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(I) Import of Services
The Finance Act, 2006 introduced a new section
66A to bring certain cross-border transactions involving overseas service
providers within the ambit of service tax. In effect it has brought certain
services provided by overseas service providers within the purview of
service tax. In such cases the recipient of the services in India would be
liable to register and pay service tax. This is known as the “reverse charge
mechanism”.
As per section 66A if a person who is based
outside India i.e. the service provider has:
established a business; or
a fixed establishment from where the services
are provided; or
his permanent address; or
his usual place of residence in a country
outside India provides a taxable service
to
a person who is based in India i.e. the
service recipient has:
a place of business; or
a fixed establishment; or
permanent address; or
usual place of residence in India
three consequences follow:
the service is treated as a taxable service;
the service is treated as having been provided
in India;
the recipient is treated as a “provider of
service” and accordingly all the provisions of the Act as they apply in
relation to a provider of taxable service would apply to him. Thus, he would
have to register, make payment, and file returns as a service provider would
do. This is popularly known as the ‘reverse charge mechanism’.
Thus, where taxable services are provided by a
person based outside India to a person based in India, the services would be
considered by a fiction of law as taxable services provided (by the
recipient) in India. This is analogous to the deeming section 9 of the
Income Tax Act, 1961.
When is a service “provided from outside India
and received in India”?
Taking into account international practices
the Taxation of Services (provided from outside India and received in India)
Rules, 2006 (“Import Rules”) has been notified w.e.f. 19.4.2006. These Rules
inter alia specify when a taxable service is to be treated as supplied in
India and accordingly coming within the Indian service tax net. This is more
popularly known as the “Place of Supply Rules”.
Broadly, the Import Rules have categorized
the services in three categories and then defined when a service can be
treated as “provided from outside India and received in India”. The
categories are:
1. Immovable property category
In case of 13 services (See Table A of
Annexure below), which are provided in relation to immovable property, the
services shall be considered as provided from outside India and received in
India (imported) if the immovable property is situated in India.
2. Performance based category
In case of 53 services (See Table B of
Annexure below), the services shall be considered as provided from outside India
and received in India (imported) if the services are wholly or partly
performed in India.
3. Location of service recipient category
In case of 41 services (See Table C of
Annexure below), the services shall be considered as provided from outside India
and received in India (imported) in case the recipient of service is located
in India and the services are used in relation to commerce or industry (i.e.
commercial use).
(II) Export of services:
The finance (No.2) Act, 1004 had empowered
the Central Government to make rules to provided for determining export of
taxable services, granting exemption to, or related tax paid on services
exported and rebate of tax paid on input services consumed or duties paid on
goods used for providing taxable services which are exported.
Accordingly the Central Government had
notified the Export of Services Rules, 2005 (“Rules”) w.e.f. 15.3.2005 which
inter alia set out the criteria to decide when a service is deemed to have
been exported, keeping in view the nature of the different taxable services.
The significant features of the Rules (as amended) are given below.
Broadly, the export rules have categorized the
services in 3 categories and then defined what would constitute export of
services for each category.
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Immovable property category
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Performance based category
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Location of service recipient category
Immovable property category: Incase of
13 services which are provided in relation to immovable property the
services shall be considered as exported if the immovable property is
situated outside India.
Performance based category: In case of
53 services the services shall be considered as exported if the services are
wholly or partly performed outside India.
Location of services recipient category:
In case of 41 services the services shall be considered as exported
(i) Where the services are provided and used
in or in relation to business or commerce if the recipient of services if
located outside India. However if such a recipient of service has any
commercial establishment in India the services shall be considered to be
exported only if the order for provision of such services is made by the
recipient of service from any of his commercial establishment located
outside India.
(ii) Where the services are not provided or
used in or relation to business or commerce the services shall be considered
as exported if the recipient of the services is located outside India at the
time of provision of such services.
Apart from the above specific conditions there
are two more mandatory conditions applicable to all services so as to
qualify as an export of services:
Mandatory conditions for the period
19.04.06 to 28.02.07 –
The following conditions apply for services to
be considered as exported in all cases mentioned above during the period
19.04.06 to 28.02.07:
(i) the service is delivered outside India
and used outside India; and
(ii) Payment for such service provided outside
India is received by the service provider in convertible foreign exchange.
