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No.14/005/066/2005
July 22, 2005
Members of the Council
Dear Sirs,
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Service Tax applicable on services provided by foreigners to Indian exporters
As members are aware, in the Union Budget 2005, the following explanation was added at the end of Section 65(105) of the Service Tax Act, to extend the scope of taxable services for the purpose of levy of Service Tax:
“For removal of doubts, it is hereby declared that where any service provided or to be provided by a person, who has established a business or has a fixed establishment from which services is provided or to be provided, or has his permanent address or usual place of residence, in a country other than India and such service is received or to be received by a person who has his place of business, fixed establishment, permanent address or as the case may be, usual place of residence, in India, such service shall be
deemed to be taxable service for the purpose of this clause.”
In other words, the services rendered by a non-resident to a resident in India deem to be taxable. In this regard, it may be mentioned that Indian exporters generally avail services from non-residents (foreigners) in respect of marketing of products, sales campaign in Departmental stores, advertisement and publicity campaigns, exhibition services, design and product development services etc. For availing these services, Indian exporters pay agency commission / professional fees in foreign currency to such service providers.
As there was no clarity in regard to applicability or otherwise of the service tax on these services, the Council sought clarifications / explanations from taxation experts. Accordingly, the Council received expert opinion as under:
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service tax will be applicable on services availed by Indian exporters from the overseas persons / companies
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the Indian exporters have to remit the service tax at applicable rate of 10.2% on all payments made towards such services
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it will be effective from June 16, 2005
In view of serious implications of such levy, which would be an additional tax burden on the export products affecting cost competitiveness, the Council strongly represented to the Hon’ble Union Minister for Finance as well as Hon’ble Union Minister for Commerce & Industry and senior Government officials, seeking service tax exemption on services provided by the foreigners to the Indian exporters. This issue was also taken up by the Chairman of the Council Shri M Rafeeque Ahmed in the first meeting of the Board of Trade held under the chairmanship of Hon’ble Commerce & Industry Minister on June 17, 2005.
This issue is also specifically included in the leather sector presentation / interaction meeting held with the Hon’ble Minister for Commerce & Industry in New Delhi on July 22, 2005. The Council is vigorously pursuing with Government in this regard.
This is for your information at this stage and the Council shall inform you the outcome of the representations upon its consideration.
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Service Tax exemption on export cargo sent through aircraft
Attention of members is also invited to the Council’s circular of even number dated June 27, 2005, regarding applicability of service tax on airfreight and all charges payable to aircraft operator in relation to export cargo which was effective from June 16, 2005.
It was also informed in the said circular that the Council already represented this issue with the senior officials in the Ministry of Commerce & Industry including DGFT for exempting the service tax on air freight charges.
In this regard, we are pleased to inform that in view of effective representation made by CLE and various Export Promotion Organizations, the Ministry of Finance exempted the service tax on services provided by aircraft operator in relation to transport of export goods by air. Notification No.29/2005 dated July 15, 2005 issued by the Department of Revenue in this regard is appended herewith for your perusal and reference.
Members may kindly note the above
Thanking you,
Yours faithfully,
K Abdul Sattar Khan
Asst Director
Circular
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