Dr. Sanjiv Agarwal
The Finance Act, 2012 has made a paradigm shift in levy of Service Tax with introduction of negative list approach to replace selective positive list approach to taxation of services in India. Consequently, section 65A which dealt with classification of taxable services shall not apply w.e.f. 1-7-2012 and cease to exist on the statute as the classification of services may no longer be required for the purpose of Service Tax.
However, in order to arrive at correct and appropriate reference to a service, Finance Act, 2012 inserted a new provision in section 66F w.e.f. 1-7-2012 to provide for principles of interpretation of specified descriptions of services or bundled services.
Composite and Bundled Services
Prior to Finance Act, 2012 i.e., upto 30th June, 2012, emphasis was mainly on classification of composite services i.e., services where more than one services are provided and which cannot be classified on the basis of specific description of taxable service. In such a case, composite service was classified in the category which gave it the essential character and where it was not possible, taxable service was to be classified under that clause of section 65(105) which appeared first amongst those requiring equal consideration on merits.
The word ‘composite’ literally means made up of various parts or elements; a thing made up of several parts or elements; putting together; combining two or more things. On what was the criteria for classification of composite taxable services, readers may refer to erstwhile provisions of section 65A of the Finance Act, 1994.
Literally, ‘bundle’ means a collection of things, or a quantity of material, tied or wrapped together; tie up or roll up a number of things together as though into a parcel.
The word ‘bundle’ has been used for the first time in the Service Tax and it has been interchangeably used with the expression ‘specified descriptions of services’. What is meant by specified descriptions of services has not been defined or explained in the Act.
Explanation to section 66F defines ‘bundled service’ to mean a bundle of provision of various services where is an element of provision of one service is combined with an element or elements of provision of any other service or services.
‘Bundled service’ means a bundle of provision of various services wherein an element of provision of one service is combined with an element or elements of provision of any other service or services. An example of ‘bundled service’ would be air transport services provided by airlines wherein an element of transportation of passenger by air is combined with an element of provision of catering service on board. Each service involves differential treatment as a manner of determination of value of two services for the purpose of charging service tax is different.
Classification issue Post Finance Act, 2012 (w.e.f. 1-7-2012)
In the post Finance Act, 2012 scenario w.e.f. 1-7-2012, classification of taxable services into categories will no longer be required as it is either a service or not a service. If it is a service, it would be a taxable service if it does not fall under a negative list or an exempted list. This is so because there is no need to classify the services into any specified categories of taxable services.
What will be more important will be to classify an economic activity as a ‘service’ or ‘not a service’. For this purpose, dominant test could be that laid down by Apex Court in BSNL v. Union of India (2006) 2 STR 161 (SC).
According to section 66F of Finance Act, 1994, as inserted by the Finance Act, 2012 w.e.f. 1-7-2012, it has been provided that unless otherwise specified, reference to a service shall not include reference to a service which is used for providing the main service. This would indicate that input services or ancillary services used in providing main output service would not take the same colour as that of the main service. There could be a main service which is in negative list. It would not imply that other services will also be in the negative list if such services are subject to differential treatment based on their description.
Principles for interpretation of specified description of services
Although the negative list approach largely obviates the need for descriptions of services, such descriptions continue to exist in the following areas -
- In the negative list of services.
- In the declared list of services.
- In exemption notifications.
- In the Place of Provision of Service Rules, 2012
- In few other rules and notifications.
Summary of provisions in relation to bundled services
In nutshell, the new classification/interpretation principles are thus as follows -
- reference to main service will not include reference to a service which is used for providing main service.
- Where a service could be subject to differential treatment for any purpose based on its description, the most specific description will be preferred over more general description (specific would prevail over a general description). (For example, ‘road repair’ would be better understood as ‘repairs to road’ rather than ‘repairs of immovable property’).
- In a bundled service, where various elements of service are naturally bundled in ordinary course of business, it will be treated as a single service which gives such bundled service its essential character. (e.g., event management service for a marriage comprising of venue, mandap, catering, logistics, tour, entertainment etc.; meals and air/rail travel; breakfast with hotel accommodation, boarding school, etc.).
- In a bundled service, if various elements of bundled service are not naturally bundled in ordinary course of business, it shall be treated as single service which results in highest liability of Service Tax, i.e. which yields highest Service Tax revenue to the Government (e.g., service comprising of consulting engineering, construction, erection & commissioning, support services; construction and club membership, dry-cleaning billed as electricity, chemicals, ironing and so on).
- Provisions of section 66F applies —
— where services have to be treated differently, for any reason, and
— for determining the taxability of bundled services.