Export & Import of Services- Service Tax
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Export & Import of Services- Service Tax

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Service Tax on Import & Export of Services

1. Export of Services

If service is exported, there is no service tax liability. If the services are exported, the Cenvat credit is not required to be reversed. Assessee can utilise credit for payment of service tax on other services. However, if this is not possible, he can get refund.

Basic principle of taxation is that ‘goods and services should be exported, taxes are not to be exported’. Another principle is that service tax can be levied only if service is provided or received or consumed in India.

Meaning of ‘export of Service’ has been defined in Export of Service Rules, 2005.

The new rules are effective from 15-3-2005. The rules make it clear that exemption from services/rebate of service tax and excise duty paid is admissible only if there is ‘export of service’ as defined in these rules. Mere receipt of payment in free foreign exchange will not be sufficient to treat the service as ‘export service’.

Exemption or Rebate of Service tax

Exporter of service has three options -

Export without payment of service tax and utilise Cenvat Credit for payment of service tax on other services.

Export without payment of service tax and claim rebate of service tax paid on input services and excise duty paid on inputs (or forget about rebate as procedure is too complicated and impractical)

Pay service tax on exported services and claim rebate (by this, he can utilise his input credit)

Export of service without service tax - As per Rule 4 of Export of Services Rules, any service, which is taxable under section 65(105) of the Finance Act, 1994; may be exported without payment of service tax.

Rebate of service tax - Where any taxable service is exported, the Central Government can grant rebate of service tax paid on such taxable service or service tax or duty paid on input services or inputs, as the case may be, used in providing such taxable service. Such rebate will be granted by issuing a notification. The rebate shall be subject to such conditions or limitations, if any, and fulfilment of such procedure, as may be specified in the notification (The procedure prescribed has been discussed later).

Section 93A of Finance Act, 1994 (inserted by Finance Act, 2006 w.e.f. 18-4-2006) empowers Central Government to make rules to grant rebate of service tax paid on input services which are used for manufacturing or processing of goods for providing any taxable service.

Meaning of Input and Input Services - Rule 2 of Export of Services Rules makes it clear that ‘input’ means ‘input’ as defined in rule 2(k) of Cenvat Credit Rules, 2004. ‘Input Service’ means input service as defined in rule 2(l) of Cenvat Credit Rules, 2004.

2. Meaning of Export of taxable service

Rule 3 of Export of Service Rules classifies the taxable services in four categories - (i) Immovable property is situated abroad (ii) Service performed outside India (iii) Recipient is located outside India (iv) Services which not be treated as ‘export of services’ under any situation.

Requirement to treat the service as ‘export of service’ are different for each category.

Common conditions

Following conditions are common in respect of all taxable services - (a) The service should be delivered outside India and used outside India and (b) Payment for such service provided outside India is received by the service provider in convertible foreign exchange [rule 3(2) of Service Tax Rules as amended w.e.f. 19-4-2006].

The condition (a) above was applicable even prior to 19-4-2006 in case of services falling under rule 3(i) and 3(ii). However, in case of services falling under third category i.e. rule 3(iii), the condition was applicable only when recipient of service had establishment or place of business in India.

Meaning of ‘delivered outside India’ – The words ‘delivered outside India’ are likely to create litigation. ‘Giving’ is complete only when someone ‘takes’ it. Similarly, ‘delivery’ is complete only when someone ‘receives’ it. Otherwise it is just throwing. Since the person receiving the service is outside India, ‘delivery’ is complete only when he gets it.

It should be noted that the words used are ‘delivered outside India’ and not ‘performed outside India’. Thus, actual (physical) performance outside India is not required.

In reverse direction, if Indian manufacturer pays some amounts to foreign exporter (for commission or technology transfer etc.), department treats it as 'service received in India’ (import of service) and asks Indian exporter to pay service tax under 'reverse charge' u/s 66A. If that service is said to be 'received in India', then correspondingly, in other direction, the service of Indian service provider is ‘delivered outside India’. Department cannot apply one criteria for 'import of service' and entirely reverse criteria for export of service.

Hence, so long as service receiver is abroad and he gets the service by any mode (by e-mail, electronic transfer, fax, post, courier or any other mode), it can be said to be ‘delivered outside India’.

