Indian service tax regime excludes services exported out of India from the payment of service tax. One of the essential criteria for supply of service to qualify as exports is the use of such services by the recipient outside India.
One significant segment of service providers are the Indian arms of offshore businesses engaged in providing services such as promotion, marketing and support services to their offshore affiliates.
Supply of commodities or services, for which the promotion and marketing is undertaken, is effected to Indian customers directly by such offshore businesses. Such services should qualify as exports if they can be said to be used outside India by the offshore businesses.
It is a fair argument to take that since such services are used by the offshore business in formulating strategies and business decisions outside India, they should be regarded as being used outside India. As an alternative, such services may be argued as being used in India on the basis that they are ultimately used for Indian businesses of the offshore entities. These conflicting arguments are likely to result in disputes with regard to the export status of such services.
Demand raised on Microsoft India for non-payment of service tax on provision of promotion and marketing services to its Singapore entity is an instance of dispute in the area. In such cases, the Revenue has sought to deny export status of such services. Presently, the instances of such service tax disputes are relatively few. However, the issue is likely to cover a much larger base of such service providers.
Recent judgements at the second level of appeal seem to be leaning in favour of export status of such services, but the position is far from settled. The issue is likely to result in a long drawn litigation before the law finally settles. At this stage, it is also relevant to note that when these services are provided by an offshore entity to a service recipient in India, such services are treated as imports under the service tax laws and require the Indian service recipient to make payment of service tax on such imports. Hence, in case the argument of ultimate use in India of such services is adopted, thereby denying export status to such services, it would result in the anomaly that different yardsticks would be applied for exports and imports.
It is therefore relevant to note that GATS outlines the criteria for services to qualify as cross-border trading between member nations. In case of provision or receipt of services meeting the said criteria, the issue of taxation by both the nations to the transaction assumes importance. It would be prudent for the Indian law makers to be sensitive to possibilities of double taxation in such cases and provide appropriate relief by way of suitable amendments to the existing framework of service exports.