Introduction:
Service tax law has
undergone paradigm shift from the selective approach to the negative
list based approach of taxation of services with effect from 01.07.2012.
Till then, service tax was payable on 117 categories of taxable
services. Now the levy of service tax encompasses all services as
defined in the law, barring 17 services listed in the Negative List. For
the first time after introduction of service tax in 1994, the
definition of the term “service” is provided in the law. Definitions of
various terms including that of taxable services in the earlier
dispensation have been given a go-bye. Certain services have been
defined as “Declared Services”. Further, changes are made in Point of
Taxation Rules, 2011, Service Tax (Determination of Value) Rules, 2006
and Cenvat Credit Rules, 2004. The Export of Services Rules, 2005 and
Taxation of Services (Provided from Outside India and Received in India)
Rules, 2006 are being replaced by the Place of Provision of Service
Rules, 2012. The ambit of reverse charge mechanism under which the
recipient of service is liable to pay tax is considerably widened. This
is described as a step towards GST. Through the increase in tax rates
from 10% to 12% and widening of tax net, the Government has targeted
revenue collection of Rs.1,24,000 crore. as against the last years
budgeted revenue of Rs. 67,000 crore and revised budgeted revenue of Rs.
92,000 crore.
An attempt is made in this article to analyse the
definition of service, charge of service tax and Negative List of
services. Clause by clause analysis of definition of service:
Section
65B (44) – “service” means any activity carried out by a person for
another for consideration, and includes a declared service, ……………… .
Important ingredients of “service”:
a) any activity
– The focus of the levy is now shifted to an activity which has a wide
coverage. The word, “activity” is not defined in the Act. Any execution
of an act or operation carried out or provision of a facility will also
be included. A single activity is also covered in its ambit and it is
not necessary that such activity should be carried on a regular basis.
Even a passive activity or forbearance to act or to refrain from an act
or to tolerate an act or a situation, would be regarded as service.
b) Carried out by a person for another
– For a transaction of service, there must be two parties, one, service
provider and the other, service receiver. By implication, self service
is outside the ambit of taxable service. However, certain exceptions are
provided which are explained later.
c) For a Consideration
– The term consideration is not defined in the Act. However, as per the
Education Guide issued by the Tax Research Unit, the meaning assigned
to it in the Indian Contract Act, 1872 is to be adopted. Under the
Indian Contract Act, 1872, the definition of “consideration” is, “When,
at the desire of the promisor, the promisee or any other person has done
or abstained from doing, or does or abstains from doing, or promises to
do or to abstain from doing, something, such act or abstinence or
promise is called a consideration for the promise”. In simple terms, the
word, “consideration” would mean everything received in return for a
provision of service including consideration of monetary or non-monetary
nature (in kind). Even deferred consideration would be included. It is
to be noted that it is not necessary that the consideration should flow
from the recipient of service only. The amount received will be
considered as consideration, as long as there is a link between the
provision of service and consideration. However, free gifts, donations,
charities would be outside its scope. Any activity carried on free of
charge or without any consideration is not covered here.
The
definition of “service” thus appears to be all encompassing, subject to
certain exclusions and inclusions explained herein below, the inclusion
of words, “and includes a declared service” appears to be for abundant
caution and the narrative of its importance.
Definition of service (contd.) – but does not include,
(a) an activity which constitutes merely
(i) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner; or
(ii)
such transfer, delivery or supply of any goods which is deemed to be
sale within the meaning of clause (29A) of article 366 of the
Constitution; or
(iii) a transaction in money or actionable claim;
(b) a provision of service by an employee to the employer in the course of or in relation to his employment;
(c) fees taken in any Court or tribunal established under any law for the time being in force.
Let us now examine what could be regarded as covered in each limb of the exclusion clause.
