Contrary to the expectation of the trade and industry that it might get delayed, the regime of ‘Negative List-based levy of Service Tax’ has kicked in from 1st July, 2012. The new regime replaces the 18-year old regime of ‘Positive List-based levy of Service Tax’. As is well known, the Government had, while introducing the levy in 1994, opted for ‘Selective Approach’, confining the levy initially only to three services. The Government, thereafter, continued with this approach for the next 18 years, expanding the coverage of levy by bringing in new services under the tax net, year after year. However, the Government has finally jettisoned this ‘Selective Approach’ and embraced the ‘Comprehensive Approach’ for the taxation of services. This marks a paradigm shift in the manner in which service tax is levied. In the new system of levy, all services, other than those covered by the Negative List (Section 66D) or exempted under a Notification, will be (or are intended to be) subjected to tax. A set of new and substantial provisions in the form of section 65B and sections 66B to 66E governing the new system has been inserted in the Finance Act, 1994 (‘the Act’) by the Finance Act, 2012 and the same has come into force on 01.07.2012. Simultaneously and effective from this date, the provisions of section 65, 65A, 66 and 66A have ceased to apply.
Section 66D – Negative List of Services:
Section 66B is the new charging provision governing the levy under the new system of taxation of services. The Section reads as under:
“66B. 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”.
(Emphasis Provided) It will, therefore, be observed that the services specified in the ‘Negative List’ are excluded from the scope of levy through the charging provision of section 66B itself. The term ‘Negative List’ is defined vide clause (34) of section 65B of the Act as under:
“65B(34) “negative list” means the services which are listed in section 66D”.
Thus, the list of services specified u/s. 66D constitutes the ‘Negative List’ and remains outside the purview of levy of service tax. Section 66D contains 17 entries covering a gamut of services which have been kept outside the tax net. Further, most of the entries have in-built sub-entries which significantly expand the number of services that remain outside the scope of levy. The services specified by 17 Clauses of the Section are briefly outlined below:
• Services by Government or local authority excluding specified services [Clause (a)];
• Services by the Reserve Bank of India [Clause (b)];
• Services by a foreign diplomatic mission located in India [Clause (c)];
• Specified services relating to agriculture or agriculture produce [Clause (d)];
• Trading of goods [Clause (e)];
• Any process amounting to manufacture or production of goods [Clause (f)];
• Selling of space or time slots for advertisements other than advertisements broadcast by radio or television [Clause (g)];
• Access to a road or a bridge on payment of toll charges [Clause (h)];
• Betting, gambling or lottery [Clause (i)];
• Admission to entertainment events or access to amusement facilities [Clause (j)];
• Transmission or distribution of electricity by an electricity transmission or distribution utility [Clause (k)];
• Specified Education related services [Clause (l)];
• Renting for residential purpose [Clause (m)];
• Extending loans, advances or deposits on interest or discount [Clause (n)];
• Sale/ Purchase of foreign currency amongst banks or authorised dealers [Clause (n)];
• Specified services of transportation of passengers [Clause (o)];
• Services of transportation of goods by road other than those excluded [Clause (p)];
• Services of funeral, burial, etc. [Clause (q)].
Conceptual Difference Between ‘Non-Taxable Services’ Covered By ‘Negative List’ & ‘Exempted Services’:
It is essential to understand the conceptual difference between ‘non-taxability’ of services covered by the ‘Negative List’ and ‘non-taxability’ arising in respect of ‘exempted services’. At first glance, whether the service is covered by the ‘Negative List‘ or by an exemption notification, both appear to be sitting at par in as much as service tax is not payable in either case. However, dig deeper, and the distinction becomes clear. The services specified in the ‘Negative List’ (section 66D) are excluded from the scope of levy through charging section 66B itself. Hence, such services are ‘non-taxable’ per se. This ‘nontaxability’ is akin to ‘non-excisability’ that arises in the context of Central Excise when, in a given case, the twin-tests of ‘manufacture’ and ‘marketability’ are not satisfied. On the other hand, a service which is exempted by an exemption notification does not become ‘non-taxable’, that is, it does not go outside the purview of levy of tax. It remains ‘taxable’ (just like an ‘excisable but exempted product’) but is freed from the burden of service tax for the time being in view of the exemption notification. It may be remembered that ‘exemption follows the levy but it does not determine nor precede the levy’. Whereas an exemption notification can be withdrawn or amended by the Central Government under its delegated powers at any time so as to subject the exempted service to the payment of service tax, the amendment to ‘Negative List’ would require legislative sanction which generally happens only through the Finance Act.
