Export of Services

To understand this concept first we will go through the exact language of the law. Don’t worry about complexity of the language of the law, later we will try to simplify the language through simple explanations and articles. Idea is to first grasp what is law and then interpretating the same and not to miss out anything.

Below is the language of Law
Very important: Below rules are amended up to date by different notifications were issued from time to time(Total 7 notifications for amendment in such rules). We don't need to see old notifications, reason is that the same have been already incorporated in EXPORT OF SERVICE RULES, 2005, thus the present law in relation to rule is in its current form so we need to know only what is current and what is applicable from now onwards i.e. changes have prospective effects not retrospective effects. But for past cases we need to check what was relevant at that time.

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EXPORT OF SERVICE RULES, 2005

[Notification NO. 9/2005-S.T., dated 03.03.2005 

as amended by 

Notification NO. 13/2006-S.T., dated 19.04.2006, 

02/2007-S.T., dated 01.03.2007, 

30/2007-S.T., dated 22.05.2007, 

05/2008-S.T., dated 01.03.2008, 

20/2008-S.T., dated 10.05.2008,

38/2009-S.T., dated 23.09.2009, 

06/2010-S.T., dated 27.02.2010,

In exercise of the powers conferred by section 93 & 94 of the Finance Act, 1994 (32 of 1994), the Central Government hereby makes the following rules, namely:-

1.  Short title and commencement.-

(1) These rules may be called the Export of Services Rules, 2005.

(2) They shall come into force on the 15th day of March, 2005.

 

2.  Definitions. - In these rules, unless the context otherwise requires,-

(a) “Act” means the Finance Act, 1994 (32 of 1994);

(b) “input” shall have the meaning assigned to it in clause (k) of rule 2 of the CENVAT Credit Rules, 2004;

(c) “input service” shall have the meaning assigned to it in clause (l) of rule 2 of the CENVAT Credit Rules, 2004.

 

3. Export of taxable service. – (1) Export of taxable services shall, in relation to  taxable services‚–

(i)  specified in sub-clauses (d), (m), (p), (q), (v), (zzq), (zzza), (zzzb), (zzzc), (zzzh), (zzzr), (zzzy), (zzzz), (zzzza) & (zzzzm) of clause (105) of section 65 of the Act, be provision of such services as are provided in  relation to an  immovable property situated outside India;

(ii) specified in sub-clauses (a), (f), (h), (i), (j), (l), [*  * *], (n), (o), [*  * *], (w), (x), (y), (z), (zb), (zc), (zi), (zj), (zn), (zo), (zq), (zr), (zt), (zu), (zv),(zw), (zza), (zzc), (zzd), (zzf), (zzg), (zzh), (zzi), (zzl), (zzm), (zzn), (zzo), (zzp), (zzs), (zzt), (zzv), (zzw), (zzx), (zzy), (zzzd), (zzze), (zzzf), (zzzp), (zzzzg), (zzzzh), (zzzzi), (zzzzk) and (zzzzl) of clause (105) of section 65 of the Act, be provision of such services as are performed outside  India:

    Provided that where such taxable service is partly performed outside India, it shall be treated as performed Outside India;

Provided further that where the taxable services referred to in sub-clauses (zzg), (zzh) and (zzi) of clause (105) of section 65 of the Act, are provided in relation to any goods or material or any immovable property, as the case may be, situated outside India at the time of provision of service, through internet or an electronic network including a computer network or any other means, then such taxable service, whether or not performed outside India, shall 

be treated as the taxable service performed outside India;

(iii) specified in clause (105) of section 65 of the Act, but excluding‚–

  (a) sub-clauses (zzzo) and (zzzv);

 (b) those specified in clause (i) of this rule except when the provision of taxable services specified in sub-clauses (d), (zzzc), (zzzr) and (zzzzm) does not relate to immovable property; and

  (c) those specified in clause (ii) of this rule,

when provided in relation to business or commerce, be provision of such services to a recipient located outside India  and when provided otherwise, be provision of such services to a recipient located outside India at the time of provision of such service:

Provided that where such recipient has commercial establishment or any office relating thereto, in India, such taxable services provided shall be treated as export of service only when order for provision of such service is made from any of his commercial establishment or office located outside India:

 

Provided further that where the taxable service referred to in sub-clause (zzzzj) of clause (105) of section 65 of the Act is provided to a recipient located outside India, then such taxable service shall be treated as export  of taxable service subject to the condition that the tangible goods supplied for use are located outside India during the period of use of such tangible goods by such recipient.

(2) The provision of any taxable service specified in sub-rule (1) shall be treated as export of service when the following conditions are satisfied, namely:-

(a) [* * * ]

(b) payment for such service is received by the service provider in convertible foreign exchange.

 

Explanation.- For the purposes of this rule “India” includes the installation structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof.

   

4. Export without payment of service tax. - Any service, which is taxable under clause (105) of section 65 of the Act, may be exported without payment of service tax.

5. Rebate of service tax. - Where any taxable service is exported, the Central Government may, by notification, 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 and the rebate shall be subject to such conditions or limitations, if any, and fulfillment of such procedure, as may be specified in the notification.

