New term for service exports

Ministry to decide what constitutes export of a taxable service

The finance ministry would introduce a new definition of exports after the passage of the Budget in Parliament, that will eliminate the current practice of using payments made in foreign exchange as a yardstick for determining the same.

The ministry has inserted an enabling clause in Finance Bill, 2004, giving itself the power to determine what constitutes an export of a taxable service.

Under Clause 77(q) of the Bill, the ministry will also have the power to decide on "grant of exemption to, or rebate of service tax to or rebate of service tax paid on, taxable services which are exported out of India".

The step would bring a large number of firms which provide services to foreign companies like management consultancy, client servicing and business process outsourcing under the tax net.

These companies have claimed that since their services are provided to entities abroad from here, and the payments are received in foreign exchange, they were entitled to show the resultant income as exports.

In February 2003, the finance ministry had done away with the proviso of exempting any service from tax liability if it were paid for in convertible foreign exchange.

But in November, it had restored the situation as no alternate definition was found to be satisfactory. The problem has occurred because, unlike goods which are physically delivered, it is difficult to decide at which point the services are consumed.

According to Rajeev Dimri, indirect tax expert with Ernst & Young, the enabling provisions would now allow the ministry to bring in the relevant notifications to switch over to a better definition than the sole use of foreign exchange paid as a means of identifying whether a service has been exported.

The method had become obsolete, as domestic companies and individuals can now hold and even settle their domestic transactions in foreign exchange easily.

Dimri said the new definition would also clear the air on whether secondary services provided for the export of service would also get an export status.

Companies had claimed that just as goods used in manufacture of exported commodities get export benefits, the same should be extended to the services sector.

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The noose tightens

• This step will bring management consultancy, client servicing and business process outsourcing under the tax net.
• Companies had claimed that since their services were provided to entities abroad from and payments were received in foreign exchange, they were entitled to show the resultant income as exports.
• The problem has occurred because, unlike goods which are physically delivered, it is difficult to decide at which point the services are consumed.
• The new definition would also clear the air on whether secondary services provided for export of service would also get an export status.