An important learning for prime minister Narendra Modi from the unfortunate case involving ONGC Videsh Limited—it has been given a Rs 5,800 crore service tax notice—is that it is not just startups that require protection from the taxman, well-established firms require this too, indeed their need is greater since their turnover is much higher. While the Rs 5,800 crore tax demand can throw OVL’s profits out of whack, it will also jeopardise its future operations. There are two or three overlapping issues, and they can impact more than just OVL. Had the payments by OVL been for routine ‘services’, there could have been a question of taxability, but these were payments made by OVL to the operators of the fields in which they hold equity—the way the E&P industry works, the fields are operated by one firm and all partners in the consortium reimburse costs on the basis of their equity share. To that extent, it cannot be considered a service rendered to OVL—under the law, while the service tax has been paid by the party rendering the service, if the party is located overseas, the payments have to be made by the company getting the service. Going by the service tax department’s notices, this means all E&P firms will have to pay service tax on their equity contributions in fields where they are not the operator.
Equally important, since a tax can only be levied on a service provided in India, whereas OVL’s operations are all overseas, it is not clear on what basis the taxman issued the notices. Indeed, if taxes are to be paid on services provided overseas, a lot of Indian firms with overseas operations could also find themselves getting served. The fact that there are close to Rs 95,000 crore worth of pending appeals—80% of these are by aggrieved firms like OVL—against service tax notices in various forum from the Commissioner Appeals to the Supreme Court, of course, indicates how contentious the tax notices are. None of this, it is useful to keep in mind, would have happened to OVL if it had been headquartered in, say, a Singapore instead of in India—that is also why, though their main business is in India, many of India’s hot startups are not registered here; in OVL’s case, this would have been justified since all its investments/revenues are overseas.