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-
(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.