© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS SERVICE TAX - NEGATIVE LIST REGIME By Jigar Shah Advocate

NEW REGIME

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 3 NEED FOR CHANGE?  Facilitate launch of GST in a more familiar environment  Simplicity and certainty in tax processes  Neutrality of tax to business  Encouraging exports  Optimizing compliances

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 4 PARADIGM SHIFT IN REGIME

5 NEW LEVY  Section 66B: There shall be levied a 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.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 6 SERVICE-DEFINED  Explanation 2: Unincorporated association or a body of persons and a member thereof, to be treated as distinct persons Establishment of a person in a taxable territory and a non- taxable territory to be treated as distinct persons  Explanation 3: A person carrying business through a branch or agency in any territory shall be treated as having an establishment in that territory.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 7 IMPORTANT ELEMENTS  Tax levied on all services,  Except those specified in negative list,  Provided or agreed to be provided,  In the taxable territory, and  By a person to another

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 8 PHRASE – AGREED TO BE PROVIDED  Not defined in the Act  Guidance Note: Services taxable on agreement even before actual provisioning Advances retained on cancellation of contract taxable

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 9 TAXABLE TERRITORY  Defined as “the territory to which the Act applies”.  Section 64 : The Act extends to whole of India except State of Jammu & Kashmir  Jammu & Kashmir considered as non-taxable territory  ‘India’ defined.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 10 SERVICE-DEFINED  Section 65B(44) defines ‘Service’ as: any activity carried out by a person for another for consideration  And includes Declared Services  Not to include: Mere Transfer of title in: o Goods or Immovable property By way of sale/gift or in any other manner "such transfer, delivery or supply of any goods which is deemed to be a sale within the meaning of clause (29A) of article 366 of the Constitution.“

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 11 SERVICE-DEFINED Not to include Continued… Mere transaction in Money or Actionable claim Services in the course of employment provided by an employee to employer Fees payable in a court/ tribunal

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 12 ACTIVITY  Not defined in the Act  Guidance Note: Meaning as understood in common parlance should be given Activity could be active or passive so to include act of forbearance etc

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 13 CONSIDERATION  Not defined in the Act  Guidance Note: Definition of consideration from Indian Contract Act, 1872 could be borrowed Anything which the receiver does or abstain from doing for receiving the service Would include both monetary as well as non- monetary Section 67 to determine value of non-monetary consideration  Whether direct nexus with activity required?

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 14 WHETHER – CONSIDERATION ?  Advance forfeited for cancellation of agreement to provide service  Excess payment made by mistake  Security deposit forfeited for damages/faulty action of receiver

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 15 DECLARED SERVICES

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 16 DECLARED SERVICES : IMMOVABLE PROPERTY RELATED  Renting of immovable property,  Construction of complex, building, civil structure or a part thereof, including a complex or a 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.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 17 DECLARED SERVICES : TAXED EARLIER  Temporary transfer or permitting the use or enjoyment of any intellectual property right,  Development, design, programming, customization, adaptation, up gradation, enhancement, implementation of information technology software.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 18 DECLARED SERVICES : DEEMED SALE  Transfer of goods by way of hiring, leasing, licensing or in any such manner without transfer of right to use such goods,  Activities in relation to delivery of goods on hire purchase or any system of payment by installment,  Service portion in execution of a works contract,  Service portion in any activity wherein goods, being foods or any other article of human consumption or drink is supplied in any manner as a part of the activity.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 19 DECLARED SERVICES : RENTING  Renting defined in Section 65B(41) 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 or other similar arrangements in respect of immovable property.”  Types of renting in exemption list: Renting of vacant land, with or without a structure incidental to its use, relating to agriculture, Renting of residential dwellings for use as a residence Renting of a hotel, inn, guest house, campsite or other similar places meant for residential or lodging purposes, having declared tariff of < Rs. 1,000/- per day

