Indian Merchant’s Chambers
Negative List Based Taxation of Services (Declared List )
19 October 2012
Negative List Regime – A Primer
2
Rationale for Negative List

First Concept Paper for Public Debate (August 2011)


Revised Concept Paper on Taxation of Services based on Negative List (November 2011)


“There are advantages in moving towards negative list at an earlier time in order to gain useful
experience in its implementation and minimize the impact of the mammoth changes that GST may
usher”.
“Introduction of Negative List at an earlier stage will pave the way for the smooth transition to the
GST, and significantly ease the challenges arising out of implementing the GST.”
FM’s speech (2012):

“At the end of June this year, this tax will attain adulthood by completing 18 years. It is therefore
time to shift gears and accelerate ahead. However, service tax needs to confront two important
challenges to sustain the journey. These are:
a)
The share of services in taxes remains far below its potential. There is a need to widen the tax
base and strengthen its enforcement;
b)
Service Tax law is complex and sometimes avoidably different from Central Excise. We need to
bring the two as close as possible in the light of our eventual goal of transition to GST.”
Negative List Based Taxation of Services aims at:
Widening the tax base
Remove the avoidable
ambiguity (eg classification)
Stepping stone towards
introduction of GST
(CGST)
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Approach - Selective vs Negative
Selective Approach Taxing only Specified Services
Negative List Based Taxation Taxing all Services except few
All Services
Taxable
Service
Exempted
Service tax levied
only on 116
specified services
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Widening the tax base - Potential Revenue
60%
Covered under
Negative List/
Exemption
40%
Under Tax Net
60%
Under Tax Net
20%-25%
effective
40%
Informal Sector
(eg Below
Threshold limit)

Effective percentage of entire service sector that is covered under the tax net = 20-25% (First
Concept Paper)

Estimated net revenue gain consequent to changes in the Union Budget 2012-13, relating to
Indirect Taxes, estimated at Rs. 45,940 crores (Budget Speech 2012-13)

Service tax changes – Rs. 18,660 crores additional revenue
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Negative List Approach
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Charging Section
Under Section 66
Under Section 66B
“There shall be levied a tax (hereinafter
referred to as the service tax) at the rate of
twelve per cent. of the value of taxable
services referred to in sub-clauses of clause
(105) of section 65 and collected in such
manner as may be prescribed.”
“There shall be levied a tax (hereinafter
referred to as the service tax) at the rate of
twelve per cent. on the value of all services,
other than those services specified in the
negative list, provided or agreed to be
provided in the taxable territory by one
person to another and collected in such
manner as may be prescribed.”
Applicable up to: 30th June, 2012.
Notification
No.
22/2012-ST,
05.06.2012
Applicable from: 1st July, 2012.
Notification
No.
19/2012-ST,
05.06.2012
dated
dated
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Services – Now defined
Means

Any activity

Carried out by a
person for another

Includes

Declared
Services
Excludes

Transfer in title of goods or immovable property by
way of sale, gift or in any other manner;

Deemed Sale of Goods as per Article 366 (29A) of
the Constitution of India;

A transaction in money or actionable claim;

Any service provided by an employee to an
employer in the course of or in relation to his
employment;

Fees taken in any Court or a tribunal established
under any law for the time being in force
For a consideration
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Declared Services (#9)

‘Declared Service’ is defined in Section 65B (22)


Means any activity carried out by a person for another person for consideration and declared as
such under Section 66E
Section 66E – The following constitutes declared services
# Declared Services
# Declared Services
1 Renting of immovable property
2 Service portion in the execution of ‘Works
Contract’
3 Construction of a complex, building, civil 4 Transfer of goods by way of hiring, leasing,
structure or a part thereof, including a complex
licensing or in any such manner without
or building intended for sale to a buyer (subject
transfer of right to use such goods
to certain specified exceptions)
5 Temporary transfer or permitting the use or 6 Activities in relation to delivery of goods on
enjoyment of any IPR
hire purchase or any system of payment by
installments
7 Development,
design,
programming, 8 Service portion in an activity wherein goods,
customisation,
adaptation,
upgradation,
being food or any other article of human
enhancement, implementation of information
consumption
technology software
9 Agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act
Renting of Immovable Property

Section 65B(41) of the Act defines "renting" to mean allowing, permitting, or granting access,
entry, occupation, use or any such facility, wholly or partly, in an immovable property, with or
without the transfer of possession or control of the said immovable property and includes
letting, leasing, licensing or other similar arrangements in respect of immovable property,
Activities which are either exempted or prescribed in negative list

Renting of vacant land with or without structure incidental to its use, relating to agriculture/
agricultural produce

Access to road or a bridge on payment of toll charges

Renting of residential dwelling for use as residence

Renting of precincts of a religious place meant for general public or conduct of any religious
ceremony

Renting service provided to or by an educational institution in respect of education

Renting of hotels, inn, etc for residential use and having declared tariff of below Rs 1,000 per
day

Service by way of vehicle parking to general public excluding leasing of space to an entity for
providing such parking facility
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Renting of Immovable Property
Activities which were earlier litigious/ not taxed are now specifically included

Granting access, entry or occupation in respect of immovable property

Renting by theatre owner to the film distributor

Permitting use of immoveable property for placing vending/dispensing machines

Allowing erection of a telecommunication towers on a building for consideration

Renting of vacant land

Land used for sports, circus, and entertainment purpose.

