Determination of place of provision of service – A thorny issue
By Kapil Sharma & Narendra Singhvi
The new regime for taxation of services based on a negative list of services has come into force with effect from 1stt July, 2012. To implement this new regime, certain provisions in the Finance Act, 1994 have been amended and some provisions have been added. A new charging provision viz., Section 66B has been introduced to widen the scope of tax on services. This provision inter-alia provides that service tax shall be chargeable on all services provided within the taxable territory. The definition of ‘taxable territory’ includes all parts of India except the State of Jammu and Kashmir (‘J&K’).
In order to determine, whether a service has been provided within the taxable territory or not, the Central Government has introduced ‘the Place of Provision of Services Rules, 2012’ (‘POPS Rules’) replacing the Export of Services Rules, 2005 and the Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 (commonly referred as ‘Import of Services Rules’). The thrust of this article is to highlight the issues arising out of the new POPS Rules and not to examine the scope of individual rules therein.
The POPS Rules do hint at an attempt to create a common approach for the determination of the place of supply both for goods and services, as India will transit to a GST regime in the near future. There are, in all, 14 rules in the POPS Rules.
Rule 2 provides for various definitions, the most important being the definitions for ‘location of the service provider’ and ‘location of the service recipient’. The main criterion for determining the place of provision for many supplies/ transactions is linked to the location of the service provider/recipient.
These two terms are defined in a similar way to mean either the place for which a single registration has been obtained or the place of business establishment/fixed establishment/establishment most directly concerned with the provision of service/usual place of residence. However, in the absence of statutory definitions for the terms ‘fixed establishment’, ‘business establishment’, etc., determination of location of the service provider/recipient itself becomes litigious, making the application of these rules more difficult.
Further, these definitions have an inherent lacuna in respect of a conglomerate having branches across India including J&K and having a centralized registration for all its branches including that in J&K. The question is: ‘Will service tax be payable on services provided from or received in J&K considering the fact that the branch in J&K is deemed to be outside the taxable territory?’
The determination of location of the service provider/recipient, in respect of intangible services such as telecommunication, IPR, etc., in which services are received at more than one location, both within and outside the taxable territory, is also a challenge under these definitions.
Rule 4 of the POPS Rules provides for determination of the place of provision of services in respect of performance-based services. However, there is no clarity in this regard when we consider services which are physically received and consumed outside the taxable territory, for example, goods made available for use outside India.
The place of provision of services directly connected with the immovable property, under Rule 5, shall be the location where such immovable property is located or intended to be located. By use of the words ‘intended to be located’, the scope of Rule 5 has been expanded to include services in relation to an immovable property which is yet to come into existence. However, is a service directly connected with an immovable property or not, is a question that can pose problems.
When any service is provided at more than one location, including a location in the taxable territory, the place of provision of such a service, under Rule 7, shall be the location in the taxable territory where the greatest proportion of the service is provided. This rule is indeed regressive in that, just because a small part is performed in the taxable territory, a major part outside the taxable territory also gets taxed. Further, no mechanism has been prescribed to ascertain the place of greatest proportion of taxable service, under these rules.
Rule 8, the most debated rule, provides that where both the service provider and the service recipient are located within the taxable territory, the place of provision of service shall be the location of the service recipient. The debate in fact originates from the pre-dominant position that Rule 8 acquires when the principle of choosing the rule, from among the rules that merit equal consideration, as prescribed in Rule 14, is to be followed. In other words, if a particular service is covered by any or all of the rules contained in Rules 3 to 7, and also Rule 8, then the place of provision of service shall be determined by adopting Rule 8 only. Accordingly, where both service provider and service recipient are located in India, services based on performance or services connected with immovable property cannot be said to have been provided outside India under Rules 4 and 5 respectively, as Rule 8 acquires predominance automatically. The principle contained in Rule 8, further, defies the logic of classification of services, on which the POPS Rules are based, and indicates that overriding this logic, these are more location/contract centric rules.
Rule 9 provides for the determination of the place of provision in respect of certain specified services, such as intermediary services, to be the location of the service provider. The definition of ‘intermediary’ under Rule 2 indicates that it applies only to persons facilitating the provision of services. In other words it does not extend to intermediaries in respect of goods. Thus there can be confusion while applying Rule 9 to intermediaries who facilitate the provision of composite services such as works contract, which involve the supply of goods as well as provision of services.
Have the POPS Rules indeed simplified the levy of tax on services, or have they further complicated the already complex service tax law? What happens when GST is introduced? Will these rules support the new regime? How will the POPS Rules differentiate between taxable and non-taxable territories under the GST regime? How is the place of taxation of goods sold between two states located within the taxable territory itself to be determined? These and many more questions arise as we think of the future of levy of tax on goods and services.
[The first author is a Principal Associate and second author is an Associate, Tax Practice, Lakshmikumaran & Sridharan, New Delhi]