The Service Exports from India Scheme (‘SEIS’) was introduced last year under the new Foreign Trade Policy 2015-2020 (‘the FTP’) to encourage export of services from India. The new SEIS policy initiative is a much better policy initiative than the erstwhile Served From India Scheme (‘SFIS’) that had its own limitations in terms of usage and transferability.
The idea behind SEIS is simply to encourage service exporters by way of grant of a duty credit scrip that can be used for a variety of purposes including payment of customs duty, excise duty and service tax on all goods and services except those specifically prohibited. The Commerce Minister could very well sense the challenges faced by service exporter in the erstwhile SFIS scheme and basis that, the new and much improved SEIS policy was announced.
The major difference between these two schemes is that the new scheme recognizes the domicile of the service provider (in India) rather than it’s legal shareholding structure. That means any company located in India shall be treated as a service exporter (subject to conditions of the FTP) rather than a service being exported by an Indian company.
Under the erstwhile policy, the benefit of duty scrip was only allowed to those companies that were promoting the ‘India brand’ and consequently, any service export to related foreign entity(s) was dis-allowed. This was on the basis the policy was meant to promote the Indian originated service exporters and not to those who were simply earning foreign exchange without promoting the brand India.
The above position was however subject to legal disputes with companies taking DGFT to Court and arguing that the intention of the legislature was never to dis-allow benefits to non-India brand promoting companies. Though, this contention was accepted by the Delhi High Court in the case of Yum Foods vs. Union of India, at the ground level in practical the benefit was not granted to Indian subsidiaries of the foreign company. However, conflicting view was taken by the Mumbai High Court in the case of UHDE India Pvt Ltd vs. Union of India, where the Court accepted the plea of DGFT and held that SFIS benefit could only be allowed to companies promoting India as a brand.
Keeping in view all these challenges, the new SEIS policy has removed the aspect of domicile of a company and with effect from April 1, 2015 the exporters of notified services who are based/located in India shall be granted the benefit of SEIS duty scrip.
When Can You Apply For SEIS Duty Scrip
The first set of applications for the SEIS duty scrip shall commence from 1st April 2016 (though the time limit is 12 months from the end of the relevant FY of claim period) for all eligible exports made during the FY 2015-16. The application should be made in Form ANF3B using digital signatures.
Consequently, it is now the right time to ascertain whether the export of services by your company qualify for this benefit and if yes, what are the house-keeping activities one should do to make yourself ready for the SEIS scrip.
Why Should You Apply For SEIS Duty Scrip
SEIS duty scrip allows a service exporter the following cash benefits:
1. You can import goods (except specifically notified as ineligible under Appendix 3A of the FTP) and pay customs duty using the duty scrip;
2. You can pay excise duty on goods including capital goods that are locally procured from Indian manufacturers;
3. You can pay service tax on services procured from Indian service providers;
4. If you are not importing or buying goods, the duty scrip can be easily sold/transferred in the market (at discount), thereby ensuring you a good source of miscellaneous income; and
Anyone who buys SEIS scrip from you can use it for the above-mentioned purposes.
Are You an Eligible Service Provider
Service providers who provide services under the following two categories are only allowed to apply for SEIS duty scrip:
i. Supply of a service from India to any other country – Cross Border trade; and
ii. Supply of a service from India to service consumer(s) of any other country – Consumption abroad
The Policy specifically prohibits scrip entitlement to service providers engaged in supply of service from India through commercial presence in any other country (Commercial presence) or supply of a service from India through the presence of natural persons in any other country (Presence of natural persons).
It is therefore, critical to analyze whether your services are indeed covered under the first two models (i.e., cross border trade or consumption abroad).
The two modes of supply of service, i.e., commercial presence and presence of natural persons might be a matter of concern since the DGFT officials would tend to apply these two modes as a service delivery model in order to refrain from granting the benefit. For example, in the case of manpower supply (which is an eligible service) to any company outside India, a view could be taken that such service is typically covered under the ‘presence of natural persons’ mode and consequently, should be denied the benefit. Whereas, the assessee could argue otherwise on the basis that supply of natural persons to an overseas entity is typically a cross border trade and since the person supplied by the assessee wouldn’t be under the control and supervision of the assessee, typically this service should get covered under the cross border mode.
