Unscrew the Negative list

An overlap where VAT and service tax apply on the same component, the amended definition of ‘works contract' does reduce double taxation to some extent.

The proposed negative-list based taxation of services has been a matter of intense public debate since it was announced in the Budget earlier this year. The industry expects the regime to be simpler and believes it would bring us closer to the much-awaited goods and service tax (GST). From the Government's standpoint, this helps in broadening the tax base and gearing the tax administration for the upcoming reforms.

The changes also throw up challenges such as the incidence of double taxation, where a transaction is subjected to both State tax and service tax. While there are many examples to show this overlap exists already, businesses worry that the problem would be compounded by the way the proposed law is worded. States also raised this concern through the Empowered Committee of GST, worried that the Central Government would encroach on State territory.

A strong contention pertained to the lease or ‘transfer of right to use' goods, which is considered ‘deemed sales' under the Constitution and subjected to VAT by States. The proposed definition of ‘service' excluded ‘sale' of goods only if it was through transfer of title. As lease, by definition, does not involve transfer of title there was a doubt whether it would be subject to service tax, in addition to VAT. This issue was subsequently addressed by an amendment in law earlier this month which specifically excluded ‘deemed sales' from the ambit of services. This would certainly simplify matters and avert unnecessary litigation to some extent.

   MOVABLE ‘WORKS CONTRACT'

One more issue of double taxation has been the composite contracts involving supply of material and services, commonly known as ‘works contract'. In the basic proposal, ‘works contracts' had been defined as contracts for construction, installation, repair, maintenance, renovation and so on in relation to buildings or structures on land. Service tax was meant to be applied on a specified percentage of the total contract price (40 per cent in many cases). It also meant that composite contracts, not involving building or structures on land, would remain uncovered under this definition. Therefore, service tax would apply on the entire contract value if a composite sum is agreed with the customer. This would  include annual maintenance contracts of, say, computers, air conditioners, etc.where connection between material and services is not available.

Providing a significant relief to industry, the definition of ‘works contract' has been amended to include contracts in relation to movable property as well.

Accordingly, service tax would now apply on an abated portion of the contract value, and not the entire contract value. While there could still be an overlap where VAT and service tax apply on the same component, the amendment does reduce incidence of double taxation to some extent.

    WAY TO  GST

Thus, double taxation remains a concern in many other cases.  However, a long-term solution appears likely only with the introduction of GST.

Thus to sum up the amendments are certainly steps in the right direction. It is encouraging to see the tax administrators not only involving the stakeholders in such an important reform but also demonstrating flexibility by carrying out necessary changes quickly. One can only hope that this process of wider consultation would continue as we embark upon the journey of the most important reform — GST.