The Hindu Business Line : Service tax on import of services

IMPORT of services should be subjected to service tax on the basis of `place of supply rules', the Institute of Chartered Accountants of India (ICAI) has suggested. The Finance Bill 2005 seeks to bring import of services under the service tax net.

The Institute has in its post-Budget memorandum highlighted that the Finance Bill 2005 has sought to tax the import of services across the board in all cases where the recipient of services is in India. The ICAI has, however, pointed out that each service was different in nature and, therefore, "place of supply rules" could be adopted.

A plain reading of the changes made, according to the ICAI, in the Finance Bill leads to a conclusion that taxable services provided by a person outside India to a person based in India, anywhere in the world would be considered as services provided in India and accordingly liable for service tax. The ICAI's post-Budget memorandum also highlighted that the "place of supply" rules had been adopted in the case of export of services rules 2005 (services export rules). It pointed out that the `place of supply rules' was present in all the nations where there was a tax on services e.g. the UK, Ireland, etc.

"The Export of Services Rules 2005 may be consolidated into a new set of rules known as `place of supply rules' which would determine the `place where services are provided' and, therefore, deal with both import and export of services," the ICAI memorandum suggested.

On the Government's proposal to bring "services to be provided" within the ambit of service tax net, the institute has held that this amendment goes against the fundamental concept of taxation which is to tax services provided.

"The taxable event is the provision of service. Thus, preponing the taxable event would go against the canons of taxation," the ICAI has said.

Noting that perhaps the intention to bring "services to be provided" under `taxable service' was to collect tax when advance payments were received for services to be provided, the institute has held that there could be many cases where services may not be provided or the money maybe returned in part to the customer.

"In such cases, it would cause undue hardship," the ICAI memorandum said.

The ICAI has said that service tax should be applicable on services provided. The ICAI has held that the erstwhile `explanation' in rule 6(1) that clarified the method of calculation of service tax for payments received in advance should be reinstated.

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