Flip-flops in services tax negative list

Maimonides, the Jewish philosopher, is quoted to have said “The risk of a wrong decision is preferable to the terror of indecision”. Framers of service tax law in India could do well to keep this quote in mind while framing the law and rolling out myriad notifications. The years 1994 and 2012 will go down as watershed years in service tax law — the former for introducing the law and the latter for revamping it with the negative list.

While there was sufficient debate and discussion prior to the arangetram of the negative list to assume that it was cast in stone and would not be tampered with too much, subsequent developments seem to indicate that the law-makers can’t get over their itch to announce notifications almost every alternate day.

Transport by rail

The intention of the law-makers to levy a service tax on transport of goods by rail in the pre-negative list era has been unclear and indecisive. The levy was first announced and then postponed ad infinitum till the negative list took over.

The negative list included in its scope transport of nine items by rail — petroleum and petroleum products, relief materials meant for victims of natural or man-made disasters, calamities, accidents or mishap, defence or military equipment, postal mail, mail bags or household effects, newspaper or magazines registered with Registrar of Newspapers, railway equipment or materials, agricultural produce, foodstuff including flours, tea, coffee, jaggery, sugar, milk products, salt and edible oil, excluding alcoholic beverages and chemical fertiliser and oilcakes.

By logical conclusion, it was deduced that transport of passengers by rail would attract service tax, though it was quickly clarified that the tax would apply only to transport of passengers in air-conditioned carriages.

Metro transport was not considered as a taxable service. On July 2, 2012, the Government did a flip-flop on the negative list by excluding transport of passengers in first-class and air-conditioned carriages and transport of goods by rail from service tax up to and including September 30, 2012.

While the intention behind this relaxation will remain unstated, it certainly does not convey a sense of stability in the negative list. The law-makers seem to be repeating the same mistake of picking and choosing services for exemption rather than looking at the substance of the law. If the intention is to exempt all transport by rail, there should be an inclusion in the negative list. If the intention is to tax these services, one does not have to wait till October 1.

The argument that the law requires time to be accepted would not hold water, as not everyone is going to stop rail travel, post-September. The nation has accepted service tax as inevitable and an increase in rail fares would be accepted, albeit a trifle unhappily.

Employer-employee nexus

In the negative list era, a whole bunch of services previously not covered would come under the levy. While the services provided by an employee to an employer is thankfully not taxable due to a specific exclusivity provided in the definition of service, there could be services provided by others that would not meet the employer-employee nexus — independent directors being a case in point.

A draft circular is doing the rounds clarifying a host of issues concerning employers and employees. It clarifies that when a director receives payment in his personal capacity, the same is liable to be taxed in the hands of the director. However, where the fee is charged by the entity appointing the director and is paid to such entity, the services shall be deemed to be supplied by such an entity and not by the individual director.

Thus, in the case of Government nominees, the services shall be deemed to be provided by the Government and liable to be taxed under the exclusion sub- (iv) of clause (a) of Section 66D of the Finance Act, 1994, that is, support services by Government to business.

Such services are liable to be taxed on reverse charge basis. Reimbursements made by an employer to an employee would be exempt. The circular clarifies that secondment of staff between companies would constitute manpower supply service, subject to the over-arching principle that there has to be a consideration received. The draft circular also explains that supplies made by employers to employees would be taxed, provided they are not in the negative list. Deductions from salary and salary foregone would also be considered to be consideration received.

The circular states that facilities such as crèche, gymnasium or a health club, which all employees may use without any charge or reduction from the salary, will be outside the tax net.

There are bound to be a few circulars that clarify components in the negative list. While these are welcome, the list per se should remain sacrosanct. One of the key ingredients of a negative list of services stability should not be vitiated at inception.

(The author is a Bangalore-based chartered accountant.)

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