TAXATION OF SERVICES BASED ON A NEGATIVE LIST OF SERVICES CONCEPT PAPER FOR PUBLIC DEBATE

In the Union Budget for 2011, the Finance Minister has promised that taxation of service will be made based on a small negative list of services. Thus the Govt has not come out with a Concept Paper for debate on the Negative List of taxation.

The negative list implies two things - (1) list of services which will not be subject to Service Tax and (2) All other services will be taxable.

Presently only those services are specifically mentioned as taxable are taxed and all other services are exempted. It is also called 'taxation by way of positive list'.

The proposed negative list contains 27 services.

The Five Questions

By this concept paper, Government  put forth 5 questions for public debate:

1. Should the country adopt a negative list? if so, what will be the proper timing - at the time of GST or earlier?
2. How to define 'Service' for the purpose of taxation?
3. What are the services to be placed in the negative list?
4. How comprehensive the negative list should be? What should be the treatment of important sectors like education, health care, Public services, Charitable & NGO, Infrastructure etc?
5. What are the likely revenue implications?

The positive list has the advantage of definitive-ness as the  number of services increases, this advantage will get reduced. More number of services in the list may lead to overlapping as well as unintended taxation, which will lead to unending litigation and compliance costs.

On the other hand, the negative list may keep some services outside the tax net leading to unintended exemptions, which will in turn lead to breakage of input tax chain, implying higher cost to tax payers and end users. Once the chain is broken, the tax credit before the broken link will not be available to the subsequent stages, whereby costs will be increased to that extent.

Moreover, reversal of cenvat credit on untaxed  supplies will add to confusion and complexity in the tax administration system. Such exclusions will distort the economic neutrality across same/similar services, or discourage outsourcing by incentivizing self-supplies. 

But the positive list has an advantage that it is already got an awareness and stability in the tax administration. 

Definition of Service

The definition put forth for public debate is an exhaustive as well as inclusive one. The Concept Paper defines service as:

“service” means anything which does not constitute supply of goods, money or immovable property- and includes-

A. right to use an immovable property;

B. 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;

C. temporary transfer or permitting the use or enjoyment of any intellectual property right;

D. obligation to refrain from an act, or to tolerate an act or a situation, or to do an act;

E. service in relation to lease or hire of goods; and

F. right to enter any premises-

 but excludes a supply-

A. by an employee to an employer in the course of or in relation to the employment of the person;

B. by a constitutional authority under the Indian Constitution or a member of an Indian legislature or a local self-government in that capacity;

C. 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;

The key words are "goods, money or immovable property". Any supply other than these three are covered under the term 'Service'.

Out of these, 'Goods' is defined under Sales of Goods Act, 'Immovable Property' is defined under General Clauses Act. “Money” is meant to capture transactions where Indian legal tender is exchanged from one form to another.

However, in the case of composite transactions like Works Contracts, Catering, hire purchase etc, the service part will be taxed.

Negative List

The Negative list is prepared based on certain considerations:

•  Administrative Considerations : like taxation of Government, sectors difficult to tax
• Under Contractual Obligations: like specified international bodies and diplomatic missions
• Welfare considerations:  vulnerable sections of the society, public health, basic education, public transport etc.
• Economic Considerations: transport for export of goods, agriculture, 
• Activities which are within the powers of the state: Betting, Gambling, Lottery etc.

Some of the thoughts of the Government are like follows:

1. There may be taxes on services provided by Government agencies exclusively. But in areas where private sector is competing with public sector, any exemption to Government will amount to discrimination and economic distortion.
2. Even though sale and purchase of shares and other securities on a principal to principal basis will be exempted, all services in connection therewith  like share broker service will be taxable.
3. Renting of personal dwelling will be exempted. But any such service in excess of a comparatively high threshold will be brought into tax net to bring in the opulent living into the tax net.
4. Regarding health services, the thinking is all basic and primary health care should be kept out the tax net. However, high end medical services by private enterprises will be taxed. Another though is to fix a reasonably high threshold and tax so that large entities and people with health insurance cover or other affluent sections of the society only will be taxed.
5. Similar arguments are there in respect of education also.

