Introduction - Taxation of Services an Education Guide by CBEC - Service Tax

1. Introduction 1.1 Background The journey of taxation of services began by selective taxation of just three services on July 1, 1994. The first year collections now appear a very modest at Rs 407 crore. After appearing largely as just-another-tax for the first 8 years, with collections touching Rs. 3,302 crore in 2001 -02, service tax took some giant leaps in the next 7 years, both on the back of wider coverage as well as increase in tax rate, reaching Rs. 60,941 crore in 2008-09. Next two years saw the growth somewhat moderating with collections reaching Rs. 70,896 crore in 2010-11. The buoyancy began once again on the back of some policy initiatives and Service Tax contributed Rs. 97, 444 crore during 2011-12, an increase of nearly 37% over the previous year. While the revenue expectations were often exceeded in all these years the administrative challenge began to assume unmanageable proportions. The newer additions to the list of services often raised issues of overlaps with the previously existing services, confounding both sides as to whether some activities were taxed for the first time or were already covered under an earlier, even if a little less specific head. There was also a near unanimity across a wide section of thinkers that potential of service tax remained huge and largely untapped. Part of the problem identified was the lack of comprehensive taxation of services, not so much in the lack of coverage but more on account of lack of clarity and significant gaps in existing definitions, exposing the tax collection process to avoidable leakages and litigation. Budget 2012 has ushered a new system of taxation of services; popularly known as Negative List. The new changes are a paradigm shift from the existing system where only services of specified descriptions are subjected to tax. In the new system all services, except those specified in the negative list, will be subject to taxation. For those who like to use modern-day terminology one could call it taxation of service version 2.0. 1.2 What is the aim of this Guide? This guide is aimed at educating the tax payers and the tax administrators on various aspects of the new concept in order to assist them in gaining better understanding about the new system of taxation. It is clarified at the outset that this guide is merely an educational aid based on a broad understanding of a team of officers of the issues. It is neither a Departmental Circular nor a manual of instructions issued by the Central Board of Excise and Customs. To that extent it does not command the required legal backing to be binding on either side in any manner. The guide is being released purely as a measure of facilitation so that all stakeholders obtain some preliminary understanding of the new issues for smooth transition to the new regime. 1.3 What is the key to using this Guide? The guide consists of a number of Guidance Notes. Each of the notes deals with a specific topic relating to the negative list. The list of these educational notes is as follows- Guidance Note 1 Introduction Guidance Note 2 What is 'service'? Guidance Note 3 Taxability of a 'service' Guidance Note 4 Negative List Guidance Note 5 Place of Provision of Service Guidance Note 6 Declared Services Guidance Note 7 Exemptions Guidance Note 8 Valuation Guidance Note 9 Rules of Interpretation Guidance Note 10 Miscellaneous In addition, the Guide has the following three Exhibits: Exhibit A1 - List of services specified in the negative list Exhibit A2 - Place of Provision of Service Rules, 2012. Exhibit A3- List of exemptions in mega notification 1.4 What is the broad scheme of new taxation? The key features of the new system of taxation are as follows: At the outset 'service' has been defined in clause (44) of section65B of the Act. Section 66B specifies the charge of service tax which is essentially that service tax shall be levied on all services provided or agreed to be provided in a taxable territory, other than services specified in the negative list. The negative list of services is contained in section 66D of the Act. Since provision of service in the taxable territory is an important ingredient of taxability, section 66C empowers the Central Government to make rules for determination of place of provision of service. Under these provisions the Place of Provision of Services Rules, 2012 have been made. To remove some ambiguities certain activities have been specifically defined by description as services and are referred as Declared Services (listed in section 66E ). In addition to the services specified in the negative list, certain exemptions have been given. Most of the exemptions have been consolidated in a single mega exemption for ease of reference. Principles have been laid down in section 66F of the Act for interpretation wherever services have to be treated differentially for any reason and also for determining the taxability of bundled services. The system of valuation of services for levy of service tax and of availment and utilization of Cenvat credits essentially remains the same with only incidental changes required for the new system of taxation.