Grant an exemption, not rebate on service exports

In a letter written in 1789, former US President Thomas Jefferson is said to have remarked, "The execution of the laws is more important than the making of them". Many a time, this quote fits squarely on the laws formulated in India.

A couple of months back, the Rules for Export of Services were announced and placed on the website of the ministry of finance. The rules attempted to recognise performance parameters for all the 71 services that were in existence at that point of time using three benchmarks:

Property located outside India which was fundamentally meant for real estate consultants and architects

Providing service outside the territorial waters of India, and

Recipient of service being outside India.

To implement these rules, Notification 11/2005 and 12/2005 have been issued by the service tax department on April 19, 2005. The 11/2005 specifies the basic ingredients to be classified as an export service:

that the taxable service has been exported in terms of Rule 3 of the said rules and payment for export of such taxable service has been received in India in convertible foreign exchange;

that the service tax and cess, for which rebate has been claimed, have been paid on the taxable service exported;

the amount of rebate of service tax and cess admissible is not less than Rs 500;

The notification rounds off by stating that in case the service tax and cess, rebate for which has been claimed, have not been paid or "the taxable service, rebate on which has been claimed, has not been exported, the rebate paid, if any, shall be recoverable with interest".

Form ASTR 1 has been devised by the department, wherein the exporter needs to make some declarations and needs to provide documentary evidence supporting the export.

Notification 12/2005, on the other hand, specifies the requirements for availing a rebate on input services.

that the taxable service has been exported in terms of Rule 3 of the said rules and payment for export of such taxable service has been received in India in convertible foreign exchange;

that the duty, rebate of which has been claimed, has been paid on the inputs;

that the service tax and cess, rebate for which has been claimed, have been paid on the input services;

the total amount of rebate of duty, service tax and cess admissible is not less than Rs 500;

in case Cenvat credit has been availed of, it is curtains for the rebate and one could be visited with interest and penalty too. ASTR 2 is the form to use to avail of this rebate.

At the outset, it is clear that the government is too keen to jump onto the service tax bandwagon to collect taxes irrespective of the location where they are provided from.

As H P Agrawal has rightly pointed out in his column in this paper on April 25, one needs rationally justifiable laws and rules. It would be naive to think of all service providers""especially the small ones like mandap keepers and pager service providers""coming under the export rules.

Tax laws have historically considered only receipt of foreign exchange as the benchmark to recognise exports. The notifications issued under the service tax laws use a "destination- based" principle to recognise exports.

However, they specify receipt of export consideration in foreign currency as a condition too when, typically, either one should have been the criteria.

The need to keep approaching the service tax department every time one exports a service appears to be sending us back in time when the time spent in the department used to be the criterion to get Cenvat credit. It would be in the fitness of things to use one common definition for export of services and grant an exemption rather than a rebate.

mohan.lavi@gmail.com