“Mere transfer of title in goods”:
Transfer
of title in goods signifies purchase or sale of goods by which property
in goods is transferred from one person to another. The term, “goods”
is defined in clause 25 of section 65B, “as every kind of movable
property other than actionable claim and money; and includes securities,
growing crops, grass and things attached to or forming part of that
land which are agreed to be severed before sale or under the contract of
sale. The word, “mere transfer of title” has been clarified in the
Education Guide to mean change in ownership. Mere transfer of custody or
possession over goods or immovable property where ownership is not
transferred does not amount to transfer of title. For example, giving
the property on rent or goods for use on hire would not involve a
transfer of title”. This means that, sale or purchase of goods would not
be covered in the definition of service. Transaction in shares and
securities, forward contracts in commodities or currencies, future
contracts in financial derivatives are also included in the definition
of “goods” and would be out of the ambit of the definition of “service”.
“Mere transfer of title in immovable property” :
As clarified in the Education Guide, the term, “immovable property” is to be defined as per the General Clauses Act, 1897. It has been defined to include land, benefits to arise out of land and things attached to earth or permanently fastened to anything attached to earth. Immovable property thus consists of bundle of rights like right to use, right to develop, right to transfer etc. Taking clue from earlier paragraph, it is clear that where ownership is changed in a transaction of immovable property, the same would not be regarded as service. The term, “transfer of property” is defined u/s 5 of Transfer of Property Act, 1882 as an act by which a living person conveys movable or immovable property, in present or in future, to one or more living persons. It has been further provided that, the seller is entitled to a charge upon the property in the hands of the buyer for payment of purchase money, or any part thereof remaining unpaid and for interest on such amount where the ownership of the property has passed to the buyer before payment of the whole of purchase money [section 55(4)] and the buyer is entitled to the benefits of any improvement in, or increase in value of the property, and to the rents and profit thereof where the ownership of the property has passed to him [section 55(6)]. As the transaction of mere transfer of title of immovable property is excluded from the definition of service, it needs to be juxtaposed against the declared service of “construction” defined in clause b of section 66E wherein tax is levied on construction of complex, building etc. for sale to a buyer, wholly or partly, except where the entire consideration is received after issuance of completion certificate by the competent authority. The conflict between the exclusion clause from the definition and this entry in “declared service” is apparent.
The activity of transfer, delivery or supply of any goods which is deemed to be sale within the meaning of clause (29A) of article 366 of the Constitution:
By 46th Amendment, Clause 29A was introduced under Article 366 of the Constitution, deeming certain transactions as sale. Such transactions are —
(a) a tax on the transfer, otherwise than in pursuance of a contract, of property in any goods for cash, de-ferred payment or other valuable consideration;
(b) a tax on the transfer of property in goods (whether as goods or in some other form) involved in the execution of a works contract;
(c) a tax on the delivery of goods on hire-purchase or any system of payment by installments;
(d) a tax on the transfer of the right to use any goods for any purpose (whether or not for a specified period) for cash, deferred payment or other valuable consideration;
(e) a tax on the supply of goods by any unincorporated association or body of persons to a member thereof for cash, deferred payment or other valuable consideration;
(f) a tax on the supply, by way of or as part of any service or in any other manner whatsoever, of goods, being food or any other article for human consumption or any drink (whether or not intoxi-cating), where such supply or service, is for cash, deferred payment or other valuable consideration, and such transfer, delivery or supply of any goods shall be deemed to be a sale of those goods by the person making the transfer, delivery or supply and a purchase of those goods by the person to whom such transfer, delivery or supply is made.
The definition of service excludes transactions of sale and purchase, delivery or supply of any of above kind of “deemed sale”. The transactions listed above needs to be juxtaposed against some of the “Declared Services” in order to understand the conflict between the exclusion clause and such “Declared Services”. It has been clarified in the Education Guide that activities specified as declared list which are related to transactions that are deemed as sales under Article 366(29A) have been carefully specified to ensure that there is no conflict. The Education Guide dwells on the Supreme Court decision in case of Bharat Sanchar Nigam Ltd. v. UOI [2006(2) STR 161] which would be a self explanatory guide to determine taxability of such transactions.
The following principles emerge from the said judgment for ascertaining the taxability of composite transactions :
- The nature of a composite transaction, except in case of two exceptions carved out by the Constitution, would be determined by the element which determines the ‘dominant nature’ of the transaction.
