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Tax on import of services
October, 09th 2006
A major recent move in service taxation in India is the introduction of the principle of taxation for import of services. The principle has been introduced with effect from April 19, 2006, and treats import of services on a par with import of goods in terms of levying an appropriate consumption tax and in the form of service tax. Import of goods in the country is similarly charged to the additional Customs duty, which is equivalent to the Cenvat chargeable on domestic manufacture of goods. There is, of course, an independent debate on imposition of state VAT on import of goods, in addition to Cenvat. It is expected that as and when the uniform Goods and Services Tax is introduced in India, import of both goods and services will be treated on a par with domestic supplies of goods and services and taxed accordingly, as is the case in all countries where VAT or GST is in place. The current basis for taxation of import of services is through the reverse charge mechanism, whereby the service recipient is required to self-declare the import and pay tax accordingly. Indeed, the law deems the recipient of such services as the service provider in order to collect tax. The basis of the concept of reverse charge is the taxation of services based on consumption, that is, it operates as a consumption-based tax. This is in line with the generally accepted principle that export of goods and services should be effectively exempt from domestic taxation in the country of export and should be taxed in the country of import or ultimate consumption. In other words, the reverse charge mechanism follows the principle of a destination-based consumption tax. The service tax is supposedly such a tax, as has been stated in a departmental circular. The principle of taxation of import of services was initially introduced with effect from June 2005 by means of insertion of an explanation to the erstwhile Section 65(105) of the Finance Act, 1994. This explanation was inserted in this section even though Section 64 of the Act envisaged the taxation of only those services that were provided in India and not those that were provided elsewhere and received in India. Further, the explanation envisaged that all services received from a foreign service provider anywhere in the world by a recipient located in India would be chargeable to tax, regardless of whether the services were received in India. Indeed, the issue with regard to the extra-territorial jurisdiction of the tax, assumed by way of insertion of this explanation, is even now a matter of judicial debate. Realising the problem posed by the aforesaid unsatisfactory manner of introduction of the tax on import of services, the government deleted the explanation, with effect from April 18, 2006, and introduced Section 66A to govern the taxation of import of services. Concomitantly, the Taxation (of Services Provided from Outside India and Received in India) Rules 2006 (hereinafter called the Import Rules) were brought into force from April 19, 2006. These rules have sought to mirror the similar provisions that exist in relation to exports in the Exports of Services Rules 2005 (hereinafter called the Export Rules), which are in place to ensure that such export of services from India is not taxed in the country. Accordingly, both the Import Rules and the Export Rules categorise the taxable services into i) those relating to immovable property, ii) those requiring performance within or without the taxing jurisdiction and iii) a residual category which covers all the other taxable services. While the Import Rules relating to the first two categories are clear, it is unfortunately not so in relation to the large residual category of services. Indeed, the Import Rules seem to suggest that for this category, the services received anywhere by a recipient, who has his place of business etc. in India, and provided by a person who has his place of business outside India will be taxed thereunder. In other words, the rules do not appear to require the receipt of the services in India in relation to this category. Indeed, Section 66A itself continues to be worded in this fashion and consequently the unhappy situation that was prevalent with regard to the possible extra-territorial jurisdiction of the erstwhile explanation to Section 65 (105) continues to prevail even under the present dispensation. Recently however, the Delhi High Court, in its decision with regard to Orient Craft Ltd, has held that the Import Rules, read in totality, make it clear beyond doubt that the taxable services provided from outside India and received in India will alone be liable to service tax. This decision of the Delhi High Court is welcome since the implications of the status quo ante position were very serious, whereby services received anywhere in the world by a recipient who has his place of business in India will be chargeable to service tax. Indeed, in the above case, the seemingly absurd proposition was advanced that should Section 66A and the Import Rules be literally interpreted, a person travelling on a corporate business trip overseas and getting a haircut would be required to declare the receipt of this service upon return to India and discharge service tax! This possibility was emphatically refuted by the Delhi High Court as not being permissible under the Import Rules. It is, therefore, possible to now contend, as should have been the case always, that services received in India from overseas by service recipients located in India are alone chargeable to service tax on import of services, as per the reverse charge mechanism. Under the reverse charge mechanism in force at present, the recipient of services is liable to register with the service tax authorities, self-declare the amount paid by him for the services, and pay service tax thereon. Registration with the service tax authorities entails a liability to file periodic returns with the department. This could become time consuming for the service recipient, particularly in cases where the recipient is otherwise not liable to pay service tax and is also not a regular importer of services. Providing an option for one-time registration and filing of returns for casual importers of services may be a good option. A cue may be taken from the VAT law where similar facilities have been provided to casual traders. However, there are other issues relating to the words used in Section 66A. Several terms such as permanent establishment and 'fixed establishment used in Section 66A have not been defined. As these provisions have major implications for business and trade, it is important to have clearly drafted definitions for such contentious expressions. Further, the implications of these definitions can be quite serious. For example, the concept of permanent establishment, in its present form, may render the expenses allocated by the head office of a company outside India to its branch office in India as chargeable to service tax as consideration for import of services, whereas no such services are at all provided or contemplated. Even if services are provided, they may not be received in India at all. As suggested earlier, taxation of import of services is a corollary to exempting tax on export of services. Logically, therefore, the provisions for determining exports from and imports into the county should be mirror images. This is not so in the present dispensation. The criterion of delivery and use of services outside India in order to determine export of services has not been matched by the criterion of delivery and use of services in India in order to determine imports. Such harmony in the export and import provisions is essential in order to enable global indirect tax principles to be put in place in India. S Madhavan
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