Taxation of services in the Exclusive Economic Zone
August, 24th 2009
Budget 2009 has effected fundamental changes in the provisions relating to service tax on activities carried out beyond the Indian landmass but within the limit of 200 nautical miles therefrom, which comprises the Exclusive Economic Zone (EEZ) of India. Certain residual issues remained even thereafter and these have very recently been addressed through appropriate amendments last week in the relevant provisions. This article addresses these matters in some detail.
By way of background, the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976, (the Act) lays down the sovereign rights that India retains for itself in relation to the territorial waters and contiguous areas adjoining its landmass. Equally, the air space over such areas is also subject to these sovereign rights. While the territorial waters extend up to a distance of 12 nautical miles from the landmass, the Act extends the sovereign rights to the Continental Shelf of India (CSI), which extends significantly beyond the territorial waters up to a maximum of 200 nautical miles from the landmass.
This is also defined as Indias EEZ, in terms of its sovereign reach. The Act also authorises the Central Government to extend any enactment, including fiscal ones, to the CSI or any designated areas therein. Accordingly, the government has sovereign rights to extend fiscal statutes that are typically applicable to the landmass of the country to a maximum of 200 nautical miles therefrom. As indicated above, the Act also enables the government to designate specified areas in the CSI/EEZ for the purpose of extension of particular statutes including fiscal ones.
In terms of the powers granted under the above Act, the government initially extended, in the year 2002, the provisions of the Finance Act 1994, in relation to service taxes, to specified designated areas in the CSI/EEZ. These designated areas actually related to the coordinates of the various oil drilling wells off Bombay High. It was thus that the service tax provisions were first extended beyond the Indian landmass, with the express purpose of bringing within the ambit of the service tax law, the services performed in the oil and gas sector in relation to the above oil wells.
This position continued from 2002 until Budget 2009 and hence services provided in all these years in the CSI/EEZ outside of these designated areas were not chargeable to the service tax. The above position changed materially when the government issued relevant notifications in July this year, at the time of the Budget, to extend the ambit of the service tax to the entire CSI/EEZ. This was done through appropriate amendments to the underlying notification of March 2002. However, only those services which are carried out qua installations, structures and vessels in the CSI/EEZ have been made taxable.
The objective of using the above expressions is apparently to ensure that only those service providers who physically provide these services in the above areas and in relation to installations, structures and vessels will need to pay the tax. These are typically in relation to the oil and gas sector. The words installations, structures and vessels have not been defined in the service tax provisions and reliance will need to be placed on the normally understood meaning of these expressions in order to appreciate as to how the law would effectively apply. That itself is a subject of independent debate and discussion.
Through an appropriate additional amendment in the Taxation of Services (Provided from outside India and Received in India) Rules, 2006, commonly known as the Import of Services Rules, services provided from outside India to such installations etc. were also made taxable.
Thus Budget 2009, through these several amendments, extended the service tax provisions to both services provided by Indian service providers and by foreign service providers in regard to these installations in the CSI/EEZ.
However, the moot question which remained unanswered even subsequent to these Budget provisions was as to whether services provided from India to these installations in the CSI/EEZ would qualify as exports of services and hence not chargeable to the tax. To reiterate, the enduring question was as to whether the service tax provisions now extended to all services provided from anywhere in the world in relation to these installations as also undoubtedly to the services provided through a physical presence in these installations, or whether the taxability did not yet extend to services provided from the Indian landmass to these installations in the CSI/EEZ.
The reason for this lingering doubt was that no amendments had been carried out in Budget 2009 in the Exports of Services Rules, 2005, in this regard. These Rules consequently continued to define India in erstwhile terms and not in the revised manner in which the principal service tax provisions and the Import of Services Rules had done. Accordingly, it could have legitimately been argued that services provided from India to these installations would continue to be treated as exports, under the Export Rules, and hence not be charged to the service tax.
In order to address this, the Central Government amended the Export of Services Rules in August 19 in order to define India as including the installations, structures and vessels in the Continental Shelf of India and the EEZ of India. With this amendment, services provided from India to such installations would now be chargeable to the service tax and it cannot be argued any longer that they would qualify as exports of services. In sum, all services relating to these installations in the CSI/EEZ would henceforth be chargeable to the service tax.
It is entirely another matter that all such service taxes are typically chargeable in relation to services provided to the oil exploration sector which, in terms, cannot offset these service taxes in the absence of any output tax in the nature of either excise duty or service tax in relation to the crude oil which is extracted by such installations or structures. The impending GST will hopefully address this fundamental problem of indirect tax cascading relating to oil exploration activities.