Last year?s Budget had pioneered a sweeping reform in the service tax legislation by introducing the negative list and place of provision of service (POS) rules, which revamped the entire basis of levying service tax. This year, the taxman would want to iron out the rough edges of the sketch drawn last year. Clarity on a host of ambiguous and contentious issues facing the services sector is expected in the upcoming Budget.
Export of services
Definition of ?location of service recipient? under POS rules, which attempts to link a location to actual usage of service, has led to widespread ambiguity. There is confusion over whether location would be decided as per location of contractual party or where the service is actually used when the establishment doesn?t belong to the contractual recipient. Adopting the latter interpretation is leading to absurd and unwarranted outcomes, resulting in denial of export benefit to various Indian service providers. It is expected that the Budget will resolve this issue.
Implementation of the POS rules has been a positive step forward to align Indian laws with international best practices. However, the basic tenet of Service tax ie a destination-based consumption tax is being diluted with the move to tax certain services such as intermediary, online information database access on the basis of the location of the service provider. This has had the effect of Indian service providers of these services losing out on the benefit of export, even when provided outside India. Further, the existing definition of an ?intermediary? has had the effect of covering unintended persons and various B-to-B transactions under its scope, thus making the arrangements liable to service tax, a situation not envisaged by the government at the time of framing the definition. It is therefore expected that the scope of intermediary would be curtailed.
Works contracts are those which involve provision of services and supply of goods under a single contract. Such contracts are subject to levy of both, service tax and VAT. After last year?s Budget, the service industry has been facing a significant issue in relation to the taxability of such contracts. In cases of indivisible works contracts, service tax is payable on 40,60, or 70% of the value of works contract. This situation leads to double taxation, with service providers paying service tax plus VAT on a value higher than the total value of contract. It is expected that relief would be granted by way of introducing appropriate rates of abatement.
An establishment of a person located within India and establishment of the same person located outside India are considered separate persons under the new regime. The rules have been amended such that a transaction between the two can never qualify as an export. This has created a furore in the services sector as a multitude of MNC?s carry out their operations through the liaison office/branch office (BO) model in India and cross-border transactions between the head office (HO) and BO in India have taken a hit on this account. The irony is that tax is being levied on reverse transactions where service is received by BO in India from its HO outside India. Amendment in the provisions governing export of services is expected, which would restore the benefit to such cross-border transactions.
Last year the government had released a draft circular for public discussion that proposed to levy service tax in the hands of employers on all perquisites/benefits extended to employees. There is a fear that the way the current legislation is framed, service tax may be levied on the benefits granted by employers to their employees, even though income tax is paid on the same by the employees. The industry had been vociferous against the draft circular, and it is hoped that the government would rectify the anomaly present in the law on this account.
The definition of ?input service? under the Cenvat rules may witness a major amendment such that its scope may be widened to align it with the negative-list regime. The negative list has opened the flood gates of taxability by bringing all services under the tax net, however, the government omitted to correspondingly widen the scope of the definition of input services. As a consequence, the service providers have not been able to reap the entire benefit of taking credit on the services utilised by them for providing taxable services.
The implementation of the negative-list regime was orchestrated as a part of a larger plan aimed at setting the stage for the day the much-hyped GST legislation would be rolled out. Today, the implementation of the GST hangs in the balance between resolving state compensation issues and architectural glitches, but, in the meanwhile, one can expect various changes in the existing legislation which would ensure a smooth transition to the GST regime.
The author is tax partner, Ernst & Young, Views expressed are personal