CONFERENCE ON GST

Distance to GST – Has the Budget 2012 shortened it?

Rohan Shah
Economic Laws Practice

02nd June 2012

Background to the introduction of the
Negative List
 Current Tax Cost in India
Octroi – 0.5 to 5%
Interstate purchase
Imports
(CST)
Customs Duty Local purchase
Basic – 10% Dealer Retailer
Local purchase VAT – 5%/12.5%
CVD – 12%
Ed. Cess – 3% VAT – 5%/12.5%


Factory Goods Transporter Other
Serv. Tax-12.36% Service Provider
Other Serv. Tax – 12.36%
Intra-State
Service Provider Service Provider
Ex. Duty – 12%
Serv. Tax – 12.36% Serv. Tax – 12.36%
Edu. Cess – 3%
VAT– 5%/12.5%

 Stock transfer
(No tax) Central Levy State Levy
Toll Manufacturer
Inter-State -Credit not fungible between State and Centre;
Ex. Duty – 12%
resulting in a cascading impact of taxes
Edu. Cess – 3%
CST – 2%
- Cumulative burden of Indirect Taxes in India – 28%
to 44% (approx.)

VAT rate may range from 12.5-15% depending on the State

 Current
Current TaxesTaxes and Credits
and Credits

Addnl. duty of Customs

Excise duty Excise duty
Service tax Service tax

VAT (State Sales tax)

VAT (State Sales tax)

Central Sales tax

Entry tax No Credit
Octroi

4
 Constitutional Framework...
 Taxes levied by Central Government and State Government(s)
 Authority to levy a tax is derived from the Constitution of India
 Which allocates power to levy various taxes between the Centre
and State
 Article 265 of the Constitution which states that "No tax shall be
levied or collected except by the authority of law”
 Article 246 of the Indian Constitution, distributes legislative
powers including taxation, between the Parliament of India and
the State Legislature
 Schedule VII enumerates use of three lists;
 List - I Where the parliament is competent to make laws
 List - II Where only the state legislature can make laws
 List - III Where both the Parliament and the State Legislature can
make laws upon concurrently
5
 ...Constitutional Framework
Union List State List Concurrent List
• Income Tax • Taxes on lands and • Stamp duties other
• Custom Duty buildings than duties or fees
• Excise Duty • Excise duty on collected by means of
alcoholic liquor etc judicial stamps, but
• Corporation Tax
• Entry tax not including rates of
• Service tax stamp duty
• Central Sales Tax
• Sales Tax
• Stamp duty in respect
• Tolls
of bills of exchange, • Luxury Tax
cheques, promissory • Stamp duty in respect
notes, etc of documents other
than those specified in
the provisions of List I

The constant blurring of taxing jurisdiction between the Centre and the
States has necessitated multiple Constitutional challenges
6
 Constitutional Amendment Bill
Introduction of Article 246A in the Constitution:

“Parliament and the Legislature of every State, have power

to make laws with respect to goods
and services tax imposed by the Union or by that State
respectively.

Provided that Parliament has exclusive power to make laws

with respect to goods and services tax where the supply of
goods, or of services, or both takes place in the course of
inter-State trade or commerce.”
 Duality of charge – pre negative list
 Goods Vs. Services
 Lines between the taxation of Goods & Services is constantly blurring
 Duality of Charge

Sr. Activity Customs Central / Service VAT /

No. duty State Excise tax CST
duty
1. Intellectual Property    
Services

2. Import of Designs,  
Technical Know etc..
3. Works Contract  
4. Construction Services  
5. Manufacture of Products  
liable to State Excise

8
 Other pain points in the current system
 Discrimination between manufacturers, service providers and traders
 Non-uniform application of exemptions, credit provisions, etc.
 Cascading impact of taxes
 Multiple causes of irrecoverable tax costs
 Accumulation of credits
 Non-transferability – lack of fungibility
 Inverted duty structures
 Rate structure - no uniformity
 no clear basis on which effective rates determined
 Non availability of credits
 Basis of levy of Service Tax was uncertain and variable
 Rendition / performance
 Consumption / use
 Receipt
GST regarded as panacea to address all
pain points
Rationale for negative list
 Rationale for Negative List…
 First Concept Paper for Public Debate (August 2011)
 “There are advantages in moving towards negative list at an
earlier time in order to gain useful experience in its implementation
and minimize the impact of the mammoth changes that GST may
usher”