Here, it would be advantageous to refer to a few judicial pronouncements in the context of Central Excise and the principles of law laid down therein which apply equally in the context of Service Tax.
• Hico Products vs. CCE – 1994 (71) ELT 339 (SC) – It was held that exemption by a notification does not take away the levy or has the effect of erasing the levy of duty. The object of exemption notification is to forgo the duty and confer certain benefits upon the manufacturer or buyer or consumer through manufacturer, as the case may be.
• Peekay Re-Rolling Mills vs. Assistant Commissioner – 2007 (219) ELT 3 (SC) – In this case, the court observed:
“In our opinion, exemption can only operate when there has been a valid levy, for if there is no levy at all, there would be nothing to exempt. exemption does not negate a levy of tax altogether.”
“Despite an exemption, the liability to tax remains unaffected, only the subsequent requirement of payment of tax to fulfill the liability is done away with.”
(para 35 & 39 of the judgment) The Hon’ble Apex Court quoted with approval the following observations of the Hon’ble Court in ACC Ltd. vs. State of Bihar – (2004) 7 SCC 642 rendered in the context of an exemption notification issued by the State Government reducing the liability of tax under the Bihar Finance Act to the extent of tax paid under an earlier Ordinance in respect of entry of goods:
“Crucial question, therefore, is whether the appellant had any “liability” under the Act…. The question of exemption arises only when there is a liability. Exigibility to tax is not the same as liability to pay tax.
The former depends on charge created by the Statute and latter on computation in accordance with the provisions of the Statute and rules framed thereunder if any. It is to be noted that liability to pay tax chargeable under Section 3 of the Act is different from quantification of tax payable on assessment. Liability to pay tax and actual payment of tax are conceptually different. But for the exemption the dealer would be required to pay tax in terms of Section 3. In other words, exemption presupposes a liability. Unless there is liability question of exemption does not arise. Liability arises in term of Section 3 and tax becomes payable at the rate as provided in Section 12. Section 11 deals with the point of levy and rate and concessional rate.”
• Kiran Spinning Mills vs. CCE – 1984 (17) ELT 396 (Tribunal) – It was observed as under:
“Such a notification issued under Rule 8(1) can only grant exemption — full or partial — vis-a-vis the duty leviable under the Tariff. An exemption notification clearly is not a charging provision and it cannot be interpreted so as to create a duty liability where none existed under the Tariff entry.”
• The judgment in Kiran Spinning Mills’ case (supra) was followed by the Larger Bench of the Hon’ble Tribunal in New Shorock Mills vs. CCE – 2006 (202) ELT 192 (Tri-LB), wherein it was held that mention of an item in an exemption Notification is not determinative of its excisability.
• Golden Paper Udyog vs. CCE – 1983 (13) ELT 1123 (Tribunal) In this case it was held:
“Exemption Notification No. 184/76 in respect of bituminised water-proof paper or paper board cannot be construed to imply a levy under Tariff Item 17(2). Where there is no levy, an exemption from levy is meaningless nor can a levy be interred from an exemption from such levy when in fact, there was none.”
• State of Haryana vs. Mahabir Vegetable Oils P. Ltd. – (2011) 3 SCC 778 SC. It was held that exemption is a concession. It can be withdrawn under the very power in exercise of which exemption was granted.
‘Negative List’, ‘Exempted Services’ & 13th Finance Commission’s Report:
As stated above, the coverage of ‘Negative List of Services’ by section 66D is substantially wide. Here, one may also refer to the Mega Exemption Notification No. 25/2012-ST dated 20.06.2012 (effective from 1st July, 2012) as well as other independent service-specific exemption Notifications granting exemption from payment of service tax in respect of various taxable services.
If the services covered by the ‘Negative List’ and the existing exemption Notifications are taken into account, then it can easily be said that a fairly large number of services are presently not facing the ‘axe of tax’. It will be interesting to note that the 13th Finance Commission headed by Dr. Vijay Kelkar has, in its Report presented on 25th February, 2010 recommended that only a handful of activities/sectors be kept outside the purview of ‘Goods & Service Tax’. The relevant abstract from para 5.29 of the Report is reproduced below:
“No exemptions should be allowed other than a common list applicable to all states as well as the Centre, which should only comprise: (i) unprocessed food items; (ii) public services provided by all governments excluding railways, communications and public sector enterprises and (iii) service transactions between an employer and employee (iv) health and education services.”