Mandatory conditions for the period from
1.03.07 – onwards
W.e.f. 1.3.2007 the words “provided from India
and used outside India” were substituted in place of “delivered outside
India and used outside India”, thus dispensing with the requirement of
“delivery outside India” for a service to be considered as exported. Thus,
w.e.f. 1.3.2007 two conditions are required to be satisfied in order for the
service to be treated as exported:
(i) the service must be provided from India;
and
(ii) the service must be used outside India.
Service not subject to Imports/Exports Rules:
(i) Air Transport of passengers embarking in
India for International Journey
(ii) Transport of persons by a cruise ship
embarking in any port in India.
(III) Valuation of Taxable
Services
The Finance Act, 2006 has substituted the
earlier provision with a new section 67 which provides for a more elaborate
method of computing the value. The significant changes are:
(i) Where the “consideration” for provision
of the service is in money, the gross amount charged by the service
provider for such services provided by him shall be the value of taxable
service;
(ii) Where the “consideration” for
provision of the service is not wholly or partly in money, then the value of
taxable service shall be such amount in money as with the addition of
service tax charged, be equivalent to the consideration.
(iii) Where the “consideration” for
provision of the service is not ascertainable the value of taxable service
shall be determined in a manner laid down by the Rules which the Central
Government has notified. ( Service Tax (Determination of Value) Rules, 2006)
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Consideration “includes any amount that is
payable for the taxable services provided or to be provided.
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Money” includes any currency, cheque,
promissory note, letter of credit, draft, pay order, travelers’ cheque,
money order, postal remittance and other similar instruments but does
not include currency that is held for its numismatic value.
Service Tax (Determination of Value) Rules,
2006:
As per Rule 3 of Service Tax (Determination of
Value) Rules, 2006:
The value of taxable service, where the
consideration received is not wholly or partly received in money shall be
equivalent to gross amount charged by the service provider to provide
similar service to any other person in the ordinary course of trade and
gross amount charged is the sole consideration
If value cannot be determined as above, the
equivalent money value of such consideration not less than the cost of
provision of such taxable service
Rule 4 – Rejection of Value:
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It empowers the officer to satisfy himself
as to the accuracy of the valuation.
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If Central Excise officer is satisfied
that the value is not determined as per provisions of the Act, a show
cause notice may be issued specifying the amount proposed to be the
value of services.
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After providing a reasonable opportunity
of being heard, value may be determined in accordance with the Act.
Rule 5 – Inclusions/ Exclusions of certain
expenditure or costs:
Any expenditure or costs incurred by
the service provider in the course of providing taxable service.
Expenditure or costs incurred by service
provider as pure agent of the recipient of service, if the following
conditions are satisfied namely . . .
Conditions to be satisfied for exclusion of
the expenditure or costs incurred by a pure agent:
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the service provider acts as a pure agent
of the recipient of service when he makes payment to third party for the
goods or services procured;
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the recipient of service receives and uses
the goods or services so procured by the service provider in his
capacity as pure agent of the recipient of service;
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the recipient of service is liable to make
payment to the third party;
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the recipient of service authorizes the
service provider to make payment on his behalf
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the recipient of service knows that the
goods and services for which payment has been made by the service
provider shall be provided by the third party;
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the payment made by the service provider
on behalf of the recipient of service has been separately indicated in
the invoice issued by the service provider to the recipient of service;
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the service provider recovers from the
recipient of service only such amount as has been paid by him to the
third party; and;
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the goods or services procured by the
service provider from the third party as a pure agent of the recipient
of service are in addition to the services he provides on his own
account;
What is meant by “Pure Agent”? [Explanation 1
to Rule 5(2)]: Pure agent means a person who -
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enters into a contractual agreement with
the recipient of service to act as his pure agent to incur expenditure
or costs in the course of providing taxable service;
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neither intends to hold nor holds any
title to the goods or services so procured or provided as pure agent of
the recipient of service;
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does not use such goods or services so
procured; and
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receives only the actual amount incurred
to procure such goods or services.
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