Overseas hitch

Mohan R Lavi | Updated on January 27, 2018 Published on August 21, 2017


‘Export services’ lack clarity under IGST

After 50 days of non-stop action on GST, it would not be an overstatement if one says the only transaction that a taxpayer can do without spending much time on www.gst.gov.in is to pay his taxes. A temporary return was conceptualised for the months of July and August in place of the trilogy of monthly returns but the strength of the population of taxpayers combined with the weakness of the network has ensured that the due date for filing the return had to be extended.

There was a lot of confusion on the taxability of exports. And the clarifying notifications only added to the confusion . There remains a problem in the definition of export of services in the IGST Act that needs to be rectified at the outset.

Section 2 (6) of the IGST Act states that export of services means the supply of any service when the supplier of service is located in India, the recipient of service is located outside India, the place of supply of service is outside India, the payment for such service has been received by the supplier of service in convertible foreign exchange and the supplier of service and the recipient of service are not merely establishments of a distinct person — the latter having been defined in Explanation 1 to section 8.

This states that for the purposes of the GST Act, where a person has an establishment in India and any other establishment outside India, establishments or business verticals in two different States or Union Territories, then such establishments shall be treated as establishments of distinct persons.

Taxing exports

This would mean that if an entity registered in India provides services to any of its establishments outside India, it would meet the definition of establishment of distinct persons. Since the supply of service is to an establishment of a distinct person, it would not meet the definition of export of service. As this would not be considered to an export of service, the transaction would not be zero-rated in accordance with Section 16 to the IGST Act.

Hence, invoking the taxing provisions of the IGST Act, supply of such services would be costlier by 18 per centafter July 1st. Under the erstwhile Place of Provision of Service Rules, such services were exempt.

Is it the intention of the Department to tax inter-country-establishment transactions? To date, indirect tax laws have consistently maintained location of the recipient to be abroad and receipt of money in convertible foreign exchange to consider a transaction as an export. By inserting the condition on establishment of distinct persons, the IGST Bill appears to have unwittingly taxed transactions that they wanted to be zero-rated. The reason for specifically defining establishments of a distinct person could have been to tax inter-State transactions and branch transfers but the definition has been expanded to exports also. The ideal way to fix this issue would be to delete the last clause in Section 2(6) in which case all exports of services would follow the Bond/LUT route for exemption just like all other exporters.

To solve this problem, Nasscom should step in now on behalf of all software service exporters with establishments abroad and lobby with the Government to zero-rate their services. The Government keeps emphasizing about improving Ease of Doing Business in India. They could make a start by training bureaucrats how to draft laws clearly.

The writer is a chartered accountant

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Published on August 21, 2017
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