S K Agrawal

Let us start with a few ground rules:

1. Service Tax in its new Avatar is applicable since 01.07.12.

2. Applicability Service tax should not be analysed based on the Act as it existed before 01.07.2012.

3. Two words, ‘exemption’ and ‘leviable’, used in The Act are distinct from each other. Duties and Taxes  that are ‘not leviable’, can not be ‘exempted’

Some definitions as appearing in Section 65 which we shall need in our analysis:

(27) “India” means …..

(a) the territory of the Union as referred to in clauses (2) and (3) of article 1 of the Constitution;

(b) its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976;

(c) the seabed and the subsoil underlying the territorial waters;

(d) the air space above its territory and territorial waters; and

(e) the installations, structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof;

(28) “information technology software” means any representation of instructions, data, sound or image, including source code and object code, recorded in a machine readable form, and capable of being manipulated or providing interactivity to a user, by means of a computer or an automatic data processing machine or any other device or equipment;

(35) “non-taxable territory” means the territory which is outside the taxable territory;

(44) “service” means any activity carried out by a person for another for consideration, and includes a declared service, but shall not include ………

(51) “taxable service” means any service on which service tax is leviable under section 66B;

(52) “taxable territory” means the territory to which the provisions of this Chapter apply;

Is export of software subjected to Service Tax?

Section 66B of The Act reads:

“There shall be levied a tax (hereinafter referred to as the service tax) at the rate of twelve per cent on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed”

The keyword is ‘provided in the taxable territory’. We will have to find out what is the location of service recipient and is it in taxable territory?

Rule 3 of ‘Place of Provision of Services Rules, 2012’ reads:

The place of provision of a service shall be the location of the recipient of service:

Provided that in case the location of the service receiver is not available in the ordinary course of business, the place of provision shall be the location of the provider of service.”

Reading Section 65B and Rule 3 together, it becomes evident that Service Tax is not leviable on export of software because the recipient of service is located in non-taxable territory.

Exempted services are those services that appear in the List if Negative Services. [refer notification No. 25/2012-Service Tax].  Note the uses of word ‘exempt’ in the opening paragraph of this notification:

…………… being satisfied that it is necessary in the public interest so to do, hereby exempts the following taxable services from the whole of the service tax leviable thereon under section 66B of the said Act, namely:- ……..

Conclusion: Software is not exempted from Service Tax because it does not appear in the List of Negative Services. Service Tax shall be levied or not is decided on case to case basis depending upon the location of service recipients. If the service recipient is located outside India, Service Tax is not leviable.

Then why this discussion about convertible foreign exchange?

There are respectable number of tax experts who talk about receiving sale proceeds in convertible foreign exchange in order to be outside the purview of Service Tax. Let us validate this advice:

1. For a human being it is far easy to learn than unlearn. Prior to 01.07.2012, as per Export of Service Rules, Convertible Foreign Exchange was one of the preconditions for service tax exemption and the same mindset is being carried forward.

2. If the sale proceeds are received in Convertible Foreign Exchange, it will be recorded in the Bank Statement. It is easier to prove to Assessing Officer that the money has arrived from the non-taxable territory.

 3. Rule 6A of ‘Service Tax (Second Amendment) Rules, 2012’ defines the phrase ‘Export of Service’ as below:

(1) The provision of any service provided or agreed to be provided shall be treated as export of service when,-

(a) the provider of service is located in the taxable territory ,

(b) the recipient of service is located outside India,

(c) the service is not a service specified in the section 66D of the Act,

(d) the place of provision of the service is outside India,

(e) the payment for such service has been received by the provider of service in convertible foreign exchange, and

(f) the provider of service and  recipient of service  are not merely establishments of a distinct person in accordance with  item (b) of Explanation 2 of clause (44) of section 65B of the Act.

(2) Where any service is exported, the Central Government may, by notification, grant rebate of service tax or duty paid on input services or inputs, as the case may be, used in providing such service and the rebate shall be allowed subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification.

A careful reading of Rule 6A means that, subject to conditions mentioned in para.1, an exporter can claim rebate on Service Tax and Duty that the exporter has paid on purchase of goods and services that has gone into the manufacture of service that was exported.

