Taxing trade in services

Defining trade in services was one of the major achievements of the Uruguay round of talks in the form of a General Agreement on Trade in Services (GATS).

According to GATS, trade in services happens in four modes of delivery, that is, cross-border trade, consumption abroad, commercial presence and movement of natural persons. Trade in services in India has not been a major reason for legislation until recently, and presently service tax is applicable on 81 services.

Certain services that involve physical assets such as building and land have been categorised under the first set of conditions for export. The condition for export is that the service should be provided in relation to a physical asset located outside India, it should be delivered outside India, and the receipt of money is in convertible foreign exchange.

An example to illustrate this is rendering of services by an interior designer with respect to a building located outside India. Similarly, an Indian insurance company insuring a building in another country to a person in that country will be export of service under this category.

The second set of services are where the place of performance is the criterion for defining whether the export has occurred. If the service has been performed outside India, it is delivered outside India and the payments are made in convertible foreign exchange, it will be considered as export of service.

Even if part of service has been performed outside India, it will be construed as the whole of service has been performed outside India. The interesting point to note here is that the performance of service is different from delivery of service.

To give an instance, if an exporter of goods transports his goods by air to somewhere outside India, the airline operator rendering the service of transport of goods by air performs the said service partly in India and partly outside.

However, this does not merit classification as export of service as the service has been requisitioned by the exporter and, hence, the delivery is taking place in India even when the performance is outside. Similarly, a courier delivering packages outside India for an Indian client will not merit export of services.

The set of remaining taxable services fall in the third category, where the main condition is that the recipient of service should be outside India.

Examples are an Indian company marketing goods in India or procuring inputs from India for a manufacturing company abroad, or an Indian company providing financial leasing facilities to a foreign company, or an Indian company providing consultancy on mergers and acquisition to a foreign client as long as the foreign firms do not have an office in India.

As for import of services, the service provider should have his fixed establishment or business or the place of rendering service or his permanent address or usual place of residence in a country other than India and the service receiver should have the same in India.

If the above two conditions are fulfilled, it is immaterial where the service is provided -- in India or outside -- it will be taxable under the service tax law. A simple example of such a service is consultancy received from a foreign firm by an Indian company, whether in India or abroad.

Similarly, if a company hires an international company to market its products in that country or gives a maintenance contract for its equipment to a foreign manufacturer, the services received will be taxable. When an Indian car manufacturer showcases its products in an international business exhibition, it receives services that are taxable in India.

Who has the liability to pay in such cases? In case the service provider has his fixed establishment or place of business from which the service is rendered, or has his permanent address or usual place of residence in a country other than India and does not have any office in India, it is the liability of the service receiver to pay the service tax.

In other cases, where the exporter has any office in India, the responsibility rests with the service provider. A simple example is an airline that signs a maintenance contract with the manufacturer of airplanes in the US. If the manufacturer has an office in India, it shall be the liability of the manufacturer to pay up the service tax else it shall be the liability of the airline receiving the service to pay service tax under repair and maintenance service.

A franchisee of an international chain of hotels in India, authorised to use its brand name under an agreement, would have received intellectual property right services from its franchiser and in absence of any office of the franchiser in India, the franchisee will be liable to pay service tax.

The law on services, at the moment, is an evolving law. The intangible nature of services will always make it difficult to build conditions for export and import, yet it is a step in the right direction.