 Revised Concept Paper on Taxation of Services based on

Negative List (November 2011)
 “Introductionof Negative List at an earlier stage will pave the way
for the smooth transition to the GST, and significantly ease the
challenges arising out of implementing the GST.”
 …Rationale for Negative List
 FM’s speech (2012):
“At the end of June this year, this tax will attain adulthood by completing
18 years. It is therefore time to shift gears and accelerate ahead.
However, service tax needs to confront two important challenges to
sustain the journey. These are:
The share of services in taxes remains far below its potential. There is a
need to widen the tax base and strengthen its enforcement;
Service Tax law is complex and sometimes avoidably different from
Central Excise. We need to bring the two as close as possible in the light
of our eventual goal of transition to GST.”
Negative list
 Enactment of Finance Act, 2012
Provisions in Finance Bill enacted as Finance Act,
2012 on May 28, 2012

Negative list provisions to come into force from a date

to be notified

The Legislative scheme for the levy of Service Tax

stands overhauled
 Approach – Selective Vs Negative List

Selective Approach – Negative List – all

selected services are taxable services are taxable

116
Taxable
Services
Taxable Services
Exempt Services - Threshold
Negative list + exempt
Service Tax net widened

17
17
 Potential Revenue Impact

 Effective percentage of entire service sector that is covered

under the tax net = 20-25% (First Concept Paper)
 Estimated net revenue gain consequent to changes in the Union
Budget 2012-13, relating to Indirect Taxes, estimated at Rs.
45,940 crore (Budget Speech 2012-13)
 Service tax changes – Rs. 18,660 crore additional revenue
 Change in provisions – Finance Act
Current Provisions under Provisions under Finance Act
Finance Act

