Introduction of Negative List - Changes in Service Tax law effective 01.07.2012
1.1 The Finance Minister announced implementation of a new system for taxation of services popularly known as the Negative List while presenting the Budget on 16 March 2012 for the fiscal year 2012-2013. The Govt. of India by clause No.143 to 145 of the Finance Bills 2012, had proposed constitutional amendment relating to the service tax law and accordingly said Bills has been received the assent of the president and as a result of which many changes has been taken place in the Finance Act, 1994 and related Service Tax Rules effective 1st day of July, 2012.
1.2 After the enactment of the Finance Bill 2012 on 28 May 2012, Notification was issued on 06 June 2012 notifying 01 July 2012 as the date for implementation of Negative List.
1.3 This would mark a paradigm shift from the way in which the services would be taxed w.e.f., 01 July 2012. That is to say, all services would be subject to service tax unless specified in the Negative List or are specifically exempted from the levy of service tax.
1.4 To implement such a significant change, series of notifications have been issued on 20 June 2012, inter alia, superseding old exemption notifications, introducing new exemptions, amending the manner of valuing services and to determine the import or export of services etc.
1.5 The Central Government has issued a total of sixteen new notifications numbering from 25/2012-ST to 40/2012-ST on 20th June, 2012. These notifications along with two further important notification issued on 29th Jun12 will assist in implementation of new regime of Service Tax based on negative list of services.
Note: All these notifications (dt. 20.06.2012 in particular) shall come into force on the 1st day of July, 2012.
1) 25/2012-ST 20.06.2012 Mega exemption notification
2) 26/2012-ST 20.06.2012 Abatement Notification … to be suitably read with 30/2012 ST 20.06.2012 for reverse charge mechanism
3) 27/2012-ST 20.06.2012 Exemption to services for the official use of foreign Diplomatic Mission
4) 28/2012-ST 20.06.2012 Place of Provision of Services Rules,2012
5) 29/2012-ST 20.06.2012 Exemption on property tax paid on immovable property
6) 30/2012-ST 20.06.2012 REVERSE CHARGE MECHANISM under sub-section (2) of Section 68 of Finance Act to be suitably read with 26/2012 ST 20.06.2012
7) 31/2012-ST 20.06.2012 Exemption to specified services received by exporter of goods
8) 32/2012-ST 20.06.2012 Exemption of services provided by TBI/ST 20.06.2012EP
9) 33/2012-ST 20.06.2012 Exemption to Small Service Providers
10) 34/2012-ST 20.06.2012 Rescinding of certain notifications
11) 35/2012-ST 20.06.2012 Rescinding of notification 32/2007-ST 20.06.2012
12) 36/2012-ST 20.06.2012 Amendment in Service Tax Rules, 1994
13) 37/2012-ST 20.06.2012 Seeks to amend Point of Taxation Rules, 2011
14) 38/2012-ST 20.06.2012 Amendment of Notification 28/2011-ST 20.06.2012
15) 39/2012-ST 20.06.2012 Notification under Rule 6A of Service Tax Rules
16) 40/2012-ST 20.06.2012 Special Economic Zones
17) 41/2012-ST dt. 29.06.2012 à grants rebate of service tax paid on the taxable services which are received by an exporter of goods and used for export of goods
18) 42/2012-ST dt. 29.06.2012 exempts Service provided by the Foreign Commission Agent to Indian Exporters for procuring order subject to fulfillment of certain conditions specified therein
19) 43/2012-ST dt. 02.07.2012 exempts the taxable services provided by the Indian Railways from the whole of service tax leviable thereon, w.e.f. 02.07.2012 up to and including the 30th day of Sep 2012 i.e., for 3 mths (July12 to Sep12)
1.6 Through this document we have made an effort to encapsulate all the relevant and key amendments that would impact the business and transactions. All implications mentioned in this note would be applicable w.e.f., 01 July 2012.
1.7 Hope you would find the document useful and relevant. We would be happy to receive your feedback / valuable advice to enable us to help perform better.
2. Definition of Service
2.1. For the first time since the introduction of service tax law, term ‘service’ has been defined under the Negative list regime to mean “any activity carried out by a person for another for consideration, and includes a declared service”.
2.2. Taxable service provided only in the Taxable Territory shall be taxed. Such determination is to be done in terms of Provision of Services Rules, 2012 (please refer to Chapter 7 of this Note). In this context, Taxable Territory has been defined to mean whole of India excluding state of J&K.
2.3. The term activity has not been defined but a very wide and broad interpretation has sought to be provided. It has been clarified that ‘activity’ could be active or passive and would also include forbearance to act. In this context, agreeing to the ‘obligation to refrain from an act’ or ‘to tolerate an act or a situation’ has been declared to be a service. Therefore, it seems that there is a possibility that following could fall within the scope of service tax net w.e.f., 01 July 2012:
Assignment or novation of a contract for a consideration
Transfer of right to use all types of Intellectual Property (including software)
Agreeing to perform/non-perform in a certain way or manner … i.e., to say non-compete agreements etc.
