NOVEMBER 27, 2017

By Shreya Mundhra, CA

THIS article is to highlight the changes in the legal provisions governing taxation of services provided by a supplier located in India to a place located outside the taxable territory of India under the Service tax regime vis-à-vis GST Regime.

Under Section 66B of the Finance Act, 1994, service tax was leviable on services provided or agreed to be provided "in the taxable territory" by one person to another. Section 65B(52) of Finance Act, 1994 defined 'taxable territory' as the territory to which the provisions of Chapter V of the Finance Act, 1994 applies. In terms of Section 64 of the said Act, "this Chapter extends to the whole of India except the State of Jammu and Kashmir".

On a conjoint reading of the aforesaid provisions, it is evident that, service tax was levied only on services provided or agreed to be provided within the taxable territory, i.e. within India (except Jammu & Kashmir). Thus, services provided outside the taxable territory was not taxable under the erstwhile Service Tax Regime.

After introduction of the negative list, even in a situation where the services provided outside the taxable territory did not meet the requirements of 'export of service' as enunciated in Rule 6A of Service Tax Rules, 1994, the said service was not leviable to Service tax. This was in consonance with the provisions of Place of Provision Rules, 2012 read with Section 66B which provides for services to be taxable only when provided in the 'taxable territory'. The only downside for such assessees was ineligibility of refund of Cenvat Credit under Rule 5 of Cenvat Credit Rules, 2004.

Now, let us analyse the taxability under the newly implemented GST laws with respect to services provided outside the taxable territory.

Section 5 of IGST Act, 2017, provides that IGST will be leviable on all inter-state supplies of services. The term 'inter-state supply' has been defined under Section 7 of IGST Act, 2017. The relevant provision is extracted herein-below:

(1) to (4)…

(5) Supply of goods or services or both, -

(a) when the supplier is located in India and the place of supply is outside India;

(b) …

(c) …

shall be treated to be a supply of goods or services or both in the course of inter-state trade or commerce.

Let us assume a situation where a supplier is located in India and is engaged is supplying a service outside the taxable territory. The place of supply of such service will be determined in accordance with Section 13 of IGST Act, 2017.

As per Section 13(2) of the IGST Act, the place of supply of services, except the services specified in sub-section (3) to (13), shall be 'the location of the recipient of services'. Therefore, in a situation where the location of the recipient under Section 2(14) of IGST Act is outside India, the 'place of supply' of the said service will also be outside India.

On a combined reading of Section 7(5)(a) read with Section 13 of IGST Act, it follows that the services provided outside the taxable territory, would become taxable as an inter-state supply under GST as opposed to the legal position prevailing under the erstwhile Service Tax Regime.

For example, consultancy services provided from India to an overseas client was not liable to service tax since the said service was provided outside the taxable territory,even though the consideration for such service may not have been received in foreign currency. However, under the GST Regime, irrespective of the place of supply being outside India, such supply to the overseas client would attract GST in case all the conditions of export of service are not fulfilled.

The aforesaid provisions levying GST on services provided outside the taxable territory have already raised eyebrows since this indicates a variation in the stance of the Government which till date had exempted such services under the pre-GST regime since the introduction of the negative list.

Nevertheless, prior to the introduction of the negative list,the Export of Service Rules, 2005 (prevailing from 15.03.2005) inter alia provided that the service provider could export services without payment of service tax, only if the payment for such service was received by the service provider in convertible foreign exchange. In other situations, the services provided outside the taxable territory was leviable to service tax.

The GST Law also provides relief from payment of tax in case of ' export of services ' by treating it as a 'zero-rated supply' under Section 16 of IGST Act, 2017. Hence, only if the service provided outside the taxable territory fulfils all the conditions prescribed under Section 2(6) of IGST Act, 2017, it would qualify as an export of service. In all other cases, the said service would attract GST. Furthermore, no refund of Input tax credit for effecting such supply will be available to the exporter if the service does not qualify to be an 'export of service' .

On a comparative analysis of the language of the provisions under the IGST Act, 2017 vis-à-vis the Export of Service Rules, 2005, it appears that the interpretation for supply of services where the place of supply is located outside India is quite similar. That said, the scheme of taxation appears to be devolving to the scheme of taxation in the pre-negative list era instead of evolving further. This move of the Government seems to have undone the relief provided to the assessees during the post negative list era under service tax regime.

The levy of tax on services provided by a supplier in India to a person located outside India has provided a major jolt to the service industry, considering the discrepancy in the taxation treatment of the said activity under the pre and post GST Regime. The lawmakers have failed to appreciate that these changes in relation to export of service, would not only impact large-scale exporters but would also affect several thousands of small and medium sized entities who are already struggling with familiarizing themselves with GST compliances. 

Before concluding, it is also relevant to note that by enabling the taxing provision for services provided by a supplier in India and the place of supply located outside India, the Government has made it clear that only taxable services fulfilling the definition of 'export of services' will be eligible for export incentives under the GST Regime.

In my view, this attempt of the draftsman shows the zeal to incorporate provisions which would lead to export of taxes along with the services, disrupting the intention of the government to make exports competitive in the international markets and a possibility of extra-territorial jurisdictional challenges. Suitable amendment in the GST Laws might help in clarifying the doubts of the assessees, removing complexities and enhancing the industry's confidence.

(The author is an Associate at M/s. Lakshmikumaran & Sridharan, Kolkata and the views expressed are strictly personal.)