- If the dominant nature of such a transaction is sale of goods or immovable property, then such transaction would be treated as such.
- If the dominant nature of such a transaction is provision of a service, then such transaction would be treated as a service and taxed as such, even if the transaction involves an element of sale of goods.
- If the transaction represents two distinct and separate contracts and is discernible as such then contract of service in such transaction would be segregated and chargeable to service tax if other elements of taxability are present. This would apply even if a single invoice is issued.
The principles explained above would, mutatis mutan-dis, apply to composite transactions involving an element of transfer of title in immovable property or transaction in money or an actionable claim”.
An activity which constitutes merely a transaction in money or actionable claim:
Transaction in money:
In relation to “transaction in money”, deposits or withdrawals from bank accounts, advancing or repayment of principal sum as loans, investments etc. would be covered under the exclusion clause. However, any return by way of interest, commission etc. in such monetary transactions would not qualify for the exclusion. The exclusion clause also would not apply to money changing or conversion from one form of currency to another form (forex transactions) for a consideration. It may however, be noted that interest is not liable for payment of service tax.
Actionable claim:
The term, “actionable claim” is defined under the Transfer of Property Act, 1882. As per the definition, “actionable claim” means a claim to any debt or to any beneficiary interest in movable property not in the possession (either actual or constructive) of the claimant. Thus, the term actionable claim has a very wide connotation. The transaction of securitisation or transfer of debt, beneficial interest in an estate or trust or any right in expectancy in a movable property, insurance claim etc. would not be covered under the definition of service. However, any commission service fees or other charges collected in respect thereof, would get covered.
A provision of service by an employee to the employer in the course of or in relation to his employment:
Services provided by an employee to the employer in the course of, or in relation to employment contract, are outside the ambit of the definition of service. In other words, the services provided by persons on the pay roll of the company, to that company would not be covered under service tax. Reimbursement of expenditure on actual basis during the course of employment should not be regarded as taxable service. Services provided by a person on contractual basis on principal to principal basis (other than employment contract), would be covered under the definition of service.
The question may arise in relation to service by employer to the employee. If such services, e.g. provision of residential accommodation at concessional rate, provision of company’s motor car for personal use with a charge, food coupons, leave travel etc. emanating from employment contract should not be covered under the definition and may not be taxable. The provision of services of employees of one company to the other group company for a consideration which is known as ‘secondment’ may not be covered in this exclusion clause and hence are taxable. Benefits to ex-employees are covered under this clause and excluded from payment of service tax if the same are in pursuance of employment contract. The fees, remuneration, commission etc. paid to employee/ whole time/executive directors would also fall under the exclusion clause.
Fees taken in any Court or tribunal established under any law for the time being in force:
This is a self explanatory clause by which Court or Tribunal fees are excluded from the purview of service tax and does not require any deliberation.
Other Exclusions:
Certain other kind of activities are also excluded from the definition of “service”. The same is provided for removal of doubt by way of an Explanation to the definition of “service” in section 65B(44) :
- the functions performed by the Members of Parliament, Members of State Legislative, Members of Panchayats, Members of Municipalities and Members of other local authorities who receive any consideration in performing the functions of that office as such member; or
- the duties performed by any person who holds any post in pursuance of the provisions of the
Constitution in that capacity; or
- the duties performed by any person as a Chairper-son or a Member or a Director in a body established by the Central Government or State Governments or local authority and who is not deemed as an employee before the commencement of this section.
This clause provides certain exclusions as an abundant caution, as the above persons may not be covered under the exclusion clause relating to employer – employee kind of relationship. The definition of Central and State Government is as per General Clauses Act, 1897. The local authority is defined in clause 31 of section 65B of the Finance Act, 1994.
