Sukumar Mukhopadhyay: Budget 2012 -Service Tax Law drafting has got conceptual problems

First thing that I want to place on record is the appreciation for the officers who have drafted the service tax law.  Not only that it was a Herculean task, what is even commendable is that the service tax law this time is not the ordinary type which was going on for the last 17 years since 1995.   Earlier it was a selective approach and now we are coming to a comprehensive approach.   For the first time all services will be taxable and only those in the Negative List will not be taxed.  So the nature of the law is different now compared to the previous Central Excise or Customs laws.  The Central Excise tax is not a comprehensive tax.    It will be made so only when the GST comes.  So the concept itself is different now.   It is a different ball game.  It is not based on defining each individual services.  And it is for this reason that some of the conceptual problems have arisen which I am going to discuss in the present treatise.

 Definition of service vis-a-vis Negative List

Let me begin with the definition of service and with the Negative List.  Service has been defined in Serial No.44 of Section 65B as “an activity carried out by a person for another for consideration, and includes a declared service, but shall not include.....”.  The inclusions and exclusions have been given here in Explanation 1, 2 & 3.  The Negative List of services has been given in Section 66D.  On these services no service tax is chargeable as laid down in the charging section 66B. 

What I find is that some of the exclusions from the definition of service should have gone in the Negative List and some items in the Negative List should have gone under the exclusion portion of the definition of service. 

            Let me point out the conceptual difference between the definition of service and the definition of Negative List. The definition of service is meant for those services which are fundamentally in the nature of service. If something is conceptually not a service, then only it can be excluded in the definition of service. Negative List on the other hand contains those which are conceptually service but the government in its wisdom does not want to charge them to tax. If this fundamental difference is understood and agreed to by the government, then the definition of service as in 65B (44) and the Negative List will have to swap items in order to be consistent. The items (e) trading of goods and (f) manufacture should not come in the category of Negative List that is 66D. They should go under the definition of service and get excluded there. Trade and manufacture are not service. Therefore the government cannot put them under the heading 66D which is a list of services. 66D reads as “The negative list shall comprise of the following services”. If the government does so, it will be a contradiction in terms. Contradiction in terms refers to a combination of words whose meanings are in conflict with one another. Examples are liquid ice or square circle. Here it is a contradiction in terms because the government has put trade and manufacture which are not service under the heading of service (Negative List of service). Therefore the items (e) trade and (f) manufacture, that is, industry should be transferred under the heading 65B (44) which is the definition of service.

            Let me put the logic more precisely.  The definition of service is meant for those which are service and should exclude those which are not service in the fundamental sense. The Negative List is for those which are service but are not being charged to duty by the government in its own wisdom.

            Now let me point out those which occur under the definition of service but which would be transferred to the Negative List.  Explanation 1 (A), (B), (C) of 65B (44) should go under the Negative List.  These are basically services.  Nobody can say the services of MPs, MLAs, those holding Constitutional posts or Chairpersons of a body established by Government are not service.  They are service.  Therefore, they cannot be defined as 'not service' in the definition of service.  They are, in fact, services which government does not want to charge duty.  Therefore, they should fall in the category of items in the Negative List.  They should be transferred to the Negative List.  It is noteworthy that in the concept paper that the government circulated, these items were placed more properly in the correct list . For example manufacture was placed in the exclusion list in the definition of service. Now the mistake has been done while finalising the final draft. 

            Some more examples are here.

                             Explanation 2 (a) & (b) in the definition of service also have nothing to do with the definition of service.  They are reproduced below:

            “Explanation 2 – For the purpose of this Chapter:-

            (a)  an unincorporated association or a body of persons, as the case may be, and a member thereof shall be treated as distinct persons;

            (b)  an establishment of a person in the taxable territory and any of his other establishment in a non-taxable territory shall be treated as establishments of distinct persons”.

            It can be seen from the above that this has nothing to do with the definition of service.  These are actually the rules of interpretation which, therefore, should go under Section 66F.

            Similar is the position with Explanation 3 in the definition of service.  Explanation 3 is reproduced below:

            “Explanation 3 – A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory”.

            This Explanation has nothing to do with the concept of service.  This contains a principle of interpretation.  Therefore it should go to the Section 66F which contains the principles of interpretation. 

   Rules for interpretation:  66 F

            Section 66(F) which is only for interpretation of specific descriptions of services or bundled services should be generalised like we have in Customs and Central Excise laws.  The Central Excise Tariff contains “General rules for the interpretations of the Schedule”.  That is of general nature.  Section 66F(2) is the same as Rule 3(a) of the General Rules for the Interpretation of the Schedule.  Therefore, all the interpretation principles occurring in the new service tax law should be brought under the Section 66 F particularly it is true for Explanation 2 and 3 of occurring in 65B(44) which is the definition of service.

            The definition section namely Section 65B has been unduly over burdened by including several items such as “metered cab”. This should be transferred to the Negative List where metered cab occurs. Like kerosene or newsprint have been defined in the Tariffs in Customs and Central Excise. They have not been defined in the general definition Section such as 2(f) in Central Excise and Section 2 in Customs. It is advisable to follow this method which is followed in Customs and Excise. This will also have an additional advantage that whenever anything occurs in the exemption list or in the Negative List, the definition is available right there.   Similarly the definition of approved occasional educational course occurring at 65B(11) should be transferred to the Negative List where the expression vocational training occurs.  We should be guided by the Customs and Central Excise tariff in this respect.  Imagine what the definition sections in Customs and Central Excise law would look like if all the definitions of waste, scraps, synthetic rubber, ash, dross and thousand other things would come in the definition section.  The proper place of define anything is not in the definition section but in the Negative List or in the exemption list.  The definition section should contain only the fundamental concept and not individual items like kerosene or newsprint. 

Charging Section 66B:

            The section 66B which puts into effect the intention of charging all services to tax is the charging section. This is corresponding to the Section 3 of the Central Excise Act and Section 12 of the Customs Act. Here in Service Tax the charging Section is 66B, which is reproduced below:

“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”.

The first point that needs to be pointed out is that the charging section should not write the rate of duty of 12%. It should be written “as in the Schedule”. In a Schedule it is easy to make two or three categories and put separate rates of duty. These rates can be changed without fouling up the charging section. But if the rate is amended for different categories of services in the charging section itself, it will be fouled up in the sense that it will look extremely complicated. Imagine that the charging section in Customs and Central Excise have hardly been changed over a long period and only the Schedules have been changed. The same example should apply here also.

Declared services 66E:

            The Act has created one more concept of declared service under the Section 66E.  The intention seems to be to allow the government arbitrarily put the doubtful services under this heading.  This will enable the government to declare something as a service which is rules by the Court as not a service. Whereas it is an easy way out, this shows in advance the government's intention to bye pass court's decision.  The law has been drafted all right but has some intangible elements which will create problems. 

            Service portion:

            The expression 'service portion' 66E(h)&(i) as a part of works contract or service of food and beverage in a hotel will be amenable to great controversy.  The Government could fix an 'abatement percentage' as a solution to this problem.


            The conclusion is that the contents of the service law are all right but they have been written in a jumbled up manner.  Certain things which have covered under the definition of service should go under the definition of negative list and vice versa. Some of them should go to the Interpretation Rules. Definitions of individual items given in the 65B should be transferred under the heading of Negative List or exemption list.  Charging section should be redrafted.  The expression 'service portion' should be quantified by an abatement system.