Immovable property situated abroad

In case of first category, the service will be treated as ‘export of taxable service’ only if the immovable property is situated abroad [rule 3(i) as substituted w.e.f. 19-4-2006. Earlier it was rule 3(1)].

Services performed outside India

In case of some specified services, the service will be treated as ‘export of service’ if it is at least partly performed outside India [rule 3(ii) as substituted w.e.f. 19-4-2006. Earlier it was rule 3(2)].

The common conditions applicable to all services as per rule 3(2) (as explained above) are also applicable. As per rule 3(2), the service has to be delivered outside India and used outside India. Further, Payment should be received in foreign exchange.

Even if such a taxable service is partly performed outside India, it shall be considered to have been performed outside India. Thus, part performance of service in India will be permissible. Since no percentage has been specified, it should be sufficient if just 1% of service is provided outside India and balance is provided from India.

However, payment should be received in foreign exchange. Thus, services of courier who deliver mail abroad will not be ‘export of service’ if they do not get paid in foreign exchange.

Service provided from India, but recipient of service outside India

Remaining services, which fall in third i.e. residual category, will be treated as ‘export of service’ if recipient is located outside India. The service can be provided from India [rule 3(iii) as substituted w.e.f. 19-4-2006. Earlier it was rule 3(3)].

The common conditions applicable to all services as per rule 3(2) (as explained above) are also applicable. As per rule 3(2), the service has to be delivered outside India and used outside India. Further, Payment should be received in foreign exchange.

Services which will never be treated as ‘export of service’

Following two services i.e. (i) Air transport of passengers embarking for international travel (zzzo) and (ii) Transport by cruise ships (zzzv), will not be treated as ‘Export of Service’ at all under any situation.

These services will also not be treated as ‘service provided from outside India and received in India’ under any situation.

As per para 4.3.3 of MF(DR) circular No. B1/4/2006-TRU dated 19-4-2006, this is done as they are service provided from India.

2. Rebate of service tax paid on exported services or tax paid on inputs/input services

Subsequent to issue of Export of Service Rules, 2005; two notifications have been issued making provisions for rebate.

(a) Notification No. 11/2005-ST dated 19-4-2005, providing for rebate of service tax and education cess paid on taxable services exported i.e. tax paid on output services

(b) Notification No. 12/2005-ST dated 19-4-2005, providing for rebate of excise duty paid on inputs and service tax paid on input services, which are used in providing exported taxable services.

Section 93A of Finance Act, 1994 (inserted by Finance Act, 2006 w.e.f. 18-4-2006) empowers Central Government to make provisions to grant rebate of service tax paid on input services which are used for manufacturing or processing of goods or for providing any taxable service. If rebate is granted, but sale proceeds of such goods or consideration of services is not realised within time allowed by RBI. Government can recover or adjust the amount in prescribed manner.

[However, the notification has been issued much prior to introduction of section 93A. Interestingly, this section does not empower Central Government to grant rebate of service tax paid on output services!].

Export of service without payment of service tax

As per Rule 4 of Export of Service Rules, any service, which is taxable under section 65(105) of the Finance Act, 1994; may be exported without payment of service tax. Thus, payment of service tax on export of services is optional.

Procedure for claiming rebate of tax paid on inputs and input services

This rebate is obtainable when service tax is not paid on exported services, but excise duty is paid on inputs and service tax is paid on input services. Rebate is obtainable of such duty/tax paid on inputs/input services. The exporter shall not be entitled to Cenvat Credit of excise duty paid on inputs and service tax paid on input services.

The procedure is very complicated, clumsy and indeed seems impractical. Luckily, a simpler procedure is prescribed in rule 5 of Cenvat Credit Rules as discussed below.

Refund of input service tax and duty under Cenvat Credit Rules

Rule 5 of Cenvat Credit Rules has been amended w.e.f. 14-3-2006 to provide for refund of Cenvat credit when output service is exported.

Procedure for claiming refund of service tax paid on input services and excise duty on inputs has been specified in notification No. 5/2006-CE(NT) dated 14-3-2006. Application should be submitted in Form ‘A’ to Assistant/Deputy Commissioner.