Deeming Fiction
Explanation 3 to the definition of “service” provides that the transaction between a member and an unincorporated association or body of persons would be treated as transaction between distinct persons and therefore would be liable to tax if not otherwise excluded. The definition of person in clause 37 of section 65B includes an individual, HUF, company, society, LLP, firm, AOP or BOI whether incorporated or not, Government, local authority or artificial judicial person. Through the insertion of the said Explanation, the concept of mutuality is sought to be diluted.
In relation to an establishment of a person in taxable territory and any of his other establishment in non-taxable territory, both the establishments shall be treated as different persons for the purpose of levy of service tax. Thus, transactions between the head office or a branch or agency or representative office located in different taxable territories are regarded as different entities for the purpose of levy of service tax. This is an exception to the general rule that services provided by a person to another are only taxable.
In view of wide coverage of the definition of “service”, the following activities are some examples of what hitherto was not covered, but now may be covered under the new dispensation:
- Activities by commercial artists/performers, actors, directors, reality show judges
- Arbitrators to business organisations
- Banking Service to Government
- Research grants with counter obligations
- Service of renting of immovable property provided by Government & local authority to non-commercial organisations unless otherwise specifically excluded
- Service of renting of immovable property provided to Government and local authority by a person located in Taxable Territory.
This is just an illustrative list, there could be many more such examples.
Charge of Service tax
Section 66B provides for charge of service tax – “There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve percent 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.”
Important requirements for charge of Service tax:
- Charge on all services [defined u/s 6B(44)], other than Negative list,
- Service provided or agreed to be provided,
- Service should be in the taxable territory (as determined under The Place of Provision of Service Rules, 2012)
- Service by one person to another (subject to exceptions mentioned above)
Having discussed the definition of service, the most important term to be discussed here is “service provided or agreed to be provided”. The term pre-supposes an agreement for provision of service. Such agreements could be oral, written or even implied by the conduct of the parties to the transaction. Without any indication in the Act or from the Government, by implication, it could be presumed that the provisions of the Indian Contract Act, 1882 would be applicable. The European Court of Justice in R. J. Tolsma’s case held that only if there is a legal relationship between the provider of service and the recipient, pursuant of which there is reciprocal performance, the remuneration received by the provider of service constituting the value actually given in return for the service supplied to the recipient. In case of Naturally Yours Cosmetics reported in (1988) ECR 6365, it is held that the basis of assessment for a provision of service is everything which makes up the consideration for the service and that a provision of service is therefore taxable only if there is a direct link between the service provided and the consideration received. In other words, in absence of a contractual obligation and direct relationship between a provision of service and the consideration, no service tax can be levied and unilateral acts would not be covered. The examples of such activities are charities, inheritance, compensation for accidents, alimonies in divorce cases, personal transactions etc.
Negative List:
The Negative list provided in section 66D, comprises of following services:
a) Services by government or a local authority excluding certain services to the extent not covered elsewhere. These are as follows :
(i) Services by the department of post, by way of speed post, express parcel post, life insurance and agency services carried out on payment of commission on non-government business,
(ii) Services in relation to a vessel or an aircraft inside or outside the precincts of a port or an airport,
(iii) Transportation of goods and/or passengers,
(iv) Support services other than those covered above to the business entities. Important support services provided by the Government to the business entities are as under:
- Infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions;
- Such functions are carried out in ordinary course of operations by the entities themselves;
- Such services, however, may be outsourced from others for any reason whatsoever;
- and includes advertisement and promotion, construction or works contract, renting of immovable property, security, testing and analysis.
b) Services by Reserve Bank of India;
c) Services by foreign diplomatic mission located in India;
d) Certain services in relation to agriculture or agriculture produce by way of,
- agricultural operations directly related to production of any agricultural produce including cultivation, harvesting, threshing, plant protection or seed testing;
- processes carried out at an agricultural farm including tending, pruning, cutting, harvesting, drying, cleaning, trimming, sun drying, fumigating, curing, sorting, grading, cooling or bulk packaging and such like operations which do not alter the essential characteristics of agricultural produce but make it only marketable for the primary market;
- renting or leasing of agro machinery or vacant land with or without a structure incidental to its use;
- loading, unloading, packing, storage or warehousing of agricultural produce;
- agricultural extension services;
- services by any Agricultural Produce Marketing Committee or Board or services provided by a commission agent for sale or purchase of agricultural produce;
The terms, “agriculture”, “agricultural produce”, “agricultural extension service” and “Agriculture Produce Marketing Committee or Board” are defined in the Act:
e. Trading of goods;
A transfer of title in goods is excluded from the definition of “service”. Trading in goods involves a transfer of title in goods. Despite that, trading of goods is also included in the Negative list. This inclusion in Negative list effectively means that Cenvat credit in relation to trading of goods will be denied/restricted.
