Service Tax on International Transactions

1
Service Tax onInternational Transactions

• Nishant Shah
• Economic Laws Practice
• Advocates Solicitors
• April 9, 2006

2
Indirect Tax Cost in India
Manufacturer
Wholesaler
Retailer
Octroi 4.5
Interstate purchase (CST)
Imports Customs Duty Basic 12.5 CVD 16 Ed.
Cess 2 Sp.CVD 4
Local purchase VAT 4/12.5
Dealer
Retailer
Local purchase VAT 4/12.5
?
Other Service Provider Serv. Tax 12.24
Factory
Goods Transporter Serv. Tax-12.24
Other Service Provider Serv. Tax 12.24
Intra-State Ex. Duty 16 Edu. Cess 2 VAT/ST
4
Service Provider Serv. Tax 12.24
?
Stock transfer (No tax)
Toll Manufacturer
Cumulative burden of Indirect Taxes in India
28 to 44 (approx.)
Inter-State Ex. Duty 16 Edu. Cess 2 CST
4
3
Cenvat Credit Present Status
MODVAT Scheme (1986)
CENVAT Scheme (2001)
CENVAT Scheme (2004)
Excise Duty paid on specified Inputs/Capital
Goods
Excise Duty paid on Inputs/Capital Goods
Excise Duty on Inputs/Capital Goods and Service
Tax on Input Services
Credit
Credit
Credit
Excise Duty on Final Products
Excise Duty on Final Products
Excise Duty on Final Products and/or Service Tax
on Output Services
4
Proposed Structure in India
GLOBAL SCENARIO
All Indirect Taxes
VAT / GST
INDIA Phase 1
VAT
State Sales Tax and Entry Tax
INDIA Phase 2
Phase 1 Service Tax Reduction in Rate of CST
VAT
INDIA Phase 3
Phase 2 Abolition of CST All Indirect Taxes
except Customs Duty
VAT
5
Service Tax In India
Proposals As introduced by Finance Bill, 2006 -
New Services - Expansion of Scope - Key
Legislative Changes
6
Service Tax Net Widened
15 New Services Introduced
7
Service Tax Net Widened

• 15 New Services Introduced
• Registrar to an Issue
• Share Transfer Agent
• Automated Teller Machine operations, maintenance
  or management
• Recovery agents
• Sale of space or time for advertisement service
• Sponsorship service
• Passenger air transport service

• Transport of goods in containers by rail
• Business support services
• Auctioneers service
• Public relations service
• Ship management service
• Internet telephony service
• Transport by cruise ship
• Credit card, debit card, charge card or other
  payment cards related service

8
Service Tax Net Widened

• New Services
• Registrar to an Issue
• Share Transfer Agent
• Automated Teller Machine operations, maintenance
  or management
• Recovery agents
• Sale of space or time for advertisement service
• Sponsorship service
• Passenger air transport service
• Transport of goods in containers by rail

• Business support services
• Auctioneers service
• Public relations service
• Ship management service
• Internet telephony service
• Transport by cruise ship
• Credit card, debit card, charge card or other
  payment cards related service

9
Business Support Services

• Support Services of Business or Commerce means
  services provided in relation to business or
  commerce
• and includes
• evaluation of prospective customers,
• telemarketing,
• processing of purchase orders and fulfillment
  services,
• information and tracking of delivery schedules,
• managing distribution and logistics,
• customer relationship management services,
• accounting and processing of transactions,
• operational assistance for marketing,
• formulation of customer service and
• pricing policies, infrastructural support
  services and other transaction processing
• Explanation - For the purposes of this clause,
  the expression infrastructural support services
  includes providing office along with office
  utilities, lounge, reception with competent
  personnel to handle messages, secretarial
  services, internet and telecom facilities, pantry
  and security

10
Scope of the term means and includes

• In Bombay Woollen Mills Pvt. Ltd and Another Vs.
  Union of India and Others 1988 (36) E.L.T. 35
  (Bom.) it was observed as follows
• Under the well-known rules of interpretation of
  statues, whenever legislature uses the words
  means and includes, it necessarily means that
  what is included after the word includes does
  not normally from part of what is expressed by
  the word means. What is introduced by the
  second half of the definition clause by adding
  the word includes is normally not a part of the
  first part. So taking resort to the first part of
  the definition is wholly irrelevant.

