The Hindu Business Line : Service tax exemption on forex payments to go

COME March 15, the existing service tax exemption on taxable services for which payments are received in convertible foreign exchange will stand withdrawn. The Finance Ministry has also issued export of services rules, which seek to spell out the meaning of such exports. These rules will come into force from March 15.

Currently, taxable services for which payments are received in convertible foreign exchange are fully exempt from service tax. Trade and industry had been seeking clarity on what constituted `export of services' for the purpose of service tax. They had also demanded that all facilities and relief available to export of goods be extended to export of services.

In keeping with their demand, the Central Government had in Budget 2004 empowered itself to make rules for defining export of services, providing exemption from service tax to such exports and rebate of tax paid on input services or duty paid on the inputs used.

Acknowledging that export of services cannot be defined in the same way as export of goods, since services are not tangible, the Finance Ministry has now held that services are treated as exports if a person outside the country ordered them and such services were delivered outside the country. In other words, the recipient of service who is the principal beneficiary of the service should be outside the country.

As per the notified export of services rules, real estate consultancy, architecture, interior decoration and construction services (provided in relation to an immoveable property) are treated as exports, if the said immoveable property is located outside India. General insurance service provided in relation to an immoveable property located outside India would also be covered under this category.

Services such as air transport of goods, commercial coaching and dry cleaning, which involve physical performance, are treated as exports if such services are partly or wholly performed outside India.

The remaining taxable services such as management consultancy, telephone, banking and other financial services are treated as exports subject to certain criterion:

(1) Service provided to an industrial or commercial establishment, which is located outside India, for use in commerce or industry, would be treated as exports.

However, if the industrial or commercial establishment also has an industrial or commercial establishment or office in India, then in such cases, the services would be considered as exports only if the order for provision of service is made from outside India; such services are delivered outside India; and the payment for such services is received in convertible foreign exchange.

(2) Taxable services provided to a recipient and used other than

in industry or commerce would be treated as exports only if the recipient is outside India at the time when such services are received.

As per the notified rules, taxable services could be exported without the payment of service tax. If services are exported after the payment of service tax, the rebate of service tax paid on such taxable services would be available. Provisions for rebate of service tax paid on input services and excise duty paid on input goods have also been made.

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