Presentation onPresentation onLive Issues On Export of Services, 2004Live Issues On Export of Services, 2004

By By Rohan Shah, Managing Partner Rohan Shah, Managing Partner

Economic Laws PracticeEconomic Laws PracticeAdvocates & SolicitorsAdvocates & Solicitors

Mumbai, DelhiMumbai, DelhiOn On

December 11, 2004 December 11, 2004

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EXPORT OF SERVICES EXPORT OF SERVICES ____________________________________________________

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Receipt Based Exemptions Vide Notification No. 6/99- ST dated 9th April, 1999, receipt of

payment in convertible foreign exchange in India for taxable services rendered was made exempt from the levy of Service Tax. It was common perception that exports of services were exempt under this Notification.

Vide Notification No. 9/2001-ST dated 16th July, 2001, condition was attached on to the operation of Notification No. 6/99, whereby receipts in convertible foreign exchange in India were only exempt to the extent such payments were not repatriated from or sent outside India.

Vide Notification No. 2/2003-ST dated March 1, 2003, exemption for receipts in foreign exchange for taxable services rendered as provided under Notification No. 6/99 dated 9th April, 1999 was rescinded.

Vide Notification No. 21/2003-ST dated November 20, 2003, exemption for receipts in foreign exchange for taxable services rendered as provided earlier under Notification No. 6/99 dated 9th April, 1999 was restored.

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Draft Rules I on Export Of Services

Draft Rules I on Export of Services introduced in December2003

Services shall be deemed to have been exported if

the service is physically carried out, partly or wholly, outside India (19 services listed)

services related to immovable property, if the said immovable property is located outside India.(4 services listed)

the recipient of the service is located outside India (38 services listed)

Location of recipient means the location of the business establishment to which the service is supplied & in case the recipient is an individual it shall be his permanent address or usual place of residence. Business establishment here shall include branch office/division

Stated that the Exemption to Foreign Exchange Notification viz. Notification No. 21/2003 will be phased out.

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Proposed Rules on Export of Services

Amended Draft Rules For Export Of Services Introduced in August 2004 (Proposed Rules) (Clause “A”):

Export of taxable services shall mean. (Clause ”A”)

taxable services provided in relation to an immovable property which is situated outside India (4 services listed)

Construction Services

Interior Decorators Services

Architect Services

Real Estate Consultancy

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Proposed Rules on Export of Services

Amended Draft Rules For Export Of Services Introduced in August 2004 (Proposed Rules) (Clause “B”):

Export of taxable services shall mean

taxable services performed wholly or partly outside India (45 Services enlisted) (Clause “B”) Airport Services Cargo Handling Services Erection Commissioning and Installation Services Credit Rating Agency Forward Contract Dry cleaning services Health club and fitness centers Internet café Mandap keepers Pandal and shamiana contractor

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Proposed Rules on Export of Services

Amended Draft Rules For Export Of Services Introduced in August 2004 (Proposed Rules) (Clause “C”):

Export of taxable services shall mean

taxable services provided to recipient situated outside India

– in relation to commerce or Industry recipient of the services shall be deemed not to be located outside India

…….

-- in any other case the recipient of the taxable service is located outside India at the time when such services are received (21 services enlisted) Advertising Agency Banking & Other Financial Services Business Auxiliary Services Intellectual Property Services Management Consultancy Services

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Proposed Rules on Export of Services

Amended Draft Rules For Export Of Services Introduced in August 2004 (Proposed Rules)

……..provided such recipient has any commercial or industrial establishment or any office relating there to in India

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Proposed Rules on Export of Services

Divergence between the Draft Rules I introduced in December, 2004 and the Proposed Rules For Export Of Services Introduced in August 2004

Certain taxable services have been migrated from their earlier position under the clauses.