11
Business Support Services

• TRU Letter -
• Business entities outsource a number of
  services for use in business or commerce. These
  services include transaction processing, routine
  administration or accountancy, customer
  relationship management and tele-marketing. There
  are also business entities which provide
  infrastructural support such as providing instant
  offices along with secretarial assistance known
  as Business Centre Services. It is proposed to
  tax all such outsourced services. If these
  services are provided on behalf of a person, they
  are already taxed under Business Auxiliary
  Service. Definition of support services of
  business or commerce gives indicative list of
  outsourced services
• Business Auxiliary service means service in
  relation to -
• (i)(vi)
• (vii) A service incidental or auxiliary to any
  activity specified in sub-clauses (i) to (vi),
  such as

12
Business Support Services

• Taxable service in relation to
• Business Support Services means any service
  provided or to be provided to any person, by any
  other person, in relation to support services of
  business or commerce, in any manner
• Business Auxiliary Service - means any service
  provided or to be provided to a client, by any
  person (commercial concern) in relation to
  business auxiliary service
• Management Consultants service - means any
  service provided or to be provided to a client by
  a Management Consultant in connection with the
  management of any organisation, in any manner

13
Sale of space or time for Advertisement

• Taxable service means any service provided or to
  be provided to any person, by any other person,
  in relation to sale of space or time for
  advertisement, in any manner but does not
  include sale of space for advertisement in print
  media and sale of time slots by a broadcasting
  agency or organisation.
• Explanation 1.For the purposes of this
  sub-clause, sale of space or time for
  advertisement includes,
• providing space or time, as the case may be, for
  display, advertising, showcasing of any product
  or service in video programmes, television
  programmes or motion pictures or music albums, or
  on billboards, public places, buildings,
  conveyances, cell phones, automated teller
  machines, internet
• selling of time slots on radio or television by a
  person, other than a broadcasting agency or
  organisation and
• aerial advertising

14
Sale of space or time for Advertisement

• Explanation 2.For the purposes of this
  sub-clause, print media means book and
  newspaper as defined in sub-section (1) of
  section 1 of the Press and Registration of Books
  Act, 1867 65 (105) (zzzm)
• Advance Authority Ruling in Googles case has
  held that sale of space in internet for
  advertisement is covered under Advertisement
  Services
• Internet advertisement is now specifically
  covered under new entry

15
Sponsorship services

• Taxable service means
• any service provided or to be provided to any
  body corporate or firm, by any person receiving
  sponsorship, in relation to such sponsorship, in
  any manner, but does not include services in
  relation to sponsorship of sports events
• Body corporates or firms involved in business or
  commerce sponsor events with an intent to obtain
  commercial benefit or bringing their name or
  products or services to public attention by
  associating with a popular or successful event.
• Proposal is to collect Service Tax under reverse
  charge method from the recipient of service (the
  Corporate Firm sponsoring the event)
• Likely amendment in the Rules along with
  notification of Service

16
Service Tax Net Widened

• Banking and Financial Services
• Bankers to an issue, telegraphic / mail /
  electronic Transfer of money
• Business Auxiliary Service
• Maintenance of computer software computerized
  data processing is no longer IT Services
• Consulting Engineers Services
• Services rendered by a body corporate made
  taxable
• Erection, Commissioning Installation Service
• Definition amended to include Structures / pre
  fabricated structures

17
Service Tax Net Widened

• Maintenance and Repair Service
• Scope enlarged to include operational services in
  relation to movable properties
• Technical Testing and Analysis Services
• Proposed to clarify that above service includes
  Clinical testing of drugs and formulations
  services

18
Key Legislative Changes

• Rate of Service Tax from 10 to 12
• Scope of Advance Ruling enlarged
• To empower Authority to determine liability to
  pay Service Tax
• Section 67 substituted
• Where consideration for the taxable services is
  in terms of money, then the gross amount
  charged
• Where the consideration for the taxable services
  is not wholly or partly consisting of money, then
  be such amount in money, with the addition of
  Service Tax charged is equivalent to the
  consideration.
• Where the consideration is not ascertainable,
  then the value would be determined as per
  prescribed manner
• Draft Valuation Rules Issued

