The most significant of all the reforms introduced in the Union Budget 2012 was the introduction of a comprehensive service tax regime based on a ‘negative list of services’ that seeks to tax all services barring the services covered in the negative list. This paradigm shift, however, has not been free from ambiguities and it is hoped that suitable clarity is provided through Budget 2013 on at least some of the critical aspects.
One of the biggest issues requiring clarity is the scope and ambit of the phrase “Online information and database access or retrieval services”. The bone of contention arises from the fact that under the Place of Provision of Service Rules, 2012, the place of provision of services qualifying as “Online….” would be the location of the service provider. This is of immense significance for various intellectual property-related services provided from outside India – if such services qualify as “Online….” the ‘place of provision’ of the said services would be the location of the service provider outside India and thus be outside the service tax net. One of the most typical transactions that can benefit from the above is a transaction of download of software under a EULA by an Indian customer from a service provider outside India. The fact that ‘software’ qualifies as ‘information’ under the Information Technology Act, 2000, strengthens the argument that such services should qualify as “Online….” services and avail the benefit of no service tax. The doubt gets aggravated because of the use of the words “database access or retrieval” or in other words, is the service recipient paying to service provider for making the software available “online” or “online” is only a way of delivering the software. Further, given that electronic download of software attracted service tax prior to July 01, 2012, by way of a specific entry, the taxpayers have a genuine concern that the service tax authorities are unlikely to accept non-levy of service tax on electronic download of software under the new regime. We hope that an appropriate clarification may be issued in this regard by the government since this issue would have a huge bearing upon the entire IT sector in India. In fact, this would also have impact on other download-based services like books, movies, games and music and hence appropriate clarity becomes more important.
Another critical issue requiring immediate clarity is the interpretation of the word ‘intermediary’. Under the Place of Provision of Service Rules, 2012, the place of provision of services qualifying as “intermediary services” would also be the location of the service provider. “intermediary” has been defined as “….who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) between two or more persons….”. It is not clear as to whether mere intention to arrange or facilitate a main service by way of introduction of a prospective vendor and customer (irrespective of whether the vendor or customer fructifies or not) is sufficient to qualify as ‘intermediary’ – if yes, then a host of marketing and sales promotion services provided by companies in India for their principals abroad would become liable to service tax. Many service providers located aboard engage the services of their group companies or even third parties located in India to promote and market their service offerings to customers in India. These sales and marketing companies in India typically undertake a host of marketing and sales promotion activities (such as road shows, customer events, door to door marketing etc) with a view to identify prospective customers for the overseas principals and the leads, if any, are passed on to the service provider abroad. Under the earlier service tax law these sales and marketing services were treated as “exports” based on the location of the main service provider abroad and service tax was not paid thereon. If this tax position has to change, it would lead to huge ramifications for the trade, particularly where such service providers earn valuable foreign exchange for the country.
It is earnestly hoped that these two critical conundrums under the new service tax regime be appropriately dealt with in the forthcoming Budget.
The author is leader, indirect tax, BMR Advisors. The views are personal. With inputs from Puneet Bansal, director, and Sudipta Bhattacharjee, associate director