Is payments received via paypal exempt from service tax?

Yes, its exempt as the payment for service is recd. in $ in paypal a/c and than its remitted to your bank accounts.

BUT HOW CAN WE SHOW THE ST DEPT THAT PAYMENT WAS RECEIVED IN CONVERTIBLE FOREIGN EXCHANGE AS IN THIS CASE WE DON'T HAVE ANY FIRC ETC.

you have to submit the bill copy issued to foreign buyer to bank and ask for Foreign Exchange Realization Certificate, bank will issue the same mentioning the bill datails and name of payee, this will suffice the purpose

Receipt of FE thrugh paypal is contravertial. Both Income tax and Service tax department disputed it saying that it is not receipt in FE because the banker cannot issue FE realisation certificate. This is bcause , banker receives the money from paypal in Rupee. Though it is disputed by departments, I feel that you have good case to argue that paypal is acting as your agent to receive payment in FE. But this is possible only If payapl can issue a FE realistion certificate. It is understood that pay pal is reluctant to issue such  certificate.
 

I think that it will never be exempt from servie tax as one of the director got the following reply from PAYPAL

"  I understand your concern. I would like to inform you that PayPal cannot issue FIRCs or coordinate how FIRCs are issued. The FIRCs are actually issued by the authorized dealer bank . PayPal’s blog post merely mentioned the FIRCs as part of the advantages of using our revised process.

Customers with questions about FIRCs should be asked to contact their bank to initiate a request for FIRC."

The understanding tha i got from the above is that after the recent changes made by RBI and Paypal, some mechanism has been made to get FIRC. 

However, i want to know if anybody got success in getting FIRC for their paypal payments? Also, what does dealer bank mean in this case? Is it the bank through which payment gets routed to my icici bank account?

Please share your knowledge