Cross-Border Transactions in services under New ST Regime
July 05, 2012
By R Raghavendra Rao
UPTO 1st July 2012, cross - border transactions in services were governed by the Taxation of Services (Provided from outside India and Received in India) Rules, 2006 and the Export of Service Rules, 2005. But, from 01.07.2012, there is a total change in treatment of cross -border transaction of services.While Rule 6A of the Service Tax Rules, 1994 defined “Export of Service”, there is no such express definition for “Import of Service”, apparently to handle the taxation of services flowing from J&K to rest of India under reverse charge. The significant difference between the position before 1.7.2012 and from 1.7.2012 is that, while to qualify as export, the recipient of the service as well as the place of provision of service should be outside India, whereas for reverse charge, it is only the service provided by any person located in a non-taxable territory (Outside India plus J&K) and received by any person located in the taxable territory (India minus J&K). The taxation of import of services is governed by Rule 2(1)(d)(G), read with Notification No.30/2012 ST and certain entries in the Mega Exemption Notification No.25/2012 ST. According to Rule 6A of the Service Tax Rules, 1994, the service shall be treated as export if:
(a) the provider of service is located in the taxable territory,
(b) the recipient of service is located outside India,
(c) the service is not a service specified in the section 66D of the Act,
(d) the place of provision of the service is outside India,
(e) the payment for such service has been received by the provider of service in convertible foreign exchange, and
(f) the provider of service and recipient of service are not merely establishments of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of section 65B of the Act
In the light of above definition and the Place of Provision of Service Rules, 2012 (POP Rules for short), I have made an attempt to tabulate the liability of service tax in various situations that may arise in cross border transactions. Let us assume an Architect has provided service for construction of a property, say a Guest House for a Company. There are three different variables, one is the location of the service provider, second is location of the service receiver and the third is location of the property. That will give us eight different combinations and the taxability of each of the situations is tabulated as under. For the sake of easy understandingJ&K has been ignored intentionally and India is taken as taxable territory and USA as non taxable territory.
Sl.No. | Location of Service Provider | Location of Service receiver | Location of the property | Liability | Remarks |
1 | India | India | India | Service Provider | Normal transaction like any other service. |
2 | India | USA | USA | Not liable to tax. | Amounts to export of service ( Rule6A of the ST Rules, 1994). |
3 | India | India | USA | Service Provider | Though property is located in USA, between Rule 5 and Rule 8 of the POP Rules, latter Rule is applicable and the POP shall be deemed to be in India. |
4 | India | USA | India | Service Provider | Though the location of Service receiver is US, since the service is provided in Taxable Territory, ST is applicable - Rule 5 of POP Rules. |
5 | USA | USA | USA | --- | Outside the purview of Finance Act, 1994 |
6 | USA | India | India | Service receiver | Clause B of Notification No 30/2012 ST. |
7 | USA | USA | India | Exempted | Though provided in taxable territory and hence taxable, it is exempted under Mega Notification No 25/2012 ST, Sl No. 34(c). |
8 | USA | India | USA | Not taxable | As per Sec 66B, the service is taxable only if it is provided in a taxable territory. In this case, since the place of service is a non-taxable territory, no ST is leviable. |
It can be seen that Sl No (1,5), (2,6), (3,7) and (4,8) are mirror images of the transactions. The above situations can be applied mutatis mutandis for other services like performance based services etc.
The views expressed are personal.
