JANUARY 28, 2015

By B N Gururaj, Advocate

FOR nearly two decades, the taxpayers have worked under Service Tax Law, which did not define "service", but defined "Taxable Service". Since taxable services had been defined, legally it was not necessary to understand what "service" per se meant. With the advent of Negative-List based Service Tax regime, proper definition of "service" became sine qua non, as the lack of definition would have opened flood gates for assessees to claim that their activity is not a service and hence out of Service Tax net. Section 65B(44) of the Finance Act, 1944, has provided us a fairly unambiguous legal framework of definition, which has not yet been seriously assailed by anyone.

If one were to ignore for the time being the long exclusion clauses dealing with the services provided by the State, the definition boils down to this: "any activity carried out by a person for another for consideration, but does not include (a) a transfer of title in goods or immovable property, by way of sale, gift or in any other manner, or (b) such transfers deemed to be "sale" under Article 366(29A) of the Constitution of India, and (c) transaction in money or actionable claims".

From the view point of an informed lay person, it would mean that as long as the transaction is not sale or purchase of goods or immovable property, or a money transaction, it would prima facie be chargeable service tax. In the last two and half years, this simple understanding has acted as a good guideline which has enabled the assessees to identify taxable services at ground level.

Now, Clause 14 of the Constitution (One Hundred and Twenty Second Amendment) Bill, 2014 proposes introduction of definition of "service" in the Constitution itself. Sub-clause (26A) of Article 366 defines "service" to mean anything other than goods.

If this definition is juxtaposed with Section 65B(44) of the Finance Act, 1994 what stands out is that there is no exclusion of transactions of sale or purchase of immovable property, and money transactions / actionable claims. Does that mean that under GST regime, money transactions and transactions in immovable property would also be covered under the genre "service"? A prudent and conservative answer would in the affirmative. At least at Constitutional level this would be so, though the GST Bill may perhaps exclude at least immovable properties from the scope of service.

Sub-clause (12A) proposed for insertion in Article 366 defines GST as any tax on supply of goods or services or both, except taxes on the supply of the alcoholic liquor for human consumption. In view of this solitary exclusion, at present, there is no reason to assume that money transactions and immovable property transactions would not be covered under the GST.

At this juncture, it would be useful to note that the principles governing the interpretation of Constitution are significantly different from those governing the interpretation of ordinary laws. Especially, when it comes to taxation matters specified in the Seventh Schedule, the courts have been wary of giving restrictive interpretation to an entry. The entries in these Schedules are treated as fields for exercising the legislative power and do not necessarily delimit the legislative powers of Parliament or the State Legislatures. No doubt, the definition of "service" is not a part of Seventh Schedule. But, one can be certain that no writ court will read any implied restriction in this definition of "service". The only important interpretative restriction that courts follow is that interpretation of one entry or provision must not infringe on another entry or constitutional provision.

This can raise alarm both for individuals and for real estate business. Stamp duties on instrument purporting to convey immovable properties is quite stiff, though over time, the rate of stamp duty has been brought down from the high levels of 14% / 15% to about 5% (in the State of Karnataka, as an instance). But, considering the huge increase in the value of immovable properties in the urban agglomerations, 5% stamp duty is still a stiff levy. If GST were to be added to this burden, it could prove to be the proverbial straw that broke the camel's back. This can spell negativity for growth of housing and other real estate sector.

At present, to some extent, the value of immovable property involved in "construction of complex" services gets taxed. Entry No. 12 of Notification No. 26/2012-ST, dated 20.6.2007, grants higher abatement when the land value has been included in the amount charged to the service receiver. But, the abatement is not high enough to exclude the value of land. Now, if the Constitution itself defines service in a sweeping manner, without excluding the transactions in immovable properties, subject to the wisdom of GST Bill and GST council, we will see the anomalous situation of property value getting taxed as "service".