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Now, let understand the law in simple language by help of following articles and explanations.

Implications of service tax on export of services

S Madhavan / New Delhi November 06, 2006 

As is by now well known, the service tax, which has been in force in India for more than a decade, is intended to operate as a destination based consumption tax.

Consequently, services will be taxed at the place of consumption and, as a corollary, not taxed from where they are exported. Therefore, export of services from India are intended to be exempt from domestic service tax law.

In order to bring about this dispensation, the Government of India introduced the Export of Services Rules, 2005, with effect from March 15, 2005. However, it was not as though that export of services from India were taxed prior to that date.

The erstwhile exemption from the tax which was prevalent prior to the above date did not however lay down rules to determine as to what constituted export of services from India, and was based on the sole condition of receipt of inward remittances of non repatriable convertible foreign exchange.

Thus, the above Rules laid down, for the first time, elaborate criteria for the determination of export of services, besides laying down other conditions, for the exemption from the service tax.

The Rules enable the exporter of services to either not charge service tax on such exports or to discharge the service tax thereon and claim a rebate/refund of the tax.

In both situations, provisions have been made to ensure that the exporter of such services is able to offset/obtain a refund of the service taxes paid on input services/goods used in the provision of the exported services.

As regards the rules for determination of exports, a three-part categorisation of services has been done. The first category relates to a set of 10 services which will be treated as exported from India if the immovable property to which these services relate are situated outside India. The second category pertains to those services which require physical performance and the Rules state that these services will be treated as exports, if the services are either wholly or partly performed outside India. A list of 50 different services has been identified under this category. The third and final category is with regard to services other than those referred to above, constituting 40 in number, which will be treated as exports, if the service is both delivered and used outside India and payment for such services is received by the service provider in convertible foreign exchange.

The Export of Services Rules underwent changes in June 2005 and April 2006, pursuant to the Finance Act 2006, as a result of which the benefit of exemption from the service tax would be available only if the twin conditions of delivery and use outside India and receipt of payment for such services in convertible foreign exchange are met.

It can thus be seen that the erstwhile condition of inward remittances of convertible foreign exchange continue to remain as an essential condition. However, the significant additional condition is that the services should be delivered and used outside India.

This leads us straight to the biggest issue surrounding the determination of export of services, in the absence of rules for determining the fact of delivery and use of services outside India, when provided from India.

The underlined expression is important since the Rules can only come into play if such services are provided from or rendered from India. If the services are altogether performed from outside the country, they would not be covered under the ambit of Indian service tax law at all.

The absence of rules to determine the delivery and use of services outside India has created numerous difficulties for a variety of service providers/services.

Given that services are typically transient in nature and also intangible in character, formidable semantic difficulties arise in determining how and when the services are supposedly delivered to a recipient outside India and also how and when such a service, which is delivered outside India, is also put to use outside India.

Broadly speaking, it could be said that if the service is executory in nature, it will be delivered and used only at the place where it is performed and if the service is advisory in nature, it will be delivered at the place where the recipient, to whom such services are rendered, is located.

However, these broad rules do not clinch the issue in a variety of circumstances where the services are quasi executory and quasi advisory in nature and it becomes imperative in such situations to apply the ‘essential characteristic’ test to determine the delivery and use of the service outside India, in order to qualify for the exemption.

The other difficulty related to the above is that the service could ostensibly be used, subsequent to its delivery, on a repeated basis and such use could conceivably be both outside and within the country. The question that arises therefore is whether the word ‘used’ is limited to the immediate use or could it extend to subsequent uses as well.

Several similar and associated difficulties have arisen in specific situations and the absence of clear rules for determination of exports has caused significant concern. An idea of the seriousness of the question can be gauged from the fact that several of the activities/services that are typically performed by the IT and IT enabled services sector, including call centre and back office operations, could potentially not qualify as exports, so as to be eligible for the exemption from the service tax.

Given that India is a significant provider of such services to the wider world, it will be self defeating and entirely negative for India’s aspirations, should there be a tax cost of 12.24% on the value of such services.

The second connected problem is with regard to the inability of service providers from India to recoup all input taxes, upon their exporting such services. As indicated earlier, the input taxes can either be set off against output taxes or refunded in cash.

Typically, for exporters of services, such offsets are not possible and hence cash refunds are the only means of recouping input taxes. For all those who are in the know, the fact that till date there is not a single instance of a refund being granted by the authorities to any service provider in India is an indication of the difficulties faced.

While the rules for grant of rebates/refunds for such exports have been in place for more than a year and have also been subsequently liberalised, it is a fact that till date no refunds have been granted.

In conclusion, it is fair to suggest that there has been significant progress in service taxation in India in terms of evolving a comprehensive set of guidelines in the form of the Export of Services Rules.

However, it is equally true that in the absence of rules of determination of the delivery and use of the service outside the country, service exporters continue to face formidable difficulties in determining whether their exports are free from service tax. Clear rules are therefore urgently required to do away with the ambiguities in service tax law relating to exports.

(The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers)