Position under Service tax law
Imposition of Service tax on reverse charge basis was first introduced in the year 2002. After decisions in the cases of Hindustan Zinc Limited vs. CCE – [2008 (11) STR 338] and Indian National Ship Owners Association vs. Union of India – [2009 (13) STR 235] striking down validity of such reverse charge tax in the absence of a specific provision for charge of tax on recipient of service, such reverse charge tax finally became effective from April 2006 upon introduction of Section 66A of the Finance Act. Further, establishments of the same person in India and outside India have been defined to be separate persons so as to tax cross border transactions of services between such establishments. Interestingly, on the export front, cross border transactions between such two distinct establishments are not treated as export of services.
It is pertinent to note that while Service tax has been made applicable on import of services as per above, reverse charge tax liability arises only for transactions undertaken for a consideration. Under the current Service tax law, there is no mechanism to charge tax on services provided in the absence of any direct or indirect consideration.
Position under the first draft of Model GST Law
The provisions of the first draft of Model GST Law issued by the Government (‘First Draft’) came to break to the above mentioned taxing spree, as they sought to exclude inter-establishment transactions from the scope of ‘import of service’. Section 2(52) of the First Draft of CGST / SGST Act inter-alia provided that a supply of service shall be treated as an ‘import of service’ if:
“… …(d) the supplier of service and the recipient of service are not merely establishments of a distinct person;
Explanation 1.- An establishment of a person in India and any of his other establishment outside India shall be treated as establishments of distinct persons. … …”
While the meaning and scope of supply as per Section 3(1)(b) of the First Draft covered “importation of service, whether or not for a consideration and whether or not in the course or furtherance of business”, the inter-establishment services were not covered within its scope due to the exclusion contained in the definition of import of service.
While this was a relaxation in applicability of reverse charge tax on one hand, the same provision on the other hand sought to levy tax on import of services without consideration even when such services are meant for personal use (subject to provisions of Section 9 whereby a person importing services below (to be) specified threshold for personal use was not to be regarded as a taxable person). This provision of the First Draft for the first time sought to levy reverse charge tax on import of services without consideration.
On the export front, Section 2(44) of the First Draft of CGST / SGST Act provided that such inter-establishment transactions would not qualify as export of services. Vide these provisions, for the first time, inter-establishment service transactions were sought to be treated at par on import as well as export front.
Position under the revised draft of Model GST Law
The provisions of the revised draft of Model GST Law issued by the Government (‘Revised Draft’) are in sharp contrast to the above discussed position laid down under the First Draft. The condition of persons not being establishments of distinct persons has been dropped from the definition of import of service (now shifted to Section 2(11) of the Revised Draft of IGST Act). Conversely, Section 5 of the Revised Draft of IGST Act specifically provides that an establishment of a person in India and any of his other establishments outside India shall be treated as establishments of distinct persons. This goes in complete contrast to the position envisaged under the First Draft wherein such inter-establishment transactions were specifically excluded from the scope of ‘import of service’.
The following changes in Section 3 and Schedule I of the Revised Draft of CGST / SGST Act also alter the position envisaged under the First Draft as regards applicability of reverse charge tax on import of services:
The above changes have the effect of restricting applicability of reverse charge tax on import of services without consideration for personal use. This change may be treated as a welcome move and would rest the debate as regards manner of taxing B2C transactions of import of services made without consideration.
However, the above changes in the Revised Draft may create a whole new set of difficulties by requiring payment of reverse charge tax on inter-establishment / office cross border transactions of services made without consideration. While such transactions made with consideration attract Service tax even under the current regime, such transactions without consideration may not have been tracked by many businesses. The typical example of such transactions may cover certain services undertaken at the overseas headquarters for various offices worldwide. In light of such provisions, one also needs to see as to whether the authorities demand reverse charge tax on notional consideration for use of logo / trademark / brand name of foreign establishment / office even where no consideration is paid by the Indian office for such use.
Applicability of GST on the above referred transactions without consideration may also create a lot of disputes regarding valuation of such services. Since such transactions would be treated as between related persons, valuation thereof may be done as per the Draft GST Valuation Rules released with the First Draft which are very similar to the current Customs Valuation Rules for import of goods. In the absence of transaction value, the authorities may proceed to determine value of such services as per comparison, computed value, or residual method. While such alternative methods of determining valuation are time tested in respect of import of goods, application thereof for import of services may create a lot of practical difficulties.
The concept of reverse charge tax on service transactions made without direct or indirect consideration would increase convergence between Indirect tax and Transfer Pricing laws, and also add to interdependent valuation issues arising under the two laws. While today such interdependence is limited to valuation of goods imported from related persons, under the GST regime, such interdependence would also be created for service transactions. Further, the Draft GST Valuation Rules do not contain any provision to accept transfer price adopted for Income tax purpose for valuation of import of services made without consideration.
On a separate note, the definition of ‘Export of service’ as per the First Draft has been continued in the Revised Draft so as to provide that inter-establishment transactions would not qualify as export of service. This in a way restores the position under the current Service tax law.
Import of online information and database access or retrieval (‘OLIDAR’) services
Vide amendments to the existing Service tax law, place of provision of OLIDAR services has been shifted to be location of service recipient effective 1 December 2016. With this amendment, OLIDAR services provided by a foreign service provider to customers in India would qualify to be import of services. To this extent, the amendment is just another extension of the concept of import of services. However, as against the hitherto provisions requiring only recipient of imported service to pay tax thereon, the amendments require the OLIDAR service provider located outside the taxable territory to discharge tax on such services provided to non-assessee online recipients in India. The similar concepts have also been incorporated in the Revised GST law. These recent changes with respect to OLIDAR service constitute first attempt of the Government to tap revenue on import of services by non-taxable persons and oblige a person not having any presence in India to pay a tax in India; making it a landmark transformation in manner of taxing import of service.
A comparison of provisions of the Service tax law, First Draft and the Revised Draft of GST law indicates that the stand as regards applicability of reverse charge tax on import of services has been evolving and has undergone change in each consecutive law. Further, the concept of forward charge tax payment on import of OLIDAR services by non-assessee online recipients has been recently introduced. However, as regards export of services, the stand of excluding inter-establishment transactions from ambit of export has remained consistent.
While the Revised Draft lays down the above discussed position, only future would reveal if there is another U-turn on cards to continue the earlier series of U-turns and new surprises!
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