Following provisions will cease to Following provisions will come into

exist from a date to be notified force from a date to be notified

Section 65 - Definitions Section 65B - Definition

Section 66B – Charging Section

Section 66 – Charging Section
Section 66C – Place of Provision

Section 66D – Negative List

Section 66E – Declared Services

Section 65A - Classification Section 66F - Classification

Section 67A – Rate and Value

Section 68 – Payment of Service tax

Section 66A – Charging Section in
case of import of services Section 66C – Place of Provision
 Charging Section
 Old charging provision (Section
66)
“There shall be levied a tax
(hereinafter referred to as the
service tax) at the rate of twelve
per cent. of the value of taxable
services referred to in sub-
clauses [ ] of clause (105) of
section 65 and collected in such
manner as may be prescribed.”
 New charging provision (Section
66B)
“There shall be levied a tax
(hereinafter referred to as the
service tax) at the rate of twelve
per cent. on the value of all
services, other than those
services specified in the
negative list, provided or agreed
to be provided in the taxable
territory by one person to
another and collected in such
manner as may be prescribed.”
 ‘Service’…
Means Includes But shall not include
- Any activity -Includes a declared service -any activity that constitutes merely a
- Carrie 1.Right to use immovable property transfer in title of goods or immovable
d out 2.Construction of a complex, building, property by way of sale, gift or in any
by a civil structure or a part thereof; including other manner;
perso a complex or building intended for sale to -such transfer, delivery or supply of any
n for a buyer, wholly or partly except where goods which is deemed to be a sale
anoth consideration is received prior completion within the meaning of clause (29A) of
er 3.Temporary transfer or permitting the Article 366 of the Constitution;
- For use or enjoyment of any intellectual - a transaction in money or actionable
consi property right claim;
derati 4.Information technology software - any service provided by an employee to
on services an employer in the course of or in relation
5.Obligation to refrain from an act, or to to his employment;
tolerate an act or a situation, or to do an - fees taken in any Court or a tribunal
act established under any law for the time
6.Service in relation to lease or hire of being in force
goods and hire purchase transactions - by a Constitutional authority under the
7.Execution of Works Contracts Indian Constitution or a member of an
8.Service portion in the serving of foods Indian Legislature or a local self-
or other article of human consumption government in that capacity
 Definition of ‘Service’ – other jurisdictions
Country Definition of service
Canada  Service means anything other than
(Section 123(1) of  Property,
the Excise Tax Act)  Money, and
 Anything that is supplied to an employer by a person who is
or agrees to become an employee of the employer in the
course of or in relation to the office or employment of that
person.”
New Zealand  Services has been defined to mean “Anything which is not goods
(Section 2 of the or money”
GST Act)
Singapore  ‘Supply of services’ means “anything which is not a supply of
(Section 10 of the goods but is done for a consideration (including, if so done, the
GST Act ) granting, assignment or surrender of any right)”
United Kingdom  ‘Supply of services’ is defined as “anything which is not a supply
(Section 5 of the of goods but is done for a consideration (including, if so done, the
Value Added granting, assignment or surrender of any right) is a supply of
Tax Act, 1994 ) services.”
 Negative List of Services...
Sr. Description of services which are not liable to Service Tax
No.
1. Services by Government or a local authority (excluding certain specified
services)
2. Services by the Reserve Bank of India
3. Services by a foreign diplomatic mission located in India
4. Services relating to agriculture (only certain specified services covered)
5. Trading of goods
6. Any process amounting to manufacture or production of goods. “Process
amounting to manufacture or production of goods" has been defined to as a
process on which duties of excise are leviable under section 3 of the CE Act,
1944 or any process amounting to manufacture of alcoholic liquors for
human consumption on which duties of excise are leviable under any State
Act
7. Selling of space or time slots for advertisements other than advertisements
broadcast by radio or television. ‘Advertisement’ has been specifically
defined.
8. Service by way of access to a road or a bridge on payment of toll charges
 ...Negative List of Services...
Sr. Description of services which are not liable to Service Tax
No.
9. Betting, gambling or lottery. The term ‘betting or gambling’ has been
specifically defined.
10. Admission to entertainment events or access to amusement facilities.
11. Transmission or distribution of electricity by an electricity transmission or
distribution utility. The term ‘electricity transmission or distribution utility’ has
been specifically defined.
12. Services by way of pre-school education, higher secondary school
education, education as a part of a curriculum for obtaining a qualification
recognised by any law and vocational education course.
13. Services by way of renting of residential dwelling for use as residence. The
term ‘renting’ has been specifically defined.
14. Services by way of extending deposits, loans or advances in so far as the
consideration is represented by way of interest or discount or inter se sale or
purchase of foreign currency amongst banks or authorised dealers of foreign
exchange or amongst banks and such dealers
 ...Negative List of Services
Sr. Description of services which are not liable to Service Tax
No.
15. Service of transportation of passengers, with or without accompanied
belongings, by a stage carriage; railways in a class other than first class or
an air-conditioned coach; metro, monorail or tramway; inland waterways;
public transport, other than predominantly for tourism purpose, in a vessel of
less than fifteen tonne net; and metered cabs, radio taxis or auto rickshaws
16. Services by way of transportation of goods by road, by an aircraft or a vessel
from a place outside India to the first customs, or by inland waterways
(subject to certain exceptions)
17. Funeral, burial, crematorium or mortuary services including transportation of
the deceased.
 Exempted Services...
Sr. Description of service in respect of which exemption from payment of Service Tax
No. is granted
1. Services provided to the United Nations or a specified international organization
2. Health care services by a clinical establishment, an authorised medical practitioner…
3. Services by a veterinary clinic in relation to health care of animals or birds
4. Services by an entity registered under Section 12AA of the IT Act ie charitable activities.
5. Services of- (a) renting of precincts of a religious place meant for general public; or (b)
conduct of any religious ceremony.
6. Services provided to any person other than a business entity by -
(a)an individual as an advocate; or
(b)a person represented on and as arbitral tribunals.

