In an earlier article, the problems faced by service exporters in obtaining refunds of input taxes were highlighted. The point was made that if India was serious about ensuring its continued competitiveness as a provider of services at a global level, it was imperative that these problems were expeditiously addressed so that the twin benefits of zero rating of exports of services under the service tax law and that of refunds of input taxes were actually realised by the services exporting community.
The matter was engaging the attention of various industry associations and the Central Board of Excise and Customs (CBEC) and it was expected that an appropriate clarificatory circular would be issued both with regard to the treatment of various services provided to overseas customers under the Export of Service Rules 2005 (the Rules), in the form of zero rating, as well as with regard to the procedures to be followed so as to obtain the benefit of refunds of input taxes in relation to such exports. This long-awaited circular has now been issued (Circular No. 111/05/2009-ST dated 24/02/09).
The Circular clarifies several key aspects of the Rules with regard to the zero rating of exports. However, the Circular does not address the procedural problems faced by service exporters in obtaining refunds of input taxes and it is expected that another circular might be issued in the near future to clarify these matters. It must be noted here however that an earlier Circular No. 828/05/2006-CX dated 20/4/2006 had indeed set out a simplified procedure for grant of refunds of input taxes but the procedural problems have cropped up despite the earlier circular.
The Circular illustrates certain typical activities carried out by service exporters which have been disallowed the benefits of refunds of input taxes by the service tax authorities on the ground that they did not constitute ‘exports of services’; under the Rules. The activities which are illustrated therein are as follows: call centre activities, medical transcription activities, activities undertaken by agents with regard to marketing in India of goods of a foreign company for consideration received as commission in convertible foreign exchange, activities undertaken by organisations to arrange remittances of monies to receivers in India, on behalf of foreign financial institutions, for consideration received as commission in convertible foreign exchange.
The Circular thereupon describes the three categories of services under the Rules. It reiterates the known condition with regard to Category 1 services of the nexus with immovable property to which such services relate and holds that as long as such property is physically situated outside India, the services covered in that category would be deemed to be exported. As regards Category 2, the Circular again reiterates the point that the services covered therein will be treated as exported if they are either fully or partly performed outside India.
With regard to the residual third category of services, under which the activities illustrated in the Circular are covered, it is clarified that the conditions that are required to be fulfiled in order for such activities to qualify as exports are: They should be provided from India and used outside India and they should be provided to a recipient located outside India. There are some amplifications of this condition based on whether or not the services are related to business or commerce.
Of course, the inward receipt of convertible foreign exchange is an underlying condition which should be fulfiled for all three categories of services. It must be mentioned here that the expression ‘provided from India and used outside India’ had replaced the erstwhile expression of ‘delivered outside India and used outside India’ in the Rules, with effect from March, 1, 2007. The purpose of this change was to ostensibly simplify the conditions that were required to be fulfiled in order for the services to qualify as having been exported from India. The point therefore is as to whether the Circular under reference could apply to the period in which the erstwhile conditions were in force. There is a reasonable basis to argue that this is indeed be the case.
The Circular states that the law has to be read harmoniously in order to avoid contradictions and, as a result, the expression ‘used outside India’ has to be understood in that context. Consequently, the expression is to be interpreted in order to require that the benefit of the services should accrue outside India. Thus, the conditions relating to exports of services will be met even where all relevant activities take place in India, as long as the benefits of these services accrue outside India.
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The Circular concludes by holding that in all of the activities illustrated above, this condition is met and hence such activities qualify for the benefits due for exports of services. It also states that a similar treatment will be accorded for other services in Category 3.
It is important to recognise here the wide amplitude of this beneficial Circular. This is for two reasons. Firstly, it illustrates the services typically carried out under Category 3 through a description of four specific activities. The most important one is that relating to marketing activities carried out in India. The Circular holds that such activities would qualify as exports even if they were to entirely take place in India, as long as the benefits were to accrue to a principal outside the country.
Consequently, even purely executory work forming part of the suite of marketing services typically performed by Indian companies on behalf of foreign principals would qualify for zero rating, as exports of services. This is undoubtedly a very significant and salutary interpretation. The other reason for supporting the wide amplitude of the Circular is the statement that the contents of the Circular and the particular treatment of services as envisaged therein would apply to all services covered in that category. The Circular is therefore a very welcome one and has the potential to significantly reduce the nature and the degree of disputations as to whether or not services performed for overseas companies by Indian entities would enjoy the benefit of zero rating.
It is hoped that the Circular will now be followed and implemented in a manner so as to give it its full effect and that no attempt is made by the field formations to interpret the Circular in any manner as to restrict the benefits that are clearly intended to accrue to the service exporting community. It is also hoped that the related and equally important circular clarifying several procedural matters in relation to the filing and processing of refund claims with regard to input taxes as also the grant of the refunds by way of payments by the service tax authorities to the service exporters is also very expeditiously issued.
A comprehensive effort is required to be undertaken to clear the very significant backlog of refund of input taxes that has accrued over time as a result of the problems surrounding the interpretation of the Rules and the procedural matters referred to above. It is only then that the entire range of benefits that is legitimately due to the service exporting community will actually accrue, thereby significantly strengthening the position of the country as a leading exporter of services to the world at large.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers