Goods versus service: Is classification relevant?

One of the principal problems that has caused the indirect tax regime in India to be complex and cascading is the delineation of taxing powers between the centre and the states. The centre collected excise duty and service tax; the states collected value-added tax (VAT), i.e. sales tax, and entry tax.

However, transactions did not always fall clearly as being goods or services, or manufacturing or processing, etc. This led to litigation and artificial overreach by the centre and the states to tax transactions that were not always within their powers. In many cases, to avoid litigation, taxpayers would charge both service tax and VAT on a transaction. The delineation also caused input taxes to be lost in the process.

DEEMING PROVISIONS

Goods and services tax (GST) solves these problems to a great degree by ensuring concurrent powers of the centre and the states to levy tax on transactions. In order to put an end to long running litigation, the draft model law includes Schedule II, which deems certain transactions as either goods or services.

L Badri Narayanan is a partner at Lakshmikumaran & Sridharan.