There has been significant headway recently over the Goods & Services Tax (GST). It is expected that the final GST laws, as approved by the GST Council and passed by Parliament, would be available in the public domain later this month for the reference of industry. Timely roll-out of the final structure is imperative in order for India Inc to prepare itself for the paradigm shift in indirect taxation.
It would be important to understand the impact of GST on businesses before its implementation. Although GST is expected to bring uniformity and simplicity in trade taxes, at the same time, it appears that in certain aspects, it may be important for businesses to re-think their existing models in order to seamlessly transition. Services exports is one such area.
Historically, exporters of goods and services have been incentivised in India, as these businesses leads to an increase in forex reserves and fosters the nation’s growth. From a tax policy perspective, since implementation of negative-list regime, services exporters have been fairly incentivised—their revenues are not subject to service tax, and central indirect taxes on procurements are largely offset by refunds.
Against this backdrop, the implications of GST regulations on the business of service exporter need to be carefully assessed. The Model GST Law prescribes IGST on all inter-state supplies of services.
To determine the nature of any supply and its place of supply (which will determine the levy of IGST), ‘Place of Supply Rules’, largely similar to the existing set of rules, have been drafted.
These rules and other relevant provisions of the Model Law suggest that if any service has been provided from India, but its place of supply lies outside India, then it would be deemed as an inter-state supply of service, thereby attracting IGST. Thus, even if the place of supply for any service lies outside India, the service will be taxable in the first place.
However, the Model Law has retained the existing policy of zero-rating services exports. It , along with the draft invoicing rules, indicate the possibility of export under bond or availing refund of IGST if ‘export conditions’ are fulfilled.
These conditions are similar to those prescribed under the Service Tax Rules at present. These new measures will effectively convert the existing, simplistic and upfront ‘no-tax treatment’ on export of services to potentially a more rigorous ‘export under bond’ procedure or a rather complex ‘pay and refund’ model.
Such provisions take the services exporter back to the era of pre-negative list regime wherein but for fulfilment of export conditions, services were liable to service tax. Hopefully, the final version of the GST law and rules should clarify that the export under bond procedure will apply only on goods, and not on services.
Lawmakers need to appreciate that these administrative changes in the current draft form, in relation to service exports, would not only impact large-scale exporters but would also affect several thousands of freelancers serving foreign clients through the internet. They might have to bear the burden of undertaking additional GST compliance, thereby adding to their compliance costs.
A reference must be drawn from the current tax regime as services provided outside India have been kept outside the ambit of service tax so far, in a manner that there was no tax on such services. At present, if the place of provision of a service lies outside India, depending on fulfilment of prescribed conditions, it may be considered an export/exempt service.
However, it seems that under the provisions of the Model GST Law, if any of the export conditions are not met, even though the place of supply lies outside India, it could attract IGST. Also, no refund opportunity would be available for such a supply.
Thus, a service supplied outside India would be stripped of the ‘no-tax’ treatment. This does not seem to be in line with the principles of GST, which is a destination-based consumption tax. If the final GST law is introduced with these provisions, there is the possibility of extra-territorial jurisdiction challenges.
Furthermore, one of the conditions to qualify for exports is that the subject transaction should not be between two establishments of the same legal entity. This implies all cross-border intra-legal-entity transactions qualifying as supply will be subject to GST, irrespective of their place of supply.
At present, such transactions do not attract service tax if the place of supply is outside India. Also, the Model GST Law doesn’t clarify whether a book adjustment with approvals in terms of forex laws will qualify as a valid foreign exchange receipt.
Interestingly, the Model GST Law provides for two different sets of rules for determination of place of supply, one for domestic transactions and another for cross-border transactions. Thus, taxability of a service transaction could be entirely different if it is provided to an overseas recipient vis-à-vis domestic customer.
Such differential treatment of domestic vis-à-vis cross-border service could lead to a lot of confusion in determining taxability of services, particularly in cases of back-to-back transactions having a domestic as well as cross-border piece.