Avoid frequent changes in service tax rules

FOREIGN ENTERPRISES

The question of granting some incentive or the other to export of services has been engaging the government's attention. The unprecedented surge in export of services by India from $ 24.9 billion in 2003-04 to $ 51.3 billion in 2004-05 necessitated some immediate steps so that service tax does not hinder the growth of export.

It may be recalled that earlier, payment received in India in convertible foreign exchange by a service provider was fully exempt from service tax. Subsequently, with effect from March 1, 2003, the CBEC clarified that service tax is a destination-based consumption tax and therefore, it is not applicable on export of services.

But the legal position till March 14, 2005, remained somewhat uncertain till the government formulated Export of Services Rules, 2005, which took effect from March 15, 2005. The rules have again been amended by Export of Services (Amendment) Rules, 2006, notified on April 19, 2006.

As per the latest position, export of taxable service has been divided into the following three categories:-

1. The first category relates to taxable services provided in relation to an immovable property which is situated outside India.

2. In the second category, there are 50 taxable services which are treated as export of service when such services are performed outside India. It may be clarified that even if the taxable service is partly performed outside India, it shall be treated as performed outside India.

3. The rest of 24 taxable services are treated as export of service when provided in relation to business or commerce located outside India.

The provision of any taxable service shall be treated as export of service when the following conditions are satisfied:

a) Such service is delivered outside India and used outside India

b) The payment for such service provided outside India is received by the service provider in convertible foreign exchange.

Anomaly in Export of Service Rules:

Export of service is effectively exempt from service tax. However, the rules made for this purpose are likely to create practical difficulties which may lead to unnecessary litigation. Some of the problems likely to be faced are enumerated below:

The export of services has been divided into 3 categories as aforesaid and different conditions have been imposed for each category. This will create unnecessary complication.

The services are required to be delivered outside India and used outside India. In many cases, it will be difficult to prove the place of delivery of services because certain services, being intangible in nature, may be incapable of being physically delivered.

It is also necessary that payment for services should be received in convertible foreign exchange. It is however, not clear as to whether payment in foreign exchange is contemplated for all the services or only for those services which are provided outside India.

Rule 3 has used different nomenclature in respect of export of services. Terms like 'provision of service', 'performance of service' and 'delivery of service' have been used in more or less the same context. Since each of the above term have a different legal implication, interpretation of Rule 3 will create practical legal difficulties.

It is necessary to check the tendency to make frequent amendments in the service tax rules without proper justification and use of appropriate judicial language. Otherwise, the service tax will become a nightmare like income-tax.