FEBRUARY 08, 2017

By Mohammad Salim, CA

AMONGST the various changes proposed in respect of taxability of services under the Revised Model GST Law vis-à-vis the current service tax law, one of the critical changes is in regard to the taxability of the supply of services provided outside India which is referred to as export of services.

The current charging section of service tax i.e. section 66B of Chapter V of Finance Act, 1994 reads as under:-

There shall be levied a tax( hereinafter referred to as the service tax) at the rate of fourteen percent 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.

Accordingly, under the current service tax law only the services which are provided in a taxable territory i.e. India minus State of J&K are exigible to service tax and services provided in a non-taxable territory are not subjected to service tax.

However, the position appears to be different in this regard when we see the Revised Model GST Law.

As per Section 5 of IGST Act which is the charging section, IGST shall be levied on all supplies of goods and / or services made in the course of inter-state trade or commerce……..

As per Section 3(5) of IGST Act supply of goods and / or services, when the supplier is located in India and the place of supply is outside India, shall be deemed to be a supply of goods and / or services in the course of inter-state trade or commerce.

From the conjunct reading of above two sections it appears that the supply of service outside India are taxable as inter-state sale under IGST Act. This is a deviation from the existing service tax law wherein such services are clearly excluded from taxability under the charging section itself.

However the story doesn't ends here as under Model GST law there is a concept of ‘zero rated supply'.

Section 2(29) of IGST Act defines "zero rated supply" as under:-

"zero rated supply" shall have the meaning assigned to it under section 16 (incorrectly stated as section 15).

Section 16 of IGST Act inter alia reads :-

(1) "zero rated supply" means any of the following taxable supply of goods and/or services, namely -

(a) export of goods and/or services; or

…………………………………………………..

Thus export of services are zero rated supply and thus is an exempt supply as per Section 2(44) of CGST / SGST Act which defines"exempt supply" thus:-

"exempt supply" means supply of any goods and / or services which are not taxable under this Act and includes such supply of goods and / or services which attracts nil rate of tax or which are exempt from tax under section 11;.

Now it is important to note what exactly is ‘export of services' as per the Model GST Law.

As per Section 2(6) of IGST Act "export of services" means the supply of any service when:

a) the supplier of service is located in India.

b) The recipient of service is located outside India,

c) The place of supply of service is outside India,

d) The payment of such service has been received by the supplier of service in convertible foreign exchange, and

e) The supplier of service and recipient of service are not merely establishments of a distinct person in accordance with explanation 1 of section 5.

Therefore, if all the above conditions are fulfilled then only export of services would not be subject to IGST else same may be exigible to IGST as inter-state sale. This is in complete contrast to the existing service tax law where in case the service has been provided in non-taxable territory the same is not subject to service tax as it is excluded from the charging section 66B of Finance Act, 1994 itself and there is no requirement in regard to the receipt of payment or location of service recipient.

It is pertinent to mention here that the above definition of exports in Model GST Law is in line with the definition currently contained in Rule 6A of Service Tax Rules, 1994 which has been provided solely for the purpose of granting rebate of service tax / duty paid on input services or inputs used in providing such service and has no impact on taxability of the service provided. However, under Model GST Law, as discussed supra, the definition governs both the taxability of supply of service as well as the claim of refund of input tax credit.

Therefore, it appears that the following supply of services may be subject to IGST which are currently not exigible to service tax:-

i) Where place of supply of service is outside India but the recipient of service is located in India.

ii) Where payment of service has NOT been received by the supplier of service in convertible foreign exchange.

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