Negative list and its implications

From the time service tax levy was introduced, the Government has been trying to increase its revenue by bringing more services within the tax net. Currently, tax is attracted on specified categories of services. The Government is now working on a negative list approach that will result in expanding the base to all but a few services in the negative list.

The concept paper issued in this regard gives one a flavour of the proposed changes. The resulting approach will be to tax anything that does not constitute supply of goods, money or immovable property.

What constitutes a taxable service has long been the subject of debate. The view expressed by the Gujarat High Court in the case of Cinemax India Ltd was that any activity that adds value comes within the meaning of service (tax).

Further, in the case of Tamil Nadu Kalyana Mandapam Association, the Supreme Court held that levy of tax on a particular kind of service would not be struck down on the ground that it does not conform to common understanding of the word ‘service', so long as it does not transgress any specific restriction contained in the constitution.

Definition of ‘taxable person'

Drawing a corollary, the concept of negative list-based taxation envisages taxing of the whole, unless something is specifically excluded, such that it does not infringe upon either the powers to tax of another legislature in a specific area or taxes areas already subjected to tax, such as goods.

The revised concept paper proposes a charging section and definition of taxable person for levy of service tax. The impact of this proposal will be to confine taxation to transaction in services carried out with another person by a person engaged in economic activity on his own account.

Economic activities are such activities as are carried out for consideration, whether or not the consideration is adequate or provided by the recipient of the service, or leads to profit at the end of a period. The taxable activities will thus exclude transactions carried out free of charge.

Clear legislation needed

Exemptions that are operational in the current service tax regime have not been discussed in the concept paper. Some of these may be retained by the Government in public interest and some others may be withdrawn as not necessary, either being covered by the negative list or not warranted any more in the light of widening of tax.

Service tax has been plagued with complexities and avoidable litigation. At the time of introduction of taxation of services based on a new approach it is crucial to have a concrete and clear legislation that will provide for rules determining place of taxation or supply of a service.

As with every change of this magnitude, there will be uncertainties and opportunities that an assessee will be faced with.

The stage is set for preparing to meet these challenges while welcoming the initiative that is being taken with a view to minimise the impact of changes that will be faced in the much awaited Goods and Services Tax regime.

( The author is Senior Director, Deloitte in India. The views are personal. )

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