Payment of fees to non-executive director
2.4. However, following have been clarified to be out of the ambit of term ‘service’
Any transaction in money or actionable claim
Transfer of title in goods or immovable property (i.e. sale, gift etc.) or deemed sale as per article 366(29A). However, a dichotomy with regard to dual taxability of software seems to continue.
Services provided under an employer-employee relationship
2.5. In view of the above, an undertaking may like to do an analysis of all revenue/expenses of its companies to ascertain the risk or exposure, if any, of certain transactions or activities falling under tax net on account of the introduction of Negative List.
3. Valuation of Service
Certain significant amendments have also been introduced in the valuation principles of services. Key amendments have been highlighted below:
Amount realized as demurrage (or by any other name called) for provision of service beyond the period originally contracted or in any manner relatable to the provision of service.
Interest charged or paid on delayed payments
Accidental damages due to unforeseen actions not relatable to provision of service
4. Key Exemptions
Following key exemptions have been provided from levy of service tax:
4.1 Services by way of transfer of a going concern as a whole or an independent part thereof.
4.2 Services received and provided between persons located in a non-taxable territory. For instance, design services provided by SAG to another foreign entity in respect of an Indian project, there should be no service tax implication on SAG. This is in line with current provisions.
4.3 Sub-contractor providing ‘works contract services’ to main contractor in respect of exempt ‘works contract services’. For instance, benefits of exemption for service provided to railway should also be available to sub-contractor - Please refer Para 9 for detailed analysis.
4.4 Benefits available to railways have also been clarified to be available to metro or mono rail - Please refers to Para 9 for detailed analysis.
4.5 Services by way of sponsorship of sporting events organized by specified organizations like national sports federation, association of Indian Universities etc.
5. Works Contract
5.1 Composition scheme which permitted payment of service tax @4.94% on total value of contract has been dispensed with.
5.2 Deduction of specified proportion of contract value, depending upon nature of works contract, has been prescribed to discharge service tax.
5.3 Scope of works contract has been extended to even include repair, maintenance, renovation and alteration etc of any moveable or immovable property.
5.4 Following schemes of taxation would now exist as regards taxability of works contract:
5.4.1 Where actual value of property in goods transferred and services provided are determined then respective taxes would apply on the respective values of goods and service.
5.4.2 Where values are not determined as above, then following method should be followed:
5.4.3 In this connection ‘original works’ would mean
All new constructions
All types of additions and alterations to abandoned or damaged structures on land that are required to make them workable
Erection, commissioning or installation of plant, machinery or equipment or structures, whether pre-fabricated or otherwise
5.4.4 From perusal of table at Para 5.4.2 above, it seems that there would be double taxation on certain proportion of contract value of works contract wherein both VAT as well as service tax would be levied.
5.4.5 One of the significant impacts seems to be in case of CAMC’s or AMC’s wherein a comprehensive price is quoted for replacement of parts and spares as well as for provision of services. Further, it is understood that in most cases, it is practically not possible to ascertain the quantum of goods and items supplied.
5.5 Further, no CENVAT credit of specified duties paid in respect of Inputs used in or in relation to works contract would be available. There is no restriction in availing credit on capital goods and input service by the service provider and hence the service provider of the works contract can take credit on capital goods and input service.
6. Reverse Charge
6.1 Provisions of Section 68(2) are proposed to be amended to empower the Government to also notify the extent and proportion of service tax that needs to be discharged by the person made liable to pay service tax.
6.2 Tabulated below are relevant service transactions towards which service tax needs to be paid under reverse charge basis:
(#) Service tax needs to be paid only on 25% of the invoice Value subject to specified conditions being fulfilled
(*) Services should be provided by an individual, HUF, partnership firm (whether registered or not) including association of persons to a company registered under the Companies Act, 1956 or a business entity registered as a body corporate.
6.3 For the purpose of works contract service, where both service provider and service recipient are liable to pay tax, then each of the persons has the option to choose such method of valuation which might be independent of the other
7. Place of Provision of Services Rules, 2012 (‘PPSR’)
7.1 These Rules will determine the place of provision of service and will supersede Export and Import Rules w.e.f., 1 July 2012.
7.2 As a thumb rule, PPSR provides that ‘place of provision of service’ shall be the location of the service recipient. However, where location of service recipient is not available in the ordinary course of business, it shall be the location of the service provider.
7.3 Certain exceptions have been carved out to the above general principle and the relevant ones have been outlined below:
Place of provision of Service
Where services are provided in respect of goods that are required to be made physically available by the service receiver to the service provider (in order to provide service)
It will be the place where services are actually performed. Relevant for CAMC’s, installation & Commissioning services.
Services relating to immovable property
Place where immovable property is located or intended to be located. Relevant for civil works contract.
Services relating to events
Place where the event is actually held
Services where both provider and recipient of services are located in the taxable territory
Place of location of the service provider
Location of the service provider