This rule 6A has nothing to do with applicability or non-applicability of Service Tax on export to non-taxable territory. If one does not want to claim rebate, he/she can forget about Rule 6A.

Conclusion: If the service provider is in possession of documentary evidence and is confident to prove to the Assessing Officer that the money has been received from out side India AND the service provider is not interested in claiming back Taxes and Duties on input goods and services as per Rule 6A, the service provider can raise invoices without adding service tax. Receiving payment from client in convertible foreign exchange is not mandatory.

When to go for Service Tax registration?

The annual threshold limit of service tax exemption for small service providers has been increased from the level of Rs.8 lakh to Rs.10 lakh with effect from 01.04.2008, provided that the aggregate value of taxable services rendered by such provider of taxable service from one or more premises, does not exceed Rs.10 lakh in the preceding financial year. [refer notification No. 8/2008-Service Tax, dated 01.03.2008]

Notification No. 33/2012-ST, dated 20-6-2012 which reads:

………..hereby exempts taxable services of aggregate value not exceeding ten lakh rupees in any financial year from the whole of the service tax leviable thereon under section 66B of the said Finance Act:

…………………….

Explanation – For the purposes of this notification-

(A)  ………………………………

(B) “aggregate value” means the sum total of value of taxable services charged in the first consecutive invoices issued during a financial year but does not include value charged in invoices issued towards such services which are exempt from whole of service tax leviable thereon under section 66B of the said Finance Act under any other notification.

The three keywords in the above notification are:

“aggregate value”- simple dictionary meaning

“exempt”             – services appearing in the Negative List are exempt services

“leviable”           -no service tax is leviable in case recipient of service is located in non-taxable territory

Conclusion: Proceed for Service Tax Registration when ‘aggregate value of taxable services’ exceeds Rs. 9.0L and start adding service tax to your invoices when it crosses 10.0L. ‘Aggregate value of taxable services’ may be calculated by adding all the invoices raised till date LESS invoices raised for Software Services which has been supplied to  customer located in non-taxable territory (read outside India).

CAVEAT:  Author of this write up is a freelance software developer. You can use these information in your business at your own risk. In case you find any fallacy in the Sections of The Act or Notification quoted and there interpretation, the author will be  happy to interact. You may contact him at saroj123(at)gmail.com.

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One response to “Applicability of Service Tax for Software Freelancer”

  1. Shrenik Bhura says:

    One of the most deeply researched and well written analysis on this topic available on the web that many CAs I have come across are unable to speak conclusively about. Holds good even 4 years after it was authored. Thank you.

  2. D.A.B.Singam says:

    What is classification of service for the assessee who has paid commission to Elance for using the service of Elance since service is payable under reverse charge method in service tax. Pl clarify this issue.

  3. Durai raj says:

    Dear,
    Engineering services like making AutoCAD drawings & sending back to foreign clients paying in foreign currency. NO BUSINESS INSIDE INDIA, ONLY ONE FOREIGN CLIENT. Will that come under Service tax?
    Kindly Reply….

    Durai

  4. upendra shah says:

    Mr. A is trainer on Skype and gives training to persons located in India and outside India. He is getting professional fees in foreign currency from the institutions located outside India.Mr. A had a professional fees in Foreign currency Rs. 600000 from persons located outside India and In Indian rupees for Rs. 350000 from persons located in India
    Has Mr A to register for Service tax?
    Does service provided to persons located outside India exempt?
    If Yes to above question, has Mr A has to register under Service tax when his Indian professional fees crosses above Rs. 10 Lacs?

  5. Nitin Grover says:

    Hello

    Do i need to take Registration of Service Tax if I export my services & turnover is more than 10 lacs.

    Regards

  6. Sourav says:

    Dear Mr. Saroj,

    I am a software freelancer provide software applications/services to my USA client.

    Soon my yearly income may exceed 10 Lakhs, please can you address my following queries.

    1) Please can you suggest me what are the tax liabilities in addition to the regular income tax ?

    2) What is service tax, do I need to pay that as well ?

    Looking forward to your reply. Thank you.


    Regards
    Sourav

  7. Piyush says:

    Hi,

    We provide writing and academic consulting services to students outside India. Just wanted to verify if such services (since they are service-exports) are exempt from service tax.

