Ankur Jain & Prerna Chopra
As India progresses towards introduction of GST w.e.f 1 July 2017, with the GST Council releasing the rates on goods and services, taxpayers are gearing up and finalizing the GST impact analysis on various facets of their business.
One of the key areas which merit consideration is the tax ability of services provided to an overseas service recipient (including group companies and subsidiaries).
In this article, we have discussed some key issues with respect to the applicability of GST on supply of services to overseas clients/ group companies that may have significant impact on the service industry.
A. Export of services under the current regime
To set the context, under the current Service Tax legislation, Section 66B specifically provides for levy of Service tax only in respect of services provided/ agreed to be provided in the taxable territory (i.e. India except the State of J&K). In other words, currently Service tax is not applicable if the place of provision of services is outside India, basis the Place of Provision of Service Rules, 2012 (‘the POPS Rules’). Further, such services remain non-taxable, even if they do not qualify as export (i.e. if the payment for the service is not received in convertible foreign exchange).
For example, general consultancy services provided by Company A (in India) to Company B (outside India), are not liable to Service tax, as the place of provision of service (i.e. location of service recipient) is outside India. Thus, even if payment for such services is not received in convertible foreign exchange, the services remain non-taxable under the current regime (as the place of provision of service is outside India) and at the same time they can qualify as export if the relevant conditions under Rule 6A of the Service Tax Rules, 1995 are met.
B. Export of services under the GST regime
Under the Integrated Goods and Service Tax, Act 2017 (‘the IGST Act’), the key relevant provisions relating to levy of tax on services provided to overseas service recipient are summarized below:
|1||5(1)||Subject to the provisions of sub- section (2), there shall be levied a tax called the integrated goods and services tax on all inter-State supplies of goods or services or both…..
|Under the charging section, the tax is on every inter-State supply of goods/ services|
|2||7(5)||Supply of goods/ services or both shall be treated as inter-state supply, when:
||Even if place of supply is outside India, the supply is treated as inter-state supply|
|3||16 (1)||“Zero rated supply” specifically includes export of goods or services or both
|Export of goods/ services is a zero-rated supply. Thus, unless a supply qualify as export, GST would apply|
|4||2(6)||“Export of services” means the supply of any service when –
i) supplier of service is located in India;
ii) recipient of service is located outside India;
iii) place of supply of service is outside India;
iv) payment for such service is received by supplier of service in convertible foreign exchange; and
v) supplier of service & recipient of service are not merely establishments of a distinct person
|All these conditions should be fulfilled for a service to qualify as ‘export’|
|5||13||Provisions in respect of Place of supply of services (in respect of international transaction) are similar to the existing POPS Rules which vary depending upon the exact nature of services and are based on parameters like location of service recipient, location of immovable property, place of performance, etc.||–|
Based on the aforesaid provisions, services provided to an overseas service recipient by a provider located in India would not be liable to GST only if it such services are zero-rated, i.e. where all the conditions stipulated for ‘export of service’ under Section 16 read with Section 2(6) of the IGST Act are fulfilled. In case a transaction does not satisfy any one of the conditions for export, the same should be liable to GST.
Accordingly, in the illustration given above, in case Company A does not receive the consideration from Company B in convertible foreign exchange, the transaction would be liable to Integrated GST even if the place of provision of services is outside India.
In such a scenario, any supply of service to an overseas service recipient would trigger GST implications as long as the payment is not received in convertible foreign exchange, irrespective of the place of supply of such services being outside India.
Thus, contrary to the current service tax regime where tax does not apply in cases where the place of provision is outside India (irrespective of such service getting qualified as export), in the GST regime tax would apply on all services where the place of provision is outside India if they don’t qualify as export.
C. Implications of the service export provisions under GST
Under the GST regime, any service export would be subject to GST where the payment is not received in convertible foreign exchange.
The issue would also have significant adverse implications in the case of transactions between a Branch/ Project Office (‘BO/PO’) in India and an overseas Head Office or vice-versa. Such transactions are quite common in case of infrastructure projects, where for executing the project, a BO/PO is established and there are various cross charges/ reimbursements received by the BO/PO.
It is relevant to mention here that under GST, the Head Office and BO/PO are treated as distinct persons and any supply of services even in absence of a consideration attracts GST.
Thus, on a combined reading of various provisions, any supply of service by an Indian BO/PO to Head Office outside India even without consideration would attract GST in spite of the reason that the place of provision of the service by BO/PO is outside India.
The issue would also be a challenge from a valuation perspective and declared value can be questioned as the service recipient would not be entitled for full input tax credit (as the HO located outside India would not be a registered person).
In any event, the GST leviable on the supply of service by Indian BO/PO on open market value would be a cost for the HO located outside India.
Thus, the new mechanism for tax ability of export would increase the cost of running and new projects involving transactions between an overseas Head Office and an Indian BO/PO or vice versa.
Since the new provisions for export under GST will have an adverse financial impact on the viability of services exported from India as well as BO/PO in India setup for specific activity/ project, the Parliament should bring appropriate amendments in the Integrated GST Act to safeguard the service exports from the enhanced tax liability.
(Author Ankur Jain is Partner with Reina Legal and Author Prerna Chopra is Senior Associate with Reina Legal)