Concept of Services, Negative List & Declared Services

Transcription

1 Concept of Services, Negative List & Declared Services July 7, 2012 Constitutional Framework 1

2 Constitutional Framework Taxes levied by Central Government and State Government(s) Authority to levy a tax is derived from the Constitution of India Which allocates power to levy various taxes between the Centre and State Article 265 of the Constitution which states that "No tax shall be levied or collected except by the authority of law Article 246 of the Indian Constitution, distributes legislative powers including taxation, between the Parliament of India and the State Legislature Schedule VII enumerates use of three lists; List - I Where the parliament is competent to make laws List - II Where only the state legislature can make laws List - III Where both the Parliament and the State Legislature can make laws upon concurrently 3 Constitutional Framework Union List State List Concurrent List Income Tax Custom Duty Excise Duty Corporation Tax Service tax Central Sales Tax Stamp duty in respect of bills of exchange, cheques, promissory notes, etc Taxes on lands and buildings Excise duty on alcoholic liquor etc Entry tax Sales Tax Tolls Luxury Tax Stamp duty in respect of documents other than those specified in the provisions of List I Stamp duties other than duties or fees collected by means of judicial stamps, but not including rates of stamp duty 4 2

3 Headlines Headlines TaxRates ServiceTaxandExciseDuty raised to12% Negative list approach to tax services 17 categories of services covered in thenegativelist EffectivefromJuly1,2012 PlaceofProvisionofServiceRules,2012 EffectivefromJuly1,2012 Significant amendments in: CENVAT Credit Rules, 2004 Service Tax (Determination of Value) Rules, 2006 Service Tax Rules,

4 Pre-Negative List Approach Current Tax Cost in India Imports Customs Duty Basic 10% CVD 12% Ed. Cess 3% Intra-State Ex. Duty 12% Edu. Cess 3% VAT 5%/12.5% Factory Service Provider Serv. Tax 12.36% Inter-State Ex. Duty 12% Edu. Cess 3% CST 2% Interstate purchase (CST) Local purchase VAT 5%/12.5% Stock transfer (No tax) Toll Manufacturer Dealer Octroi 0.5 to 5% Local purchase VAT 5%/12.5% Goods Transporter Serv. Tax-12.36% Other Service Provider Serv. Tax 12.36% Central Levy Retailer Other Service Provider Serv. Tax 12.36% State Levy -Credit not fungible between State and Centre; resulting in a cascading impact of taxes - Cumulative burden of Indirect Taxes in India 28% to 44% (approx.) VAT rate may range from % depending on the State 8 4

5 Duality of Charge Pre Negative List Goods Vs Services Lines between taxation of Goods & Services is constantly blurring Duality of charge Sr. No. Activity 1. Intellectual Property Services Customs duty Central / State Excise duty Service tax VAT / CST 2. Import of Designs, Technical Know etc.. 3. Works Contract 4. Construction Services 5. Manufacture of Products liable to State Excise 9 Other Pain Points in Current System Discrimination between manufacturers, service providers and traders Non-uniform application of exemptions, credit provisions, etc Cascading impact of taxes Multiple causes of irrecoverable tax costs Accumulation of credits Non-transferability lack of fungibility Inverted duty structures Rate structure - no uniformity no clear basis on which effective rates determined Non availability of credits BasisoflevyofServiceTaxwasuncertainandvariable Rendition/ performance Consumption/ use Receipt 10 5

6 Negative List Approach Rationale for Negative List First Concept Paper for Public Debate(August 2011) There are advantages in moving towards negative list at an earlier time in order to gain useful experience in its implementation and minimize the impact ofthemammothchangesthatgstmayusher Revised Concept Paper on Taxation of Services based on Negative List (November 2011) Introduction of Negative List at an earlier stage will pave the way for the smooth transition to the GST, and significantly ease the challenges arising out of implementing the GST 12 6

