Pluses in the negative list

Negative list of services, which existed as a mere concept until sometime ago, is finally seeing the light of day. Budget 2012 has proposed a paradigm shift in the way services are to be taxed in India. Currently, service tax is levied only on a positive list of services, which are specified in the service tax legislation. However, if the budget proposals are accepted then all kinds of activities, except those in the negative list, would become taxable.

Definition of ‘service'

But what exactly is ‘service'?. The Finance Bill broadly defines service as any activity carried out by one person for another for consideration, but does not include sale of goods or immovable property, transaction in money or actionable claim, service provided by employee to employer in course of employment and fee taken by court or tribunal.

Accordingly, all services that were not taxable earlier have now been brought within the purview of service tax. For example, if you provide translation services for a consideration, it would now attract service tax. Similarly, if you are an actor, magician or a non-classical musician, your services would attract service tax.

The definition of service also includes certain declared services. Although most of the declared services are taxable under the present positive-list regime, they have been so declared in order to remove ambiguity and ensure uniform application of law all over the country.

Some important declared services include renting of immovable property, customisation and upgradation of information technology software, and agreeing to refrain from an act or tolerating an act.

With all services, except those in the negative list, attracting service tax, the list itself assumes great importance. The negative list has been drafted after ensuring that certain services that assume social, economic and political relevance remain outside the ambit of service tax. Services provided by the Government and RBI, agricultural services, educational services, transportation of passengers in stage carriage and railways (other than first class or air-conditioned coach), and other essential services such as funeral, burial and crematorium services, have been included in the negative list.

Bundled services

An interesting aspect of the negative list is the bundled services. What is the taxability of bundled services wherein some services are in the negative list while others are not? The Finance Bill states that where different services are naturally bundled in the ordinary course of business, the bundle shall be treated as provision of a single service that gives the bundle its essential character. In other cases, the bundle shall be treated as provision of a single service that results in highest liability of service tax.

There is no doubt that taxation of services under the existing positive-list regime has made the law lengthy and litigious. The option of including additional items in the positive list makes the tax structure even more complex. Therefore, the shift to taxation of services based on negative list is certainly a positive development.

However, the new regime still fails to address the issue of double taxation, where State taxes are also liable on some of the transactions. The inclusion of ‘temporary transfer or permitting the use or enjoyment of any intellectual property right' within the definition of declared services could result in double taxation, as several VAT legislations treat the same as ‘goods' subject to VAT.

Similarly, providing licence to use software may continue to suffer both service tax and VAT. Further, with an involved definition of services including declared services, a long negative list and mega exemption list, it must be ensured that the new tax regime does not result in another complex tax structure that is difficult to interpret and implement.

(The author is Tax Partner, Ernst & Young.)

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