So?

So, other criteria have to be used for defining service exports. For most services, the main criterion used by tax authorities is the place of residence of the customer. For example, under the European VAT (value-added tax) system, supplies to a business customer are generally treated as exports as long as the customer is a resident of another country, regardless of where the service is performed or used or where the supplier is located. For certain services, such as personal services (e.g., barbers, beauty salons, and medical treatment), or those related to real property (e.g., services of architects or building repair and maintenance), supplementary criteria of place of performance of the service or location of the property are also used.

How divergent is our tax treatment from international practices in this regard?

The Indian rules were similar to the international practice prior to the Budget of 2006. The main condition for defining export of service was the place of residence of the customer or recipient of the service. For some services, export treatment was linked to either the location of their physical performance or the location of immovable property in relation to which they were provided. These were simple rules and easy to follow. However, this is no longer the case.

How so?

The simplicity of the rules was lost in 2006 by the addition of the overriding conditions that, to qualify as an export, the service had to be delivered outside India and “used” outside India. For many services, there is no well-defined place of “delivery” or “use”.

Any examples?

There are many examples. Take the case of a call centre. Is the place of “delivery” and “use” of the call centre service the point of origin of the calls or the point of termination? Similarly, for a management consultant, is the place of delivery the place from which the consultation is provided, or the point where the written report is delivered? When a merchant bank is assisting a French company to make an equity investment in a company in India, is the service “used” in India where the investment is made or in France from where the investment is made.

Does the complexity add to costs?

Definitely. Because, besides adding to complexity, these tests had the impact of disqualifying many services from the definition of exports. Even services of agents in India who assist foreign clients to procure goods in India for export became disqualified, as these services were clearly held to be for use in India prior to the export of the goods. This added to cost of doing business with India and significantly undermined her competitive position in the global markets. Recognising these difficulties, the Budget of 2007 replaced the condition of “delivery” of service outside India with the condition that the service should be “provided” from India.

A solution, at last?

Not really. While the amendment lessened the confusion, the restrictions imposed by the “use” test continue to deny the benefits to many services which are treated as exports in other international jurisdictions.

Your suggestions, therefore?

The Government should seriously consider deleting the “use” test and revert to the regime that prevailed prior to the 2006 Budget. The export of service rules are plagued with other problems as well. For a category of services, the rules require that the service should be performed, at least, partly outside India. Thus, if a cost/chartered accountant is examining the books of accounts of a foreign company to give advice on accounting matters, then the same shall not be treated as export because the service has been performed wholly in India. To avoid the tax, he has to find an excuse to visit the office of client abroad and partially perform the service there.

You mentioned about refunds. Is delay the only sour point?

There are other difficulties as well. The input tax refunds are completely denied for exports of those services which are not made taxable at all. The export rules are specific to services that are “taxable”, and in the event a service is not taxable, it cannot be said to have been exported. No refund of inputs and input services used in such exported services is available.

If BPO services are exported, refund of all input taxes is available to the BPO because those services would otherwise be taxable in India. However, if software consultancy services are exported, no refund of input taxes is available because software services are not on the list of taxable services. Similarly, goods exported by merchant exporters suffer input taxes on services utilised (including cargo handling, transportation, inland haulage and other export-related services), for which no refund is available.

As for delay, even where the services qualify as exports, the benefits which should accrue to the exporters are slow in coming because of legislative and administrative issues. The exporters are allowed to claim a refund of the tax paid on inputs and input services used in providing the exported services. However, thanks to the complexity of the procedures, or reluctance of the authorities to part with the cash, hardly any refunds are being sanctioned by the excise authorities. The delay in getting the benefit is in effect a denial of the benefit.

Is there light at the end of the…?

Fortunately, the Commerce Ministry has belatedly recognised the anomaly of the situation and the hurt being caused to exporters in India. It has announced a policy of granting tax refunds in such situations. The ball is now in the Finance Minister’s court, to put in place an enabling mechanism for these refunds. As the country moves towards a comprehensive GST (goods and service tax), the chinks in the rules need to be plugged so that clarity emerges both in the rules and procedures.