax paid on various input services.  But the overall burden will fall on the consumers.   Now a days the services takes the vital part in the human life than goods.   More services are availed by people.  Increase of cost for availing services by the people is inevitable.