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

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Se

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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