Some illustrations in this regard are:

From Clause “A” to Clause “B”

Mandap Keeper Service

From Clause “B” to Clause “C”

Cable Operator Service

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Proposed Rules on Export of Services

From Clause “C” to Clause “B”

Air Travel Agent Cost Accountant

Chartered Accountant Company Secretary

Sound Recording Service Courier Agency

Video Tape Production Service Credit Rating Agency

Market Research Agency Stock Broker Service

Rent A Cab Operator Rail Travel Agent

Technical Testing & Analysis Underwriting Service

Technical Inspection & Certification Photography Service

Commercial Training & Coaching Service Fashion Designers

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List of Taxable Services where benefit of Export of service is not available under Category B of Proposed Rules

Authorised service station for motor vehicles

Beauty parlours

Dry cleaning services

Health club and fitness centers

Internet café

Mandap keepers

Pandal and shamiana contractor

Port services

Rail travel agent

Rent-a-cab operators

Road transport

Stock broker

Underwriting services

Benefit under Export of Services not availableBenefit under Export of Services not available

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Proposed Rules on Export of Services

Proposed Rules For Export Of Services Introduced in August 2004

Taxable services provided in relation to export of goods shall be deemed to be export of taxable services

Any taxable service may be exported without payment of service tax

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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FOREIGN TRADE POLICY 2004-2009

Position Under the FOREIGN TRADE POLICY 2004-2009

Paragraph 3.6.1 of the Policy, which deals with service exports provides as under:

Services include all the 161 tradable services covered under the General Agreement on Trade in Services where payment is received in free foreign exchange. A list of Services is given in Appendix 36 of the Handbook (Vol.1). All provisions of this policy will apply mutatis mutandis to export of services as they apply to goods, unless otherwise specified.

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FOREIGN TRADE POLICY 2004-2009

Parity Between Goods & Services Brought in under the FTP

Paragraph 2.48.1 of the Policy, which deals with exemptions from Service Tax in the Domestic Tariff Area (DTA) provides as under:

For all goods and services which are exported from units in Domestic Tariff Area (DTA), remission of service tax levied shall be allowed.

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FOREIGN TRADE POLICY 2004-2009

Position Under the FOREIGN TRADE POLICY 2004-2009

“Service Provider” as defined in Para 9.53 of the Policy, means a person providing –

• Supply of a `service’ from India to any other country;• Supply of a `service’ from India to the service consumer of any

other country in India; and • Supply of a `service’ from India through commercial or physical

presence in the territory of any other country• Supply of a `service’ in India relating to exports paid in free

foreign exchange or in Indian Rupees which are otherwise considered as having being paid for in free foreign exchange by RBI.

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GENERAL AGREEMENT ON TRADE IN SERVICES(GATS)

GATS provides for various modes for the provision of services, which have been universally accepted by the WTO member countries including India. In brief, the accepted modes for the provision of services are the following:

Mode 1 – In this case services flow from the territory of one member into the territory of another member by crossing national frontiers (viz. via the Internet, Satellite, etc.).

Mode 2 – refers to situations where a service consumer moves into another Member’s territory to obtain a service (viz. tourism, medical treatment, education, etc.).

Mode 3 – is the supply of a service through the commercial presence of the foreign supplier in the territory of another WTO member.

Mode 4 – involves the admission of foreign nationals to another country to provide services there.

Perspective under International Legislation…Perspective under International Legislation…

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Summary of International LegislationSummary of International Legislation

EU: The taxability of services supplied outside the EU/country of supply

depends on the location of the consumer of the service under Article

9(2)(e). If the recipient of the service has established his business

outside the EU, the service provided would not be taxed in the EU

Singapore: Services supplied for and to a person who „belongs“ in a

country other than Singapore and is outside Singapore at the time of

supply of the service are zero rated.

New Zealand: Services supplied to persons resident outside New Zealand

and who are outside New Zealand at the time of supply of the service

are zero rated. However, this rule does not apply when the service is

received within New Zealand by another person, including an employee

or a director of the non-resident consumer and the service is not

received for taxable/exempt services.

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The Concept of “To” & “For”….The Concept of “To” & “For”….

Most mature taxing legislations, whether the EU or Singapore and taxing

guidelines such as the GATS provide for the benefit of tax eiher in zero

rated/exemption/refund mode in the following situatuions: where services are physically provided/ exported to recipients

outside India Where the Service recipient of another country utilises services in

the country of service provider (VAT Refund and GATS Mode 2) Where the service is provided to a person in the same territory as

the service provider on behalf of a person resident outside the

territory of the Service Provider.

