Import

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Import Export of Services-Service Tax Issues

• By
• V K Garg

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Issues

• Import
• Export
• Rebate/refunds

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Import of services
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Taxability

• Not based on receipt from across the border,
  though loosely the term used is import
• Providing a taxable service
• from a person abroad (exporter)
• to a person of Indian base (importer)
• Service may be provided anywhere

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Importer?

• Any person who has any of the following in
  India
• Business/fixed establishment or
• Permanent address or
• Usual place of business
• Person need not be Indian resident. Sufficient if
  he fulfills any of the requirements

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Important points

• Point 1
• Received by PERSON
• Not limited in respect of operations in India
• Point 2
• Mere RECEIVED not necessarily consumed

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Tangibility of services

• Mostly goods
• Rent a cab
• BAS (production not amounting to production)
• Combination of goods services
• Catering
• Beauty parlor
• Only service
• Management consultancy
• BAS (commission agents)

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Anywhere?

• Service received in India
• Consumed in India
• Consumed elsewhere e.g. mobile chip used outside
  India
• Service received outside India
• Consumed in India e.g. mobile chip purchased
  abroad used in India
• Consumed elsewhere

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Anywhere?
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Services received outside

• Extra-territorial?
• Act does not restrict services provided in India,
  unlike Central excise which says goods
  manufactured in India
• Income tax on income earned abroad by Indian
  residents
• Many other economic legislations e.g. FEMA
• Even IPC applicable for acts abroad
• However they are applicable to Indian
  residents/citizens.
• Service tax made applicable to non-residents
  too though restricted to entities with physical
  presence in India, howsoever little

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Services received outside

• Does not appear unintentional no confusion in
  terms of taxability
• Circular B1/6/2005 dt 27 July, 2005 states
  charging service tax from recipients when the
  service is provided by a non-resident is a well
  accepted international practice
• Individuals exempt for non-commercial use
• Notfn. 22/2005-ST exempts certain services (e.g.
  CHA,Steamer agent, CF provided by non-residents
  and consumed outside India in the context of
  sailing of an Indian ship

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Services received consumed outside

• Foreign consultant for a foreign project
• Advertising abroad
• Market research of foreign markets for new
  projects abroad
• Banking Financial services abroad
• Event management
• Dry cleaning abroad
• Health club fitness

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Extra-territorial issues

• Importer
• Permanent residence UK
• Usual place of business USA
• Small establishment in India
• Exporter
• Established in USA with no office in India
• Service Consultancy for business in USA
• This may lead to multiple taxation totally
  disproportionate to business presence in a
  country

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Determining test

• For persons with residence/usual place of
  business in India
• Services received anywhere and for use anywhere
• For persons with residence/usual place of
  business other than India
• For use in a business/ establishment or
  operations in India

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International situation

• Services received by entity in that country
• Services received outside not taxable
• Same as import in the case of goods
• Received????
• Delivery
• Consumption
• Either

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Protections

• Service should be a taxable service
• Provided by a service provider defined as per the
  Act e.g.
• Banking Financial Services
• Banking/NBFC Co as per RBI Act
• Authorized dealer as per FEMA Act
• Body Corporate as per Indian Companies Act
• Commercial Concern???

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Protections

• Insurer
• carrying .insurance business in India
• Custom House Agent
• licensed under Section 146 of Customs Act
• Telegraph authority
• As per Indian Telegraph Act
• Stock broker
• As per SEBI Act

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Effective date

• Explanation is only clarificatory can have
  retrospective effect
• Sulochana Amma vs Narayanan Nair
  2002-TIOL_SC-Misc.
• Harmonise and clear up ambiguity
• Mithilesh Kumari vs Prem Behri Khare
  2002-TIOL-293-Sc-Misc
• The presumption against retrospective operation
  is strong in cases in which the statute, if
  operated retrospectively, would prejudicially
  affect vested rights or the illegality of the
  past transactions, or impair contracts or impose
  new duty or attach new disability in respect of
  past transactions or consideration already
  passed.

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Liability for tax

• Foreign service provider has an office in India
• Liability of service provider
• Foreign service provider does not have any office
  in India
• Liability of service receiver
• Office in India on the date of taxability of
  service opened later or closed later
  inconsequential
• Exemption to individuals for non-business purpose

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Export of services
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Export

• Three criteria
• Property outside
• Performance outside
• Recipient outside
• Other conditions
• Delivery outside
• Use outside
• Payment in Convertible currency

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Export?