    Thanks in advance for your support. Regards

  8. Brijesh Tekrawala says:

    Hi ,

    We are doing work from ELANCE.com portal and elance convert USD to INR and in our bank account it will be received as INR.

    Do we need to consider for Service tax ? and if yes how we can deduct TDS from ELANCE as they are paying us and we do not have any control and we can’t deduct TDS.

    Thanks
    Brijesh

  9. RPP says:

    Previously we used to charge our USA based client on project basis, which did not attract service tax.

    We have now shifted to fixed cost/month. Hence, we receive a fixed amount for software development from client for every month.
    Do we now require to register and pay service tax?

    Thanks

  10. kunjar shah says:

    i am sure that service tax is not payable on export of free lancer service.only one doubt is whether service tax registration required after nine lacs limit? we are providing only export of free lancer service and dont want to take any rebate of service tax.

  11. kunjar shah says:

    marvelous and illustrative articles…

  12. Piyush says:

    This is in reference to the query raised on ST applicability for Indian Pvt. Ltd. companies exporting (invoicing) to their US based subsidiary which thereon Invoicing to the end client. As per all the communication read, it seems that Indian company is not liable to ST as per the definition of Rule 6A.

    There is this 6th point in the Rule 6A:

    “f. the provider of service and recipient of service are not merely establishment of a distinct person in accordance with item (b) of Explanation 2 of clause (44) of section 65B of the Act.”

    Please clarify if Indian company exporting to it’s subsidiary is an exception or would be liable to pay ST?

  13. Hastimal says:

    I am working as freelancer and getting work from odesk.com and all of my clients are from USA . They pay me on odesk in USD.
    Odesk have no office in India and they have payment method for withdrawing money is PayPal , local fund transfer and wire transfer. But am using local fund transfer which cheaper and money coming directly to my bank account in INR from US Well Fargo Bank.

    so I need to pay service tax or not if cross the limit of 10lakh INR?

    Thanks in advance

  14. Ritesh says:

    Thanks a lot for your response. I understand the difficulties and complexity involved in claiming refund. I will not be applying for refund but just wanted to understand by law can I get refund.

  15. S K Agrawal says:

    Refer Mr. Manish Agrawal’s Post of March 4, 2013

    Yes, Mr. Agrawal. I mean exactly that. And the logic for this statement of mine is available in the write up above.

    I shall be thankful if you can give me your reasons for doubting it by a counter logic.

  16. S K Agrawal says:

    Refer Mr. Ritesh’s Post of February 21, 2013

    Please read Para 3 of ‘Then why this discussion about convertible foreign exchange?’ You are fulfilling all the conditions and you can claim for refund of service tax paid by you on the services purchased which has been used for software development.

    However getting it back may not be an essy task. Before venturing into this project please critically evaluate how much you are entitled to get back and against it how much time, effort and maney you shall spend.

  17. CA MANISH AGRAWAL says:

    you mean if the service provider is receiving the consideration in indian currency then also he can get benifit of exemption under export of service if we satisfied the assessing officer….??????

  18. Ritesh says:

    Thanks Sandeep for the response. We have FIRC copy and Invoice and also the consulting agreement with the client.

    We receive money directly through wire transfer from US. They route the money through their US branch to our Indian account. And our bank account clearly shows the transaction.

    As we don’t charge client for service tax but can we claim service tax refund which we pay it as part of rent and telecommunication expenses.

  19. CA Sandeep Kanoi says:

    Refer Mr. Ritesh’s Post of February 11, 2013

    You are providing your services to USA which is a non-taxable territory. And hence as per Section 66B of the Act, reproduced above verbatim within quotes, Service Tax is not leviable. In your case, you can easily establish it on the strength of Invoice and FIRC in your possession.

    If the professional you are interacting with does not accept this logic and says “that if the service is provided from India then we are liable to pay service tax on the invoice”, please invite him/her to put forward the reasoning for such an opinion. After all this is your money and you have a right to know. You should not agree to 10% additional expense on account of Service tax.

