One aspect of the goods and services tax (GST) that hasn?t received the attention it deserves is service tax. Internationally, the fundamental rule is that goods should be taxed in the jurisdiction where the customer is located.
Financial flows, business agreements and underlying transactions generally reflect this philosophy. Only in exceptional circumstances, such as cross border leasing of goods, does one witness any deviation from this rule.
Competition and rapidly changing customer preferences often require businesses to import services. Multinational businesses find themselves struggling with laws and administrative requirements at odds across different countries. Then, monitoring tax compliances becomes unduly burdensome. Uncertainty marks most service transactions, particularly the likes of shared service centres, centralised sales and procurement functions, call centres, data processing and information technology support. Businesses can incur double taxation when two different jurisdictions tax the same supply.
The general agreement on trade in services (GATS) provides an inclusive definition of the segment, including ?any service in any sector, except services supplied in the exercise of governmental authority?. Even the glossary of the organisation for economic cooperation and development calls services ?outputs produced to order and which cannot be traded separately from their production. Services are not separate entities over which ownership rights can be established?. This glossary further defines a host of related terms such as market services, non-market services, competitive services, educational services, personal services and individual services. In other words, every activity other than trade in goods is envisaged within the ambit of ?service?. Most industrialised countries including the US, the EU, Canada and Australia, classify intangible rights as service. They also agree that consumption tax should be levied as per jurisdiction at the site of consumption.
In India, the Kelkar committee, appointed by the Centre to counsel tax reforms, has recognised that selective taxation of services covering selective activities in the service sector is distortionary. It affects neutrality between goods and services, and services inter se. Its ambiguities boost classification disputes. When some services are taxed and some are not, service providers will always try to label theirs under the non-taxable category. So the committee has recommended taxing all services or neutrality in taxation. Exclusion, if any, should only be on grounds of significant externalities and have administrative feasibility.
But the place of taxation (or situs, in jargon) of services has always been a contentious issue in India, especially in case of exports where the definition of services has undergone several changes in the past five years. Some internationally accepted services are taxed under VAT as well as service tax. Given
Indian tax legislation?s tendency to deviate from generally accepted international practice, it is imperative the issue is resolved once and for all at the time of inception of GST. Defining services in general and its situs in particular will be crucial in determining whether the levy, administration and collection of GST on services is seamless.
Under dual GST as proposed by the FM, it is envisaged that there will be a simultaneous levy of Central and state GST on both goods and services. Goods are presently taxed in the state from where they move and it may be easy to determine their situs. But the taxation of services provided between states will pose a challenge to the proposed GST format. It is hoped that these issues will be resolved in accordance with internationally adopted practices.
The author is a tax partner, Ernst & Young, India