Revenue Impact

Presently 57% of the GDP is from Services. If we include construction also, it will increase to 63% which is equivalent to Rs. 50 Lakh Crores. However we do not have statistical data on the contribution of different service sectors  into the GDP. 

The Government estimates that, considering the negative list of exclusions and the informal sector comprising of around 60% of the total service sector, the potential for effective taxation of services may be confined to about 20-25% of the service sector contribution. This is still a sizable number and will add significant numbers to the revenue though may not sound astounding as some sections believe it to be.

The Negative List of Services

Given below is the proposed negative list of services:

Sector	S. No.	Negative List	Remarks
1. By specified persons	1.	Notified services provided by: a. Government* and Judiciary; b. RBI; and c. government regulatory bodies	List of these services or the principle for exclusions will be worked out based on the outcome of the debate
	2.	Services provided by inpiduals to Government in relation to their representation on any council, commission or similar body set up by the Government
	3.	Service by UN, international bodies, diplomatic missions under diplomatic and consular arrangements as per laid down conditions (details to be specified)	Services provided to such entities to remain exempt as at present.
2. Social welfare and public utilities	4.	Services provided by organizations registered as non-profit entities in matters relating to public and social welfare activities-excluding education and health (covered separately)-including charitable fund-raising events, sponsorships to charitable events and voluntary donations to charity	Public and social welfare activities will be suitably defined and may be restricted to specified fields only
	5.	Funeral, burial, crematorium and mortuary services
3.Agriculture & animal husbandry	6.	Services directly used for growing, cultivation, harvesting of the agricultural produce, horticulture , animal husbandry, forestry, dairy, poultry farming and pisciculture (including renting of vacant land exclusively or predominantly for any such purpose)	Certain support services in relation to agriculture and allied activities may be separately exempted
4. Financial Sector	7.	Sale, purchase or acquisition of securities and debts on principal-to-principal basis	Acquisition of shares in lieu of services will be liable to tax
	8.	Interest
	9.	pidend on investments
	10	Inter-bank sale and purchase of foreign currency
5.Transport	11	Transport of passengers by: a) public transport buses on a 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; d) by metered taxis or three-wheeler auto rickshaw plying within the precincts of a city
	12	Transport of goods to a destination outside India by any means of transport
	13	Supply of goods carriage to a person engaged in the business of transportation of goods
6. Construc-tion & Real Estate	14	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 of a single dwelling unit; d) homeless shelter, orphanage, old-age home, rehabilitation & de-addiction centre, child day-care home or place of worship
	15	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
7. Education	16	Pre-school, school and recognized education** and vocational training recognized by NCVT except as capitation fee, donations or similar charges in relation to admission
8. Health	17	Option 1: Services provided by a clinical establishment with a turnover below Rs. 4 crore in the previous year Option 2: 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	Services to specified sections and by public hospitals may be exempted under option 1.
9. Others	18	Copyright services of original literary, dramatic, musical and artistic works
	19	Services provided by independent journalists, PTI & UNI for providing news
	20	Services provided by sportspersons, as a player, coach or referee/umpire and performing artists in that capacity (excluding as brand ambassadors)
	21	Religious services provided by any person.
	22	Services provided by a political party recognized by Election Commission of India
	23	Services provided by a trade union to its members
	24	Representational services provided by an advocate to inpiduals
	25	National or international prize/award in recognition of achievement in the field of art, literature, science, sport, economics or public life
	26	Tolls except services in relation to collection of tolls
	27	Betting and gambling except services in relation to promoting, marketing or organizing games of chance, including lottery services

TO READ THE FULL TEXT OF THIS CONCEPT PAPER, CLICK THE FOLLOWING LINK:

http://jantonyca.blogspot.com/2011/08/taxation-of-services-based-on-negative.html