The finance ministry's proposal to impose a tax on services received by any entity in India from overseas will make import of technology a costly affair, particularly for companies in the areas of manufacturing-engineering, pharmaceutical, FMCG, information technology hardware, telecom equipment and engineering consultancy. The proposed service tax will now cover even royalty and remittances.
"The undeclared intention appears to be to impose service tax not only on the import of services but also on all incomes or receipts arising from India for services performed abroad. If the proposed amendment to the Finance Act 1994 suggested in the Budget is enforced, such remittances will be subjected to an additional cost of 10-20 per cent," Ranjan D Gupta, indirect tax practices head at audit firm Khaitan & Co told Business Standard.
According to Gupta, many Indian companies, especially Indian subsidiaries of foreign companies, remit royalties and fees for technical services to companies based abroad.
Such amounts are remitted because of several benefits granted by the foreign companies to the Indian ones under foreign collaboration agreements, including use of trademarks, brands, logos and drawings, or for any technical or management functions performed abroad.
These benefits or services are in the nature of intellectual property services, consulting-engineering services and management consulting services.
At present, such remittances are considered to be not chargeable under service tax because the Indian service tax law -- the Finance Act 1994 -- does not apply in areas beyond India's territorial waters.
The Finance Bill 2005 seeks to insert a new explanation to Section 65 of the Finance Act 1994 as per which, any specified service rendered by a service provider based overseas will be deemed a taxable service, if the recipient of such a service has a place of business or residence or an establishment in India.
The possible implication will be that even the services physically performed outside India will come under the service tax ambit in India, if the recipient of the service is based in India, Gupta said.
"Under the current scheme of provisions, if an overseas service provider does not have any office in India, the Indian service recipient is liable to pay service tax on the amount remitted abroad," he said.
According to Gupta, the legal validity of this move is not clear as the amendment is sought only in Section 65, which is a Section that defines, and no corresponding amendment is proposed in Section 66 of the Finance Act 1994. Section 66 is the charging Section and authorises the government to levy service tax on specified services.
Gupta pointed out many countries imposed sales tax/value-added tax on import of services. However, these countries have elaborate rules to determine the taxability of services rendered from abroad or performed overseas on the basis of "concepts of business presence".
India does not have these concepts in place and hence, companies remitting money abroad will face serious problems. On the other hand, the overseas entities will want their full payments. The cost will, therefore, be ultimately borne by the Indian companies," he added.
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