It will, however, be seen that the number of activities or sectors kept outside the tax net is quite large. This does not augur well for the impending GST regime. Though the introduction of GST may not materialise any time soon (in the author’s view, at least, not before F.Y. 2016-17), keeping such a large number of services outside the tax net during the intervening period will only create hurdles and roadblocks in the path of a smooth introduction of GST.
After all, the GST (or VAT), operating through ‘tax credit or invoice method’ (i.e. the subtractive/indirect method) is expected or ought to be an all encompassing, comprehensive system of taxation of goods and services. Under this system, the sectors or activities kept outside the levy (through exemption or otherwise) should ideally be bare minimum, keeping socio-economic or practical considerations in mind. There is no gain-saying that exemption creates distortions in the tax system; breaks the input-stage tax credit chain and hinders the smooth flow of credit across the supply chain of goods or services. In hindsight, one may even say that instead of solving or mitigating the problem of cascading effect of ‘tax on tax’, exemption indirectly aggravates the problem.
This idiosyncrasy of GST is best captured in the following words of a distinguished author on the subject:
“The VAT is a paradox: (using the credit method) the VAT is a tax in which those who believe themselves exempt are taxed, and those who believe themselves taxed, are generally exempt. This is not valid at the retail level; a retailer who is believed exempt is nevertheless taxed, and indeed taxed, when subject to taxation. Whoever grasps the meaning of this, will not have any trouble under-standing VAT”.
[J. Reugebrink/M.E. van Hilten, Omzetbelasting, Deventer 1997, p.40]
‘Negative List of Services’ & its implications under the Cenvat Credit Rules, 2004:
In the preceding paragraphs, we have seen that there is a significant conceptual difference between the services covered by the Negative List and the ‘exempted services’. We have also seen that the policy of keeping large number of services outside the tax net may render the task of smooth and comprehensive introduction of GST extremely difficult. Not only this, if persisted, this policy may create distortions in the system and disturb the uninterrupted flow of credit across the supply chain.
But then, one may not be required to wait till GST is introduced to understand these implications of ‘non-taxability of services’, whether through Negative List or Exemption Notifications. The implications are quite evident in the context of the existing Cenvat Credit Rules, 2004 (the CCR) as explained below.
Rule 2 (e) of the CCR defines the term ‘exempted service’ as under:
“R.2(e )- ‘exempted service’ means a –
(1) taxable service which is exempt from the whole of the service tax leviable thereon; or
(2) service, on which no service tax is leviable under Section 66B of the Finance Act; or
(3) taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken;
but shall not include a service which is exported in terms of Rule 6A of the Service Tax Rules, 1994.”
The moot question here is whether the ‘non-taxable services’ i.e. the services covered by the ‘Negative List’ prescribed vide section 66D can be considered as ‘exempted services’ within the meaning of the term as defined vide Rule 2(e) of the CCR?. The answer is an unequivocal ‘yes’. As explained above, the services specified in the ‘Negative List’ are excluded from the purview of service tax vide the charging section 66B and hence, no service tax is leviable thereon at all. As a consequence, these services would be covered by clause (2) of Rule 2(e) of the CCR and considered as ‘exempted services’ as defined in the said Rule.
It may be noticed that there is a stark difference between the definition of ‘exempted goods’ given vide Rule 2(d) of the CCR and that of ‘exempted service’ given vide Rule 2(e) ibid. The definition of ‘exempted goods’ does not include ‘non-excisable goods’ i.e. the goods which are outside the purview of levy of the excise duty. The definition of ‘exempted service’, on the other hand, is quite expansive and includes even ‘non-taxable services’ i.e. the services which are outside the scope of levy of service tax.
