What constitutes an export of services has always been a bone of contention between the tax authorities and companies. The Union Budget increased the ambit of “taxable service” by introducing new services and expanding the scope of existing services and so has tried to bring some relief to the Indian service exporter. This article seeks to explore the implications of the amendments introduced to the Export of Service Rules, 2005 (Export Rules).
The concept of export of services was introduced in March 1999, by notification no. 6/99-ST of 9 April 1999. It provided a simple condition to constitute export, according to which payments received in India in convertible foreign exchange by a service provider were fully exempt from service tax. Subsequently, the Export Rules were framed and made law in March 2005. When the Export Rules were initially introduced they lay down two conditions to determine what constitutes service exports.
The first condition was that the service should be in relation to an immovable property located outside India; should be performed fully or partly outside India; or the service recipient should be located outside India. The second condition stipulated the receipt of convertible foreign currency in India. Over time there were various amendments to these conditions and the position with regard to the taxation of export of services changed.
After the introduction of the Export Rules, the main controversy arose with the introduction of the words “provided from and used/delivered outside India”. The current amendments in the Export Rules seek to bring the controversies surrounding export of services to rest.
While there remained ambiguity on what constitutes an export of service, in May 2003 the Central Board of Excise and Customs (CBEC) clarified that service tax is a “destination based consumption tax” and is not applicable on the export of service. The revenue authorities failed to apply this clarification while dealing with service exports and this resulted in further controversies and complications.
However, in April 2006, the Export Rules were amended to provide an additional condition of “delivered and used outside India”, to determine what constitutes an export of service. While the amendment was made, there was no definition provided in the law for “delivered outside India” or “used outside India”.
This invited a lot of litigation, especially since services are inherently intangible in nature. The judgments delivered in the case of Blue Star, ABS India, Lenovo (India) brought clarity to the terms “delivered and used outside India”. It was held that if a service is provided to an entity outside India and the benefit of such a service is received outside India then the service would be considered as delivered and used outside India.
Subsequently in February 2009 the CBEC (through Circular No. 111.05/2009-ST) clarified that the meaning of the term “used outside India” was to be understood in the context of the characteristics of a particular category of service as mentioned in sub-rule (1) of rule 3 of the Export Rules.
Specifically in relation to category III services, it was clarified that the relevant factor for determining an export is the location of the service receiver and not the place of performance. In addition it was clarified that the phrase “used outside India” should be interpreted to mean that the benefit of service should be gained outside India and that the export of service may take place even when all the relevant activities take place in India, so long as the benefits of the services accrue outside India.
Later in 2009 in an order that negated the certainty provided by the CBEC in its February 2009 circular, the Customs, Excise and Service Tax Appellate Tribunal (in the case of Microsoft), held that destination-based consumption of services ended with the performance of those services in India. It also stated that the place of performance of a service would determine the event of taxability as well as incidence of tax.
As is evident from above, in a world of constantly changing taxation provisions, what remains constant is the nature of service that the Indian service provider exported. However, with the deletion of the condition of “provided from India” and “used outside India”, from the Export Rules, the finance minister has put highly disputed issues to rest. This is a welcome change and brings tremendous relief to Indian service exporters.
Apart from this, the finance minister has also simplified the procedure for the verification and grant of export refunds and simultaneously sought to amend the procedure to expedite the processing the refund claims. This will help resolve past disputes and aid the processing of future refund claims on an expedited basis.
While the finance minister’s move is in the right spirit, what is perceived to be a change setting aside the pending issues in the case of export of services may not address every pending issue. The revenue authorities may, for example, enquire who the service recipient is, and justifying this may be difficult with the lack of any judicial precedents or clarifications.
All of this is a positive change, but the Indian service exporter must urgently be freed from never ending ambiguities, disputes and litigations.
Rohit Jain is a partner at Economic Laws Practice where Parth Contractor is an associate. The firm is headquartered in Mumbai, and has offices in New Delhi, Pune and Ahmedabad.
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