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Since the day I started reading tax it was dinned in my ears that exports are tax free and that it is akin to blasphemy to export tax. Change alone is permanent in this universe and taxation is no exception?


The Finance Act, 1994 has seen many ups and downs in the last 19 years of its existence. Surprises galore, the law has spared none while taxing including the exporters of services. How can a service be exported? The practical answer of this question can be, when you provide service beyond the borders of ‘India’.


The first notification relating to export can be traced back to Notification No.2/99 dated 28-02-1999 which means that since July 1, 1994 up to 28-02-1999 the concept of ‘export of service’ was absent and consequently earnings in foreign exchange suffered service tax in contrast to the exporters of goods who enjoyed exemption. The said notification was simple and provided exemption to specified services for which payments were made in convertible foreign exchange. This notification was rescinded and replaced by a new notification no.6/99 dated 09-04-1999. The only change was the addition of a proviso. The proviso withdrew the exemption granted if the proceeds received in India in convertible foreign exchange was repatriated from or sent outside India. This notification survived till February 28, 2003. With effect from March 1, 2003 vide Notification No.2/2003 the Government exploded a nuclear device on the exporters of services by rescinding (withdrawing) the notification.


Acting on the Tsunami of representations the Government issued circular no.56/5/2003-ST dated 25-4-2003 clarifying that “Service tax is destination based consumption tax and it is not on export of services. Export of Services would continue to remain tax free even after withdrawal of Notification no.6/99 dated 9-4-99”.


Varied interpretations coupled with the field formations denying the benefit of exemption forced the Government to reinstate the position that existed on April 9, 1999. Vide Notification No.21/2003 dated November 20, 2003 it was notified that export of specified services for which payment was received in convertible foreign exchange and the said proceeds were not repatriated were exempted from payment of service tax. This notification survived till March 14, 2005.


In October, 2004 the Government released the draft of Export of Services Rules for public comments something unknown till then in the history of CBEC.  The Export of Services (EOS) Rules were notified with effect from March 15, 2005 vide Notification No.9/2005 dated 03-03-2005.  These rules were rescinded with effect from July 1, 2012 and Place of Provision of Services Rules (POP) stand notified from the same date.


The EOS rules specified three criteria and a taxable service shall qualify as “export” only when it fell under any one of the three criteria. Though a service may have fulfilled the “export” criteria yet exemption was linked to the receipt of payment in convertible foreign exchange. The three criteria were Situation, Performance and Usage.


The POP rules do not lay down any criteria for determining whether a service is export or not. It merely lays down guidance to determine the “place” were a service is provided. The ‘place’ of providing a service is the key determinant factor in deciding whether a service is taxable or not taxable. It must be mentioned here that these rules, though not fully, are almost close to the OECD draft guidelines.


The OECD is developing the Guidelines to address uncertainty and risks of double taxation and unintended non-taxation that result from inconsistencies in the application of VAT to international trade, with a specific focus on trade in services and intangibles. By the end of 2014 the OECD is expected to arrive at a complete set of guidelines applying to cross border trade in services and intangibles.  Towards achieving this objective the released the draft of the “OECD International VAT/GST Guidelines” in February 2013 and the same was open to public comments till May 3, 2013. Chapter 1 Para 1.8 captures the spirit behind the “destination principle” in other words “the place of provision” which is as follows:


“The application of the destination principle in VAT achieves neutrality in international trade. Under the destination principle, exports are exempt with refund of input taxes (that is, free of VAT) and imports are taxed on the same basis and at the same rates as domestic supplies. Accordingly, the total tax paid in relation to a supply is determined by the rules applicable in the jurisdiction of its consumption and therefore all revenues accrues to the jurisdiction where the supply to the final consumer occurs”.


India is a developing economy and a complex Nation to administer. The POP rules have been drafted to suit the local conditions and in this process of localization certain services which though are exports are not treated as exports resulting in their taxation.


Rule 6A of The Service Tax Rules, 1994 provide that a service shall be treated as export if:


a. The provider of the service is located in the taxable territory

b. The recipient of service is located outside India

c. The service is not a service specified in section 66D (Negative list) of the Finance Act, 1994

d. The place of provision of the service is outside India

e. The payment of the service is received by the provider of service in convertible foreign exchange, and

f. The provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of section 65B of the Finance Act.


Hence, the POP rules determine the place where the service is provided and only when read together with Rule 6A as above the question whether a service is export or not can be answered.


Rule 3 of POP rules contains that the place of provision shall be the location of the service recipient and were the location is not available in the ordinary course of business then the same shall be the location of the service provider. Rule 4, 5 and 9 of POP make a compulsory reading.


Rule 4 deals with performance based services. In respect of services which demand a performance like installation of a machine, maintenance or repair etc. the place of provision shall be the place where the machine is located or installed. However this criteria does not cover goods that are temporarily brought into India for repair, reconditioning or re-engineering and after carrying out the said process the same goods are re-exported.


Rule 5 contains the provisions relating to immovable property. The place of provision for services relating to immovable property shall be the place at which the said immovable property is located. Services like hotel, inn, guest house, club, construction work, architect, interior decorator, real estate agents etc. will merit coverage under this category. For Example if a real estate agent is appointed by a company situated outside to source a office in India and such agent receives his remuneration in foreign exchange the said remuneration is taxable.


Rule 9 is a change from the past. From July 1, 2012 in respect of the following services the place of provision shall be the location of the service provider and hence even if the service recipient is located outside India and money is received in foreign exchange service tax shall be payable on such realization in foreign currency:

(a) Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders;

(b) Online information and database access or retrieval services;

(c) Intermediary services;

(d)  Service consisting of hiring of means of transport, up to a period of one month.

For Example: A company in Chennai is an agent of a company located in USA. The company in Chennai identifies certain software companies with whom the company in USA can do their business and for this service the Chennai company is paid in foreign currency.  The company in Chennai has to pay service tax or not? The answer is yes. However the answer will be “No” if the Chennai Company is not an intermediary but is a provider of service on their own account which means that they do not acts as brokers or agents but are principle service providers.

Air of change is breezing past in taxation and before the air becomes wind and wind becomes gale and gale becomes storm let us read and equip to face the force of the legislation. With the kind of confusing changes the reader shall dive deep into the subject and the depths of your study alone will decide whether you are gifted with a pearl.  


CA. Rajendra Kumar P, FCA, Chennai


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Category Service Tax   Report

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