Negative list approach to taxing services introduced

The Union Budget 2012-13 has proposed a paradigm shift in the way in which services are taxed, by moving from a “positive list” to a “negative list” approach. Currently, only notified services attract service tax. Under the negative list approach, all services, other than those on the negative list or specifically exempted, will be taxed.

The provisions in relation to the negative list are contained in the Finance Bill, 2012, which has been passed by the Lok Sabha (lower house of parliament) and is currently being considered by the Rajya Sabha (upper house). The provisions will come into force from a date to be notified.

A definition of “service” has been introduced for the first time under the service tax legislation to take forward the negative list approach. The definition is extremely broad and covers any activity carried out for a consideration (or price). Specific transactions are excluded from the definition, including mere sales of immovable or movable property, “deemed sales” (specified supplies which do not meet the classic definition of “sale” but are deemed to be sales, e.g. works contracts), transactions in money, services provided by employees to their employers in the course of employment, etc.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Ranjeet Mahtani is a senior associate at the firm and Divya Jeswant is an associate.