Budget 2012 has proposed certain conceptual changes in the way service tax in India is administered, and this article seeks to summarise the key statutory proposals which have relevance across industry segments and also highlights the challenges arising during the process of convergence of the new regime of the proposed Goods & Services Tax (GST).
Negative-list model of taxation
In line with the model adopted to tax services in the European Union, service tax would now be imposed on all ‘services’ other than those in the negative list and a specially articulated exempt list. The intent is to streamline and widen the tax net to cover services that were hitherto not covered.
As an illustration, the act of undertaking an obligation to refrain from an act is now specifically defined to be a service. Thus, M&As involving non-compete obligations would now attract tax and could lead to some complexities. The statutory verbiage adopted could result in debate in certain areas. For example, the coverage of equipment supply/leasing activities, AMC-type arrangements and transactions relating to “actionable claims” under the service tax regulations could now become debatable.
Service-to-self (for cross-border deals)
As a general rule, services rendered inter se is not subjected to service tax; the only exception being in bound transactions between an Indian branch and its HO outside India. Now, this exception has also been extended to outbound services also, where say a branch in India renders services to its HO located overseas. This is expected to place further compliance obligations on the entities adopting similar structures while operating in India, such as foreign banks and oilfield service providers.
Place of supply rules
Services that qualify as an ‘export’ do not attract service tax and are entitled to certain Cenvat credit-related benefits. This export status was determined under the Export of Services Rules, 2005. Similarly, the liability to pay tax on services imported was determined by the Taxation of Service Rules, 2006. Both these rules are now intended to be replaced by a singular Place of Provision of Service Rules, 2012 (New Rules); the New Rules are intended to determine the location where services are consumed since service tax as an indirect tax should accordingly apply based on the place of consumption of services. Thus, if the location determined is outside India or in a special economic zone, service tax will not apply.
The current rules categorise services exported and imported into three segments and applies different rules to determine their tax treatment. A plain reading of the New Rules in this context throws up some inferences and surprises summarised below:
Basket A: The no-tax treatment for services rendered to customers outside India should continue. However, specific status-based exceptions to this 'liberal' treatment have been introduced for services by a bank/ FI/ NBFC to an account holder, telecommunication service providers, online information access and retrieval services, and intermediary services. These exceptions could incrementally impact the financial services sector; Additionally, the definition of an intermediary is likely to lead to debate on its scope and effect, and could become relevant for the outsourcing sector too.
Basket B: Situations where the tax treatment was hitherto dependant on the service being partly performed outside or within India will undergo some change. Here, the export status will now depend on where the services or events are actually performed or held. Instances where services are rendered upon goods being made physically available for a service to be rendered have an exposure to a change in tax treatment for cross-border revenues and expenses. Preliminary analysis suggests that the logistics and courier industry segments may face challenges in this regard.
Basket C: The existing treatment of immovable property-related services, where the criterion is the location of such property, should continue.
Given that the New Rules are yet to become effective, the government has invited comments from the industry. It will be imperative for the industry to identify risks to a no-tax status for export revenues and make the appropriate representations, as recovery of additional taxes from overseas customers could become challenging.
As indicated above, the Budget also seeks to introduce a negative list. This includes a list of specific exemptions. This list indicates that some of the exemptions are end-use based. For example, construction services for civil structures for non-industrial/non-commercial use, educational, drinking water supply, etc, are enumerated as exempt activities.
While the legislative intent for these exemptions is laudable, debate may result from whether such services would continue to be exempt at the sub-contractor level. Given this, the infrastructure segment should review scope of these exemptions and transitional issues when underlying provisions come into effect.
To conclude, it seems that classification matters will continue to be relevant as long as exemptions and concessions (though justified) continue. Further, the proposals in the Union Budget 2012 underscore the increasing relevance for businesses to try to bring a degree of certainty on the tax treatment of revenues and limit surprises, especially when tax framework is in the state of evolution.