7 Rationale for Negative List Hon ble Finance Minister s Speech(March 2012) At the end of June this year, this tax will attain adulthood by completing 18 years. It is therefore time to shift gears and accelerate ahead. However, service tax needs to confront two important challenges to sustain the journey. These are: The share ofservicesin taxesremainsfarbelowitspotential. There isaneed to widen the tax base and strengthen its enforcement; Service Tax law is complex and sometimes avoidably different from Central Excise.Weneedtobringthetwoascloseaspossibleinthelightofoureventual goal of transition to GST Guidance Paper on Taxation of Services based on Negative List(June 2012) The new approach to taxation of services is intended to take the country and the economy a step closer towards the introduction of GST Negative List is expected to make the administration of the tax simple, both for the Department as well as the taxpayers, reduce litigation and usher a regime much closer to our eventual goal of GST 13 Approach Selective Vs Negative List Selective Approach selected services are taxable Negative List all services are taxable 116 Taxable Services Taxable Services Exempt Services - Threshold Negative list + exempt 14 7

8 Service Tax Net Widened Potential Revenue Impact Total Service Sector (approx. 57% of GDP) (A) 40% remains in the tax net 60% covered under the negative list, exemptions 40% attributable to the Informal sector (under threshold limit) 60% remains taxable (20-25% of A) Effective percentage of entire service sector that is covered under the tax net = 20-25% (First Concept Paper) Estimated net revenue gain consequent to changes in the Union Budget , relating to Indirect Taxes, estimated at Rs. 45,940 crore (Budget Speech ) Service tax changes Rs. 18,660 crore additional revenue 16 8

9 Change in Provisions Finance Act Provisions under Finance Act, 1994 Provisions under Finance Act, 2012 Following provisions will cease to exist from July 1, 2012 Section 65 Definitions Section 66 Charging Section Following provisions will come into force from July 1, 2012 Section 65B - Definition Section 66B Charging Section Section 66D Negative List Section 66E Declared Services Section 65A - Classification Section 66F - Classification Section 66A Charging Section in case of import of services Section 67A Rate and Value Section 68 Payment of Service tax Section 66 C Place of Provision 17 Charging Section Old charging provision (Section 66) New charging provision (Section 66B) There shall be levied a tax (hereinafter referred to as the servicetax) attherateoftwelveper cent. of the value of taxable services referred to in sub-clauses [ ] of clause (105) of section 65 and collected in such manner as may be prescribed. There shall be levied a tax (hereinafter referred to as the servicetax) attherateoftwelveper cent. on the value of all services, other than those services specified in the negative list, provided or agreedtobeprovidedinthetaxable territory by one person to another and collected in such manner as may be prescribed. 18 9

10 Negative List Approach Definition of the term Service Section 65B(44) Means Includes But shall not include - Any activity - Carried out by a person for another - For consideration - Includes a declared service - 9Declared categories / species of services - Any activity that constitutes merely a transfer in title of goods or immovable property by way of sale,giftorinanyothermanner - 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 - A transaction in money or actionable claim - Any service provided by an employee to an employer in the course of or in relation to his employment - FeestakeninanyCourtoratribunalestablished underanylawforthetimebeinginforce 19 Definition of Service Other Jurisdictions Country Canada (Section 123(1) of the Excise Tax Act) New Zealand (Section 2 of the GST Act) Singapore (Section 10 of the GSTAct) United Kingdom (Section 5 of the Value Added Tax Act,1994) Definition of Service Service means anything other than Property, Money,and Anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person Service has been defined to mean Anything which is not goods or money Supplyofservices means anythingwhichisnotasupplyofgoods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) Supply of services is defined as anythingwhich is notasupply of goods but is done for a consideration (including, if so done, the granting, assignment or surrender of any right) is a supply of services 20 10

11 Negative List Declared Services Negative List of Services (17) Description of services Services by Government or a local authority (exclusions provided) Services by the Reserve Bank of India Services by a foreign diplomatic mission located in India Services relating to agriculture (specified services covered) Trading of goods Services by way of transportation of goods by road, by an aircraft or a vessel from a place outside India Selling of space or time slots for advertisements(exclusions provided) Service by way of access to a road or a bridge on payment of toll charges Betting, gambling or lottery Description of services Admission to entertainment events or access to amusement facilities Transmission or distribution of electricity Services by way of renting of residential dwelling for use as residence Services by way of pre-school education, higher secondary school education Any process amounting to manufacture or production of goods Services by way of extending deposits, loans or advances consideration is interest / discount; purchase/ sale of foreign currency Services of transportation of passengers first class railways, metro etc Funeral, burial, crematorium etc 22 11

