Negative list in focus

The indirect tax proposals announced in the Budget are on expected lines. The thrust of these changes is to generate more tax revenues and take the indirect tax legislation closer to the GST regime. The most significant change is the increase in the excise duty and service tax rate from 10 per cent to 12 per cent. The peak customs duty rate for non-agricultural products remained unchanged. While generating more tax revenues for the Government, this measure is likely to increase the cost of most goods and services for the common man. Most of the remaining changes in the indirect tax regime relate to service tax, as discussed subsequently.

NEGATIVE LIST APPROACH

The most important change under service tax is the proposed introduction of the negative list for taxation of services. The negative list approach would be a paradigm shift in the manner the services are taxed. Presently, service tax is levied on a list of approximately 120 services. As a result, all services provided in India will become taxable, barring a short list of 17 services which will be kept out of the service tax net. The key services which have been proposed to be kept out of the service tax net are government services besides those which compete with the private sector, pre-school and school education, recognised education at higher levels and approved vocational education, renting of residential dwellings, entertainment and amusement services etc.

While the introduction of the negative list approach was expected, it entails sweeping changes to the service tax legislation. As a result, every service provider will be required to have a relook at its business, to determine aspects like point of taxation, availability of CENVAT credit, determination of place of supply vis-à-vis export or import of service etc. The Budget also proposed various measures which may bring happiness to assessees.

SIMPLIFIED REGISTRATION

As part of an effort to harmonise Central Excise and Service Tax, a common simplified registration form and common returns for Central Excise and Service Tax have been introduced. This is a welcome measure, even though the frequency of compliances of service tax assessees may increase from a six-monthly to a monthly basis. Refund of service tax has always been a subject matter of concern, both for the assessee and the department. In order to get rid of the cumbersome paper work and verification, this Budget has sought to replace the refund provision with a seemingly more simplified provision. However, a specific notification prescribing the detailed procedure and safeguards in this regard would be issued shortly. One will need to wait and watch if this will actually simplify grant of refund to service exporters.

The Point of Taxation Rules, which were introduced in 2011, had various ambiguities and issues on practical implementation. Certain amendments have been made in these rules to provide greater clarity and remove the ambiguous provisions. Perhaps, one area where the industry has been left disappointed is widening of the definition of ‘input service'. There was strong expectation that the definition of ‘input service' would be given a broader coverage and made more liberal. Besides an amendment pertaining to services relating to motor vehicles, no further amendment has been proposed in this Budget on ‘input services'. A word of appreciation for the efforts of the Tax Research Unit is in order. They have come out with a detailed yet extremely simple note, to guide assessees on the sweeping changes sought to be introduced under service tax, like the negative list, place of supply rules etc.

(The authors are Tax Partner, and Associate Director, Ernst & Young, respectively.)

COMMENT NOW