However, in the export regime as currently contemplated in India, only

the benefit of a direct export and not in any other manner.

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Coverage of the FTP is more comprehensive

The criteria on what constitutes an ‘export of services’ is divergent

No condition in the FTP as regards, recipient of the service having a commercial or industrial establishment in India

The Foreign Trade Policy provides that the where a service is wholly provided in India, but which is paid for in free foreign exchange is also considered as an export of a service.

The Draft Rules II is silent on the issue of whether services wholly performed in India for which receipts are in foreign exchange, would constitute an export of a service.

Issues and Anomalies: FTP- Proposed Rules Issues and Anomalies: FTP- Proposed Rules

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• FTP provides exemption to all units in EOU/EHTP/STP/BTP/SEZ from service tax whereas under Service Tax the benefit has only been extended to units in the SEZ

• Under the FTP, Deemed Export benefits are available for supply of goods to

1. projects financed by multilateral or bilateral agencies/ funds notified by the MOF

2. Fertilizer plants to the extent of 10% of FOR (Only capital goods)

3. any project or purpose in respect of which the MOF permits the import of such goods at zero customs duty

4. power projects and refineries not covered in point 2

under the procedure of International Competitive Bidding

Deemed export benefits has not been extended to services consumed by or provided to such Projects nor has it been reflected in Service Tax viz. by way of Circulars/Notifications/Rules etc.

Issues and Anomalies: FTP- Proposed Rules-Service Issues and Anomalies: FTP- Proposed Rules-Service Tax Tax

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• Under Rule 5 of the CENVAT Credit Rules, the benefit of refund of Service Tax on input Services and Excise Duty on inputs is available only to manufacturers and output taxable service providers have been omitted to be mentioned.

Issues and Anomalies: FTP- Proposed Rules-Service Issues and Anomalies: FTP- Proposed Rules-Service Tax Tax

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Issues and Anomalies under the Proposed Rules…Issues and Anomalies under the Proposed Rules…

• In the draft Export of Services Rules (the “Proposed Rules”) issued on August 12, 2004, various services are placed under Clause B (services would be considered as exports if wholly or partly provided outside India) , whereunder several of the services placed under Clause B are incapable of meeting the relevant criteria for being regarded as Export of Services by the inherent nature and form of these services. As a result under Clause B, these services can never be considered as the Export of Services under the Proposed Rules. The benefit of Export of Services related to these services is therefore illusory and unattainable. Examples of services in this behalf are

– Stockbroker Services

– Beauty Parlour

– Laundry Services

– Port Services

– Storage & Warehousing

– Pandal & Shamiana Contractors

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List of Taxable Services where benefit of Export of service is not available under Clause C of the Proposed Rules

Cable operators

Facsimile service

Pager

Telegraph service

Telephone

Telex service

Issues and Anomalies under the Proposed Rules…Issues and Anomalies under the Proposed Rules…

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• As a generic issue the condition in Clause C of the Proposed Rules to the effect that the benefit as to the Export of Services would not be available if the recipient of the services is outside India and if such recipient has any commercial / industrial establishments/offices relating thereto in India is a condition beyond that prescribed in the FTP or in any other taxing jurisdictions.

• This condition is also uncertain in its application as to the factual situation that various entities outside India have subsidiaries, branch office, project office etc. which are entirely unconnected with the services that they receive outside India from a service provider in India

Issues and Anomalies under the Proposed RulesIssues and Anomalies under the Proposed Rules

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As we in India are attempting to evolve into a unified global trade regime (specifically on the Export Of Services), and to create a globally competitive position for our services, it is imperative that our concepts as to the ‘export of services’ is reconciled with and reflective of the concept of Export of Services globally. To achieve this:

it would be necessary to reconcile the divergence between the positions as set out in the Foreign Trade Policy and in the Proposed Rules

The condition in Clause C is required to be deleted to ensure greater certainty and lesser litigation in the administration of the Proposed Rules.

Services, which have been enlisted under criteria/category, which render the benefit of Export of Services nugatory should be transferred to the appropriate category, which would allow service providers, who would qualify as a service exporter otherwise, to fully effectuate the benefit under the Proposed Rules.

Most Desirable PositionMost Desirable Position