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Understanding GST Model law - Definition of Import and Export of services

Madhukar N Hiregange 
on 16 November 2016

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The GST article series was started with the basic concepts, now on definitions. Next would be the transitional provisions (specified and left out) and ending up with some miscellaneous parts of GST not covered in the series. 

Introduction

Import of services: Under present service tax law, in respect of any taxable services provided or agreed to be provided by any person located in a non-taxable territory and received by any person who is located in taxable territory, the service receiver is liable to make payment of service tax.

Service tax is payable by recipient of service in respect of services received in taxable territory of India. We determine location of place of provision of service, whether within or outside India, by referring to the Place of Provision of service Rules. 

Applying the principles laid down in the said rules, if the place of provision of service happens to be outside the taxable territory. Then there is no taxability in hands of service receiver on the payments/remittances done to outside India, under reverse charge mechanism.

Export of services: In the earlier regime (prior to 01.07.2012) taxable services where tax was payable if certain conditions were fulfilled it was treated as export and tax payable thereon was relaxed and made free from payment of tax.

Post 1.7.2012 Rule 6A is inserted in Service Tax Rules which provides conditions for export of services.

However in the new regime of taxation post July 2012, if all following conditions given in Rule 6A are fulfilled, the service provider can avail credit related to such exported services, alternately go for refund.  Even if all conditions are not satisfied, when place of provision of service by service provider is outside India, as per Place of provision of service rules, then no service tax liability on such services either.

The said rule provides that any service provided or agreed to be provided would be treated as export of service when-

  • The provider of service is located in taxable territory of India[other than J&K].
  • The recipient of service is located outside India.
  • The service is not specified in negative list of the Act.
  • The place of provision of service is outside India.
  • The payment for such service has been received by provider of service in convertible foreign exchange and
  • The provider and the recipient of service are two distinct establishments and not merely establishments of the same person.

Relevance of place of supply and location of recipient and supplier of service

It is important to decide place of supply of service whether within or outside India. The transactions of provision of service where the place of supply of service is in India would fall within ambit of GST levy. The place of supply of service is determined by applying place of supply provision given in section 6 of IGST Act. When place of supply of service is determined to be outside India, not liable to GST.

 The default provision in section 6(2) sets out that the place of supply of service is location of registered person. Section 6(3)-When such services are provided to any person other than registered person, place of supply of service is location of the recipient where address on record is there. The location of supplier of service in other cases.

The default provision is not applicable when service is related to immoveable property/ performance based such as restaurant or catering/training/performance appraisal, admission to events/organization of events, services ancillary thereto, transport of goods, passenger transport, services on board conveyance, telecommunication services, banking services, insurance services, advertisement services to Central/State Govt.  

Before getting into the concept of import and export of services under GST, it is critical to understand how to determine the location of supplier and recipient of service.

Concept of location of supplier and recipient of service

Section 2(65) “location of supplier of service” means:

(i) where a supply is made from a place of business for which registration has been obtained, the location of such place of business ;

(ii) where a supply is made from a place other than the place of business for which registration has been obtained, that is to say, a fixed establishment elsewhere, the location of such fixed establishment;

(iii) where a supply is made from more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the provision of the supply; and

(iv) in absence of such places, the location of the usual place of residence of the supplier;

Example:

When design services are provided by A Co a firm of Bangalore, registered under GST to Mr X of Kathmandu, who is not registered under GST. The address of Mr X is also not available on record of A Co. Such services are covered in the default provision. Therefore the place of supply of service is location of service provider A Co is Bangalore ( Karnataka) in India. Place of supply of service is inside India, liable to Tax.

Section 2(64) “location of recipient of service” means:

(i) where a supply is received at a place of business for which registration has been obtained, the location of such place of business;

(ii) where a supply is received at a place other than the place of business for which registration has been obtained, that is to say, a fixed establishment elsewhere, the location of such fixed establishment;

(iii) where a supply is received at more than one establishment, whether the place of business or fixed establishment, the location of the establishment most directly concerned with the receipt of the supply; and

(iv) in absence of such places, the location of the usual place of residence of the recipient;

Example:

When consulting services are provided by CA firm of Bangalore, registered under GST to Z of Delhi Co registered under GST. Place of business for which registration has been obtained by service recipient Delhi co, is Delhi which is location of recipient of service. Place of supply of service is Delhi, liable to tax.

When consulting services are provided by the same CA firm to Montreal (Canada) based company where foreign co address is available with CA firm. The Montreal co is not registered under GST.

Such services are covered in the default provision. As per which place of supply of service is location of recipient co in Canada. As place of supply of service is outside India, not liable to GST/IGST.

Import of services under GST

Section 2(52):The supply of any service shall be treated as an “import of service” if,

(a) the supplier of service is located outside India,

(b) the recipient of service is located in India,

(c) the place of supply of service is in India, and

(d) the supplier of service and the recipient of service are not merely establishments of a distinct person;

An establishment of a person in India and any of his other establishment outside India shall be treated as establishments of distinct persons.

A person carrying on a business through a branch or agency or representational office in any territory shall be treated as having an establishment in that territory.

