Kanak R Gajjar

It’s very often that exempted service are considered as any service on which service tax not payable by the assessee. But the term “exempted service” is explained in each rule itself. Export Services are not exempted service if those are provided and all the conditions laid down under Rule 6A of the Service Tax Rules, 1994. But if any condition is violated then it’s not considered as export but it’s not taxable u/s 66B as it is provided in nontaxable territory but in that case benefit of OPTION 1 and OPTION 2 & 3 (as produced below) both will not be available to the assessee and any credit taken for such export of service needs to be reversed.

HENCE, in case of exporter Rule 6A of Service Tax Rules, 1994 plays a vital role

Following Options are available only to those service providers who are providing services to both Domestic Tariff Area (DTA) and Area outside the taxable territory i.e. outside India.

Assumption:  Such Export must be an export in terms of Rule  6A Service Tax Rules, 1994

Conditions laid down by the Rule 6A is produced below for ready reference

“ 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 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 92bExplanation 3 of clause (44) of section 65B of the Act.”

Option 1 : Taking the benefit of Rule 6 of CENVAT credit Rules, 2006

Rule 6 of the CENVAT Credit Rules, 2004 speaks about the reversal of CENVAT credit where both Exempted Service and Taxable Service are provided by the Service Provider

Sub Rule (1) Which is as under

“The CENVAT credit shall not be allowed on such quantity of input as is used in or in relation to the manufacture of exempted goods or for provision of exempted services or input service as is used in or in relation to the manufacture of exempted goods and their clearance upto the place of removal or for provision of exempted services and the credit not allowed shall be calculated and paid by the manufacturer or the provider of output service, in terms of the provisions of sub-rule (2) or sub-rule (3), as the case may be”

Above rule can be interpreted as the whole rule 6 is applicable only when both EXEMPETED and TAXABLE service are provided by one service provider.

Now the question arise as to what is Exempted service

In answer to that Explanation No 3 of the Rule 6(1) redirect us to clause (e) of Rule 2 of the said Rules which defines exempted service as under

“”exempted service” means a—

taxable service which is exempt from the whole of the service tax leviable thereon; or

service, on which no service tax is leviable under section 66B of the Finance Act; or

taxable service whose part of value is exempted on the condition that no credit of inputs and input services, used for providing such taxable service, shall be taken,

but shall not include a service—

which is exported in terms of rule 6A of the Service Tax Rules, 1994; or

by way of transportation of goods by a vessel from customs station of clearance in India to a place outside India. “

More over in Rule itself in Sub Rule (7)

“For the purpose of this rule, a service provided or agreed to be provided shall not be an exempted service when: —

(a)  the service satisfies the conditions specified under rule 6A of the Service Tax Rules, 1994 and the payment for the service is to be received in convertible foreign currency; and

(b)  such payment has not been received for a period of six months or such extended period as may be allowed from time-to-time by the Reserve Bank of India, from the date of provision:] “

Hence from the above we can conclude that an exporter of service who is availing input service and using it for provision of both the taxable and exported services can take the benefit of whole of the input tax credit without any reversal.

Option 2 : Taking Refund of CENVAT Credit under Rule 5 of CENVAT Credit Rules, 2004

Rule 5 of the Cenvat Credit Rules, 2006 states as under

“A manufacturer who clears a final product or an intermediate product for export without payment of duty under bond or letter of undertaking, or a service provider who provides an output service which is exported without payment of service tax, shall be allowed refund of CENVAT credit as determined by the following formula subject to procedure, safeguards, conditions and limitations, as may be specified by the Board by notification in the Official Gazette:

Refund Amount = Export Turnover of Goods + Export Turnover of Services / Total Turnover of Good/Services * Net CENVAT credit

One can refer to the said rule for Definitions of “ Export Turnover of Goods”, “Export Turnover of Services”, “Total Turnover” and “Net CENVAT credit”.

This means Total Credit reduced by refund amount as per the manner prescribed in Rule 5 is eligible for set off against service tax liability of service provided in DTA.

Hence under this option also service provider can take benefit of whole of the CENVAT credit by taking Rebate and using balance as eligible CENVAT Credit.

In my opinion under this of this option one cannot take refund of Swachh Bharat Cess paid as it does not form part of eligible CENVAT credit.

Option 3 : Taking Rebate of Input Service Tax Paid under Rule 6A(2) of Service Tax Rules, 1994.

Rule 6A(2) Grants power to the government to issue notification granting rebate of service tax paid on input services. In this regard CBEC has issued notification No. 39/2012-ST dated 20-06-2012 where in Exporter can take rebate of whole service tax and Swachh Bharat Cess and Krishi Kalyan Cess paid on Input services subject to certain conditions

1. Service has been exported in terms of rule 6A of the said rules

2. Service tax and cess, rebate of which has been claimed, have been paid on the input services to the provider of service

3. Total amount of rebate of duty, service tax and cess admissible is not less than one thousand rupees;

4. No CENVAT credit has been availed of on inputs and input services on which rebate has been claimed

Rebate can be filed within 1 Year of export of service.

A Declaration must be filed with Jurisdictional Officer before the export of service take place. However, in case of Wipro Ltd vs UOI (2013) Delhi High Court ruled out that in case of export of IT – Enabled Services declaration can be filed after the export take place

The highlight of this option is that under this option one can take rebate of Swachh Bharat Cess which is not the case with option 1 and 2.

For Detailed Procedural part refer to notification mentioned above.

All the Above mentioned options ultimately give the same benefit, so why three options ?? because it can affect your working capital requirements. In Option 1 & 2 Your funds will be blocked until the refund is received but if you take CENVAT credit than you can utilize it for other duty payments.

Opinions are welcomed at [email protected]

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September 2021