• For
• Services relating to property e.g. General Ins.,
  Architect, Interior Decorator, Real Estate Agent,
  Construction, Site preparation, Dredging/ Map
  making
• Rule 1 Property should be outside India

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Additional conditions

• Service delivered outside India and
• Used in business or for any other purpose
  outside India and
• Payment in convertible currency

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Export?

• For Specified services e.g.
• CA/ICWA/CS
• Agency functions CHA/Steamer agent/Stock
  Brokers/CF/Travel agents/ Underwriter
• Travel related/ GTA
• Surveys market research
• Rule 2 Service performed outside India-partly or
  fully

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Additional conditions

• Service delivered outside India and
• Used in business or for any other purpose
  outside India and
• Payment in convertible currency

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Export

• All other services e.g.
• Advertisement
• Manpower recruitment
• Business Auxiliary
• Consulting/IPR
• Insurance
• Banking financial
• Telephone

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Export- Rule 3

• Provided used in or in relation to commerce or
  industry
• Recipient is located outside India
• Recipient has presence in India
• Order from outside India
• Service delivered outside and used outside
• Payment in convertible currency
• Used other than Commerce industry
• Recipient located outside at the time of receiving

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Important point

• When recipient outside India following conditions
  not necessary
• Delivery outside India
• Use outside India
• Payment in convertible currency
• Perhaps not necessary because these conditions
  automatically satisfied

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Other important terms

• Provided/performed/rendered/supplied
• Inter-changeable depending on subject
• Delivered
• Where physical delivery possible e.g. maintenance
  repair, job-worked goods
• But also used in the context of performance
• Performed partly abroad, delivered fully ??

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Rebate of taxes on export of services
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Summary of rebate schemes

• Pay tax on export and claim refund
  (Notfn.11/2005-ST) No input-output co-relation
• Export tax free and claim refund on input taxes
  based on prior declaration of input-output norms
  (Notfn 12/2005-ST)
• Export tax free and self-utilize the Cenvat for
  DTA clearances and claim refund of any
  unutilizable amount (Rule 5 of Cenvat Rules)

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Rebate requirements

• Proof of realization
• Proof of payment of tax on output service or
  inputs, as the case may be
• Undertaking to repay wrongful amount, together
  with interest

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No refund available

• Of taxes paid on input goods and input services
  on the export of non-taxable services e.g. ITES
• Similar refund available on the export of
  non-dutiable or exempt goods, though restricted
  to Cenvat on input goods and not input services
  (there was no provision for Cenvat on input
  services under relevant Rule 18 of Central Excise
  Rules when it was enacted in 2002)

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A few issues

• Absence of safeguards, conditions etc in Rule 5
  of Cenvat
• Mere absence of safeguards doesnt mean refund
  not admissible for Govt. to prescribe to
  safeguard its interest
• Used in final goods/output services
• Not directly or indirectly, in or in relation
  to
• Unlike goods where one-to-one co-relation
  possible services are difficult to co-relate

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A few issues

• Unlike goods services can be used simultaneously(
  with no possibility of separate accountal) for
• Dutiable non-dutiable good
• Taxable non-taxable services
• Exempt non-exempt good/services

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A few issues

• Possible solution to allow refund as follows
• Directly relatable full admissibility
• Not relatable at all full inadmissibility
• Common use As per following formula
• Max refund Total tax on input services
  export turnover on which refund claimed Total
  turnover

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A few issues

• Input-output actually required and not estimated
  (Notfn 11/2005-ST)
• Actually required vs required actually
• Semantics
• Invoice for input services received periodically
• Generally simultaneous except utilities like
  telephone

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A few issues

• Delivery outside India
• Generally same as performed/provided unless
  service in physical form
• Date of export
• When all the conditions of export have been met
  date of invoice not applicable when receipt of
  payment a condition precedent for recognizing
  export

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Problems of EOUs

• Not allowed to receive input services free of tax
  as in the case of SEZs or as in respect of input
  goods
• Thus pay tax and use Cenvat for DTA or claim
  refund under Rule 5
• Difficult to co-relate services with goods

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Services capable of co-relation

• Organized Industry/public sector
• Telephone
• Insurance
• Banking financial
• BAS in certain areas

• Goods related
• GTA
• Air transport
• Cargo handling
• Commission agents/CF/CHA
• Packaging
• Dry cleaning/fashion designer ( Garments
  industry)

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Vision for future

• Era of extreme international competition
• Zero-rating of all exports
• Most of the problems due to selective taxation
  and large number of exemptions
• Universal taxation of goods and services/unified
  VAT
• Refund based on international practice drawback
  incorporating service tax element
• Simplification

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Thanks