Negative List of Service Tax in India

Services, Service Tax and Complexity with its applicability go hand in hand. The service provider is always unsure of compliances pertaining to Service Tax on the services provided by him and it is also a major issue for our government as well.

To resolve majority of such issues and streamline the applicability of Service Tax, we are moving towards adapting an international mechanism called “Negative List of Services” (NLS). Now let’s understand in steps what this is all about and why is it a step forward?

Current system of Service Tax Applicability

Before going on to NLS, first let’s recap in short on the present method of taxation of services:

Current Service Tax Rate in India: The new service tax rate in India is 12.36% including education cess

1. Currently, what happens is we have a detailed list of services that are liable to service tax and make calculation of service tax  in India
2. As on date, we have 119 taxable services.
3. All the services carry a detailed description and the services not specified are not subject to service tax.
4. This method is also called “taxation by way of positive list” or “selective approach”.
5.  Selective approach is to first classify the service, outline exactly what shall be the taxable event and levy the tax on it. Selective approach has been followed in Finland, Norway, Sweden, Indonesia, Argentina, Brazil, Colombia, Equator, Peru, Costa Rica, Dominion Republic, Nicaragua, Algeria and Senegal.

Diagrammatically, current system shapes like this  Taxable Inputs  Output  Input Tax Credit  ST@10%  Net Liability  Supplier Rs.           - Rs. 100.00 Rs.        - Rs. 10.00 Rs. 10.00  Service Provider Rs. 100.00 Rs. 200.00 Rs. 10.00 Rs. 20.00 Rs. 10.00  Total Rs. 20.00

Negative List of Services in India

The concept paper on “Taxation of Services Based on Negative List” has proposed to tax services based on a negative list of services in service tax which means –

a)     A list of services will be introduced and they shall not be liable to service tax.

b)     Barring the services in the service tax negative list, every service shall fall within the ambit of “supply of services”

The government is likely to bring more services in the tax net to raise revenues and may introduce a negative list of service tax in India in the forthcoming Budget.

The government is expected keep 22 services in the negative list and impose 10 per cent tax on the rest, sources said, adding that services for the purpose would be defined as all kinds of economic activities, barring goods, money and immovable property.

Negative List of Service Tax – Step Forward

Among other things, few things that would sort out are –

1. It will benefit by fetching in many untouched sectors of industry within its ambit.
2. It is in sync with the implementation of GST in India.
3. The bigger problematic issue of litigation and compliance costs would largely reduce as against our current system.
4. The need to clarify definitions, scope and ambit of charge on services would no more be essential.
5. It would be lot simpler for the service provider to understand the law and apply it thus assuring a lot more compliance of service tax applicability

Is it really a desirable change?

With every good thing comes challenges, no rose comes without thorns. Similarly, negative list of services under service tax in India carry baggage of few challenges that needs to be addressed. Let’s take a close look at them –

Positive list has already built a strong hold in the industry and individual/Firm service providers. The awareness and solidity of law and its administration has already attained a firm level. Introduction of something new, overtaking something which we are used may take some time to sink in.

1. It is a challenge for the law-makers to define ‘service’ in such a way that it does not invade the taxability governed by other legislation.
2. Implementation of such lists would call for dramatic changes in the rules within the law associated with it to assist it.

It is being speculated that any time soon negative list of service tax can be introduced, as soon as coming budget but nothing conclusive has come up yet. It is being seen as a step to go in sync with launch of GST in India.

Because of new and revised service tax rate in India being 12.36%, advancement of service tax rules in India and given the advantages of negative list of services, its smooth transition is of utmost importance for its success. It will also make way for smoother implementation of GST