Application can be submitted every quarter. However, in following cases, refund can be claimed on monthly basis - (a) persons whose average export clearances are more than 50% of total clearances (b) EOU units.

Refund of input service credit will be restricted to the extent of ratio of export turnover to the total turnover for the given period e.g. if total credit of input services is Rs. 100, total turnover is Rs. 500 and export turnover is Rs. 250, refund of input service tax credit will be only Rs. 50 (i.e. 50%, since export turnover is 50% of total turnover).

This restriction applies only credit of service tax paid on input services and not in respect of refund of excise duty.

EOU eligible - The procedure seems to be simple. EOU is eligible to avail this procedure.

3. Import of Services

The statutory provisions use the words ‘Services provided from outside India and received in India’. However, generally, the tax is known as tax on ‘Import of Services’.

New section 66A(1) (effective from 18-4-2006) provides that where any service specified in section 65(105) of Finance Act, is,— (a) provided or to be provided by a person who has established a business or has a fixed establishment from which the service is provided or to be provided or has his permanent address or usual place of residence, in a country other than India, and (b) received by a person (hereinafter referred to as the recipient) who has his place of business, fixed establishment, permanent address or usual place of residence, in India, such service shall, for the purposes of this section, be taxable service, and such taxable service shall be treated as if the recipient had himself provided the service in India, and accordingly all the provisions of this Chapter shall apply.

Exemption to individual receiving the service

First proviso to section 66A(1) states that where the recipient of the service is an individual and such service received by him is otherwise than for the purpose of use in any business or commerce, the provisions of this sub-section shall not apply [Similar exemption was given vide notification No. 25/2005-ST dated 7-6-2005. Now this notification has been rescinded w.e.f. 19-4-2006, since the provision has been made in main section itself].

When service provider has establishment at more than one places

Second proviso to section 66A(1) states that where the provider of the service has his business establishment both in that country and elsewhere, the country, where the establishment of the provider of service directly concerned with the provision of service is located, shall be treated as the country from which the service is provided or to be provided.

Thus, even if a service provider has office in India as well as in foreign country, the service will be treated as provided from foreign country, if service is provided from that country.

Branch is also establishment

Explanation 1 to section 66A make it clear that a person carrying on a business through a branch or agency in any country shall be treated as having a business establishment in that country.

Intention seems only to tax services received in India

Though section 66A is broadly worded and covers even services provided and consumed abroad, it appears that intention is to tax only services received in India, for following reasons - (a) The title of section reads, ‘Charge of service tax received from outside India’ (b) Explanatory Note to clause 68 of Finance Bill, 2006, para 3 reads as follows, ‘sub-clause (C) seeks to insert new section 66A to levy service tax on taxable services provided from outside India and received in India’ (c) Rules issued under section 66A also refer to only services provided from outside India and received in India.

If so, then only possible objection can be violation of DTA.

Services provided and consumed abroad cannot be taxed

Even otherwise, it is highly doubtful if tax can be levied on services when service is provided and consumed abroad just because service receiver has a place of business in India. Section 64(1) of Finance Act, 1994 states that provisions of Chapter V of the Finance Act, 1994 (which contain provisions relating to service tax) extend to whole of India except J&K. Thus, the Act does not have any extra-territorial jurisdiction. It is doubtful if such jurisdiction can be created by adding an explanation.

Stay against operation of the explanation under section 65(105) was granted for a period of four weeks from 3-2-2006 by Madras High Court in writ petition No. 3122 of 2006 in case of Tamilnadu Spinning Mills Association.

Service provided from outside India and received in India

Though scope of section 66A is wide, it can be argued that service tax is payable only if the service falls within the definition of ‘Service provided from Outside India and Received in India’ as defined in Taxation of Services (Provided from Outside India and Received in India) Rules, 2006.

The rules classify all taxable services in three categories, namely (i) Services in relation to immovable property (ii) Services to be performed in India and (iii) Services received by recipient located in India. The classification is same as per export of Service Rules.

Rule 4 provides that if a service is provided from outside India and received in India, the recipient of service will be liable to register and pay service tax.

Rule 5 makes clear that Cenvat credit cannot be utilised for payment of service tax by the service receiver.

