Annexure “A”

Draft Guidance Paper: A

Taxation of Services based on Negative List

TRU, Central Board of Excise & Customs, Department of Revenue, Ministry of Finance March 16, 2012

In this guidance paper

•  Introduction
•  Guidance Note 2: What is service?
•  Guidance Note 3: Taxability of services
•  Guidance Note 4: Negative List
•  Guidance Note 5: Declared services
•  Guidance Note 6: Exemptions
•  Guidance Note 7: Rules of interpretation
•  Exhibit1:Negative List of services
•  Exhibit2: Exemptions in mega notification
•  Exhibit3: Other exemptions

1. Introduction

1.1 What is the significance of the changes due to the new system of taxation?

Budget 2012 proposes to usher a paradigm shift in the manner services will be taxed in future. The transition involves shift from taxation of 119 service-specific descriptions to a new regime whereby all services will be taxed unless they are covered by any of the entries in the negative list or are otherwise exempted. The new system is a marked shift by way of comprehensive taxation of the entire service sector without getting into complex issues of classification of services.

1.2 What is the aim of this Guidance Paper?

This draft guidance paper is aimed at explaining various aspects of the new concept in order to seek the inputs of all stakeholders and to address any issue that may impact the harmonious application of the new provisions in general or any specific sector in particular. The guidance will be useful to all those who are rendering a service, whether presently taxable or not, tax administrators and tax practitioners besides others who have interest in indirect taxation.

The paper is being brought out as draft guidance recognizing that legislative changes are contained in the form of a Bill which has to undergo the due process of law. Besides it will be desirable that when changes on this scale are being carried out it should have the benefit of inputs from all stakeholders before it attains finality.

1.3 What is the key to using this Guidance Paper?

The guidance paper consists of a number of Guidance Notes. Each of the notes deals with a specific topic relating to the proposed new system of taxation based on the negative list, as summed up in para 1.2 above. The list of these guidance notes is as follows-

Guidance Note 1	Introduction
Guidance Note 2	What is ‘service’?
Guidance Note 3	Taxability of a ‘service’
Guidance Note 4	Negative List
Guidance Note 5	Declared Services
Guidance Note 6	Exemptions
Guidance Note 7	Rules of interpretation

In addition, the Guidance Paper has the following three Exhibits:

•  Exhibit A1 - List of services specified in the negative list
•  Exhibit A2 – List of exemptions in mega notification
•  Exhibit A3 - Gist of other proposed exemptions

1.4 What is the broad the scheme of new taxation?

In the new system, service tax will be levied on all services provided in a taxable territory other than the services specified in the negative list. The key features of this system are as follows:

 At the outset ‘service’ has been defined in clause (44) of section65B of the Act.

 Section 66B specifies the charge of service tax which is essentially that service tax shall be levied on all services provided or agreed to be provided in a taxable territory, other than services specified in the negative list.

•  The negative list of services is contained in section 66D of the Act.
•  Since provision of service in the taxable territory is an important ingredient of taxability, section 66C empowers the Central Government to make rules for determination of place of provision of service. Under these provisions the Place of Provision of Services Rules, 2012 have been made for which a separate and detailed guidance paper (GPB) has been issued.
•  To remove some ambiguities certain activities have been specifically defined by description as services and are referred as Declared Services (listed in section 66E).
•  In addition to the services specified in the negative list, certain exemptions have been given. Most of the exemptions are proposed to be consolidated in a single mega exemption for ease of reference.
•  Principles have been laid down in section 66F of the Act for interpretation wherever services have to be treated differentially for any reason and also for determining the taxability of bundled services.
•  The system of valuation of services for levy of service tax and of availment and utilization of Cenvat credits essentially remains the same with only incidental changes required for the new system of taxation

Taxation of services based on negative list: comprehensive levy except listed exemptions and declared services. Taxation shifts to a comprehensive levy under which all services provided in a taxable territory are taxable unless excluded by the negative list or expressly exempted; the guidance explains statutory definition of service, territorial place of provision rules, the negative list, declared services, a consolidated exemptions scheme, interpretative rules for bundled supplies, and continuity of valuation and Cenvat credit principles with limited adjustments.