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 20 COMPARISON  Status of : Renting of property to educational institutions, Renting of property to hospitals, Renting of land or building for sports and entertainment purposes Earlier PositionCurrent Position w.e.f When such premise is for use in the course of furtherance of business or commerce. Renting is taxable in general with some specific exclusion mentioned in negative list.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 21 DECLARED SERVICES : IT SOFTWARE  IT Software defined as ‘any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, be means of a computer or an automatic data processing machine or any other device or equipment’.  Guidance Note : On site development covered Providing advice and consultancy covered  Guidance Note on pre-packaged software: Sale of pre-packaged software not covered Taxability of License to use such software – Depends upon whether TRUG or not

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 22 DECLARED SERVICES : TRANSFER BY WAY OF HIRE, LEASING, LICENSING ETC  Transfer of goods without transfer of right to use goods is taxable  All kinds of transfer of goods (which are not TRUG) covered  Guidance note : Transaction needs to be analyzed to see if it is TRUG or not.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 23 DECLARED SERVICES : SUPPLY OF FOOD AND BEVERAGE  Taxable transaction: Service portion in an activity of supply of food or other article of human consumption or beverage (whether alcoholic or not).  Guidance note – Items covered: Supply of food in a restaurant Supply of food and drinks by an outdoor caterer  Abatement prescribed to compute service portion

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 24 DECLARED SERVICES : TEMPORARY TRANSFER OF IPR  Temporary transfer or permitting the use or enjoyment of any IPR,  IPR not defined  Guidance Note: Phrase ‘IPR’ is to be understood as done in normal trade parlance IPR to include: Copyrights, Patents, Trademarks, Design, Any other similar right to intangible property

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 25 COMPARISON  Status of : Technical know-how. Undisclosed information, Trade secrets etc. Earlier PositionCurrent position w.e.f IPR covers only those intellectual property right which are recognized in India for time being in force. All types of IPR are covered.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 26 DECLARED SERVICES : SERVICE PORTION IN A WORKS CONTRACT  Works contract defined: “a contract wherein transfer of property in goods involved in the execution of such contract is leviable to tax as sale of goods and such contract is for the purpose of carrying out construction, erection, commissioning, installation, completion, fitting-out, improvement, repair, renovation, alteration of any movable or immovable property or for carrying out any other similar activity or a part thereof in relation to such property."  Works contract definition amended to include both movable and immovable property.  Pure labour contracts not covered here

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 27 DECLARED SERVICES : WORKS CONTRACT  Deletion of Notification No.12/2003-ST

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 28 DECLARED SERVICES : REFRAIN FROM AN ACT ETC.  Entry covers: Agreeing to an obligation to refrain from an act, Agreeing to an obligation to tolerate an act or a situation, Agreeing to the obligation to do an act  Non-compete fees etc taxable  Amount charged for non-lifting desired quantity?

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 29 NEGATIVE LIST OF SERVICES

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 30 BASIS FOR FRAMING THE NEGATIVE LIST Administrative Reasons Welfare Reasons Economic Reasons Explicit Activities Contractual Obligations Negative List (Basis)

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 31 NEGATIVE LIST : ADMINSTRATIVE REASONS  Activities in the negative list owing to Administrative Reasons are:  Services by Government or a local authority excluding the following services to the extent they are not covered elsewhere : Service by Department of Post by way of speed post, express parcel post life insurance and agency services provided to a person other than Government Service in relation to an aircraft or a vessel, inside or outside the precincts of a port or an airport, Transport of goods or passengers, or Support services, other than covered under clauses (i) and (iii) above, provided to an business entity.  Services by Reserve Bank of India,

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 32 NEGATIVE LIST : CONTRACTUAL OBLIGATIONS  Activities in the negative list owing to Contractual obligations are :  Services by a foreign diplomatic mission located in India