    In fact, if the payment is received through PayPal, then also it is possible to prove that the payment has been received from non-taxable territory and the Service Tax is not leviable. Read https://taxguru.in/service-tax/service-tax-payment-received-paypal-software-freelancer.html

  20. Ritesh says:

    As I have read through your article it says clearly that software export service is no liable to pay service tax. But some tax advisor is telling me that if the service is provided from India then we are liable to pay service tax on the invoice.

    1) We are Pvt Ltd company
    2) Our client is US based Delaware corporation (has no office in India)
    3) We provide software development services
    4) Invoices are raised in USD from our India regd address to their US regd address
    5) Funds are received in USD through wire transfer
    6) our banker convert them into INR and credit it to our account and issue FIRC against it

    Do you think are we liable to pay any service tax for this invoice? Our all the business are through this client only (no other invoice are raised). We have not take service tax number also. Do you think we should apply for one? Can we can service tax refund on input service (mostly rent, telephone and internet)?

    We wanted to take service tax number so that we could do some business in India but really don’t know what to do now

  21. Saroj Kumar Agrawal says:

    Refer Mr. Kannan post of 22nd January 22

    I understand you are using services of a consultant X located outside India for exporting software and your query is about applicability of Service Tax for payment made to this consultant X.

    To analyse we will have to understand:
    1. nature of service consultant X is providing ?
    2. Where is this service used in USA or India ?
    3. Do you receive export proceeds after deducting payment made to consultant X ?
    4. If the answer to question 3 above is NO, how the payment is made ?

    S. K. Agrawal

  22. kannan says:

    if a free lance consultant export software to USA uses the services of another consultant X abroad for part of his services will the fees paid to this X attract ST on reverse charges? the spftware is utilized by clients outside India..

  23. S. K. Agrawal says:

    Refer Mr. Jags post dated Dec 27

    Para (l) of Section 2, titled Definitions, of Place of Provision Rules 2012 defines the phrase “online information and database access or retrieval services” as “providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network;”

    This definition makes reference to ‘data and information’ and not to Information Technology or Software. Therefore it is important to understand the meaning of the two nouns ‘data’ and ‘information’. As these words have not been defined in The Act, we shall go by the dictionary meaning. I have referred to the Microsoft Computer dictionary Fifth Edition available from:
    www. assaabloyamericasuniversity.com/Other/AssaAbloyAmericasUniv/Library/Reference%20Docs/Computer%20Dictionary.pdf

    data n. Plural of the Latin datum, meaning an item of information. In practice, data is often used for the singular as well as the plural form of the noun. See also datum. Compare information.

    information n. The meaning of data as it is intended to be interpreted by people. Data consists of facts, which become information when they are seen in context and convey meaning to people. Computers process data without any understanding of what the data represents.

    In simple words, ‘data’ is the Fact and what emerges after processing ‘data’ is ‘information’. Possible examples are i) website of stock exchange provides data on current stock prices ii) website of an Education Board provides a student’s mark sheet iii) website of Indian Railway provides information on reservation status or many other commercial databases which can be accessed only after paying a subscription.

    Processing is done with the aid of software (and computers). A freelancer’s activity is concerned with this software tool used in processing while data and information falls in the domain of owner of the website.

    Conclusion: Providing ‘data and information’ is outside the reach of an average freelancer. If an Indian business man earns revenue by providing ‘data and information’, he can not shield himself from the rigors of Service Tax by saying that all the end user of his service are located in non-taxable territory.

  24. Jags says:

    Please see point 9 of Notification No. 28/2012 – Service Tax dated 20th June, 2012
    It says:
    9. Place of provision of specified services.- The place of provision of following services shall be the location of the service provider:-

    (a) Services provided by a banking company, or a financial institution, or a non-banking financial company, to account holders;
    (b) Online information and database access or retrieval services;
    (c) Intermediary services;
    (d) Service consisting of hiring of means of transport, upto a period of one month.

    I think the point 9b essentially covers websites, mobile/desktop applications etc. Which mean place of provision becomes India in this case. So does this mean freelancers (software devs) in India are covered by service tax?

  25. Jags says:

    Thanks Sandeep for this explanation with all the legal provisions intact. Its only this article where I can see that RULE 6A has been clearly explained. Your conclusions sounds reasonable and logical. I just hope a service tax “pro” that I am consulting comes to same conclusion, since he is clueless about this.

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