Indian service tax law is just about 20 years old. When it was introduced in 1994, the law had consciously been kept simple in design by the policy-makers. Justifiably so, as the intent was to ensure that it gradually gains acceptance in the complex indirect tax expanse. Considering that the tertiary sector is now nearly 60% of the GDP, North Block has been at pains to widen the ambit of service tax.
The introduction of the negative-list-based service tax dispensation in mid-2012 ensured that service tax pretty much encompasses all services. Even though the budgeted service tax revenue is the largest and pips the revenue receipts from either excise or customs duty, the finance ministry is still at odds to somehow mop up more revenue from this sector.
Trade and industry woke up a tad late to a seemingly innocuous amendment in the Place of Provision of Service Rules (which came into effect from October 1, 2014).The effect of this amendment is that it results in imposition of service tax on provision of intermediary service of facilitating supply of goods to foreign principals. Thus, any facilitation services provided to overseas companies in either sourcing Indian manufactured goods from India or importing of goods for domestic manufacturing in India, would now be subject to service tax. This service tax of 12% would simply add to the cost of goods and adversely impacts India’s competitiveness in exporting goods and makes a mockery of prime minister’s pet initiative, Make-in-India.
This change in service tax law is wholly unwarranted and unjustifiable. Not only has such intermediary services, since the very beginning of service tax law in India, been held by CBEC’s own circulars and clarifications to be exported services, but such services are also in the VAT/GST world, whether in the mature VAT countries or competing emerging economies, considered exported services. If this was not reason enough to see through the extreme inaptness of this change in law, there exists a plethora of jurisprudence under Indian service tax law which has unfailingly held such intermediary services to be exported services.
Even intellectually, there is little reason to consider such services to be anything other than exports. The economic and direct beneficiary of such facilitation or marketing services provided by indenting or sales agents is the foreign principal who pays for such services in foreign exchange. Taxing such services would result in an absurd conclusion that business support or marketing services, which are remunerated by way of a commission, can never be exported from India. This result is perverse and contrary to the very basic principle of Place of Supply under VAT law, of VAT being a destination-based consumption tax. In fact, if this rule which imposes tax in the hands of a provider of an intermediary service is carried forward to the GST (sought to be implemented from 2016) it is likely to result in large scale litigation between the origin state and the destination state. Unequivocally, such intermediary services are consumed by the contractual recipient of such services who resides in the destination state and who pays for consuming such services.
There is no logical or legal basis for creating an exception to the default rule which mandates that for B2B services the place of provision of service is the location of the service recipient and therefore such B2B services can only be taxable in the recipient state. This principle, when applied to provision of intermediary services supplied outside the border, carries the obvious consequence of such service being treated as exports and hence not liable to service tax.
Service tax law has till date been criticized largely on only one count—the inability of Indian revenue to timely refund the input service tax borne on exported services. In numerous, long-drawn legal battles, dragged right up to tribunals and high courts, revenue has time and again been shamed for not refunding input taxes borne on exported services. Having lost, the ill-advised policy-maker is now trying to legitimize the denial of export status to intermediary services which are provided to an overseas customer and thus denying the service-provider the benefit of input tax refund—revenue little realises the incalculable disservice it is doing to Indian economy. Not merely exports, but even imports required for development of infrastructure sector which is otherwise intended to be incentivised, would ironically become more expensive when service tax is levied on intermediary services supporting such cross-border trade of goods.
The place of supply rule on intermediary services needs to be reinstated lest India run the risk of being termed a pariah even in the VAT world, thus vitiating the indirect tax landscape right before the proposed GST is rolled out next year.
The finance minister must intervene and nullify any such attempt to deny export status to exported intermediary services. India cannot afford to isolate itself from globally-followed tax practices time and again, completely disregarding the tax regime of its trading partners, and make cross-border trade of goods expensive and difficult.
The author is an ex-IRS officer and is presently indirect tax head of a leading MNC. Views are personal