7. Services of technical testing or analysis of newly developed drugs, including vaccines

and herbal remedies, on human participants by a clinical research organization...

8. Services by way of training or coaching in recreational activities relating to arts, culture

or sports.
 ...Exempted Services...
Sr. Description of service in respect of which exemption from payment of Service Tax
No. is granted
9. Services provided-
(a) to an educational institution by way of catering under any centrally assisted mid – day
meals scheme sponsored by Government; (b) to or by an institution in relation to
educational services, where the educational services are exempt from the levy of Service
Tax, by way of transportation of students or staff (c) to or by an institution in relation to
educational services, where the educational services are exempted from the levy of
service tax, by way of services in relation to admission to such education.

10. Services provided to a recognised sports body by-

(a) an individual as a player, referee, umpire, coach or manager for participation in a
tournament or championship organized by a recognized sports body;
(b) another recognised sports body;
11. Services by way of sponsorship of tournaments or championships organised,-
(a) by a national sports federation, or its affiliated federations…
(b) by Association of Indian Universities, Inter-University Sports Board, School Games
Federation of India, All India Sports Council for the Deaf, Paralympic Committee of India,
Special Olympics Bharat;
(c) by Central Civil Services Cultural and Sports Board;
(d) as part of national games, by Indian Olympic Association; or
(e) under Panchayat Yuva Kreeda Aur Khel Abhiyaan (PYKKA) Scheme;
 ...Exempted Services...
Sr. Description of service in respect of which exemption from payment of Service Tax
No. is granted
12. Services provided to the Government or local authority by way of erection, construction,
maintenance, repair, alteration, renovation or restoration of -
(a) a civil structure .. meant predominantly for a non-industrial or non-commercial use;
(b) a historical monument, archaeological site or remains of national importance...
(c) a structure meant predominantly for use as (i) an educational, (ii) a clinical, or (iii) an
art or cultural establishment;
(d) canal, dam or other irrigation works;
(e) pipeline, conduit or plant for (i) drinking water supply (ii) water treatment (iii)sewerage
treatment or disposal; or
(f) a residential complex predominantly meant for self-use or the use of their employees
or other persons specified in the Explanation 1 to clause 44 of section 65 B of the said
Finance Act;
13. Services provided by way of erection, construction, maintenance, repair, alteration,
renovation or restoration of,-
(a) road, bridge, tunnel, or terminal for road transportation for use by general public;
(b) building owned by an entity registered under section 12AA of the Income tax Act,
1961(43 of 1961) and meant predominantly for religious use by general public;
(c) pollution control or effluent treatment plant, except located as a part of a factory; or (d)
electric crematorium;
 ...Exempted Services...
Sr. Description of service in respect of which exemption from payment of Service Tax
No. is granted
14 Services by way of erection or construction of original works pertaining to,-
(a) airport, port or railways;
(b) single residential unit otherwise as a part of a residential complex;
(c) low- cost houses up to a carpet area of 60 square metres per house in a housing
project approved by competent authority empowered under the ‘Scheme of Affordable
Housing in Partnership’ framed by the Ministry of Housing and Urban Poverty Alleviation,
Government of India;
(d) post- harvest storage infrastructure for agricultural produce including a cold storages
for such purposes; or
(e) mechanised food grain handling system, machinery or equipment for units processing
agricultural produce as food stuff excluding alcoholic beverages;
15. Temporary transfer or permitting the use or enjoyment of a copyright covered under
clause (a) or (b) of sub-section (1) of section 13 of the Indian Copyright Act, 1957 (14 of
1957), relating to original literary, dramatic, musical, artistic works or cinematograph
films;
16 Services by a performing artist in folk or classical art forms of (i) music, or (ii) dance, or
(iii) theatre, excluding services provided by such artist as a brand ambassador
