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Service tax and negative list

| Updated on: Apr 08, 2012
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The negative list approach is a right step towards GST and widening of the tax base.

As is well known by now, the Budget proposes to usher a paradigm shift in the manner services will be taxed in future — whereby all services will be taxed unless they are covered by any of the entries in the negative list or are otherwise exempted.

Further, in order to identify the taxing jurisdiction for services under the negative list of services, the Budget has also proposed to discard the existing rules for export and import of services with new Rules namely, the Place of Provision of Service Rules (“POS Rules”).

These changes would be effective shortly from such date as the Central Government would notify. It is worthwhile to highlight the key areas that the industry needs to be cognizant of while implementing the changes in the taxation of services.

STREAMS OF INCOME

One would need to relook at all streams of income to assess if it would be considered as an income from “service” and determine its taxability with reference to the services covered by the negative list or are exempt by way of a notification. For example, dividend income and gain from exchange fluctuations would not be income from “service”.

Further, interest on deposits, loans or advances being covered in the negative list, would not be subject to service tax.

Cross-border services

The POS rules to be implemented along with the negative list-based taxation of services will, prior to the introduction of GST, hold significance in cross-border service transactions.

The POS Rules, which are based on the principle of service tax being a consumption based tax, declare the place of receipt of services as the default place of provision with differential treatment for specified categories of services where such default rule is not applicable. In addition, the services have also been categorised based on place of event; place of immoveable property; location of performance, location of the service provider; transportation-based services, etc for the purpose of determining the place of supply of service. The key notable points are highlighted here.

Rule 7 , which deals with part performance of the services at different locations is an interesting and unusual at the same time.

It provides that where any service (for which the place of provision of service is to be determined based on place of event; location of the immoveable property; performance of the service) is provided at more than one location, including a location within India, its place of provision shall be the location in India where the greatest proportion of the service is provided.

Simply stated, this would mean that the place of provision of service (that are partly performed within and outside India), would not be considered as export as these would need to be wholly performed outside India to qualify for export.

However, a close reading of this Rule also suggests that the converse would not be true for import of services. Rule 9 provides that the place of provision of specified services such as Telecommunication, Online information and Database access services, etc. shall be based on the location of the service provider.

In the context of cross-border services, it appears that these services would not be taxable in India if provided by a service provider located outside India.

It may be noted that the location of the service provider in such cases would need to be determined as per the Rules based on the location of business establishment/ fixed establishment of the service provider being outside India.

Further, there also appears to be some degree of classification required while applying these rules to determine the place of services. Given these, there could be instances where services qualifying as export/import under the present rules may not qualify to be so going forward and vice-versa. Accordingly, one may need to examine the taxability of cross-border services.

The negative list basis of taxation is a right step to prepare for GST and widening of the tax base.

However, it may still be optimistic to consider that these changes will be free from doubt/interpretations, especially with respect to place of provision of services. So, it may really take a while before the law gets settled and simplified.

(The author is Executive Director, Tax & Regulatory Services, PwC India. With inputs from Keyur Shah, Senior Manager PwC India.)

Published on November 15, 2017

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