f. Any process amounting to manufacture or production of goods;
Generally speaking, process amounting to manufacture or production of goods cannot be said to be a “service”, however, the same is not specifically excluded from the definition of service as we have seen above. Process amounting to manufacture or production of goods is defined as “a process on which duties of excise are leviable u/s 3 of the Central Excise Act, 1944 or any process amounting to manufacture of alcoholic liquors for human consumption, opium, Indian hemp and other narcotic drugs and narcotics on which duties of excise are leviable under any State Act for the time being in force”. Further, the Education Guide clarifies that this entry covers manufacturing activity carried out on contract or job work basis, which does not involve transfer of title in goods, provided duties of excise are leviable on such processes under the Central Excise Act, 1944 or any of the State Acts.
The inclusion of such activity in Negative list effec-tively means that Cenvat credit in relation to such process amounting to manufacture or production of goods may be denied to a job worker though the principal manufacturer has paid excise duty.
g) Selling of space or time slots for advertisements other than advertisement broadcast by radio or television;
Selling of space or time slots in cinema theatres, hoard-ings in public places etc. are covered in the State List and therefore they are placed in the Negative list.
h) Services by way of access to a road or a bridge on payment of toll charges;
Allowing access to road or a bridge on payment of toll is in Negative list. However, services rendered by any toll collecting agency are leviable to tax.
i) Betting, gambling or lottery;
Betting or gambling is defined in the Act to mean, “putting on stake something of value, particularly money, with consciousness of risk and hope of gain on the outcome of a game or a contest, whose result may be determined by chance or accident, or on the likelihood of anything occurring or not occurring”. Lottery is covered under “actionable claim” which is excluded from the definition of “service”. Further, the betting or gambling activities are included in the State List. However, any ancillary service for organising or promoting betting or gambling events is not covered under the Negative list.
j) Admission to entertainment event or access to amusement facilities;
Entertainment event is defined under the Act to mean, “an event or a performance which is intended to pro-vide; recreation, pastime, fun or enjoyment, by way of exhibition of cinematographic film, circus, concerts, sporting event, pageants, award functions, dance, musical or theatrical performances including drama, ballets or any such event or programme”.
Amusement facility is defined under the Act to mean, “a facility where fun or recreation is provided by means of rides, gaming devices or bowling alleys in amusement parks, amusement arcades, water parks, theme parks or such other places, but does not include a place within such facility where other services are provided”.
Tax on admission or entry to such events is covered in the State List which is subjected to Entertainment tax and therefore the same is included in the Negative list. It has been clarified that membership of a club providing such amusement facility would not be covered in the Negative list. Further, any ancillary service in relation to such entertainment event like an event manager for organising such event or an entertainer for providing the entertainment is also not covered under the Negative list.
k) Transmission or distribution of electricity by an electricity transmission or distribution utility;
Electricity transmission or Distribution utility is defined under the Act to mean, “the Central Electricity Authority; a State Electricity Board; the Central Transmission Utility or a State Transmission Utility notified under the Electricity Act, 2003; or a distribution or transmission licensee under the said Act, or any other entity entrusted with such function by the Central Government or, as the case may be, the State Government”. It has been clarified that a developer or housing society collecting charges for distribution of electricity within a residential complex would not be covered under the Negative list. Further, any service provided by way of installation of gensets etc. by private contractors for distribution of electricity would not be covered under this entry.
l) Certain educational services;
- Any pre-school education and education up to higher secondary school or equivalent;
- Education as a part of a curriculum for obtaining a qualification recognised by any law for the time being in force;
- Education as a part of an approved vocational education course.
