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Tax norms for foreign service providers still confusing
November, 06th 2007
If you thought that the vexed question of deciding the situs of services for the purpose of service tax levy has died its natural death following the introduction to import and export rules in service taxation, its time for a rethink.

For those, who are not tax-savvy, situs in the context of tax law is the place where a particular income, service or transaction can be legitimately taxed by a given authority. For example, the service tax norms in India provide that the tax law applies to whole of India, excluding the state of Jammu & Kashmir.

The question that arises is in relation to services provided by non-resident service providers. To this, the government promptly clarified that services rendered from outside India will not be liable to service tax in India. Therefore, by applying the situs theory as explained by the government in its circular, services provided from or within India were liable to service tax in India.

Admittedly, the above clarification will now have to be read in the context of the newly introduced import, export rules for services to determine taxability of a particular service, though, that is besides the subject matter of this article.

With respect to non-resident service providers, initially they were liable to pay service tax either themselves or through appointed agents if they did not have an office in India.

However, to ensure greater compliance and control on such tax payments, on August 16, 2002, the government amended the rules in this regard and shifted the responsibility of payment of service tax with regard to services availed from non-resident service providers to Indian service recipient. However, this amendment did not change the underlying principle that service provided from outside India should not be taxed.

What the amendment of August 16, 2002, meant was if the non-resident service provider provided any services from India (by visiting India) then in such cases the Indian service recipient would be obliged to discharge service tax on such services. In fact, this position stands vindicated by various court rulings and is in conformity with the circular issued by the government in this regard.

However, recently there are instances where assessees are being asked to provide information on services availed from non-resident service providers from August 16, 2002, onwards, presumably based on certain clarification issued by CBEC officials to the Director-General of Service Tax.

In this regard one needs to understand that services provided by non-resident service provider can be classified into two categories. One, services provided by a non-resident service provider from outside India and two, services provided by a non-resident service provider within India.

With respect to the second category, there should not be any doubt that if such services were classifiable under any of the taxable service categories, then service tax on the same should have been paid by the service recipient in India.

With respect to the first category i.e., services provided by a non-resident service provider from outside India, the same cannot be levied with service tax prior to June 2005 i.e., the date when explanation was inserted in the definition of taxable services making such services taxable irrespective of its place of performance, or April 2006 when a specific section was inserted in lieu of an above explanation, along with rules prescribing parameters to determine import of services.

The reason of mentioning two dates of applicability of service tax is due to there being two views existing on applicability of service tax on services provided by non-resident service providers.

Last but not the least, there have been a number of tribunal decisions by now to hold that in cases where services were availed from non-resident service providers, the government cannot levy and collect service tax on the same prior to January 1, 2005, i.e., the date when these services were notified to be taxable in the hands of its recipient.

Given this, where services are provided from outside India, it cant be taxed in India prior to June 16, 2005, and in a best case scenario prior to April 18, 2006. It will be a great service if CBEC promptly clarifies the above position to the field formations before they initiate inquiry and incur huge amount of time and efforts of the industry and also of themselves in trying to detect a revenue leakage which does not exist.

Sachin Menon & Prasad Paranjape
(The authors are executive directors at PricewaterhouseCoopers)
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