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 33 NEGATIVE LIST : WELFARE REASONS  Activities in the negative list owing to Welfare Reasons are :  Service by way of: Pre-school education and education upto higher secondary education or equivalent, Education as a part of a curriculum for obtaining a qualification recognized by any law for the time being in force, Education as a part of approved vocational education course.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 34 NEGATIVE LIST : WELFARE REASONS  Services of transportation of goods : By road except the service of - A goods transportation agency, or A courier agency. By an aircraft or a vessel from a place outside India up to the custom station of clearance in India, or By an inland waterways  funeral, burial, crematorium or mortuary services including transportation of deceased  Services by way of renting of residential dwellings for use as residence

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 35 NEGATIVE LIST : ECONOMIC REASONS  Economic Reasons are :  Transmission or distribution of electricity by an electricity transmission or distribution utility,

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 36 NEGATIVE LIST : EXPLICT ACTIVITIES  Explicit activities are :  Trading of goods  Service by way of access to a road or a bridge on payment of toll charges,  Betting, gambling or lottery,

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 37 NEGATIVE LIST : EXPLICT ACTIVITIES  Admission to entertainment event or access to amusement facilities  Selling or space or time slots for advertisements other than advertisements broadcast by radio or television  Online advertisement ?

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 38 NEGATIVE LIST : EXPLICT ACTIVITIES  Any process amounting to manufacture or production of goods  Process on which duties of excise leviable under Section 3 ; or  Duties of excise leviable under any State Act;  Any process amounting to manufacture of alcoholic liquor of human consumption, opium, Indian hemp and other narcotics drugs and narcotics

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 39 NEGATIVE LIST : OTHER ITEMS  Other activities mentioned in the negative list are :  Service by way of: Extending deposit, loans or advances in so far as the consideration is represented by way of interest or discount,’ Inter-se sale or purchase of foreign currency amongst banks or authorized dealer of foreign exchange or amongst banks and such dealers

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 40 RULES OF INTERPRETATION

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 41 CLASSIFICATION OF SERVICES  Section 66F replaces Section 65A  1 - Reference to main service not to include reference to service used for providing main service Sub-contractor to main Contractor?  2 - Specific description to prevail over general

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 42 CLASSIFICATION continued….  Bundled service means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services.  Rule 3 - Bundled services NatureClassification (a) Naturally bundled in the ordinary course of business Single Service giving its essential character (b) Otherwise than (a)Single Service resulting in highest liability of Service Tax

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 43 Classification of Services Draft Circular dated Issued in the context of air lines services Charges which are directly relatable to journey will get abatement. Therefore, charges like reconfirmatin fees, upgrade charges, date change fees, preferred seat charges are differential ticket fare and will get abatement Sky Meal On Order and escort charges are not directly related to journey and therefore, will not get any abatement Excess baggage charges and pet charges will not get any abatement Cancellation charges are also taxable without abatement

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 44 Classification of Services Some Important ECJ Rulings Card Protection Plan (Case No. C-349/1996) Societe Thermale d’Eugenie-les-Bains Vs. Ministere de l’Economie, des Finances et del’Industrie (Case C-277/05) B.A.Z. Bausystem AG Vs. Finanzamt Munchen Fur Korperschaften (1982) 3 CMLR 688

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 45 REVERSE CHARGE

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 46 REVERSE CHARGE Notification No.30/2012-ST replaces Notification No.36/2004-ST for specifying person liable for payment of service tax in respect of services provided or agreed to be provided by: Insurance agent to person carrying on the insurance business, Goods transportation agency in respect of transportation of goods by road, where the person liable to pay freight is one of the specified persons, Sponsorship service to body corporate or partnership firm in taxable territory, Credit of inputs opened except goods specified in Chapter 1 to 22.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 47 REVERSE CHARGE By arbitral tribunal or an individual advocate or a firm of advocates to a business entity Support service provided by Government or local authority, to any business entity located in taxable territory, excluding: Renting of immovable property, Speed post, transport services and services in relation to aircraft or vessel in certain cases Service provided by way of : Renting of motor vehicle designed for carrying passengers to any person not in similar line of business, Supply of manpower, Service portion of Works contract (Notified services) By an individual, HUF, Partnership Firm or Association of persons to a business entity registered as body corporate in a taxable territory

