Clearing the negative air

The introduction of the GST regime has been one of the biggest non-starters in the area of tax reform — which would explain the cynicism trade and industry attaches to any discussion on GST. It is in this light that the recent announcement of a negative list in service taxation from July 1 should be considered. It appears that the Central Government, which has the prerogative in taxation of services, is sending out a clear message that the GST regime is on its way, albeit delayed, and the negative list is meant to facilitate the transition to the GST regime.

While the negative list is a welcome step, there could be quite a few challenges that trade and industry may have to face .

The negative list is proposed to be introduced with an exemption list — which suggests that there could be several services that are not covered by the negative list and, yet, are exempted. Such a provision may negate the fundamental proposition that all services that are not mentioned in the negative list would be taxable.

The mention of certain services as “declared services” also gives rise to a specifically enumerated list of services which would be taxable under the NL. The stated intention of specifying certain services as “declared services” is “to remove any ambiguity”. This could mean that whenever there is any ambiguity on the taxability of any service in future, such services can be added to the existing nine activities mentioned in Section 66E.

While some of the exclusions in the NL signify a continuation of the earlier service tax regime, some of the new exclusions such as the exemption given to mutual fund agents, distributors of mobile sim cards and so on are bound to result in a similar demand from insurance agents and other commission agents, who remain taxable.

The valuation rules that would operate in the negative list were recently notified, and it is seen that several provisions have been retained from the earlier regime. Some of the contentious provisions, such as those relating to pure agents — which may not have much use in the new regime — have been retained.

While the rules with respect to valuation of the service component of works contracts have been revamped, new rules concerning the valuation of the service component of catering contracts have been introduced.

There are also some interesting changes, such as the mandatory inclusion of demurrage in the taxable value despite the fact that charges in the nature of demurrage are normally punitive and do not represent any underlying services.

The CENVAT Credit Rules, which govern the credit mechanism for excise and service tax, will also need to change in order to operate in tandem with the negative list. The CCR requires linkages between the input and output services (for instance, telecom services would have a direct nexus with the output services of a call centre). It will now be difficult to satisfy this condition in the absence of specifically described output services, which is one of the hallmarks of the negative list.

The CCR also prohibits credit on some defined services, and it remains to be seen whether these restrictions would continue in the negative list. The nature of the services provided can also be gauged at present by referring to the taxable category under which the service provider is registered.

This would not be possible under the negative list, and hence, service recipients may be required to furnish copies of their contracts/ work orders to tax authorities to explain the nature of services received by them and their credit eligibility

A smooth and well-defined transition to the negative list regime would help reassure trade and industry that migration to the GST system would be painless, and enable tax policymakers to garner more support for the GST regime.

M.S. Mani is a Senior Director, Deloitte Touche Tohmatsu India Pvt Ltd.

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