Transition from service tax to GST

Transition from service tax to GST

S MADHAVAN LEADER, INDIRECT TAX PRACTICE, PRICEWATERHOUSECOOPERS


THE CURRENT SCHEME OF TAXATION OF services in India is likely to be substantially revised under the much-awaited dual goods and service tax (GST). Services which are at present only taxed at the federal level would be taxed under the GST both at the federal and state level, resulting in a paradigm shift in the taxation of services. This shift will be with regard to coverage and scope, the manner of charge of the tax, its levy and collection and so on.
At present, what is sought to be taxed is defined in elaborate fashion. As opposed to this, it is likely that under the GST scheme of things, the internationally accepted principle of taxing all services, with a small negative list of services which will either not be taxed or will be exempt from the tax, will be adopted. Thus, all services with the possible exception of essential public services such as education, basic healthcare and public transport could be brought within the ambit of the GST. Indeed, activities which are typically not understood as services at all will also be covered. An example is that of refraining from doing something i.e. contractually choosing to be inactive for a consideration , as is the case with fees paid for non compete.
One significant benefit of such manner of coverage would be to substantially reduce disputes on categorisation and classification of services. Presently, a significant amount of vexatious litigation is centred around interpretation of the various complex definitions of taxable services. To reduce classification disputes, it would be essential that all Indian states adopt a uniform statute on taxation of services along the aforesaid lines.
One contentious issue under the proposed dual GST is with regard to framing of the place of supply rules so as to identify the place where the tax will be paid. As for the federal GST, this is unlikely to pose a problem since regardless of these rules, the Central government would be in a position to collect the tax from the service provider located in any part of the country. However, in the absence of clear place of supply rules, serious problems could arise as to which particular state would be eligible to charge the tax in relation to the cross border (inter-state ) supplies of services.
In this connection, it would be worthwhile to consider the rules as are typically in force in the European Union (EU). Although the EU member countries have uniformly implemented a unified GST, as opposed to the dual GST model, these rules are in force in relation to inter- country supplies of services and could hence easily form the basis for a similar model to tax inter-state services in the Indian context. Typically, the EU rules envisage the place of supply to be the place where the service recipient is located, on the principle that the tax ought to apply at the place of consumption of the services. However, there are situations where services are taxable at the place where the supplier is established as a business. Other parameters which are relevant in order to determine the place of supply are in regard to place of performance of the services and place of effective use or enjoyment of the services. The rules also change based on whether the services are rendered by businesses to consumers (B2C) or from businesses to businesses (B2B). Consequently, the place of taxation of services would also depend on the characteristics and the nature of services. Industries such as telecommunications, insurance, banking, software and the like could face serious challenges in regard to determining the place of supplies of services in relation thereto. The challenge would be to ensure that the place of supply rules are reasonably simple.
Another important dimension to the discussion on transition of services taxation from the present model to the GST is with regard to exclusions and exemptions. This aspect becomes doubly important considering that the aggregate rate of service tax needs to be a moderate one, notwithstanding that it would be taxed at both federal and state levels. If this objective, and the allied and equally important objective of having one single rate is to be achieved, it is important that exemptions and exclusions from the tax, which have the effect of narrowing the base of the tax, are minimised. It is therefore entirely possible that the numerous exemptions that are currently in place will be discontinued.
Another aspect of the transition is about the problem of double taxation of a single transaction to both the goods tax and the service tax. With the advent of the GST, the statute on services, as also that for goods, will be so framed that mutual exclusivity will obtain and hence the problem of double taxation will be obviated. This will come about if services are deemed to be as all those which are not treated as goods and it is only goods which will be individually categorised and classified, possibly as per the well known HSN. Internationally, the GST has indeed precluded the possibility of double taxation on the above basis and it is hoped that it will be the case in the Indian context as well.
To summarise, the taxation of services going into the GST is scheduled to undergo fundamental changes and hopefully for the better. The expectation under the GST is for a simpler and more transparent scheme of services taxation, with less attendant complexity. It is also the expectation that the aggregate incidence of service tax under the GST, albeit comprising both the federal and the state services tax, as opposed to the present singular federal tax, will nevertheless be a moderate one. The country will soon know whether these expectations have been met.