JULY 14, 2014

By Krupa Venkatesh & Mausumi Saikia, Deloitte Touche Tohmatsu India Pvt Ltd

FINANCE Minister while presenting the Service tax proposals during Union Budget 2014-15 stated that, with dual objective of transition to Goods and Services Tax and widening of tax base and enhancing compliance, minimal changes have been proposed . One major Service tax amendment widening the tax base has been amendment of Rule 9 of Place of Provision of Services Rules, 2012 (‘POP Rules').

As per Service tax laws, taxable event .i.e. ‘service' must happen in the ‘taxable territory' to attract Service tax. ‘Taxable territory' has been defined to mean the territory to which the provision of Service tax applies extending to whole of ‘India' except State of Jammu & Kashmir and includes its territorial waters, continental shelf, exclusive economic zone or any other maritime zone. POP Rules were notified to determine when services would be considered as provided in the taxable territory and when it would not. The essence of POP Rules is that service is to be taxed in the jurisdiction of the place of consumption of service and is based on the basic rule that the place of provision of service is the location of the service receiver.

Rules 9 of POP Rules lists out specific services wherein place of provision of service is location of the ‘service provider' and not ‘service receiver'. One such specified service is ‘intermediary services' [Rule 2(f) of POP Rules] defined to mean a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main' service), between two or more persons, but does not include a person who provides the main service on his account. Prior to 11 July 2014, intermediate services did not cover services in relation to goods and were specifically excluded from the definition of ‘intermediary services' which was also clarified by Education Guide. Therefore, by virtue of Rule 9 of POP Rules, place of provision of service in case of services provided by Indian service providers rendering services in relation to goods/materials in India on behalf of foreign suppliers/parent entities were not considered to be provided from taxable territory, i.e. India. Place of provision of such services were considered to be place of the service receiver as per Rule 3 of POP Rules i.e. outside India and thereby qualifying such services as ‘export of service' as per Service tax laws and not attracting Service tax.

Budget 2014 amendment [Notfn. 14/2014-ST dt. 11.07.2014] has expanded the definition of intermediate service to include services in relation to goods and definition of ‘intermediary services' has been amended to mean a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main' service) or a supply of goods, between two or more persons, but does not include a person who provides the main service or supplies the goods on his account. Therefore, with effect from October 1, 2014, place of provision of services in case of commission agent or stock broker or any service provider who arranges or facilitates supply of goods in India on behalf of foreign supplier/parent entities shall be place of service provider, i.e. India. As a consequence such services shall not be eligible to qualify as ‘export of services' as one of the condition of ‘export of services' is that place of provision of service should be outside India.

In view of the above amendment of POP Rules, Service tax positions being adopted by commission agents or stock brokers or any service provider who arranges or facilitates the supply of goods on behalf of foreign suppliers/parent entities needs to be re-looked and proper compliance under Service tax laws shall be required.