Service tax was introduced in India in a small way in 1994. It was thereafter extended to additional services in the next few years. An interesting historical legacy is that the service tax provisions even now continue to be part of the Finance Act, 1994, though there has been talk of enacting a standalone service tax code.
One key aspect of chargeability of services to the tax is the urgent need to incorporate these provisions in a separate enactment. Additionally, the point regarding the manner of the chargeability of the tax itself is relevant. The question is whether it is more appropriate for the service tax provisions to be applicable on all services, with a negative list which would qualify for exemption from the tax, or whether the present manner, in the form of a detailed list of definitions of taxable services, is the more appropriate one. This question is also connected in many ways to the related discussion surrounding the grant of taxing powers to the states.
The central problem with regard to chargeability of services to the tax is perhaps the very generic language used in definitions.
There have been conflicting judicial decisions on this particular point. The better view appears to be that it cannot be the case that the broad and generic nature of the definitions and the presence of the aforesaid expressions could result in activities entirely unconnected with the principal activities being charged to the service tax.
Yet another dimension of the particular problem is that several of the definitions are inclusive. In other words, they do not limit themselves to the activities described therein but are seemingly intended to cover activities not expressly included but are similar in nature. Consequently, it is quite the case in a majority of definitions under service tax law that the principles of interpretation of statutes are required to be pressed into service. Principles such as ejusdem generis and noscitur a sociis are continuously relied upon by the courts to interpret these very broadly defined services in a manner that is appropriate, so that they are capable of actual implementation and not rendered entirely unworkable in practice. Another manifestation of the issue of chargeability is the conflict between two contending definitions. A related aspect is the possible coverage of the particular service or activity under an erstwhile definition, given the subsequent introduction of another definition which could possibly apply to the activity. There are decisions which suggest that should the services be expressly covered under the new definition, they could not be held chargeable under the erstwhile definition which are more generic in nature. This is, however, not a settled proposition and a more authoritative set of judgments is required to establish this principle.
Insofar as this issue is relevant for two extant definitions, the rules for classification, as contained in Section 65A of the Finance Act, 1994, will come into play. These rules are broadly as follows:
If a service is prima facie covered under more than one category of taxable service, the category providing the most specific description of the service shall be preferred to the categories providing general descriptions. In case a composite service, consisting of a combination of different services, cannot be classified in the manner specified above, it shall be classified as if it consisted of a service which gives it its essential character. Where a service cannot be classified in the manner specified above, and where it equally merits consideration under more than one taxable category, it shall be classified under such eligible category of taxable service which is defined first in order, under Section 65 of the Act.
Therefore, if there is a possible classification of a service under two contending definitions, the aforesaid rules will need to be applied in order to determine the appropriate classification.
One final aspect of the matter surrounding the chargeability of tax on services is the legality of several clarificatory circulars issued by the department. There are instances where such departmental clarifications appear to go beyond the provisions of the service tax law and hence seemingly endeavour to tax something which is not covered under a particular definition. In all such instances, the principle in law that will apply is that such departmental circulars are not binding on the assessee and can always be challenged. It is possible of course that the department will rely on such circulars and seek to recover the tax. In such situations, the circulars cause considerable hardship to assessees. Insofar as such circulars are beneficial in nature, the legal position is that the departmental authorities are bound to honour them whereas the assessees, at all times, are able to challenge them.
S Madhavan The writer is Leader, Indirect Tax Practice, PwC