19
Service Tax on International Transactions
- Export of Services - Export of Goods -
Import of Services
20
Service Tax on International Transactions
- Export of Services
21
Four Modes of Supply of Service under GATS

• GATS recognizes 4 modes of delivery of Services-
• Mode 1-Cross border supply, e.g. supply of
  diskettes, architects blueprints, etc.
• Mode 2-Consumption abroad, e.g. a tourist
  availing of Services abroad
• Mode 3-Commercial presence, e.g. form of legal
  entity established abroad like a bank branch
• Mode 4-Movement of Natural Persons, e.g. physical
  movement of professionals, skilled and unskilled
  labour for temporary period. It does not cover
  permanent migration

22
Export of Service under FTP

• "Services" include all the tradable services
  covered under General Agreement on Trade in
  Services and earning free foreign exchange. 
• "Service Provider" means a person providing  
• Supply of a service from India to any other
  country  
• Supply of a service from India to the service
  consumer of any other country in India and  
• Supply of a service from India through
  commercial or physical presence in the territory
  of any other country 
• Supply of a service in India relating to
  exports paid in free foreign exchange or in
  Indian Rupees which are otherwise considered as
  having being paid for in free foreign exchange by
  RBI

23
Export of Services

• Position from 9.4.1999 to 28.2.2003
• Notification No. 6/99 dt. 9.4.1999
• Payments received in India in convertible foreign
  exchange were fully exempt
• From 1.3.2003
• Circular No. ST-56/5/2003, dt. 24.4.2003
  clarified that -
• Service tax is destination based consumption tax
  and it is not applicable on export of service
• Condition to receive payments in foreign exchange
  withdrawn
• From 20.11.2003
• Notification No. 21/2003
• Condition to receive payments in foreign exchange
  revived as was under Notification No. 6/99
  dt.9.4.99

24
Export of Services ....

• From 15.3.2005
• Export of Services Rules, 2005 notified
  (Notification 9/2005)
• Effective from March 15, 2005
• Notification 21/2003 providing exemption to
  foreign exchange receipt has been rescinded vide
  Notification No. 10/2005
• No service tax required to be paid on export of
  services
• Rebate may be granted by way of Notification
• 3 categories of services specified
• Category I 9 services
• Category II 50 Services
• Category III Balance Services not specified in
  Categories I and II

25
... Export of Services

• Category I
• Rule 3(1) Services in relation to immovable
  property situated outside India
• Specific conditions
• Such services must have been provided in relation
  to an immovable property situated outside India
• Category II
• Rule 3(2) Services performed partly in India and
  partly outside India deemed to be provided
  outside India
• Specific conditions
• Services must have been performed, either fully
  or partly, outside India

26
... Export of Services

• Common conditions for Categories I and II
• Such service is delivered outside India and used
  in business or for any other purpose outside
  India
• Payment for such service provided is received by
  the service provider in convertible foreign
  exchange
• Category III
• Rule 3(3) taxable services shall be treated as
  export if recipient is located outside India
• Conditions..

27
Export of Services

• Category III -
• Condition for export of services -
• Service which are provided and used in relation
  to commerce and industry and service recipient is
  situated outside India or
• If the recipient has any commercial establishment
  or office in India then
• Such service is delivered outside India
• Such services used in business or for any other
  purpose outside India
• Payment for such service provided is received by
  the service provider in convertible foreign
  exchange
• Order for provision of service is received from
  the office located out side
• Service which are provided and used other than in
  relation to commerce and industry and the service
  recipient is located outside India at the time of
  receipt of service

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Export of Services
Category I Category II Category III
Architects Services Stock Brokers Services Advertising Agencys Services
Commercial and Industrial Construction Service Clearing Forwarding Agent's Services Consulting Engineers Services
Construction of Complex service Business Exhibition Services Management Consultants Services
Dredging Service Chartered Accountant's Services Business Auxiliary Services
Interior Decorator service Maintenance or Repair Service Intellectual property service
Real Estate Agent Transport of Goods by Road / Air Service Franchise Services
29
Export Benefits Input Service Tax
Type of Benefit For Eligible under
Rebate Export of Services Rule 5 of Export of Services Rules
Refund Export of Goods and Services Rule 5 of Cenvat Credit Rules
Duty Drawback Export of Goods and Services Vide Sec93A of the Act
Other Benefits Export of Goods and Services Empowered under Sec 93A of the Act
30
Rebate on Input Service Tax