Also, where a law firm assists a client in international arbitration matters should it get covered under the ‘cross border’ trade model or would the officials insist covering it under the ‘presence of natural persons’ model will be interesting to note.
It is important the officials understand the true spirit of the SEIS policy benefit and should make an earnest effort to analyze each case on an objective basis.
Are Your Services Covered Under The Notified List Of Services
It is important to note not all services are notified under the list of services eligible for the duty scrip. Vide Public Notice No. 3/2015-20, dated April 1, 2015 the list was released and few of prominent services that are covered include accounting, taxation, architectural, renting of aircrafts/ships, medical services, legal, advertising, market research, management consulting, services incidental to manufacturing, placement and supply of personnel, security services, maintenance and repair of equipment, photography, packaging, freight transport, cargo handling etc.
It is important to note few services appear to be missing from the list of notified services. These services include Information technology (‘IT/ITes’), banking and financial services, telecom services and services of a commission agent. From a foreign exchange earning perspective, these services help India earn a huge forex but are still outside the ambit of SEIS benefit.
What is also important to note is how the services have been listed and in the absence of any description, the same may be open to varied interpretation by the DGFT officials.
Is Export Of Service Under Service Tax Legislation Of Any Relevance
All service exporters earning in foreign exchange are well-conversed with the Service tax legislative provisions, typically when it comes to export of services as the Service tax legislation also provides cash benefits. How a service is categorized as ‘exports’ under the Service tax legislation should not have any bearing under this Policy. This is purely because the service categorization under SEIS is basis the Central Product Code Classification (CPC) under the United Nations Secretariat. Also, the FTP and Service tax legislation are not pari materia to be able to have any link between the two.
However, what is interesting to note is the fact that services which may not qualify, as exports under the Service tax legislation should get the benefit of SEIS duty scrip subject to other conditions being met. For example, warehousing services provided to a customer in India are not considered exports even if the earnings are in foreign exchange. This is on the basis such services are performed in India and their place of provision is India, consequently denied the benefit of exports. Such services should however, get the benefit of SEIS duty scrip. Similarly services relating to maintenance or repair, ground clearance, building cleaning, convention services, construction related services etc should also get the benefit of SEIS even though they may not be classified as exports under the Service tax legislation.
Some Quick Condition Precedents For Claiming SEIS Benefit
i. The service provider should have a positive Net Foreign Exchange (NFE) earnings, meaning the foreign exchange income on account of services should be more than the foreign exchange payments for such services and the minimum difference should be in excess of USD 15,000;
ii. In calculating the NFE, any payments/receipts other than in relation to services should not be considered. Any unrelated inflow or outflow is to be ignored;
iii. In order to claim reward under the scheme, Service provider shall have to have an active IEC at the time of rendering of such services for which rewards are claimed.
Should I apply for SEIS benefit even if I did not have a valid IEC at the time of rendering such services?
Para 3.08(f) of the FTP provides that in order to claim reward under the scheme, Service provider shall have to have an active IEC at the time of rendering of such services for which rewards are claimed.
The Service provider should fulfil this being a condition precedent provided in the Policy. This means that any eligible Service provider who did not have a valid IEC till date would be dis-allowed the benefit of SEIS scrip. Though this seems to be a plain interpretation of the Policy, mere procedural non-compliance should not dis-allow an eligible assessee the benefit of this duty scrip. This is also relevant from the fact that a service exporter per se doesn’t need a valid IEC for rendering of services and consequently he shouldn’t be denied the benefit simply because of non-availability of the IEC. At best, the Service exporter can be asked to apply for a valid IEC and declare all the export earnings for the previous period. This, to my mind should serve the purpose of Commerce Ministry, i.e., gathering the data on export of services from India.
Authored by Nimish Goel, Head of Indirect Taxes and GST at International Business Advisors (www.ibadvisors.co). Nimish has spent almost 13 years practicing indirect taxes including VAT, Service tax, Excise and Customs. He has worked with BIG4s including EY and KPMG both in India and in Europe. For any queries he can be reached at firstname.lastname@example.org