12 Declared Services (9) Declared Service is defined in Section 65B(22) Means any activity carried out by a person for another person for consideration and declared as such under Section 66E Section 66E List of declared services Description of services Renting of immovable property Construction of a complex, building, civil structure or a part thereof, including a complex or building intended for sale to a buyer (subject to certain specified exceptions) Temporary transfer or permitting the use or enjoyment of any IPR Development, design, programming, customisation, adaptation, upgradation, enhancement, implementation of information technology software Agreeingtotheobligationtorefrainfromanact,or totolerateanactorasituation,ortodoanact Description of services Service portion in the execution of a Works Contract Transfer of goods by way of hiring, leasing, licensing or in any such manner without transferofrighttousesuchgoods Activities in relation to delivery of goods on hire purchase or any system of payment by installments Service portion in an activity wherein goods, being food or any other article of human consumption 23 Transactions newly liable? Non-compete fee License fee / Assignment fee Revenue share arrangements with agencies like AAI, NHAI, MMRDA Directors fee to non-executive directors Ever evolving tax footprint 24 12

13 Concerns / challenges Duality of Taxes Post Negative List Renting of immovable property service Stamp duty vis-à-vis Service Tax Supply of software VATandServicetax? Works Contract/ Construction services Differing schemes of abatements under VAT Laws and Service Tax law Original Works, Contract value = Rs. 100/- ServiceTax@12.36%onRs.40/-(abatementof60%) VAT@14.5%onRs.75/-(abatementof25%underVATLaws) Effective value of contract subjected to Indirect Taxes is Rs.115/- as against an actual realization of Rs. 100/- Taxing impact further aggravated for other than Original Works on account of the Service tax abatement being only 40%, therefore effective value of contract subject to Indirect Taxes is Rs.135/- Credits of Excise Duty paid on goods not available on account of conditions of the abatement scheme 26 13

14 Path to GST Dichotomy between Tax Footprint and Credit Footprint While the tax footprint has risen exponentially, the credit footprint is narrow and remains fragmented in silos Scope of the term input service was narrowed in 2011, to eliminate services availed for businesses and restricted only to services used for providing taxable output service, and/or used in or in relation to manufacture Flexibility for distribution of credit has been restricted for Input Service Distributors No concept of First Stage Dealer to pass through Service Tax credits Net impact is that the cascading of taxes will rise and the sunk costs in unutilisable credits will escalate The potential approaches to addressing this problem could be Enlarge the scope of input services Grant refund of unutilisable credit Offer fungible reflective credits unutilised CENVAT credit can be made available fungibly as VAT credit 28 14

15 Milestones & Signals of GST Issue Emerging Position Expanded scope of ST Negative list introduced Automatic refunds New scheme notified Place of supply rules Time of supply rules(pot Rules) IT Infrastructure / Administrative structure Draft legislations (Centre &States) Political will Introduced for Public debate Notified in 2011, Amendments to remove teething difficulties GST Network to be operational from August 2012 / Single forms notified forcedandst No Draft legislations Many States forming a consensus 29 Milestones & Signals of GST Transition date Constitutional amendments Draft legislation Issue Emerging Position Alignment of CED and ST rates with proposed CGST rate Reduction in number of CED exemptions CST CST compensation To be decided post discussion with States Introduced in the Lok Sabha, referred to Standing Committee Bill to be introduced Rate of CED & CE increased to 12% - expectedrateofcgst is8%to10% Reduction in number of exemptions from CED No reduction in CST rate Centre has refused to grant CST compensation 30 15

16 The greater the time gap between the introduction of Negative List (July 1, 2012) and the introduction of GST, the greater the burden for industry and consumers 31 16

17 Mumbai 1502, A Wing, Dalamal Towers, Nariman Point, Mumbai Phone: , Fax: , mumbai@elp-in.com Delhi , 4 th Floor, World Trade Centre, Barakhamba Lane, New Delhi Phone: , Fax: , delhi@elp-in.com Ahmedabad 801, Abhijeet III, Mithakali Six Roads, Ellisbridge, Ahmedabad Phone: / 8, Fax: , Ahmedabad@elp-in.com Pune Suyog Fusion, 7 th Floor, No. 197 Dhole Patil Road, Nr. Ruby Hall Clinic, Pune Tel: / 02 Fax: pune@elp-in.com 17