Be positive

As the country gears up for the upcoming budget, India Inc is betting big on some concrete announcements on tax reforms such as GST and, in the interim, further fine-tuning of the existing regime. Introduction of negative-list based taxation of services along with rules to determine place of provision of service (PoPS) in 2012 was one of the key steps towards GST. While this was welcome, ambiguities still exist under negative-list based taxation.

The introduction of a specific definition of ‘service’ has eased out the manner of determining the ambit/intent of coverage of service tax.

However, there are a few issues that lack clarity, such as taxability of ‘liquidated damages’/ ‘penalties’ recovered under contractual arrangements, ‘activities’ undertaken by employers for its employees (provision of amenities such as food, cab), taxability of food and beverage supply by way of take away / off the counter / home delivery and so on.

These aspects must be addressed at the earliest in light of the true legislative intent of the term ‘service’, which would help ensure proper compliance in respect of such transactions by assessees.

Introduction of the concept of ‘intermediary’ under Rule 9 of PoPS has created certain anomalies. While the earlier ‘intermediary’ only applied to the person arranging or facilitating provision of service, the same has also been extended to supply of goods.

However, there has been a lack of clarity on persons arranging or facilitating the provision of composite activities such as works contracts, which involves both supply of goods and services.

Further, it is unclear as to what is the precise extent of activities that are covered as ‘arranging’ or ‘facilitating’ a provision of service or supply of goods.

On activities covered under Rule 4, which determines place of provision in relation to services requiring the physical presence of a goods or service recipient for provision of such services, there is ambiguity over the activities covered. Appropriate clarifications may be issued to link the physical presence of a goods or service receiver with performance criteria in order to bring about the true coverage of this provision.

Rule 14 says that when any service qualifies under more than one rule, the rule that occurs later will be applicable. In case of performance-based services under Rule 4 — when services are performed outside India or services relating to immovable property under Rule 5 are provided in relation to immovable property outside India —, the place of provision would be outside of India, irrespective of the fact that both the provider and recipient of the service are located in India.

However, the subsequent Rule 8 provides that where both service provider and recipient are located in taxable territory, the place of provision shall be the location of the recipient. In such a case, the authorities could always argue that Rule 8 predominates over Rule 4 or Rule 5.

This principle defies logic in classifying the services and merely makes these rules location-centric rather than consumption-centric.

What assessees are expecting is absolute clarity on tax treatments so that they can abide by legislative provisions in a diligent manner rather than grappling with legal battles with tax authorities.

While one hopes for wishful announcements on ‘tax reforms’, an immediate and substantive resolution of any unwarranted alternate interpretations to ensure proper adherence to existing provisions is also expected.

The writers are with Grant Thornton India LLP

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