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Service Tax onInternational Transactions
Nishant ShahEconomic Laws Practice
Advocates & SolicitorsApril 9, 2006
Manufacturer Wholesaler
Intra-StateEx. Duty – 16%Edu. Cess – 2%VAT/ST – 4%
ImportsCustoms DutyBasic – 12.5%CVD – 16%Ed. Cess – 2%Sp.CVD – 4%
Service ProviderServ. Tax – 12.24%
Factory
RetailerDealer
Retailer
Toll Manufacturer
Goods TransporterServ. Tax-12.24%
Interstate purchase(CST)
Stock transfer(No tax)
Octroi – 4.5%
Indirect Tax Cost in India
Inter-State Ex. Duty – 16%Edu. Cess – 2%CST – 4%
Local purchaseVAT – 4%/12.5%
OtherService ProviderServ. Tax – 12.24%
Local purchaseVAT – 4%/12.5%
OtherService ProviderServ. Tax – 12.24%
Cumulative burden of Indirect Taxes in India – 28% to 44% (approx.)
Cenvat Credit – Present Status
MODVAT Scheme (1986)
Excise Duty paid on specified
Inputs/Capital Goods
Excise Duty on Final Products
Credit
CENVAT Scheme (2001)
Excise Duty paid on Inputs/Capital Goods
Excise Duty on Final Products
CENVAT Scheme (2004)
Excise Duty on Inputs/Capital Goods and Service Tax on
Input Services
Excise Duty on Final Products and/or
Service Tax on Output Services
CreditCredit
Proposed Structure in India
GLOBAL SCENARIO
All Indirect Taxes VAT / GST
INDIA – Phase 1
State Sales Tax and Entry Tax
VAT
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
Proposals As introduced by Finance Bill, 2006
- New Services
- Expansion of Scope
- Key Legislative Changes
Service Tax In In
dia
Service Tax – Net Widened …
15 New Services Introduced
4 613
24 26
4049
58
7181
96
0
20
40
60
80
100
120
'94 '96 '97 '98 '00 '01 '02 '03 '04 '05 06
Year
Nu
mb
er
of
Se
rvic
es
… 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
… Service Tax – Net WidenedNew 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
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
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.
… 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 …
… Business Support ServicesTaxable 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 Consultant’s 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
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
…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 Google’s 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
Sponsorship servicesTaxable 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
… 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
… Service Tax – Net WidenedMaintenance 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
Key Legislative ChangesRate of Service Tax from 10% to 12%Scope of Advance Ruling enlarged
To empower Authority to determine liability to pay Service TaxSection 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
- Export of Services
- Export of Goods
- Import of Services
Service Tax on
International T
ransactions
- Export of Services
Service Tax on
International T
ransactions
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
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
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
… 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 servicesRebate may be granted by way of Notification
3 categories of services specifiedCategory I : 9 servicesCategory II : 50 ServicesCategory III : Balance Services not specified in Categories I and II
... Export of Services …
Category IRule 3(1) Services in relation to immovable property situated
outside IndiaSpecific conditions
Such services must have been provided in relation to an immovable property situated outside India
Category IIRule 3(2) Services performed partly in India and partly outside
India deemed to be provided outside IndiaSpecific conditions
Services must have been performed, either fully or partly, outside India
... 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..
… 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
… Export of Services …
Category I Category II Category III
Architect’s Services Stock Brokers Services
Advertising Agency’s Services
Commercial and Industrial Construction Service
Clearing & Forwarding Agent's Services
Consulting Engineer’s Services
Construction of Complex service
Business Exhibition Services
Management Consultant’s 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
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
Rebate on Input Service TaxExport 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 usedfor providing taxable services which are exported
- Export of Goods Service Tax on
International T
ransactions
Refund of Cenvat Credit on ExportsRule 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
… Export of Goods & ServicesRefund 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
Rebate of Input Service Tax on Export of Goods
Section 93A as inserted by Finance Act, 2006Section 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
Duty DrawbackIn 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
- Import of Services Service Tax on
International T
ransactions
Import of Services-International PrecedentNew 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
Import of Services-International PrecedentReverse 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
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
… 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
… 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;
… 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
… Vexing IssuesExplanation 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
… 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
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 specifiedCategory I
Rule 3(1) Services in relation to immovable property situated in India
Category IIRule 3(2) Services performed fully or partly in India deemed to be
received in IndiaCategory 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
… Import of Services
Category I Category II Category III
Architect’s Services Air Travel Agent's Services
Advertising Agency’s Services
Commercial and Industrial Construction Service
Clearing & Forwarding Agent's Services
Consulting Engineer’s Services
Construction of Complex service
Business Exhibition Services
Management Consultant’s 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
… 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
Thank You
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