Comments:

  • The fundamental principle is that tax is payable on the supply of services which is supplied to recipient in India.
  • Under GST, as it was in service tax, the tax under reverse charge on services provided from outside and received in India cannot be paid out of input tax credit.
  • Tax to be paid by e-payment on services supplied from outside India and received in India.
  • After making payment of GST, the eligible credit can be availed to extent attributed to taxable supply of goods or services.
  • It provides that establishment of a person in taxable territory and any of his other establishment in non-taxable territory shall be treated as establishments of distinct persons. The effect is that though two persons may not be different, yet by this fiction they are recognized as separate person and any transaction between them, if it satisfies elements of taxability would be liable to service tax.
  • Example, transaction of supply of service between branch located in non taxable territory, say Singapore and Indian HO is treated as transaction between 2 persons.

Export of services under GST

Section 2(44) of GST law: The supply of any service shall be treated as “export of service” when

(a) the supplier of service is located in India,

(b) the recipient of service is located outside India,

(c) the place of supply of service is outside India,

(d) the payment for such service has been received by the supplier of service in convertible foreign exchange, and

(e) the supplier of service and recipient of service are not merely establishments of a distinct person;

For the purposes of clause (e), an establishment of a person in India and any of his other establishment outside India shall be treated as establishments of distinct persons

Comments:

  • The concept of export of services is similar to concept of exported services under Rule 6A of ST Rules of present service tax law.
  • Services treated as export services, if all the conditions to treat as export of services in section 2(44) is satisfied
  • It provides that establishment of a person in taxable territory and any of his other establishment in non-taxable territory shall not be establishments of distinct persons.  Example, transaction of supply of service between branch located in non taxable territory, say Singapore and Indian HO.
  • Export shall be treated as zero rated supply.
  • Eligible Credit related to supply of exported services can be availed.
  • Alternately go for refund/rebate to extent of credit attributed to exports. [ Refunds under GST expected to be faster - first 80% on application and balance after due process]

Service

Section 2(88)of GST law: “Services’’ means anything other than goods;

Services include intangible property and actionable claim but does not include money;

Intangible property is not defined under GST law.

Intangible Property:  In common parlance it has no physical existence, cannot be seen or touched. It can be transmitted, transferred, delivered, stored and possessed for a value.

Section 2(59) “intangible property” means any property other than tangible property;

Section 2(1) “actionable claim” shall have the meaning assigned to it in section 3 of the Transfer of Property Act, 1882;

Comments:

  • Service is defined to be anything other than goods.
  • Goods is defined in GST law to mean “every kind of movable property other than actionable claim and money but includes securities, growing crops, grass and things attached to or forming part of the land which are agreed to be severed before supply or under the contract of supply”.  Similar definition in present service tax law in section 65B(25).
  • Intangible property, means any property which cannot be touched, felt, but which can be bought/sold/stored/supplied for a value. Example could be licensed software.
  • Actionable claim is defined in section 3 of the Transfer of Property Act, 1882to mean a claim to any debt, other than a debt secured by mortgage of immoveable property or by hypothecation or pledge of moveable property or to any beneficial interest in moveable property not in the possession, either actual or constructive, of the claimant, which the Civil courts recognize as affording grounds of relief, whether such debt or beneficial interest be existing, accruing, conditional or contingent. Example: right to participate in lottery draw.

Position under existing provisions

  1. Though import of services into the country is liable to service tax in hands of service recipient under reverse charge. Service tax is exempted on import of services by individual for personal use.
  2. Tax is payable by cheque/e-payment.
  3. The service tax under reverse charge cannot be paid out of Cenvat credit post 1.7.2012 and has to be paid by cheque/e-payment.
  4. After making payment of tax, credit can be availed to extent attributed to manufactured dutiable final products/exported goods or provision of taxable/export services.
  5. Alternately go for refund of such unutilized cenvat credit to extent attributed to such exported goods/ services.
  6. Rebate option can also be opted in respect of exported services under notification 39/2012-ST.

Landmark decisions

  1. Tech Mahindra Limited vs C.C.Ex Pune-I  (2016-TIOL-709-CESTAT-MUM) – It was held that the transfer of funds by gross outflow or by netted flow is, therefore, nothing but reimbursements and taxing of such reimbursement would amount to taxing of transfer of funds which is not contemplated by Finance Act, 1994 whether before 2012 or after. Tribunal sets aside Rs.637 crore Service Tax demand against Tech Mahindra. Reimbursements made to Overseas Branch Office by the Head Office in India are not liable to service tax. 
  2. In KPIT Technologies Ltd vs CCE (2014 (36) STR 1098 (Tri-Mum) observed that merely because expenditure for receipt of service was reimbursed by foreign branch, the transaction would not be an import as services were rendered abroad. In this entry, services provided and received abroad by branches, subsidiaries which are recovered from parent in India would not be covered.

Conclusion

In this article, the paper writers have examined the definition of import and export of services under GST and the possible implications.

The authors can also be reached at madhukar@hiregange.com or roopa@hiregange.com


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