Export of Service

If the services are exported, the Cenvat credit is not required to be reversed. Assessee can utilise credit for payment of service tax on other services.

However, if this is not possible, he can get refund. There is drafting mistake in rule 5 of Cenvat Credit Rules. The rule says that ‘manufacturer shall be allowed refund’. Actually, the words should have been ‘manufacturer or provider of output services shall be allowed refund’. However, subsequent rules envisage that rebate can be obtained both by manufacturer as well as service provider.

Basic principle of taxation is that ‘goods and services should be exported, taxes are not to be exported’. Another principle is that service tax can be levied only if service is provided or received or consumed in India.

Meaning of ‘export of Service has been defined in Export of Service Rules, 2005.

Exemption/rebate only if export is as per Rules – The new rules are effective from 15-3-2005. The rules make it clear that exemption from services/rebate of service tax and excise duty paid is admissible only if there is ‘export of service’ as defined in these rules. The exemption Notification No. 21/2003-ST dated 20-11-2003 has been  withdrawn w.e.f. 15-3-2005.

Exemption or Rebate of Service tax

Exporter of service has three options –

(a)   Export without payment of service tax and utilise Cenvat Credit for payment of service tax on other services

(b)   Export without payment of service tax and claim rebate of service tax paid on input services and excise duty paid on inputs (or forget about rebate as procedure is too complicated and impractical)

(c)   Pay service tax on exported services and claim rebate (by this, he can utilise his input credit)

Export of service without service tax - As per Rule 4 of Export of Services Rules, any service, which is taxable under section 65(105) of the Finance Act, 1994; may be exported without payment of service tax.

Rebate of service tax - Where any taxable service is exported, the Central Government can 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. Such rebate will be granted by issuing a notification. The rebate shall be subject to such conditions or limitations, if any, and fulfilment of such procedure, as may be specified in the notification (The procedure prescribed has been discussed later).

Meaning of Input and Input Services - Rule 2 of Export of Services Rules makes it clear that ‘input’ means ‘input’ as defined in rule 2(k) of Cenvat Credit Rules, 2004. ‘Input Service’ means input service as defined in rule 2(l) of Cenvat Credit Rules, 2004.

Meaning of Export of taxable service

Rule 3 of Export of Service Rules classifies the taxable services in three categories – (a) Immovable property is situated abroad (b) Service performed outside India and (c) Recipient is located outside India. Requirement to treat the service as ‘export of service’ are different for each category.

Immovable property situated abroad - In case of first category, the service will be treated as ‘export of taxable service’ only if the immovable property is situated abroad. These services will be eligible for exemption as ‘export of service’ only when following conditions are satisfied – (a) the immovable property is situated abroad (b) The service is delivered outside India and used in business or for any other purpose outside India and (c) Payment for such service is received in convertible i.e. free foreign exchange [Rule 3(1)] [Conditions in clauses (b) and (c) have been added w.e.f. 16-6-2005].

Following services are covered in this category (arranged alphabetically)  - Architect(p) * Commercial or industrial Construction (zzq) * Construction of Complex (zzzh) * Dredging (zzzb) * General insurance of immovable property (d)

* Interior decorator (q) * Real estate agent (v) Site formation and clearance, excavation and earthmoving and demolition (zzza) * Survey and Map-making of immovable property (zzzc).

Services performed outside India – In case of some specified services, the service will be treated as ‘export of service’ if following conditions are satisfied – (a) It should be at least partly performed outside India. (b) The service is delivered outside India and used in business or for any other purpose outside India and (c) Payment for such service is received in convertible i.e. free foreign exchange [Conditions in clauses (b) and (c) have been added w.e.f. 16-6-2005] [rule 3(2)].

Even if such a taxable service is partly performed outside India, it shall be considered to have been performed outside India. Thus, part performance of service in India will be permissible. Since no percentage has been specified, it should be sufficient if just 1% of service is provided outside India and balance is provided from India.

However, payment should be received in foreign exchange. Thus, services of courier who deliver mail abroad will not be ‘export of service’ if they do not get paid in foreign exchange.

Following services fall in this category (arranged alphabetically)

* Air travel agent (l) * Airport Services (zzm) * Authorised service station (Light motor vehicle) (zzj) * Authorised service station (Motor car/ Two-wheelers) (zo) * Beauty treatment (zq) * Business exhibition  (zzo)

* Cargo handling (zr) * Chartered Accountant’s Services (s) *  Cleaning activity (zzzd) * Clearing & Forwarding Agent (j) * Club or Association services (zzze) * Commercial training or coaching (zzc) * Company Secretary Services (u) * Convention (zc) * Cost Accountant Services (t) * Courier (f) * Credit rating agency (x) * Custom house agent (h)

* Dry cleaning (zt) * Erection, Commissioning or installation (zzd) * Event management (zu) * Fashion designing (zv) * Forward contract  (zzy) * Health and fitness (zw)

* Internet access (zzf) * Maintenance or repair (zzg) * Mandap keeper (m) * Market research agency (y) * Opinion poll  (zzs) * Other Ports (zzl) * Outdoor Caterer (zzt) * Packaging Activity (zzzf) * Pandal or Shamiana  (zzw) * Photography (zb) * Port (zn)

* Rent-a-Cab operator (o) * Security agency (w) * Sound recording (zj) * Steamer agent (i) * Stock-broking (a) * Storage and warehousing (zza) *  Survey and exploration of mineral  (zzv)

* Technical inspection and certification (zzi) * Technical testing and analysis (zzh) * Tour operator (n) * Transport of goods by air  (zzn) * Transport of goods by road  (zzp) * Travel agent (other than air travel agent and rail travel agent) (zzx) * Underwriter (z) * Video production agency (zi)

Service provided from India, but recipient of service outside India – Remaining services, which fall in third i.e. residual category, will be treated as ‘export of service’ if recipient is located abroad. These can be treated as ‘export of service’, even if the service is provided from India [rule 3(3)].

