Lakshmi Kumaran & Sridharan AttorneysAn ISO 9001 / 27001 certified law firm

Export of services under the new regime of Service Tax

By Visali Kumar & Jagannadh Grandhi                  

As we approach the second year in the negative list based regime in service tax, there are many issues which have not been comprehended yet. Section 66B of the Finance Act, 1994 ( ‘the Act’) is the new charging section which replaced the earlier charging section, paving way for the new and wide net of service tax. This section provides that  service tax will be levied at the rate of 12% on the value of all services, other than those specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed. Thus, it can be seen that the significant change under the new regime, inter alia, is that service tax shall be levied on all services, which are provided in the ‘taxable territory’ as against on specified services under the earlier charging section.                    

The term ‘taxable territory’ is defined in Section 65B (52) of the Act as “the territory to which the Act applies” i.e. the whole of territory of India other than the State of Jammu and Kashmir. The term ‘non-taxable territory’ is defined in Section 65B (35) to mean territory which is outside the taxable territory. Thus, it is imperative now that a service is provided in the taxable territory in order to attract service tax levy.        

Determination of place of provision of service            

As a derivative of the charging section emerges the concept of Place of Provision (‘POP’) of a service. Accordingly, the Place of Provision of Services Rules, 2012 (‘POP Rules’) were framed vide the power granted under Section 66C (1) of the Act, with effect from 1-7-2012. It may also be noted that the POP Rules are issued in supersession of the Taxation of Services (Provided from outside India and Received in India) Rules, 2006 (‘Import of service Rules’ or IOS Rules’) and the Export of Services Rules, 2005 (‘EOS Rules’). The POP Rules appear to be a conscious attempt in presenting the new service tax law as a destination based consumption tax in its true sense.        

On a brief reading of the POP Rules, it can be seen that Rules 4 & 5 seem to have carried forward the treatment of services on the basis of ‘performance’ or ‘location of immovable property’, as was the case under the erstwhile EOS Rules. However, the effect of such categorisation is nullified by Rule 8 which provides that where the service provider and recipient are located in the taxable territory, the POP would be the location of the service recipient. To put it precisely, if both the parties in a service agreement are located in India which is the taxable territory, then the POP would be India irrespective of the nature of service.        

Taxability of export of services under the new regime

A relook at the erstwhile EOS Rules, before venturing into the new provisions dealing with export of service brings back to our memory that in order to qualify as export, the taxable services had to fall under any of the three categories contemplated under Rule 3 of the EOS Rules based on (i) location of immovable property, (ii) performance of service and (iii) location of recipient. In addition to the service falling under any one of these categories, the consideration for the service had to be received in Convertible Foreign Exchange (CFE).          

Now coming to the new regime, along with the introduction of POP Rules, Rule 6A is introduced under the Service Tax Rules, 1994 ( ‘ST Rules’) to determine when a service shall be treated as export of service. As per this rule, provision of service shall be treated as export of service, inter alia, when (i) service recipient is located outside India (ii) place of provision, as per POPS Rules, is outside India and (iii) consideration for the service provided is received by the service provider in CFE. The condition of service recipient being outside India for all services is a startling departure from the erstwhile EOS Rules which did not impose it for performance based services and services relating to immovable property, to qualify as exports. This condition in fact, flows from Rule 8 of the POP Rules which provides that the POP of a service where the service provider and recipient are located in the taxable territory shall be the location of the recipient which is India. In other words, in respect of a service transaction where the service provider and recipient are located in India, the POP would automatically become India and such service would not qualify as export, irrespective of fulfilling other factors such as receipt of CFE or the service being fully performed outside India, or being in respect of an immovable property outside India. This condition of recipient being outside India arbitrarily restricts the scope of services qualifying as exports, thereby exporting taxes in respect of services which are essentially performance based/immovable property based/event based.          

Significance of receipt of CFE under the old and new regimes            

Let us now analyse the significance of receipt/non-receipt of CFE under the old & new regimes. Under the erstwhile EOS Rules, the services which were put to the export test are taxable services per se, which had to cross the threshold of falling under one of the prescribed categories and receipt of CFE. Therefore, even if a performance based service is fully performed outside India, it would not qualify as export if the consideration for such service is not received in CFE. Consequently, tax became payable on such a service. Furthermore, as there was already a levy on the services which had to qualify the test of export, Rule 4 of the EOS Rules specifically provided that any service taxable under Section 65 (105) of the Act may be exported without payment of service tax. Rule 5 of the EOS Rules in turn provided for rebate of service tax paid on such services exported or of the duty/service tax paid on inputs/input services used in providing such services. Thus, the service providers who are engaged in exporting services had an option to provide such services without payment of service tax. Also, as the services which were exported were taxable per se the service providers were entitled to avail Cenvat credit in respect of the goods and services used in providing such services.                          

In contrast to such position under the erstwhile EOS Rules, under the new regime, the test of categorisation for a service to qualify as export is replaced with the concept of ‘place of provision’ which incidentally is also the test of taxability. Thus, in a situation where the POP of a service is outside India the service would not be liable to service tax even if the consideration is not received in CFE, as the service is not provided in the taxable territory. In other words, a service in respect of which the POP is outside India and where the consideration is received in Indian currency, such service would neither be an export nor a taxable service. In such a case, the service provider would not even be entitled to avail Cenvat credit on the goods and services used by him, the service being a non taxable service. Some re-thinking on the part of CBEC, on the treatment of such services which are neither taxable services nor export services would be welcome, as the Cenvat Credit chain in respect of inputs/input services used in providing such services would be broken and become a cost to the service providers due to the non-availability of credit.                          

The only silver lining under the new provisions dealing with export is that the Cenvat Credit Rules, 2004 (‘CCR Rules’) have taken care of the credit aspect of goods/services used in providing services which qualify as exports under Rule 6A of the ST Rules. This has been done by amending the definition of ‘exempted service’ which excludes a service exported in terms of Rule 6A of the ST Rules, giving a sigh of relief to the exporters of services who successfully cross the hurdles of POP Rules and Rule 6A.

[The authors are respectively, Principal Associate and Senior Associate, Lakshmikumaran & Sridharan, Hyderabad]
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