MARCH 23, 2018

By Rohan Muralidharan

IN the last two decades, India has become an export hub and all the major international players in the service sector such as IT & ITES, Engineering Consultancy etc. have set up shop in India. Furthermore, there has been multi-fold expansion of indigenous service sector organizations as well who have attained a global outreach and client base.

Successive Central Governments have constantly strived toward boosting exports and have been providing various export related tax incentives to achieve the objective. The primary purpose for promoting exports is twofold - increase in foreign exchange and making Indian companies more competitive in the international market.

Through this article, I will be highlighting a specific conundrum that has arisen on account of peculiar drafting of GST Act when compared to the treatment of the same transaction in the erstwhile regime which may have a direct bearing on the treatment of export transactions.

For provision of any service to constitute an 'export of service', it has to satisfy the following conditions [ Section 2(5) of the IGST Act, 2017 refers] : -

i) the supplier of service is located in India;

ii) the recipient of service is located outside India;

iii) the place of supply of service is outside India;

iv) the payment for such service has been received by the supplier of service in convertible foreign exchange; and

v) the supplier of service and the recipient of service are not merely establishments of a distinct person.

Consequence of any supply being treated as an export of service is that an exporter can provide the service tax free, either directly or indirectly [Section 16 of the IGST Act, 2017 refers]. In this article,I will deliberate on the taxability of transactions wherein one of the attributes for export as highlighted above is not satisfied viz. consideration is not received in foreign currency.

Treatment of Export Transactions in Service Tax where consideration is received in INR

The definition of 'export of service' under the erstwhile service tax regime was pari materia to the definition in GST.

Nonetheless, there is a crucial difference between export transactions under Service Tax and GST.

Section 66B of the Finance Act, 1994[w.e.f. 01.07.2012] was the charging section for levy of service tax. It provided that service tax will be levied on the value of all services provided or agreed to be provided in the taxable territory. Thus, any service which was provided outside the taxable territory was not leviable to service tax. Taxable Territory was defined as whole of India except the State of Jammu and Kashmir.

Section 66C of the Finance Act, 1994 provided the manner of determining the situs of service. To effectuate this provision, the Government prescribed Place of Provision of Services Rules, 2012 [POPS].

The relevance of POPS was elucidated in the Service Tax Education Guide which provided as under:

Under section 66B, a service is taxable only when, inter alia, it is "provided (or agreed to be provided) in the taxable territory". Thus, the taxability of a service will be determined based on the "place of its provision". The 'Place of Provision of Services Rules, 2012' will replace the 'Export of Services, Rules, 2005' and 'Taxation of Services (Provided from outside India and received in India) Rules, 2006

Consequently, where the place of provision of service was held to be outside India, irrespective of whether the service constituted an export or not, no service tax was payable on provision of such service in accordance with Section 66B. Thus, if POPS was outside India, even if the consideration was received in INR, the transaction was not leviable to service tax.

GST

Under GST, the POPS Rules have been ostensibly replaced by provisions relating to place of supply(POS) of service under Section 12 & Section 13 of the IGST Act, 2017. Now the question for consideration is, if POS is held to be outside India, then whether GST is payable on the said transaction even if the same does not constitute export of service (consideration being received in INR).

At this point it will be relevant to note that although the GST Act applies to whole of India; unlike service tax, nowhere does it say that it will tax only those supplies which are taking place within the taxable territory. This is made manifestly clear by virtue of Section 7(5)(a) of the IGST Act, 2017 which states that when the supplier is located in India and the place of supply is outside India, it will be treated as an inter-state supply .

Thus, in a scenario, where the place of supply is located outside India and the same does not constitute export of service on account of consideration being received in INR, the transaction will be leviable to IGST. This is a clear departure from the service tax regime; wherein although the benefit of export of service was not given to a transaction where consideration was received in INR; nonetheless, the same was not made taxable.

Situs of Supply

It may also be relevant to note that unlike service tax provisions (Section 66C), there is no provision under GST that deems the 'Place of Supply' as the actual situs of supply. In other words, place of supply is only relevant to determine whether a supply is an intra-state or an inter-state supply, there is nothing in the law to say that place of supply is location where the supply is actually made . Thus, after applying the POS provisions, if it is determined that POS is outside India, then it cannot be said the actual place of provision of service is outside India.

Whether present provisions of IGST Act are ultra vires the Constitution?

Now I shall analyse whether an argument can be made that laws having extra-territorial jurisdiction will be ultra vires the provisions of the Constitution. Article 245(2) of the Constitution of India provides that no law made by Parliament will be deemed to be invalid on the ground that it has extraterritorial operation.

In GVK Industries v. Income Tax Officer - 2011-TIOL-128-SC-IT-CB, the Hon'ble Apex Court was examining the power of Parliament to enact laws which are extra territorial in application in light of Article 245 of the Constitution. The court concluded that Parliament is competent to enact laws in relation to extra-territorial aspects or causes if such aspects/causes are expected to have, some impact on, or effect in, or consequences for : (a) the territory of India, or any part of India ; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India.

In light of the above case law, it can be said that laws cannot be invalidated on the ground that they are extra-territorial in its application as long as the legislation has some nexus with India or is for the benefit of Indian citizens.

In the present case, since the service provider is located in India, it cannot be said that the legislative provisions taxing such a supply do not have any nexus with India. Thus, even though the IGST Act, 2017 has an extra territorial application under Section 7(5)(a), it cannot be invalidated on such grounds.

In my view, this is an unintended consequence wherein a transaction which was never liable to tax has been subjected to tax due to peculiar wordings of Section 7(5)(a) (supra). A view can be taken that Section 7(5)(a) was inserted to treat the impugned transaction as an inter-state supply in order to oust the jurisdiction of the states to tax such a supply and there was never an intention to tax such transactions.

Conclusion

A tax of 18% on such export transactions with no provisions for refund, will make such services uncompetitive in the global market and the cost of services will increase by the tax charged. The customers may look at other avenues to avail similar services considering the tax arbitrage. Therefore, it is imperative that Government recognizes the anomaly that has been created and brings out an exemption in this regard in order to promote the 'Make in India' objective.

(The author is Senior Associate, Lakshmikumaran & Sridharan, Chennai and the views expressed are strictly personal.)