• Export of Service Rules exempts services exported
• Not Service Tax on input services
• Such Service Tax exempt vide Rule 5 of Export of
  Services Rules
• Rule 5 of Export of Services Rules, 2005
• Rebate of service tax.- Where any taxable
  service is exported,
• 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
• the rebate shall be subject to such conditions or
  limitations.specified in the notification
• Procedure for obtaining such refund set out in
• Notification No. 11/2005 rebate of tax paid on
  services exported
• Notification No. 12/2005 rebate of
• Service tax paid on input services used, or
• Duties paid on goods used
• for providing taxable services which are exported

31
Service Tax on International Transactions
- Export of Goods
32
Refund of Cenvat Credit on Exports

• Rule 5 Refund of Cenvat Credit
• Where input or input service is used in
• final products which is cleared for export under
  bond or LUT
• Intermediate products cleared for export
• Providing output service which is exported
• Cenvat credit on above inputs or input services
  shall be allowed to be utilized by the
  manufacturer or service provider towards payments
  of
• Excise duty on final product cleared for home
  consumption or export on payment of duty
• Service tax on output service
• If adjustment not possible than the manufacturer
  shall be allowed refund
• No refund shall be granted if drawback availed or
  rebate claimed

33
Export of Goods Services

• Refund of unutilized input service credit
  restricted to the extent of the ratio of export
  turnover to the total turnover for the given
  period to which the claim relates i.e.
• Maximum refund Total CENVAT credit taken on
  input services during the given period export
  turnover Total turnover 

34
Rebate of Input Service Tax on Export of Goods

• Section 93A as inserted by Finance Act, 2006
• Section 93A enables -
• Rebate of service tax paid on input services used
  in the manufacturing or processing of goods and
  provision of taxable services, which are exported
• Enables the Central Government to prescribe
  schemes for neutralization of service tax on
  input services used in export goods or services
• Such rebate subject to receipt of consideration /
  sale proceeds within the time allowed by the RBI
  under section 8 of FEMA
• Consequently, Section 94 amended to empower
  Central Government to frame Rules in this regard

35
Duty Drawback

• In line with powers acquired vide introduction of
  Section 93A
• Govt intends to extend Duty Drawback Scheme to
  Service tax
• Letter issued requesting for information on input
  Service tax on export products
• Duty Drawback Rates to be modified to factor in
  the Service Tax component

36
Service Tax on International Transactions
- Import of Services
37
Import of Services-International Precedent

• New Zealand
• System based on the destination principle Place
  of supply essential
• Place of supply determined by reference to the
  residence of the supplier
• In the case of non-resident suppliers, the test
  is whether the services are physically performed
  in New Zealand and, for transactions between
  registered persons, whether the parties agree to
  treat New Zealand as the place of supply
• European Union
• The place of supply determined by reference to
  the establishment of the supplier
• These rules are based on the principle that the
  majority of consumption will occur in the GST or
  VAT jurisdictions in which the supplier resides
• Some jurisdictions like UK apply a targeted
  effective use test to certain types of imported
  services, such as telecommunications

38
Import of Services-International Precedent

• Reverse charge Mechanism OECD Framework
• Most commonly used mechanism for taxing imported
  services is the reverse charge
• Reverse charge mechanism consistent with the
  accepted OECD framework for consumption taxes,
  which provides for taxation of services in the
  jurisdiction in which the services are consumed,
  that is, in the jurisdiction to which they are
  imported

39
Import of Services

• The concept of Non-resident Service Provider
  introduced in 2002 with the introduction of Rule
  2(1)(d)(iv)
• Until introduction of Finance Act, 2005 services
  provided beyond the territorial waters of India
  not liable to Service Tax
• Finance Act, 2005 brought major amendment to
  Section 65(105) by inserting the Explanation
  from 16.06.2005
• Finance Bill, 2006 proposes to insert new Section
  66A to fortify explanation inserted earlier

