Taxing services abroad can lead to absurd fix

However, Service Tax Circular No. 36/4/2001 dated October 8, 2001 clarified that services provided beyond the territorial waters of India were not liable to service tax.

Therefore, till recently, the uniform view was that only services rendered within territorial waters of India were subject to service tax.

Surprisingly, the Finance Bill, 2005 proposes a major amendment to Section 65(105). The following explanation is proposed to be inserted:

"For the removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which the service is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or, as the case may be, usual place of residence, in India such service shall be deemed to be taxable service for the purposes of this clause".

The broad import of the proposed amendment is to clarify that even services performed outside India will be subject to service tax as long as the recipient of the service is in India. The opening words"""For the removal of doubts..." "" seem to suggest that the amendment is sought to be made with retrospective effect.

It may be noted that vide Notification No. 12/2002-ST dated August 1, 2002, the Service Tax Rules were amended with effect from August 16, 2002.

According to the amendment, in the absence of an office in India, a non-resident foreign company rendering taxable services in India would no longer be liable to pay service tax itself. The service tax will have to be paid directly by the India client receiving the services.

Therefore, the various Indian entities, who have made payments to foreign enterprises for services in the past, may find themselves being served with notices to cough up huge amounts by way of service tax.

Further, the wording of the explanation sought to be inserted by the Finance Bill, 2005 are so wide that the provision of service tax may also cover any payment made by an individual/company being a resident of India for any taxable services rendered to it outside India.

This may create an absolutely unintended absurdity. For example, technically, it could be argued that the amounts paid by India residents to clearing agents, internet cafe, tour agencies, beauty parlours, etc., while on a trip abroad, would attract service tax in India because such services are liable to service tax.

As jurist N Palkhiwala wrote in the context of Section 9 of the Income Tax Act: "If the Indian Parliament can cast the net wide enough to collect tax in such cases, where the foreigner's income has no nexus with India, only because the income is derived from a transaction with an Indian, it can equally levy a tax on a hotel in a foreign country where an Indian goes to stay or dine, or on a foreign store where an Indian buys shirts or grocery, or on a foreign physician whose services are sought by an Indian while abroad."

Therefore, the amendment proposed by Finance bill, 2005 needs to be seriously reconsidered to make the same rationally justifiable.

agar@nda.vsnl.net.in