Taxation of Services: The International experience

The previous article in this column had discussed the determination of the tax base for service taxation in India and the pros and cons of having a negative list for taxation of services. This article is aimed at discussing the international experience of taxation of services.

It is correct to say that most countries, which have had experience of VAT/GST systems for a while, have found it convenient and appropriate to define the supply of services through the operation of a catch all model, in that they have defined such supplies as any transactions that do not constitute a supply of goods. A corollary to this manner of defining the supply of services is to consequently set up a negative list, comprising of those services which would be outside the ambit of the tax.

For instance, in the EU, which is clearly the trendsetter insofar as VAT is concerned, the definition of a service reads as follows:-

“A supply of a service is considered to be any transactions, which does not constitute a supply of goods”.

The regulations also thereafter state that such a transaction may, inter alia, include the following:-  

• assignment of intangible property
• obligations to refrain from an act or to tolerate an act or situation 
• performances of services in pursuance of an order made by or in the name of a public authority or in pursuance of the law

It can thus be seen that not only is the definition worded in a negative way but also that certain transactions are described therein to ensure that they are also within the ambit of the tax.

The exclusions from the tax inter alia extend to the following services:- 

• Transportation of persons and/or goods
• Bundled supplies of certain kinds 
• Health 
• Education 
• Insurance and reinsurance 
• Banking 
• Rentals of furnished housing and unfurnished business premises

This is of course an indicative list of exclusions from the ambit of the tax since the negative list for services taxation evidently differs from country to country within the EU. The important thing to note is that the exclusions are categorized and are limited in number, with the result that all other services are automatically taxed.

Similarly, the New Zealand law defines services as follows:-

“Services mean anything which is not goods or money”.

Here again therefore, the law uses the catch all definition.

Further, the negative list basis of excluding services from the tax has been adopted and incorporates exported services, supply of B2B financial services, financial services in general and residential accommodation.

Yet another country i.e. Singapore, has defined services as follows:-

“Anything which is not a supply of goods but is done for a consideration (including, if so done, the, assignment or surrender of any right) is supply of services.

Further, the Singapore GST Act also empowers the Government to provide in respect of any transactions

a) that it is to be treated as a supply of goods and not as a supply of services

b) that it is to be treated as a supply of services and not as a supply of goods or

c) That it is to be treated as neither a supply of goods nor a supply of services.

As regards the exemptions from the tax, Singapore also operates an implied negative list with the exemptions from the tax, as regards services, listed out as those with credit and those without credit. In the first category, the only excluded service is the supply of international services, as defined. In the second category of exemptions without credit, the exclusions extend to life insurance and all forms of reinsurance activities, as well as most banking and financial services, including the provision of loans, the sale of securities and the sale of currency. Thus, Singapore also operates on a very limited set of excluded services.

Finally, in Canada, the definition of services is as follows:- 

• Anything other than property (tangible, intangible, real, personal, moveable, immoveable, corporeal, incorporeal).
• Money 
• Anything that is supplied to an employer by a person who is or agrees to become an employee of the employer in the course of or in relation to the office or employment of that person.

Further, the exemptions from the tax are categorized similar to how Singapore has done it and thus the exemptions are categorized as follows:- 

• Exemptions with credit
• Exemptions without credit 
• Exemptions where the option to tax is available

As regards services in the category of exemptions with credit, tour packages, inbound/outbound transportation services and exported financial services are listed out therein. As regards exemptions without credit, the following services have been notified:-

financial services, real estate, healthcare services, education services, child and personal healthcare services, legal aid services and ferry, road and bridge tolls.

It can thus be seen from the example of the above four taxing jurisdictions of importance that the use of the residual or catch all definition of services i.e. the use of the negative list as a corollary, has been resorted to as the only appropriate way to tax all services in the respective economies and to ensure that supplies of services of any nature, other than those in the negative list, do not escape the tax net. Further, the catch all definition potentially prevents attempts by entities to structure activities and transactions in a manner as to not attract the GST based on the premise that they are not within the prescribed definitions of services, as would be the case if such a catch all definition were not to be introduced.

The Organisation for Economic Co-operation and Development (OECD) had issued international VAT/GST guidelines in 2006. While these are being revised and expanded, it is instructive to read this document today, a full five years after its publication, to understand the principles that ought to govern taxation of consumption in general and of services in particular. The OECD is also of the view that services characterization is a critical part of VAT design and goes on to recommend the application of the principles of simplicity, uniformity and efficiency, besides implied broadbasing, while determining the tax base, particularly in regard to services.

An important challenge in this regard is the treatment and taxation of bundled supplies, comprising both supplies of goods as well as services. This is a complex subject and will be addressed in a subsequent article.

It is therefore fair to conclude from an analysis of the international experience of taxation of services that the best practice is clearly to implement the catch all definition/ negative list model. It is perhaps in realization of this imperative that the Government of India has taken the recent initiative on the negative list on services, as a precursor to its possible inclusion in the GST, based on experience to be obtained by switching to this model even under the present service tax scheme.

The author is Executive Director, PricewaterhouseCoopers Pvt. Ltd. pwctls.nd@in.pwc.com 
Supported by Rahul Renavikar and Abhishek A. Rastogi