Sukumar Mukhopadhyay: Comments on the revised concept paper on negative list

It is surely something for which the CBEC needs to be congratulated that the Concept Paper on the Negative List has been circulated for public comments not only once but twice. So two cheers for the CBEC . For another thing also it needs recognition. It has now four lady Members amongst six. Did somebody whisper that it is a Ladies` Club ?   It is an extremely wise decision for the Government to introduce the comprehensive service tax with a negative list even before the introduction of the GST. This will give the Government to find out what the problems are and how to find a solution before the next Budget when the GST is likely to come hopefully.  I have been suggesting the same in my previous articles.    Now I am giving some suggestions on various issues which should be of importance.

            The  Negative List should be called exempted list because that is the legal language. 

            Charging Section has been defined in 2.2 of the Revised Paper as follows: “There shall be levied a tax (hereinafter referred to as service tax) at the rate of  ….. percent of the value of services provided or to be provided by a taxable person to another person and collected in such manner as may be prescribed”.  The age-old examples of the charging sections of Customs (Section 12) and Central Excise (Section 3) have not been kept in view while drafting this section. Therefore, this definition suffers from several defects as pointed out below:-     

i)          The proposed Charging Section provides for the rate of tax also.  That must be avoided.  The charging sections in Customs (Section 12) and in Central Excise (Section 3) do not indicate rate of duty but say that it will be given in a separate Schedule.  Same thing should be done here also.

ii) The charging section does not have the expression “on”.  The tax is “on” something.  Like  the Charging Section in Customs Act, says that the Customs duty is “on the goods imported ….”.  Similarly, Central Excise Charging Section, Section 3 says that the Central Excise duty is “on all exciseable goods”.  So the crucial word is “on” which must be introduced. 

iii)   The word “referred to” should be replaced as “as called”.  See the example of Section 3 of Central Excise. 

iv)   The expression “to be provided” must be deleted.  Unless a service is provided, it cannot be taxed.

So the charging section should be reworded as below: 

“There shall be levied a tax (hereinafter called a service tax) on the service provided  by a taxable person to another person and collected in such manner as may be prescribed and at such rates as set forth in the Schedule …...... “. 

 It needs to be clarified that the Schedule should indicate that the rate of tax will be on the value of service.  The word value should not occur in the charging section. 

2.4 of the Concept Paper – Definition of taxable person has been defined as the following: “Taxable person may be defined as : “any person who independently carries out any economic activity, whether or not for a pecuniary profit”.

This definition need rethinking. In the case of  the activity of the Police or CISF in giving protection to airport or industrial unit on pecuniary consideration, the  Government is charging service tax on this activity.  This will not be covered by the proposed definition because it is not an economic activity.  Protection or security cannot be called as an economic activity. 

Therefore, the idea should be to tax all activity in the nature of service and not just economic activity (even provided by the Government) so long as it is paid for.  The expression “whether or not for a pecuniary profit” should be deleted and reworded as “for pecuniary consideration”.   The word “profit” is vague.  It should be “consideration”.    Therefore the definition of taxable person should better be redrafted as “any person who independently carries out any activity for pecuniary consideration”.  This definition will take care of the problem of not levying service tax on IFS, IAS, IRS, Judiciary etc. which are known as  sovereign functions of the State. 

 The Concept Paper says at para 2.9 that the Central Government shall have power to declare an activity as a provision of service or otherwise and such activity, notwithstanding anything to the contrary, shall be considered as a provision of service. There are two things wrong here. First , this is an inherent power and there is no need to make a provision for this. One does not have to state something which is inherent. Secondly this inherent power does not exist to the extent that the government can call something a service when it is not. The expression “notwithstanding anything to the contrary” gives the meaning that but for this declaration, it is not service. Really speaking, if it is not service under Article 92C of the  Constitution, merely giving a clarification or issuing a notification cannot make it a service. If that was so, so many Supreme Court judgments would have been redundant.  We have to take note that on the goods (central excise ) side, even if the First Schedule which contains certain goods, they have been declared as not goods and non-excisable by the Supreme Court in several judgments such as  CCE vs Markfed Vanaspati, 2003(153)ELT 491 (SC),   Moti Laminates vs CCE, 1995 (76) ELT 241 (SC), and Hyderabad Industries vs UOI, 1995 (78) ELT 641 SC. The same principle applies in the case of service. If it is not a service, the government cannot call it a service. Let there be no misapprehension about it.

In general we can say that  the general expression that the taxation will be confined to economic activity  is the one which is likely to create confusion. It is directly contradictory to the definition of service. Service has been defined as  “ anything which …......”. So how can tax be limited to economic activity? It should be “any activity which is for financial consideration”. This is a major point which must be settled before the service tax on comprehensive basis is finalised for this Budget. Another very important point is that the Negative List is too big. It is better to make the Negative List very small. If it is  necessary to help any sector , it is better to give subsidy in a transparent manner.