Last week, the Union finance ministry issued several notifications, giving effect to decisions of the Goods and Services Tax
(GST) Council at the latter’s 28th meeting. One of these, [15/2008-Integrated Tax (Rate)] dated July 26, deals with exemption to services supplied by an establishment of a person in India to any establishment of that person outside India.
The import of this exemption deserves some deliberation. Under the GST laws, where a person has an establishment in India and any others outside, these are to be treated as establishments of distinct persons. Supply of services between these when in the course or furtherance of business attracts GST, even if no consideration (fee) is involved.
Normally, export of services is zero-rated. However, supply of any service does not qualify as export of services when the supplier of the service is in India and the recipient is an establishment of the same person outside India. That is, supply of services from India by an entity to its own branches, project offices, liaison offices or the like in another country does not qualify as export of services. Consequently, such supplies are not zero-rated and attract GST.
Thus, the GST becomes a cost, though the service is supplied from India to a recipient in another country. In response to representations from the trade, the GST Council has decided not to burden such supply of services from India to another country with GST.
This decision, however, takes effect by way of an exemption notification, rather than an amendment to the definition of export of services. As a result, supply of services by an Indian entity to its establishment abroad is not zero-rated. However, such an outward supply will be exempt, which means the supplier will not be eligible for input tax credit in respect of such supplies. Any credit already taken will have to be reversed, in line with the prescribed formula. To that extent, the suppliers will have to bear the cost. So, the relief to such suppliers is limited.
Indian entities not only provide services to own establishments abroad but also receive these in return. Import of services by a taxable person from any of his other establishments outside India, in the course or furtherance of business, attracts GST, even if the supply is made without consideration. The receiver of supply is required to discharge the tax liability through the reverse charge mechanism. When such a supply of service is made without consideration, the issue of valuation of services comes into play for the purpose of taxation. More, the GST Council has recommended amendments to the laws whereby even unregistered persons will be required to discharge the tax liability on a reverse charge basis if they receive services from their own establishments abroad.
Overall, the latest exemption for services supplied by an establishment of a person in India to any other of that person outside India is an improvement over the earlier position, when tax was payable.
However, it is far better to amend the definition of export of services, to enable zero-rating of such supplies. The GST Council should consider the case for similar exemption for import of services by a person in India from his own establishments abroad.