Export of Services: A Synopsis

In India the contribution of service sector to the GDP is about 55% and is a major driver of economic growth. However it was very difficult to define export of services and therefore many multinationals were wary of exploring opportunities for cross-border trade with India.

Unlike  goods which are defined to be exports when they physically cross the Indian territory it was very complex to define the export of services given that they were mostly intangible assets with no direction of movement or unique or definable place of their consumption or use. This left the question of defining the export of services.

One of the major achievements of the Uruguay Round negotiations on the General Agreement on Trade in Services (GATS) was agreement on four modes of delivery or ways in which services may be exported:

1)      Mode 1: Cross border – the service itself crosses the border

Cross border trade takes place when the service itself crosses the border from one country to another, without the movement of persons. The service is being transported either via electronic means (e-mail, fax) or by infrastructure such as (transportation services – (air, rail, land, sea,) or telecommunications (telephone, radio). Some of the examples are :

·         Management consulting – studies, reports, business plans, financial advice

·         Information and communication technology – Internet service provision, cellular telephony

·         Marketing – market research, advertising, articles

·         Consulting engineering – feasibility studies, drawings

·         Health Services

·         Education and training – e-learning, distance learning

·         Transportation – courier services, other transportation services

2)      Mode 2: Consumption abroad – the consumer travels across the border

Consumption abroad relates to the services provided to nationals of another country who  require them to travel to India for availing those services. Some of the examples are:

·         Tourism and travel-related services – tour operators, hospitality industry, business tourism, agri-tourism, eco-tourism, edu-tourism

·         Education and training – conferences, seminars, study tours, foreign students

·         Legal – client seeks legal advice in local market therefore travels to the market

Thus we can export your services without ever leaving the country.

3)      Mode 3: Commercial presence – establishment of an office or entity

Commercial presence refers to instances where a company from one country sets up subsidiaries or branches to provide services in another country. Some of the examples are:

·         Financial services – banks, investment companies, insurance brokers

·         Construction engineering – sets up project offices to manage local infrastructure projects

·         Information technology – local offices set up to service local clients

·         Distribution – shipping, warehousing, logistics

4)      Mode 4: Movement of natural persons – the services supplier travels across the border

Movement of natural persons refers to individuals traveling from their own country to supply services in another. Some of the examples are:

·         Arts and Culture – film industry – actors, directors, production crew, performers

·         Construction – architects, trades people

·         Education and training – trainers, professional speakers

·         Environmental – consultants, specialists

·         Geometrics – mapping, oceanography

·         Recreational and sporting – coaches, trainers, promoters

Many firms export services in several of these modes. Once it is determined which mode is best suited the service provider will be in a better position to Identify Opportunities, to Research the  Market, and to decide the best means of Marketing the Services.

Keeping the above principles in consideration the government notified Export of Service Rules, 2005 which were made effective from 15-3-2005. (Notification No. 9/2005-S.T., dated 3-3-2005 as amended by Notification no 13/2006 dated 19-04-2006)

In drafting the export of services rules the government considered three  basic  principle of taxation :

1)       That 'goods and services can be exported, while taxes are not to be exported'

2)       That service tax can be levied only if service is provided or received or consumed in India.

3)       Service  tax is a destination based consumption tax and, therefore, if services provided are consumed abroad the same  are not leviable to service tax in India and therefore, exempt.

Rule 3 of Export of Service Rules classifies the taxable services in five categories –

1.       Situation of Immovable property

2.       Place of performance of the service

Remaining services:

1.       Location of the Recipient

2.       Services which are not be treated as 'export of services' under any situation.

3.       Conditional exports.

Requirement to treat the service as 'export of service' are different for each category

Situation of Immovable property

In order to qualify as Export of taxable services under this category the services must be provided relation to an immovable property situated outside India: Say for example

·         Provision of services by an interior designer with respect to a building located outside India.

·         Provision of services by an Indian insurance company insuring a building in another country.