17. Services by way of collecting or providing news by an independent journalist, Press Trust
of India or United News of India.
 ...Exempted Services...
Sr. Description of service in respect of which exemption from payment of Service Tax
No. is granted
18. Services by way of renting of a hotel, inn, guest house, club, campsite or other
commercial places meant for residential or lodging purposes, having declared tariff of a
room below rupees one thousand per day or equivalent;
19. Services provided in relation to serving of food or beverages by a restaurant, eating joint
or a mess, other than those having the facility of air-conditioning or central air-heating in
any part of the establishment, at any time during the year and which has a license to
serve alcoholic beverages;
20. Services by way of transportation by rail or a vessel from one port in India to another of
the 9 specified varieties of goods.
21. Services provided by a goods transport agency by way of transportation of fruits,
vegetables, eggs, milk, food grains or pulses, or where gross amount charged on a
consignment transported in a single goods carriage does not exceed Rs. 1,500; or
where gross amount charged for transportation of all such goods for a single consignee
in the goods carriage does not exceed Rs. 750
22. Renting of motor vehicles to State transport undertaking meant to carry more than twelve
passengers and to a goods transport agency, a means of transportation of goods.
 ...Exempted Services...
Sr. Description of service in respect of which exemption from payment of Service Tax
No. is granted
23. Transport of passengers by-
•air embarking or terminating in an airport located in the state of Arunachal Pradesh,
Assam, Manipur, Meghalaya, Mizoram, Nagaland, Sikkim, or Tripura or at Baghdogra
located in West Bengal; or
•a contract carriage for the transportation of passengers, excluding tourism, conducted
tour, charter or hire
24. Services by way of motor vehicle parking to general public excluding leasing of space to
an entity for providing such parking facility
25. Services provided to the Government or a local authority by way of -
(a) repair of a ship, boat or vessel;
(b) effluents and sewerage treatment;
(c) waste collection or disposal;
(d) storage, treatment or testing of water for drinking purposes; or
(e) transport of water by pipeline or conduit for drinking purposes
26. Services of general insurance business provided under specified schemes
27. Services provided by an incubatee up to total business turnover of Rs. 50 lakh in an FY,
subject to the following conditions: (a) total business turnover had not exceeded Rs. 50
lakh in the preceding FY and
(b) 3 years has not lapsed from the date of entering into agreement as an incubatee
 ...Exempted Services...
Sr. Description of service in respect of which exemption from payment of Service Tax
No. is granted
28. Service by an unincorporated body or an entity registered as a society to own members
by way of reimbursement of charges or share of contribution
(a) as a trade union;
(b) for the provision of exempt services by the entity to third persons; or
(c) up to an amount of Rs. 5000 per month per member for sourcing of goods or services
from a third person for common use of its members in a housing society or residential
complex
29. Services by the following persons in respective capacities -
(a) a sub-broker or an authorised person to a stock broker;
(b) an authorised person to a member of a commodity exchange;
(c) a mutual fund agent or distributor to mutual fund or asset management company for
distribution or marketing of mutual fund;
(d) a selling or marketing agent of lottery tickets to a distributer or a selling agent;
(e) a selling agent or a distributer of SIM cards or recharge coupon vouchers; or
(f) a business facilitator or a business correspondent to a banking company or an
insurance company in a rural area;
 ...Exempted Services
Sr. Description of service in respect of which exemption from payment of Service Tax
No. is granted
30. Carrying out an intermediate production process as job work in relation to specified
goods
31. Services by an organiser to any person in respect of a business exhibition held outside
India

32. Services by way of making telephone calls from:

(a) departmentally run public telephones;
(b) guaranteed public telephones operating only for local calls; or
(c) free telephone at airport and hospitals where no bills are being issued
33. Services by way of slaughtering of bovine animals