Education services relating to delivery of education as a part of the curriculum that has been prescribed for obtaining a qualification under Indian law is covered in this entry. Conduct of degree courses by colleges, universities or institutions which lead grant of qualifications recognised by the law, is covered. It has been clarified that services of international schools by way of education upto higher secondary school or equivalent giving IB certifications are covered in this entry. Coaching or training given by private coaching institutes or tutors is not covered in this entry.
Approved Vocational Education Course as defined under the Act, is also covered in the Negative list.
m) Services by way of renting of residential dwelling unit for use as residence;
Renting is defined under the Act as “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”. Renting of a residential accommodation for use as residence is covered under the Negative list. However, a hotel accommodation, motel, inn, guest house, campsite, lodge are not covered in this entry.
n) (i) Services by way of extending deposits, loans or advances for interest or discount;
This entry covers such services wherein money is allowed to be used or retained on payment of interest or discount. The deposits, loans or advances, corporate deposits, overdraft facility, mortgage or loans with a collateral security, corporate deposits lent for interest or discount would also be covered in this entry. However, any charges like administrative charges, fees, entry charges recovered in addition to interest, would not form part of this entry. It has been clarified that, late payment charges signifies extra charges over and above the normal interest in relation to credit cards and therefore would not be covered under this entry.
(ii) Inter se, sale or purchase of foreign currency amongst banks or authorised dealers;
This entry covers sale and purchase of foreign exchange between banks, or banks and authorised dealers of foreign exchange. Any commission or discount in relation to such forex transactions would not be covered in this entry.
o) Services of transportation of passengers with or without accompanying belongings by,
- railways in a class other than first class; or an air-conditioned coach;
- metro, monorail or tramway;
- public transport, other than predominantly for tourism purpose, in a vessel between places located in India; and
- metered cabs, radio taxis or auto rickshaws;
The term, “stage carriage”, “inland waterways” and “metered cabs” are defined under the Act. However the term, “radio taxis”, is not defined.
In relation to services by public transport other than for tourism purpose, it has been clarified that normal public ships or other vessels that sail between places located in India would be covered in the negative list entry, even if some of the passengers on board are using the service for tourism as predominantly such service is not for tourism purpose. However, services provided by leisure or charter vessels or a cruise ship, predominant purpose of which is tourism, would not be covered in the negative list even if some of the passengers in such vessels are not tourists.
p) Services by way of transportation of goods by road except the services of a goods transportation agency or a courier agency or by an aircraft or a vessel from a place outside India to the customs station of clearance in India or by inland waterways;
The term, “goods transport agency” is defined under the Act as “any person who provides service in relation to transport of goods by road and issues consignment note, by whatever name called”.
The term, “courier agency” is defined under the act as “any person engaged in the door-to-door transportation of time-sensitive documents, goods or articles utilising the services of a person, either directly or indirectly, to carry or accompany such documents, goods or articles”.
It has been clarified that service provided by ‘angadia’ is covered within the definition of courier and liable to Service tax. Services provided by an agent for transportation of goods by inland waterways would not be covered in the Negative list.
q) Funeral, burial, crematorium or mortuary.
Conclusion:
The definition of service provides greater clarity and is a good attempt to begin with. However, the inclusion of “any activity” may create a number of complications as any non-economic activities can also be covered. It is therefore necessary to confine the levy only on economic activity. The Negative list based taxation substantially reinvents the law on Service tax and will have a deep impact on service transactions. From specific definition of taxable services in the earlier dispensation, the shift to all inclusive definition of service, the onus of proof that a service provided is taxable or not has shifted from the department to the service provider or the recipient, as the case may be. A provider of service would now be required to discharge the burden of payment of tax, if his activity is not excluded from the definition of service or not covered in the Negative list and not an exempted activity under the Mega exemption notification. The necessity of written contract of provision of service cannot be over-emphasised under the changed provisions of the law.
