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Change of Rate:
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1-4-2012
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10%.....12%
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9/4/2012 25/5/2012 12% 9/4/2012
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25/5/2012 10% 28/3/2012
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Date of Service
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Date of Invoice
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Date of Payment
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Rate of Tax
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POT
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28/3/2012
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9/4/2012
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25/5/2012
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12%
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9/4/2012
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28/3/2012
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25/5/2012
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10%
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28/3/2012
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9/4/2012
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26/3/2012
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10%
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26/3/2012
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10/4/2012
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28/3/2012
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25/5/2012
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12%
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25/5/2012
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28/3/2012
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16/3/2012
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10%
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16/3/2012
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9/4/2012
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28/3/2012
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12%
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9/4/2012
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Implications of service tax on export of services
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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(The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers)
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