Earlier articles in this area focused on the problem relating to grant of refunds of input tax credits to exporters of services. By way of recapitulation, the Centre has zero rated such exports. Consequently, the services exporting community is entitled to obtain refunds of input tax credits or utilize such credits to offset domestic output service taxes. The IT/ITeS industry is a key part of the service exporting community and was expected to be competitive in global markets as a result of the zero rating benefits. However, as in well known by now, exporters of services had faced serious problems in obtaining refunds of input taxes for a variety of reasons. In order to ameliorate the problem, the CBEC had issued Circular No. 120/01/2010-ST dated 19th January, 2010 to clarify several important points on exports of services from India and to also lay down a simplified procedure for grant of refunds.
In order to legalise the intent behind the Circular, the Government has amended the Export of Services Rules, 2005 (‘ESR’) in Budget 2010. By way of background, for the purpose of ESR, all taxable services are classified in three categories. These are (a) services in relation to immovable property (b) services where performance is key and (c) services where the location of the service recipient. Hence, any particular taxable service would fall in any of the service categories. The ESR also lays down the conditions required to be fulfilled by the service providers in order to claim the benefit of zero rating. The conditions varied from category to category, although there was one common condition applicable to all the three categories which is the receipt of payment in convertible foreign exchange. In fact, this was the only condition that was required to be fulfilled prior to the notification of the ESR in 2005.
Thus, the ESR expanded the conditions that were required to be fulfilled in order for the services to qualify for zero rating. Broadly speaking, these conditions required demonstration of the fact that the services were provided from India, delivered outside India and used in business or commerce outside India. Given the enormous challenges that service exporters faced in demonstrating the above, these conditions underwent material changes and at the time of issuance of the CBEC circular under reference, the condition that was incorporated in the relevant provisions was that the services should be provided from India and used outside India. Of course, the common condition of receipt of payment for such services in convertible foreign exchange was also required to be met.
Now, Budget 2010 has deleted this other condition of provision of such service from India and its use outside India, which was a condition relevant for services in categories (b) and (c) above.
Therefore, it is now no longer essential for service exporters to demonstrate that such services are, firstly, provided from India, and, secondly, are used outside India. Now, demonstration of the fact of provision of service from India was a relatively easy task. The much harder one was the one relating to its use outside India. The basic idea was to determine the exportation based on the location of the economic beneficiary of the service. If that person was located outside India, then a case could be made that there had been indeed been an export of service. This meant that even if all the services were rendered in India and the service recipient was situated outside India, the exemption could be availed by arguing that the provision of services was indeed from India and its economic use was outside the country. Indeed, this was how the earlier CBEC Circular of early 2009 was framed, so as to grant the benefit of zero rating to such services. However, this was seriously challenged by the Department in the Tribunal and the Courts. Indeed, the Tribunal, in its decision with regard to Microsoft, disregarded the Circular and disallowed the benefit of zero rating for services rendered in India, even though the beneficiary of such services was outside the country.
It is thus now the case that the wheel has turned full circle and that the only condition that is now required to be met, for the benefit of zero rating to apply, is the location of the service recipient outside the country and for payment for such services to be made in convertible foreign exchange. This would thus mean that even if the services were to be rendered in country, these would qualify for the benefit of zero rating under the revised provisions. This was indeed the case prior to the introduction of the ESR in 2005. It will be interesting to see how the impending GST will address the issue of zero rating of services, as exports from India.
(The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers)
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Supported by Rahul Renavikar