The services specifically specified under this category are as under:

1.	(d)	General insurance business
2.	(p)	Professional services by an architect
3.	(q)	Professional services by an interior decorator.
4.	(v)	Services by a real estate agent
5.	(zzq)	Commercial or industrial construction service
6.	(zzza)	Site formation, clearance, excavation, earthmoving and demolition
7.	(zzzb)	Dredging services
8.	(zzzc)	Survey and map-making services
9.	(zzzh)	Construction of complex services
10.	(zzzr)	Auction of property services.
11.	(zzzy)	Mining of mineral, oil or gas services
12.	(zzzz)*	Renting of immovable property services.
13.	(zzzza)	Execution of a works contract services.

 

 (zzzza) Execution of a works contract services.

* Renting of immovable property services has been held to be ultra vires by the Hon'ble Delhi High Court's order dated 18-04-2009 and the Hon'ble Supreme Court has declined to grant a Stay on  the High Court order.

Place of performance of the service

In order to qualify as Export of taxable services under this category the services must be provided performed outside India. Even if part of service is  performed outside India, it will be also be construed as the whole of service has been performed outside India. Thus, part performance of service in India will be permissible. Since no percentage has been specified, it should be sufficient if just 1% of service is provided outside India and balance is provided from 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.

The services specifically specified under this category are as under:

Sr. No.	Sub Clauses	Type of Service
1.	(a)	Stock broker
2.	(f)	Courier Agency
3.	(h)	Custom House Agent
4.	(i)	Steamer Agent
5.	(j)	Clearing & Forwarding Agent
6.	(l)	Air Travel Agent
7.	(m)	Mandap keeper
8.	(n)	Tour operator
9.	(o)	Rent-a-Cab
10.	(s)	Chartered Accountant
11.	(t)	Cost Accountant
12.	(u)	Company Secretary
13.	(w)	Security Agency
14.	(x)	Credit Rating Agency
15.	(y)	Market Research Agency
16.	(z)	Underwriting
17.	(zb)	Photography
18.	(zc)	Convention
19.	(zi)	Video Production
20.	(zj)	Sound Recording
21.	(zn)	Port Services
22.	(zo)	Authorized Service Station Motor Car
23.	(zq)	Beauty Parlor
24.	(zr)	Cargo Handling
25.	(zt)	Dry Cleaning
26.	(zu)	Event Management
27.	(zv)	Fashion Designing
28.	(zw)	Health & Fitness
29.	(zza)	Storage and Warehousing
30.	(zzc)	Commercial Training or Coaching
31.	(zzd)	Erection, Commissioning or Installation
32.	(zzf)	Internet Café
33.	(zzg)*	Repair or Maintenance
34.	(zzh)*	Technical Testing and Analyzing
35.	(zzi)*	Technical Inspection & Certification
36.	(zzl)	Other Port
37.	(zzm)	In an airport or civil enclave
38.	(zzn)	Transport of goods by aircraft
39.	(zzo)	Business Exhibition
40.	(zzp)	Transport of Goods by Road
41.	(zzs)	Opinion Poll
42.	(zzt)	Outdoor Caterer
43.	(zzv)	Survey or Exploration of Mineral
44.	(zzw)	Pandal or Shamiana
45.	(zzx)	Travel Agent
46.	(zzy)	Forward Contract
47.	(zzzd)	Cleaning Activity
48.	(zzze)	Membership of Club or Association
49.	(zzzf)	Packaging Activity
50.	(zzzp)	Transport of Goods in Container by Rail
51.	(zzzzg)	Stock Exchange Service
52.	(zzzzh)	Commodity Exchange Service
53.	(zzzzi)	Processing and Clearing House Service

 

However in respect of services mentioned at Sr. No. (33) Repairs and Maintenance (34) Technical Testing and Analyzing and (35) Technical Inspection & Certification  provided through internet or an electronic network including a computer network or any other means, then such taxable service, whether or not performed outside India, shall be treated as the taxable service performed outside India.

Remaining Services:

a. Location of the Recipient

In order to qualify as Export of taxable services under this category the services:

·         When provided to a recipient in relation to business or commerce the recipient must be located outside.

