MOVE TO CORRECT PROCEDURAL ANOMALIES
THE government is likely to redefine the export and import of services. The proposal is part of the initiative aimed at correcting procedural anomalies that have gripped services exports leading to large-scale litigation in service tax. An announcement in this regard may be made in the Budget.
At present, export of service is defined as service being used outside India. Sources said the definition was quite open-ended and, therefore, led to increased litigation. The effort is now being to make this definition more specific to prevent tax demands going into litigation.
“A condition exists in the export of service rules that ‘service should be used outside India’ to qualify as export of service. This condition is ambiguous and restricts the benefit. The rules need to be amended to bring clarity,” says Ernst & Young senior professional Bipin Sapra.
For example, a large number of foreign companies set up liaison offices before setting up full-fledged subsidiary. The primary job of this office is to carry out facilitation work and exploratory work for the parent. The service tax department is some cases has raised demands against these liaison offices which deliver service to an overseas customer. Similarly, in the case of money transfer agents, there is ambiguity. Service tax is charged both when the service is used to receive or send funds.
If the proposal goes through, it is expected to give substantial relief to large number of multinationals who operate through liaison offices, commission agents of MNCs and money transfer agents.
The government had carried out changes in the export rules in Budget 2007 as well. However, the change brought about by knocking from the export of service definition “delivered outside India” did not solve the problem completely. This time, procedural simplification including effective dispute resolution is high on government’s agenda because of growing litigation in service tax. Procedural simplification should allow the government to unlock the tax demand accumulating in disputes.