Immovable property situated in India

In case of services specified in rule 3(i), the service will be ‘taxable service provided from outside India and received in India’ if the service provided or to be provided is in relation to an immovable property situated in India.

Service at least partly performed in India

In case of services specified in rule 3(ii), the service will be ‘taxable service provided from outside India and received in India’ if the service is at least partly performed in India.

The aforesaid services are also classifiable as ‘Export of Service’ if these are at least partly performed outside India, by person resident in India.

Services received by recipient located in India for use in business or commerce

In case of services specified in rule 3(iii), the service will be ‘taxable service provided from outside India and received in India’ if the recipient of service is located in India, for use in relation to business or commerce. Reasonable interpretation is that it should be for use in relation to business or commerce in India.

This category covers all remaining taxable services, excluding the following -

(i) Air transport of passengers embarking for international travel (zzzo)

(ii) Transport by cruise ships (zzzv)

(iii) All services falling under rule 3(i) or rule 3(ii).

Meaning of ‘received in India’

It is clear that recipient is liable to pay service tax only when service is ‘received in India’. Some arguments are possible, since the rules do not define when a service is said to be ‘received in India’.

For example, if you commission agent abroad procures orders and forwards them to a person in India, is the service ‘received’ in India? One argument is that provision of his service is complete abroad itself. Though the benefit of service is received in India, service as such was never received in India. Giving one illustration, doctor’s service is over when he examines patient and gives prescription. The patient may make use of that prescription anywhere in the world, but provision of service is complete in the chamber of doctor himself.

Counter argument is that ‘provision’ is complete only when someone ‘receives it’. ‘Giving’ is complete only when someone receives it. Otherwise it is just throwing.

In my view, services of commission agent or technical collaboration etc. can be said to be ‘received in India’ even if service provider completes his part of provision of service abroad, if its benefit is received in India.

Person liable to pay service tax

As per Rule 2(1)(d)(iv) of Service tax Rules (amended w.e.f. 19-4-2006), person liable for paying the service tax means - in relation to any taxable service provided or to be provided by any person from a country other than India and received by any person in India under section 66A of the Act, the recipient of such service.

Thus, person receiving service in India will be liable to pay service tax. He will have to register under Service tax provisions and submit returns.

Rule 4 of Taxation of Services (Provided from India and Received in India) Rules, 2006 also state that the recipient of taxable service received in India shall apply for registration.

The provision that service receiver is liable to pay service tax is termed as ‘Reverse Charge’, as per press note dated 7-6-2005 issued by Central Government.

Para 4.2 of MF(DR) circular No. 81/4/2006-TRU dated 19-4-2006 states as follows, ‘Internationally, services provided by a foreign supplier to a domestic customer are subjected to VAT/GST under reverse charge or tax shift mechanism. Under the reverse charge method, a legal fiction is created treating as if the recipient had himself provided the services domestically and accordingly, the recipient of services is treated as deemed service provider’.

As per para 4.2.2 of the aforesaid circular, charging of service tax at the hands of the recipient of service where the taxable service is provided from outside the country is required to prevent distortion of competition.

Tax to be paid in cash but Cenvat Credit can be availed

Rule 5 of Taxation of Services (Provided from outside India and Received in India) Rules, 2006 clarifies that the taxable service will not be treated as output service of the recipient for purpose of availing of Cenvat credit of duty of excise paid on inputs or service tax paid on any input services.

Thus, the recipient of service has to pay the service tax in cash by TR-6 challan. He cannot utilise his Cenvat credit for payment of this amount, as it is not his ‘output service’, though he is liable to pay service tax.

However, once the person receiving the service pays service tax, it is his ‘input service’. He can avail credit of service tax paid, if it is his ‘input service’ as defined. The TR-6 challan by which he has paid the service tax will be eligible document for availment of service tax credit, as per rule 9(1)(e) of Cenvat Credit Rules, 2004.

Para 4.2-13 of MF(DR) circular No. B1/4/2006-TRU, dated 19-4-2006 confirms as follows ‘Where such service is used as an input for providing any taxable output, the service tax paid on such service can be taken as input credit’


For Comments...

Regards

Arun K Mishra

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