A key issue in regard to taxation of cross border transactions of services is to ensure that the provisions of indirect tax law across countries are aligned so that there is just the one tax on a particular cross border transaction and, therefore, there is no possibility of either double taxation or double non-taxation.
There are two ways to analyse the situation. The first is to compare whether the provisions of specific countries relating to exportation of services therefrom and their consequent zero rating are matched by corresponding provisions on importation of services and their taxability in the importing countries. The other way to do this is to see whether within one country, the provisions relating to exports and imports of services are broadly similar in nature, in order to conclude that the two are in tandem and hence mutually compatible. It will be interesting to see whether this is indeed the case in India.
The service tax provisions were amended for the first time in 2005 in order to incorporate a taxation code in relation to exports of services, vide the Exports of Services Rules 2005 (Export Rules). While there were erstwhile provisions that did address the issue of zero rating of services prior to these rules, it was only with the introduction of these rules that comprehensive provisions were introduced to precisely determine the exportation of services.
A similar situation has obtained regarding importation of services as well. There has been a great deal of controversy as to the effective date from which importation of services were sought to be taxed. However, here again, it was only with the introduction of the Taxation of Services (Provided from outside India and Received in India) Rules 2006 (Import Rules) that the provisions were codified and formalized. The question that is addressed in this article is whether the Export and Import Rules are mirror images of each other, as they ideally should be.
The Export rules categorise the several taxable services into three different categories. The first category covers 13 services, all of which are related to immovable property. The Export Rules hold that if the immovable property in relation to which such services are provided is situated outside India, such services would be treated as exports simply on that ground.
The second category covers a set of 53 services which are performance based and the Export Rules hold that these services will be treated as exports if they are performed outside India. They also hold that such services will be treated as exports even if partly performed outside India.
The third category is the most important one and extends to all taxable services other than those referred to above. The Export Rules state that such services will be treated as exports if they relate to business or commerce and are provided to a recipient located outside India. The Rules also provide that if the recipient has a commercial establishment or an office in India, the services will be treated as exports only if the order for provision of services is issued by an establishment or office located outside India. Thus, the third category extends the benefit of zero rating to services, based on the condition that the recipient of the services should be located outside the country.
Apart from the above categorisation of services, the Export Rules also incorporate two important additional requirements as well. These are that the services should be provided from India and should be used outside India and that the payment for such services should be received by the service provider in convertible foreign exchange. These two conditions are applicable to all three categories of services. As is well known by now, the particular condition of provision of services from India and its use outside India, even though more liberally worded than was the case earlier, continues to bedevil the service exporters and the taxing authorities alike.
If one were to analyse the Import Rules in alike fashion, it can be seen that a similar set of three categories of services has been incorporated thereunder, with similar underlying conditions. Thus, the set of 13 services in relation to immovable property for the first category and the Import Rules provide that if the immovable property were to be situated in India, the reverse charge mechanism of payment of tax by the importer on such services would apply. Similarly, the second category covers the set of 53 services and the Import Rules hold that if these are performed either wholly or partly in India, the tax consequences would apply.
Finally, the third category of services in the Import Rules is also a mirror image of the third category of services as contained in the Export Rules and the Import Rules similarly hold that if the recipient of such services was located in India and the services were in relation to business or commerce, the service tax on imports would accordingly apply.
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As can thus be seen, the aforesaid categorisation of services is identically done in both the Export and Import Rules. To that extent, the two Rules are indeed mirror images. However, if one were to analyse the key common condition in the Export Rules i.e. the provision of services from India and their use outside India, it can be seen that no corresponding provision exists in the Import Rules. Indeed, the significant divergence between the two Rules is the absence of the common condition, referred to above, in the Import Rules.
However, even if one were to analyse the third category of services under the Import Rules, they provide that such services will be treated as imports into India if they are received by a recipient located in India.
Thus, apart from the fact that there is no equivalence of the expression ‘provided from India and used outside India’, as occurring in Export Rules, in the Import Rules, in that there is no expression such as ‘provided from outside India and used in India’, the particular expression incorporated in the third category thereof i.e. services should be received by a recipient located in India, is itself the subject of differing judicial interpretation.
As a result of these materially differently worded provisions, as contained in the Export and Import Rules, it is the position today that notwithstanding that the categorisation of services as contained in these two Rules are identical, the two Rules are not mirror images in terms of their real effect and it is therefore a reality today that the tax consequences in terms of zero rating of exports and a reverse charge payment of tax on imports do not correspond with each other. This situation needs to be addressed through legislative changes in order to avoid unintended tax consequences.
The author is Leader, Indirect Tax Practice, PricewaterhouseCoopers