Does service tax apply to payment in foreign exchange?

Font Size

Print

Feedback

Email

Discuss

Related Articles

New direct taxes code likely to hit PFC opsNSSO to estimate GST taxpayer baseProposed MAT rate could be cut by 1%Revenue secy hints at plugging tax leakages

: We provide Information Technology Software Services (ITSS) to group companies (that qualify as associated enterprises under the income tax law) located outside India. We receive payment for our services in convertible foreign exchange. Are we required to deposit service tax on such services?

As per the Service Tax Export Rules, ‘ITSS’ qualifies as ‘export of services’ if the service recipient is located outside India. The following additional conditions also require to be satisfied for services to qualify as export. The service is provided from India and used outside India, and payment for such service is received in convertible foreign exchange.

In the present case, all the above conditions would be satisfied and therefore, your services should qualify as export of service from India. Being an export of services, service tax should not apply.

In case of transactions between associated enterprises, service tax is payable on book adjustment and not upon collection (as is the usual case). At the time of book adjustment for the services provided to group companies, the condition of receipt of payment in foreign exchange may not have been met in your case and technically a liability to deposit service tax can arise. This appears to be an anomaly.

We manufacture auto components in our factories in Madhya Pradesh and Tamil Nadu and installed machinery in these factories a few years ago. We now plan to shift some of these machines to our new factory in Uttaranchal. We have been advised to pay cenvat credit availed in respect of the machines and remove the same under the cover of an excise invoice. Is this correct?

Since the machines are removed after use, the cenvat credit rules prescribes a formula for payment (that is, reversal) of cenvat credit availed. As per the rules, the cenvat credit availed on the machinery is to be reduced by 2.5% for each quarter of a year from the date of taking such credit. Hence, you are not required to reverse the entire cenvat credit taken initially but the reversal can be limited to the amount after the allowed deduction.

What is the scheme of advance rulings? Who can apply for the same?