Transition from Service Tax to GST

Taxation of Services – Transition from Service Tax to GST

By: Nimish Goel

The current Federal structure for taxation of services is likely to be revamped substantially under the much-awaited Goods and Services Tax (‘GST’) expected to be operational from April 2011.  Services, which at present are only taxed at the Federal level, would be taxed both at the Federal and the State level resulting in an overhaul of the services taxation.

With only specified services currently being offered for service tax, the businesses should be prepared to levy tax on all their services unless any service specifically forms part of the negative list proposed under the GST regime.  The well accepted international principle of taxing all services and restricting only ones of national or social importance is likely to be adopted in India as well.  As a result, one should not be surprised to see activities of ‘refraining from doing something’ such as non-compete fee be considered as a service subject to GST and at the same time services of education, basic healthcare and public transport outside the GST purview. 

At present, disputes on classification of services are limited to the extent arising from differences in the interpretation of definitions provided under the Finance Act, 1994.  This is unlikely to continue in the GST regime on the basis that supply of services, as defined internationally may include anything other than supply of goods.  This should, effectively reduce classification disputes as all activities other than supply of goods may be treated as supply of services.  However, with the GST proposed at a dual level, it would be imperative that all the States and Union Territories implement a single comprehensive services schedule in their respective State GST laws to ensure a seamless flow of transactions.

Under the dual GST regime, serious challenges are likely to be posed in terms of the place where the services shall be taxed.  Though, Federal GST is likely to flow through smoothly as the principle of levy and collection should remain similar to the present structure, which State would collect GST shall be a contentious issue for levying the State GST.  Although, in virtually all the countries VAT/GST has been implemented as a single levy vis-à-vis a dual levy proposed for India, it would still be worthwhile to have a look at how the place of supply rules for taxing services have been put in place in such countries which may be relevant for us. 

The place of supply rules are extremely important as they only would define the place (i.e. State) where a supply shall be deemed to have been made and only that place would be eligible to levy the State GST.  Broadly, at the international level, the general rule for place of supply of services is that services are taxable at the place where the supplier has established his business (though for all B2B transactions EU is now changing it to the place where the service recipient is located).  Further, the place of supply rules define the place supposed to levy tax based on various parameters such as place of performance of the service, place of effective use or enjoyment of the service, place of residence/location of the service provider and the recipient.  Depending upon the characteristic of the service, the place of supply rules governs its place of taxation.  Industry players engaged in telecom, insurance, banking, software and intellect based services such as consultancy, advertising, accountancy etc should gear up for some serious challenges regarding levy of state GST on their services as practically determining the place of supply for such services may be a complex issue.  Indeed, the international VAT treatment on such services would be handy to start with.  

With GST proposed to be levied at each level in the supply chain, any tax exemptions will have the effect of narrowing the tax base.  As a result, the current exemptions such as services provided to UN, SEZ, commercial or industrial construction services in relation to ports, roads, etc are expected to be modified though not completely removed.  Similarly, abatements by way of deduction of the value of goods from the value of services are also likely to discontinue in the absence of different levies on goods and services.  To implement this, it is crucial that goods and services of a similar nature are subject to a similar tax rate such as construction services and goods required for construction activities.  Then only, the Government can expect to have a seamless flow of transactions between different states with a clean credit mechanism.

With the Finance Minister laying great emphasis on introducing GST from April 2011, it is the right time that the government and the industry work jointly and pre-empt the issues likely to cause hardships and their solutions.  With this unified approach, we can expect to have a GST regime without much adversities and challenges.  

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The Author is a Partner with NMA.  He has more than 8 years of experience in Indirect Taxes with E&Y and PwC in India and with KPMG in Ireland.  Nimish is also a Lead Advisor to Promaynov (www.promaynov.com), a firm engaged in providing Executive training and mentoring programmes to CAs and Lawyers in the field of Tax, Audit, M&A and Soft skills.