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 48 REVERSE CHARGE  Service provided or agreed to be provided by a person located in non-taxable territory and received by a person in a taxable territory  Notified services are as follows: SL. No.Description of serviceService Recipient Service Provider 1.Renting of a motor vehicle designed to carry passengers: With abatement Without abatement 100% 40% Nil 60% 2.Supply of manpower for any purpose 75%25% 3.Service portion in Works contract service 50%

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 49 REVERSE CHARGE  Whether service provider to charge full rate of tax?  Payment of entire tax by service provider: - Service recipient absolved?  Different options be exercised by provider and receiver ?

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 50 VALUATION

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 51 VALUATION : RULE 2 A  W.e.f. July 1, 2012  Works Contract Service Rule 2A substituted o Value of service = Gross amount charged less actual value of goods transferred in execution Actual value of goods for VAT purposes to be considered for determining material value

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 52 VALUATION: RULE 2 A  Where value is not determined then: Service value shall be computed as : o Original work – 40% of total amount charged o Contract for maintenance or repair, renovation or restoration of any goods – 70% o Other works – 60%  Original works means: 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

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 53 VALUATION: RULE 2 A  ‘Total amount’ means: Gross amount charged Plus FMV of all goods and services supplied in or in relation to the contract whether or not supplied under the same contract Less The amount charged for such goods and services, and Less VAT or sales tax levied thereon  Specific bar inserted for availing excise duty credit in respect of inputs used in works contract services

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 54 VALUATION : RULE 2C W.e.f. July 1, 2012 Value to be determined in the manner as discussed in Rule 2A Credit of inputs allowed except those specified in Chapter 1 to 22. DESCRIPTIONEARLIER TAXABLE VALUE CURRENT TAXABLE VALUE W.E.F Supply of food and beverages at restaurant 30%40% Outdoor Catering 50%60%

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 55 VALUATION : RULE 6 Value to include: Amount realized as demurrage or by any other name for provision of service beyond originally contracted period in any manner relatable to service Value to exclude: Interest on deposits and delayed payment of any consideration for the provision of service or sale of goods Accidental damages due to unforeseen actions not relatable to provision of service Subsidies/grant by Govt. not effecting the value of service

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS 56 NOTABLE ABATEMENTS DESCRIPTIONTAXABLE % CONDITIONS Bundled service by way of supply of food or any other article of human consumption or any drink, in a premises, including hotel, convention center, club, pandal, shamiana or any place specially arranged for function together with renting of such premises 70Cenvat credit on any goods under Chapters 1 to 22 used for providing output service has not been taken in terms of Cenvat Credit Rules, Construction of a complex, building, civil structure or a part thereof, intended for sale to a buyer, wholly or partly except where entire consideration is received after issuance of completion certificate by the competent authority. 25(i)Cenvat credit on inputs used for providing the taxable services has not been taken (ii)The value of land is included in the amount charged from the service receiver.

© COPYRIGHT 2012, INSTITUTE OF BUSINESS LAWS Contact DetailsOur Knowledge Partner NEW DELHI 5, Jangpura Extension Link Road, New Delhi Phone: +91 (11) /800 MUMBAI , Kakad Chambers 132, Dr. Annie Besant Road, Worli Mumbai Phone: +91 (22) /84/86 HYDERABAD ‘Hastigiri’ , Chapel Road, Opp. Methodist Church, Nampally, Hyderabad Phone: +91 (40) /25 BENGALURU 4th Floor World Trade Center, Malleswaram, Bangalore Phone: +91 (080) CHENNAI 2, Wallace Garden 2nd Street Chennai Phone: +91 (44) , AHMEDABAD B-334 (3rd floor), SAKAR-VII, Nehru Bridge Corner, Ashram Road, Ahmedabad Phone: +91 (79) PUNE EBONY Meeting Room, Ist floor Apartment Section of Hyatt Regency Weikfield IT Park, Nagar Road Pune , Maharashtra Thank you