34. Services received from a service provider located in a non- taxable territory by: (a) the
Government, a local authority or an individual in relation to any purpose other than
industry, business or commerce; or
(b) an entity registered under section 12AA of the Income tax Act, 1961 (43 of 1961) for
the purposes of providing charitable activities.
 Principles of classification
 Concept of ‘composite service’ under Section 65A has been replaced
by ‘bundled service’
 Reference to a service shall not include reference to a service used in
providing such main service
 For services capable of differential treatment for any reason based on its
description, the most specific description to be preferred over a more
general description
 In case of a bundled service, i.e. when provision of one service is
combined with element(s) of other service(s), taxability is to be
determined as under:
 If various elements of such service are naturally bundled in the ordinary
course of business, it shall be treated as provision of the single service which
gives such bundle its essential character
 If various elements of such service are not naturally bundled in the ordinary
course of business, it shall be treated as provision of the single service which
results in the highest liability of Service Tax

What is naturally bundled will be the subject matter of interpretation

 Duality of taxes post negative list
 Renting of immovable property service
 Stamp duty vis-à-vis Service Tax
 Supply of software
 VAT and Service tax
 Works Contract / Construction services
 Differing schemes of abatements under VAT Laws and Service Tax law
 Original Works, Contract value = Rs. 100/-
 Service Tax @12.36% on Rs. 40/- (abatement of 60%)
 VAT @ 14.5% on Rs. 75/- (abatement of 25% under VAT Laws)
 Effective value of contract subjected to Indirect Taxes is Rs.115/- as
against an actual realization of Rs. 100/-
 Taxing impact further aggravated for other than Original Works on
account of the Service tax abatement being only 40%, therefore
effective value of contract subject to Indirect Taxes is Rs.135/-
 Credits of Excise Duty paid on goods not available on account of
conditions of the abatement scheme
 Transactions newly liable?
 Non-compete fees

 Financial transactions for consideration – derivatives, hedges

 Sale of business (slump sale transactions)

 License fees / Assignment fees

 Revenue share arrangements with agencies like AAI, NHAI,

MMRDA

 Directors fees to non-executive directors

Ever evolving tax footprint…

 Dichotomy between tax footprint and credit footprint

 While the tax footprint has risen exponentially the credit footprint is
narrow and remains fragmented in silos
 The scope of the term ‘input service’ was narrowed in 2011, to
eliminate services availed for businesses and restricted to only for
providing taxable output service, and / or used in or in relation to
manufacture
 Flexibility for distribution of credit has been restricted for Input Service
Distributors
 No concept of First Stage Dealer to pass through Service Tax credits
 The net impact is that the cascading of taxes will rise and the sunk
costs in unutilisable credits will escalate
 The potential approaches to addressing this problem could be
 Enlarge the scope of input services
 Grant refund of unutilisable credit
 Offer fungible reflective credits – unutilised CENVAT credit can be
made available fungibly as VAT credit
Goods and Service Tax (GST)
Key taxes subsumed

CST TO BE
PHASED
OUT

Dual GST
 Likely GST Model
Import
GST

Central
Sales
Tax Central IGST State
State
GST GST
GST
 Milestones & Signals of GST

Issue 2011 2012 Emerging Position

Expanded scope of ST Negative list introduced
Automatic refunds New scheme notified
Place of supply rules Introduced for Public debate
Time of supply rules Notified in 2011, Amendments to
(POT Rules) remove teething difficulties
IT Infrastructure / GST Network to be operational from
Administrative structure August 2012 / Single forms notified
for CED and ST
Draft legislations (Centre No Draft legislations
& States)
Political will Many States forming a consensus

41
 Milestones & Signals of GST

Issue 2011 2012 Emerging Position

Transition date To be decided post discussion with
States
Constitutional Introduced in the Lok Sabha, referred to
amendments Standing Committee
Draft legislation Bill to be introduced
Alignment of CED and Rate of CED & CE increased to 12% -
ST rates with expected rate of CGST is 8% to 10%
proposed CGST rate
Reduction in number Reduction in number of exemptions
of CED exemptions from CED
CST No reduction in CST rate
CST compensation Centre has refused to grant CST
compensation
42
 The greater the time gap
between the introduction of
negative list and the
introduction of GST, the
greater the burden for industry
and consumers
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individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such
information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on
such information without appropriate professional advice after a thorough examination of the particular situation.
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