The increase in revenues and a burgeoning list of taxable services were accompanied by increased complexities in the law, leading to a consequent increase in litigation, with classification being an oft-cited reason due to frequent overlaps among taxable categories. The classification of a service assumed importance since it was the basis to determine tax rates, availability of exemptions as well as qualification of service as export or imports.
In this backdrop, the negative list-based approach of taxing services, introduced in July 2012, was considered an improvement over the erstwhile tax regime, since it eliminated classification issues, allowed easier flow of tax credits and widened the tax base while keeping certain sensitive activities outside of the tax net.
It was believed that this would be welcomed by all stakeholders since the industry had been demanding introduction of a negative list-based tax regime for long. However, the government is copping a lot of criticism for the manner in which this change has been brought about.
The primary reason for this is that instead of simplifying the tax regime, the new laws are more complex and difficult for a layman to comprehend while tax experts are still attempting to understand its finer nuances.
The philosophy presupposes taxability of all services, except those mentioned in the negative list. However, in addition to the negative list, we also have a declared list of services that include activities declared as taxable services, and a plethora of services exempted by way of notifications, often referred to as Exempt list of services.
Therefore, one has to first ascertain whether he is covered in any of these lists in order to determine if he is required to pay tax.
However, while determining the taxability of services, one may also need to examine the concept of bundled services, which has been introduced to determine the taxability of multiple activities undertaken together to render a service. The rules governing the taxation of such services are exceedingly complex and the lack of substantial guidelines and judicial precedents on the subject has resulted in adoption of differing tax positions by service providers. This is likely to lead to a raft of litigation.
Then, there are multiple sets of rules governing various aspects of law. Since tax is levied on services provided in the taxable territory, there are rules to determine the place of provision of services. Further, one also needs to examine the rules governing valuation of services, as well as the time at which the tax liability needs to be discharged. However, some of the provisions in this regard are imperfectly drafted and ambiguous.
For instance, the place of provision of services rules consists of 14 rules. Out of these, 10 are operative rules including general as well as specific rules framed for certain situations. There is often an overlap among rules, which is addressed by mentioning that the latter rule would take precedence over the earlier ones. This seems to be in contravention of well-settled judicial principles, which state that specific rules should take precedence over general rules.
Earlier, the receipt of consideration was the single reference point to discharge service tax liability. However, this simple rule has now been replaced by point of taxation rules that determine the point of tax incidence with reference to completion of service, raising of invoices and receipt of money or advances, depending on facts and circumstances of each transaction.
At times, it may be difficult to ascertain the point at which a service can said to have been completed, resulting in disputes with the tax authorities on timing for discharge of tax liability. Further, the rules also cause administrative difficulties, in so far as they do not provide any room for adjustment of tax liabilities in case of partial payment of invoices or bad debts.
One feels that though a step in the right direction, the new scheme of taxation has been waylaid due to multiplicity and complexity of rules which may have arisen as a result of revenue pressures. While one is not challenging the intent and coverage of the rules, one thought that a smaller and simpler set of rules was the need of the hour.
It is hoped that when the FM presents his Budget proposals later this week, some of these issues will be suitably addressed to make life simpler for the assessee as well as the taxman.
The author is executive director, Khaitan & Co. Rahul Jena contributed to the article. Views expressed are personal