Therefore, a manufacturer of excisable and dutiable goods or a service provider engaged in providing a taxable service, if, also simultaneously carries on any activity which is covered by the Negative List u/s. 66D, then he would be considered as being engaged in both, dutiable/taxable activity and provision of ‘exempted service’. Consequently, the provisions of Rule 6 of the CCR would stand attracted in case of such an assessee if he uses common inputs or input services for carrying on both the types of activities i.e. dutiable/taxable activity and the non-taxable activity i.e. activity covered by the Negative List and considered as ‘exempted service’. The assessee, in such a situation, will have to comply with the rigours of Rule 6 of the CCR. The course of action available to the assessee can be briefly explained below:
(a) The assessee can avail full Cenvat Credit on the inputs or input services exclusively used for carrying on the manufacture of dutiable product or for provision of taxable service [Rule 3 (1)];
(b) In respect of inputs or input services exclusively used for providing the ‘exempted service’ i.e. the activity covered by the Negative List, the Assessee will have to forgo the entire Cenvat Credit attribut-able to such input or input services [Rule 6 (1)];
(c) So far as the common inputs or input services used for carrying on the dutiable/taxable activity and the exempted activity are concerned, the assessee can:
(i) Maintain separate records and avail the Cenvat credit only on inputs or input services attributable to dutiable/taxable activity [Rule 6 (2) ]; or
(ii) pay an amount equal to 6% of the value of the exempted goods or exempted services [Rule 6 (3)(i)]; or
(iii) pay an amount i.e. equal to proportionate credit as determined under sub-rule (3A) of Rule 6 [Rule 6 (3)(ii)]; or
(iv) maintain separate accounts for inputs and avail Cenvat credit on inputs attributable to dutiable/taxable activity and pay an amount i.e. proportionate credit as determined under sub-rule (3A) in respect of input services [Rule 6 (3)(iii) refers].
Thus, even though there is a conceptual and legal difference between the ‘non-taxable service’ (i.e. service covered by the Negative List and outside the purview of the tax) and ‘exempted service’, for the purposes of Cenvat Credit, the two have been treated at par by the legislature. Needless to say, this is a highly dangerous provision and the implications for the Assessees can be quite severe if they are engaged in both types of activities i.e. dutiable/taxable activity and activity covered by the Negative List and are availing the benefit of Cenvat Credit on input/input services. Such assessees may be caught unaware and are well advised to be on their guard. If Rule 6 is found attracted in a given case, then the assessee will have to carefully select from the options available to him under sub-rule (2) or (3) of Rule 6. It shall be noted that it is not uncommon for the department to raise huge demand in terms of Rule 6 (3)(i) i.e. demand of an amount equal to specified percentage of the value of exempted goods or exempted service even if a negligible credit is availed on the common input or input services used for both the types of activities.
Placing the ‘non-taxable services’ on the equal footing as ‘exempted services’ is rather unfortunate. The only justification can be that the Board might be apprehensive of the assessee availing the Cenvat Credit on all inputs or input services, regardless of whether the same are exclusively used or are common for the dutiable/taxable activity and exempted activity. However, whatever may be the reason or logic behind this provision, the fact remains that it will only lead to ‘compliance nightmare’ and more seriously, the cascading effect of tax inasmuch as non-admissibility of Cenvat Credit on input or input services may result in the increased cost of the final activity. Whether the assessee opts to maintain separate records in terms of Rule 6 (2) or to pay an amount equal to proportionate credit in terms of Rule 6 (3)(ii) or 6(3) (iii), the task of maintaining the separate records and/or determining the quantum of proportionate credit is not an easy one. On the other hand, with the bar on availing of input-stage credit due to the final activity covered by the Negative List not attracting the service tax, the cascading effect of tax will only be aggravated.
Conclusion:
The shift to ‘comprehensive approach’ or ‘Negative List-based levy of Service Tax’ was inevitable considering the fact that the GST regime is knocking at the door of the Indian economy. Besides this, the ‘selective approach’, though, served its purpose well in the initial years, with the passage of time, it was turning out to be a burden, both, for the departmental authorities and the tax payers. The advantage of ‘definitiveness’ or ‘certainty of taxation’ associated with ‘selective approach’ disappeared once more and more services were brought under the tax net. With the overlapping of services, the spectre of classification disputes had started raising its ugly head and the interpretation- related issues were arising more as a rule, than as an exception. Under these circumstances, the shift to ‘comprehensive approach’ is only to be welcomed. No doubt, the coverage of the activities vide the Negative List as also the Mega Exemption Notification No. 25/2012-ST is sufficiently large which may create complications at the time of introduction of GST. Moreover, the implications of the ‘Negative List’ in the context of Cenvat Credit Rules are also quite serious as discussed above. One can only hope that the steps would be taken to ensure, on one hand, the comprehensive coverage of services under the tax net, barring a bare minimum exceptions and on the other hand uninterrupted and unrestricted availment of input-stage Cenvat Credit to the assessees.
“Death and taxes and childbirth – There’s never any convenient time for any of them!” (Margaret Mitchell)