40
Import of Services

• Rule 2(1)(d)(iv)
• From 16.08.2002 to 16.06.2005
• in relation to any taxable service provided by a
  person who is a non-resident or is from outside
  India, does not have any office in India, the
  person receiving taxable service in India
• Post 16.06.2005
• in relation to any taxable service provided or
  to be provided by a person, who has established
  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 such service
  provider does not have any office in India, the
  person who receives the service and has his place
  of business or fixed establishment, permanent
  address as the case may be usual place of
  residence in India

41
Import of Services

• 16.6.2005 up to date of enactment of Finance Bill
  2006
• Explanation to Section 65 (105)
• Explanation - For the removal of doubts, it is
  hereby declared that where any service 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 such service is received or to be
  received by a person who has his place of
  business, fixed establishment, permanent address
  or, as the case may be, usual place of residence,
  in India such service shall be deemed to be
  taxable service for the purposes of this clause

42
Import of Services

• Whether services provided outside India are
  liable ?
• Levy does not satisfy the requirement of
  territorial nexus
• Sec 64 extends the Act to the whole of India
  other than the State of Jammu and Kashmir but not
  beyond
• Judicial precedents under other taxing laws -
• State of Bombay v. R.M.D. Chamarbagwala 1957
  SCR 874
• Haridas Exports v. All India Float Glass Mfr
  Asso. 2002 145 ELT 241 (SC)
• Issue of territorial constraint recognised by
  CBEC in its circular dated 8-10-2001
• Circular No. 36/4/2001 dated 8.10.2001 clarified
  that services provided beyond territorial waters
  of India not liable to Service Tax
• To sustain the levy, rendition of the service
  must be in India
• CBEC has recognized that the tax is a destination
  based consumption tax, therefore, consumption in
  India is a vital ingredient of the levy
• Levy cannot be sustained if neither rendition nor
  consumption is in India

43
Vexing Issues

• Explanation being clarificatory in nature
  Whether applicable retrospectively ?
• Recently, held by the Hon'ble Supreme Court in
  the case of Sedco Forex Vs CIT (279 ITR 310)
• Explanation can not have retrospective
  applicability when intended to change the scope
• Interim stay granted for 4 weeks for the
  operation of Explanation under Section 65(105)
  and Rule 2(1)(d)(iv) and Notification No. 23/2005
  S.T. dated 07.06.2005 by Madras High Court in
  Tamil Nadu Spinning Mills Association Vs. Union
  of India 2006-TIOL-28-HC-MAD-ST

44
Import of Services

• Section 66A Introduced
• Services provided by a person who has established
  a business or has a fixed establishment or has
  his permanent address or usual place of residence
  outside India to a person who has a place of
  business in India are sought to be made liable to
  Service Tax
• The provisions of the new Section will not be
  applicable to Individuals receiving the services
  not for business or commercial purpose
• Company receiving services from its overseas
  branch will have to pay Service Tax
• Even if the services is provided by a person to
  is own self, Service Tax will be applicable
• Explanation to Section 65(105) to be omitted
• All demands under Explanation 65(105) should
  stand abated
• 16.8.2002 to 16.6.2005
• 16.6.2005 up to date of enactment of Finance Bill
  2006

45
Import of Services

• Draft Import of Services Rules
• Services provided by a person who has no place of
  business / establishment in India, deemed to be
  received in India in following situations
• 3 Categories of services specified
• Category I
• Rule 3(1) Services in relation to immovable
  property situated in India
• Category II
• Rule 3(2) Services performed fully or partly in
  India deemed to be received in India
• Category III
• Rule 3(3) taxable services shall be treated as
  received in India if recipient is located in
  India and service is for use in commerce and
  industry

46
Import of Services
Category I Category II Category III
Architects Services Air Travel Agent's Services Advertising Agencys Services
Commercial and Industrial Construction Service Clearing Forwarding Agent's Services Consulting Engineers Services
Construction of Complex service Business Exhibition Services Management Consultants Services
Dredging Service Chartered Accountant's Services Business Auxiliary Services
Interior Decorator service Maintenance or Repair Service Intellectual property service
Transport of Goods by Road / Air Service Franchise Services
47
Import of Services

• Recipient of services liable to pay Service tax
• Rule 4 provides that Cenvat credit cannot be
  utilized towards payment for services received
  from person outside India and Service tax paid by
  recipient

48
Thank You