Following services fall under this category (Arranged alphabetically) –

* Advertising agency (e) * Banking and Financial services (zm) * Broadcasting (zk) * Business auxiliary services (zzb) * Cable Operator (zs) * Computer network (On-line information and data base access or retrieval) (zh) * Consulting Engineer (g)

* Facsimile (FAX) (zg) * Foreign exchange broking (zzk) * Franchise (zze) * General insurance of other than immovable property (d) * Insurance Auxiliary (zy and zl) * Intellectual property  (zzr)

* Leased circuit (zd) * Life insurance  (zx) * Management Consultant (r) * Mailing list compilation and mailing (zzzg) * Manpower recruitment agency (k) * Pager (c) * Programme Producer (of TV or Radio programmes) (zzu)

* Rail travel agent (zz) * Scientific and technical consultancy (za) * Survey and map making of other than immovable property (zzzc) * Telegraph (ze) * Telephone (b) * Telex (zf) * Transport of goods through pipeline or other conduit (zzz)

In case of services falling under third category, there are certain conditions and restrictions if the recipient has a commercial or industrial establishment or any office relating thereto, in India. These are discussed in next paragraph.

Recipient abroad but has establishment in India

As explained above, in case of certain specified services falling under third category, service provided will be treated as ‘export of service’ even if service is provided from India, if recipient of service is out of India. However, if the recipient has office or establishment in India, the service will be treated as ‘export of service’ subject to certain restrictions and conditions.

Note that the provisions discussed below apply only to services falling under the third category i.e. rule 3(3) and not in respect of all services.

Taxable services provided and used in or in relation to commerce or industry – If the taxable service is provided and used in relation to commerce and industry and recipient is located outside India, the service will be treated as ‘export of service’ only if following conditions are satisfied –

Note that these restrictions are applicable only if – (a) the recipient has any commercial or industrial establishment or any office relating thereto, in India and (b) the taxable service is used in relation to commerce and industry.

Rebate of service tax paid on exported services or tax paid on inputs/input services

Subsequent to issue of Export of Service Rules, 2005; two notifications have been issued making provisions for rebate

(a)   Notification No. 11/2005-ST dated 19-4-2005, providing for rebate of service tax and education cess paid on taxable services exported i.e. tax paid on output services

(b)   Notification No. 12/2005-ST dated 19-4-2005, providing for rebate of excise duty paid on inputs and service tax paid on input services, which are used in providing exported taxable services.

Export of service without payment of service tax - As per Rule 4 of Export of Service Rules, any service, which is taxable under section 65(105) of the Finance Act, 1994; may be exported without payment of service tax. Thus, payment of service tax on export of services is optional.

Services provided abroad to be taxed in India

An explanation has been added to section 65(105) w.e.f. 16-6-2005 to provide that service provided from outside India to a person in India will be taxable, if such service is received by a person who has place of residence or establishment in India. Even services provided and consumed abroad come under net of service tax.

The Explanation reads as follows - For the removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India such service shall be deemed to be taxable service for the purposes of this clause.

Act does not have extra-territorial jurisdiction – Section 64(1) of Finance Act, 1994 reads as follows, ‘This Chapter (i.e. Chapter V which contains provisions relating to service tax) extends to the whole of India except the State of Jammu and Kashmir’.

Thus, the Act does not have any extra-territorial jurisdiction. It is doubtful if such jurisdiction can be created indirectly by adding an explanation to the definition section.

Services provided and consumed abroad

The aforesaid Explanation inserted w.e.f. 16-6-2005 does not say that the service should be received in India. Thus, even if a service is received abroad by a person who has his place of residence in India, the service will be taxable.

For example, if a construction company having office in India is undertaking some construction work in Dubai and if some taxable service is availed there, it will be taxable in India.

If a branch of Indian company like Infosys, Air India, State Ban of India has office abroad, the services like telephones, courier, security, construction etc. received abroad will be taxable in India. [Taking the logic to ridiculous extent, if an Indian has hair cut abroad, he will have to pay service tax in India!. Luckily, services provided to an individual for non-business purposes have been exempted vide notification No. 25/2005-Cus dated 7-6-2005].

Services received by an individual abroad

An individual who goes abroad may utilise some services like telephone, beauty treatment, travel agent etc. abroad, which he may consume abroad. Such services are exempt from service tax, if the services are not in the course or furtherance of commerce or industry of any other business – Notification No. 25/2005-ST dated 7-6-2005.

Thus, if a person goes abroad on private or personal visit, services received and consumed by him abroad will not be taxable. However, if he goes on a business trip, the services received and consumed by him abroad will be taxable and tax will be payable in India.

Person liable to pay service tax

If a person providing service is a non-resident and does not have address or place of business in India, service tax is payable by person receiving taxable service in India [Rule 2(1)(d)(iv)].

The exact wording of rule 2(1)(d)(iv) (as amended w.e.f. 16-6-2005) is as follows – Person liable for paying the service tax means - In relation to any taxable service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India, and such service provider does not have any office in India, the person who receives such service and has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India.