SERVICES UNDER GST REGIME (PART-I)

[Dr. Sanjiv Agarwal]

Services contribute over 57 percent to Indian economy (GDP) which is the highest, followed by industry and agriculture. Services have been growing at the rate of 9-11 percent since last few years which is higher than the GDP growth itself which is growing @ 7-7.9 percent.

The tax on services was introduced in India in 1994 with 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

Presently, services are defined very comprehensively under section 65B(44) of the Finance Act, 1994. Accordingly, the term ‘Service’ has been defined in clause (44) of the new section 65B inserted by the Finance Act, 2012 as applicable w.e.f. 1.7.2012 and means –

• any activity
• for consideration
• carried out by a person for another
• and includes a declared service.

The said definition further provides for certain exclusions.

What is Service

The scope of 'service' in GST regime is going to be very wide as it has been defined as 'anything other than goods is service'. Thus, 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 whole of India and SGST law would apply to 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 cover 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

Presently in Service Tax, there is a threshold exemption of ₹ 10 lakhs based on the aggregate turnover limit of ₹ 10 lakh and no Service Tax is payable in such cases. In the GST regime, the limit of threshold exemption will be enhanced to ₹ 20 lakh on all India basis except in case of North-eastern and hilly States (total 11 States) where it will be ₹ 10 lakhs. 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 existing taxation of Service Tax, the services are taxed at the rate of 14% alongwith 0.50 % each for Swatch Bharat and Krishi Kalyan Cess (KKC), making it a total of 15%.

In 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. Resultant, services will become costlier and all the continuing / ongoing contracts will have to suffer the increased rate in respect of work completed after effective date making B2B and B2C services costlier.

In GST regime, rate of GST on services could be 18 percent which will enhance the tax rate across the board by 3 percent and is considered a steep increase of 20 percent from present tax rate of 15 percent. This additional 3 percent 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 percent or lower rate.

Relief from Double Taxation- Sale v. 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 VAT /CST Department and dealers who are paying VAT /CST get notices from service tax Department in 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.

Presently such services are largely covered under section 66E as declared services. In 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 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 rupees 10 lakhs in North-East States including Sikkim and hilly area and rupees 20 lakhs for other States. Therefore, threshold limits of aggregate turnover of rupees 20/10 lakhs 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 rupees 20/10 lakhs but less than rupees 50 lakhs in a financial year. However, composition scheme is not available to supply of services.

(To be continued.....)

Discussions to this article

[Ganeshan Kalyani]

Very informative article. Enriched my knowledge. Thanks.