·         When provided otherwise , the recipient must be located outside India at the time of provision of such service :

·         When provided to a recipient having commercial establishment in India, only if the order for such service is made from any of his commercial establishment or office located outside India :

·         When provided to a recipient in relation to supply of tangible goods including machinery, equipment and appliances for use, without transferring right of possession and effective control of such machinery, equipment and appliances such taxable service shall be treated as export of taxable if these tangible goods supplied for use are located outside India during the period of use of such tangible goods by such recipient.

The services specifically specified under this category are as under:

Sr. No.	Sub Clauses	Service Category
1	(b)	Telephone
2	c	Pager
3	d	General Insurance
4	e	Advertising
5	g	Consulting Engineer
6	k	Manpower Recruitment or Supply
7	r	Management Consultant
8	za	Scientific or Technical Consultancy
9	zd	Leased Circuit
10	ze	Telegraph
11	zf	Telex
12	zg	Fax
13	zh	On-line Information
14	zk	Broadcasting
15	zl	Insurance Auxiliary
16	zm	Banking and Other Financial Services
17	zs	Cable Operator & MSO
18	zx	Life Insurance
19	zy	Insurance Auxiliary to Life Insurance
20	zz	Rail Travel Agent
21	zzb	Business Auxiliary Service
22	zze	Franchise Service
23	zzk	Forex Broker (other than in relation to Banking)
24	zzr	Intellectual Property Service
25	zzu	Programme Producer
26	zzz	Transport through Pipeline
27	zzzc	Survey and Map making
28	zzzg	Mailing List Compilation & Mailing
29	zzzi	Registrar to an issue
30	zzzj	Share Transfer Agent
31	zzzk	ATM Operation, Maintenance & Management
32	zzzl	Recovery Agent
33	zzzm	Sale of Space for Advt. other than Print Media
34	zzzn	Sponsorship other than for Sports
35	zzzq	Business Support Service
36	zzzr	Auctioneers
37	zzzs	Public Relations Service
38	zzzt	Ship Management Service
39	zzzu	Internet Telecommunication
40	zzzw	Credit Card, Debit Card & other payment Cards
41	zzzx	Telecommunication Service
42	zzzzb	Development & Supply of Content
43	zzzzc	Asset Management other than Banking company
44	zzzzd	Design Service
45	zzzze	Information Technology Software
46	zzzzf	Management of Investment-ULIP
47	zzzzj	Supply of Tangible Goods

 

Supply of Tangible Goods

Services which are never be treated as export of service

Export of Services in relation of services mentioned below shall not be treated as export of services  in any condition

Sr. No.	Clause	Type of Service which are never be treated as export of services
1.	(zzzo)	Air transport of such passengers embarking in India for international journey other than economy class.
2.	(zzzv)	Transport of such person embarking from any port or other ports in India, by a cruise ship

 

Conditional export of service:

The following services ,though classified under clause (1) above but which do not relate to immovable property ,will be treated as export under this  category.

Sr. No.	Clause	Service Category
1	(d)	General Insurance
2	(zzzc)	Survey & map making
3	(zzzr)	Auctioneers

 

The provision  of  any  specified taxable  service  shall be treated as export of service only when the following conditions are satisfied, namely: -

a. Such service is provided from India and used outside India; and

Payment for such service is received by the service provider in convertible foreign exchange.

Incentives for export of services.

Once it is established that the services has been exported out of India, the exporters are entitled to the following incentives:

·         Any taxable service may be exported without payment of service tax.

·         The exporter can claim rebate of service tax paid on input services.

·         The exporter can use the cenvat credit on input services used in export of services to pay service tax on output services provided in the local market.

·         If the adjustment stated in (c) above is not possible then the exporter can claim refund of input service tax used in the export of services provided he does not claim any drawback or rebate under any rules pertaining to export-related activities.

Disclaimer:

The information contained in this article has been compiled in good faith from various sources available on the matter. But no representation is made or warranty given (either express or implied) as to the completeness or accuracy of the information it contains. The reader is therefore requested to verify this information before he acts upon it. By accessing this information , the reader  agrees  that the author will not be liable for any direct or indirect loss arising from the use of the information and the material contained in this article.

Compiled by: C.A. LALIT MUNOYAT, B.Com (Hons.), CS, FCA, ISA

Assisted by: C.A. N.K. Mittal, FCA