Except where services are provided by a recognised sports body to another recognised sports body
Challenge to Constitutional validity in Home Solutions Retail (India) Limited of the Center’s
power to tax renting of immovable property is pending before the Supreme Court
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Construction of Complex

As per section 66E (b) of the Act, declared services includes construction of a complex,
building, civil structure or a part thereof, including a complex or building intended for sale to a
buyer, wholly or partly, except where the entire consideration is received after issuance of
completion-certificate by the competent authority.

Competent authority includes

Government of India, if any law requires such completion certificate; or

Architect,

Chartered Engineer,

Licensed surveyor

Construction includes addition, alternation, replacement or remodeling of existing civil structure

Earlier ‘construction of complex services’ excluded levy of service tax on

Complex having less than 12 dwelling units, [which is now taxable post 1.7.2012]

Complex whose layout need not be approved by an authority under any law for the time being in force
[now such exclusion is removed w.e.f. 1.7.2012]
Bombay High Court has upheld the Constitutional Validity of levying service tax on the
Construction of complex services - Maharashtra Chamber of Housing Industry (25 STR
35). The Special Leave Petition challenging the constitutional validity has been admitted
by Supreme Court (SLP (C) 9313/2012)
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Construction of Complex
Opportunities available to rationalise the tax cost

The said service continues to be taxed on 25% of the total consideration received

CENVAT credit, now allowed on capital goods and input service used in provision of services.


Developers are permitted to avail and utilised CENVAT credit on input services and capital goods to
discharge output Service tax liability.

Input services such as works contract services, architect services, security services, etc shall be used to
set-off output Service tax liability.
Can preferential location charges be taxed at an abated rate?

Applicability of provision of ‘Bundled services’ (ie Section 66F) to be examined

Historic treatment of preferential location charges also needs to be considered.
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Construction of Complex
Open issues

Applicability of Bundle Services provisions for existing agreement/ arrangements agreed prior
to 1 July 2012

Availment of CENVAT credit for capital goods


Procured and put to use prior to 1 July 2012 [ie existing machines]

Procured prior to 1 July 2012 but put to use after 1 July 2012
Availment of CENVAT Credit on input services
Activity
Scenario 1
Scenario 2
Scenario 3
Scenario 4
Raising the Invoice
Post
Prior
Prior
Post
Provision of Services
Post
Post
Prior
Prior
Subsequent Payments
Post
Post
Post
Post
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Temporary transfer/ permitting the use of IPR

Section 66E (c) of the Act prescribes temporary transfer or permitting the use or enjoyment of
any intellectual property right (‘IPRs’) as declared services

Such services were erstwhile taxed under intellectual property right services (u/s 65(55b))



Restriction that IPRs should be registered in India, is removed.
Any temporary transfer of IPRs registered outside India shall also be subjected to service tax.

Determination of place of provision of service, in accordance with Place of Provision of Service Rules,
2012 (‘POPSR’), shall be relevant to determine the taxability of the service

As per Rule 3 of POPSR, location of recipient shall be the relevant place of provision of services

Accordingly, if the Assessee is located in taxable territory (ie India other than Jammu & Kashmir) and
receives the services of temporary transfer of IPRs, the transaction shall be liable to service tax.

If the service provider does not have presence in India, the service recipient shall be liable to pay service
tax under the reverse charge
Temporary transfer of copyrights relating to original literary, dramatic, musical, artistic works, or
cinematograph films is exempted from levy of service tax.
Transfer of right to use IPRs are also subjected to VAT in various states. Accordingly,
the said levy has been litigious. A writ petition is pending before Bombay High Court
challenging constitutional validity for levy of service tax on Copyrights
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Development, design... software

Section 66E(d) of the Act prescribes activity of development, design, programming,
customization, adaptation, upgradation, enhancement, implementation of information
technology software as declared services

Copyrights to use any information technology software is not subject to service tax.
Understanding of Supreme Court Case in Tata Consultancy Services [178 ELT 22]

As per the Apex Court software can be considered as goods, provided it has the attributes
thereof having regard to
a)
It’s utility;
b)
it’s capable of being bought and sold; and
c)
capable of being transmitted, transferred, delivered, stored and possessed.

If a software, whether customised or pre-packed/ canned, satisfies these attributes, the same
would be goods.

Accordingly, the same shall be governed by the provision of Article 366(29A) of the
Constitution of India and shall be subjected to VAT
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Development, design... software

The definition of ‘service’ excludes transactions governed by Article 366(29A) and hence,
applying the ratio of Apex Court, transfer of certain software (packaged or customized) should
not be subjected to Service tax.


This creates a situation wherein a transaction is first included as ‘declared services’ and then excluded
as the same is governed by Article 366(29A) of the Constitution.
In this regard, it would be relevant to understand the interpretation which CBEC is likely to
adopt (i.e. reference may be drawn from Education Guide released by CBEC)
Implication suggested by Education Guide released by CBEC

Supreme Court ruling in case of Tata Consultancy Services shall apply only to Pre-packed or
Canned Software and accordingly transfer of same should not be liable to service tax

Although, TCS judgment applies even to customized software transferred in media, considering
the predominant nature, service tax should be payable

Exclusion should apply ‘only’ to transfer of property in goods

Customization has service element and applying dominant nature test, service tax would be payable

Software, transferred electronically (whether packaged/ customized) should be subjected to
service tax, since Supreme court’s ruling of TCS is applicable only to software on media

If license to use the software has certain restriction to use the same, the same shall also be
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subjected to service tax.
Development, design... software
Open issues

Dual levy of taxes (ie VAT and Service tax) continues to exist

CBEC has unambiguously quoted that if the license to use software has any restriction, then
such license shall not be governed by Article 366(29A).


If rights to use the software is restricted, it is likely to result in dual taxation
Software transferred electronically contains all the characteristics of goods as prescribed by
Apex Court

Absence of situs of sale, the same have not been successfully taxed by the State Government

Accordingly, does it permit Central Government to levy service tax on the same?
Software industry have been discharging VAT and Service tax on same transaction value.
Although, it permits them to avail CENVAT and VAT credits, the transaction cost has
substantially increased. The transaction to GST is likely to reduce the transaction cost to
the customers of the IT industry.
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Refrain from an act

Section 66E(e) states agreeing to the obligation to refrain from an act, or to tolerate an act or a
situation, or to do an act, to be a declared services

Accordingly, consideration received for following shall be subject to service tax

Agreeing to the obligation to refrain from an act,

Agreeing to tolerate an act or a situation,

Agreeing to the obligation to do an act

Non-compete agreements shall be included in the declared services

Non-compete fee arrangement comes into existence at the time of transfer of business
between two independent business group.

However, service by way of transfer of going concern, as a whole or an independent part thereof shall
be exempted (as per Sr no 37 of Notification No 25/ 2012 dated 20.06.2012)
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Wet Lease

Section 66E(f) provides that transfer of goods by way of hiring, leasing, licensing or in any such
manner without transfer of right to use such goods, shall be a declared services

The test laid down by the Supreme Court in the case of Bharat Sanchar Nigam Limited vs
Union of India [2006 (2) STR 161 SC] to determine whether a transaction involves transfer of
right to use goods, are as follows:
a)
There must be goods available for delivery;
b)
There must be a consensus ad idem as to the identity of the goods;
c)
The transferee should have a legal right to use the goods-consequently all legal consequences of such
use including any permissions or licenses required therefore should be available to the transferee;
d)
For the period during which the transferee has such legal right, it has to be to the exclusion of the
transferor this is the necessary concomitant of the plain language of the statute - viz. a “transfer of the
right to use” and not merely a licence to use the goods;
e)
Having transferred the right to use the goods during the period for which it is to be transferred, the owner
cannot again transfer the same rights to others.

In cases where the vendor identifies goods to be used for its client by retaining the possession
and control over the goods, the rights to use such goods is not transferred by vendor to its
client. Accordingly, such transactions are not subjected to VAT.

Service by way of giving on hire (a) to a state transport undertaking, a motor vehicle meant to
carry more than 12 passenger; or (b) to goods transport agency, a means of transportation of
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goods is exempted from levy of service tax.
Service element in Deemed Sale

Article 366(29A) of the Constitution list specific transaction wherein the State Government have
right to tax the value attributable to the ‘goods’ deemed to be transferred.

Under the declared list, the service elements in the deemed sales is identified to be taxed eg



Financing charges, processing fees on transactions of lease, hire purchase etc

Service portion in the execution of works contact

Service portion in an activity wherein goods, being food or other article for human consumption
Central Government has prescribed various abatement to tax only the service portion in
aforesaid service namely:
Services
Taxable Value
Remarks
In relation to financial leasing
including hire purchase
10%
Abetment only to Interest cost
Works Contract
40% - 70%
CENVAT credit of Capital goods, Input Services
is available
Catering Services
70%
CENVAT credit on any goods classified under
Chapter 1 to 22 of Central Excise Tariff Act, 1985
is not available.
Deemed valuation has resulted in duality of taxes applicable on a portion of total consideration
received
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The greater the time gap
between the introduction of
Negative List (July 1, 2012) and
the introduction of GST, the
greater the burden for industry
and consumers
Mumbai
1502, A Wing, Dalamal Towers, Nariman Point, Mumbai 400 021
Phone: + 91 22 6636 7000, Fax: + 91 22 6636 7172
Delhi
405-406,
4th
floor, World Trade Centre, Barakhamba Lane, New Delhi 110 001
Phone: + 91 11 4152 8400, Fax: + 91 11 4152 8404
Ahmedabad
801, Abhijeet III, Mithakali Six Roads, Ellisbridge, Ahmedabad 380 006
Phone: +91 79 6605 4480 / 8, Fax: +91 79 6605 4482
Pune
7th Floor, Suyog Fusion, 97, Dhole Patil Road, Pune 411001.
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