IMPACT OF SERVICE TAX ON THE BPO INDUSTRY
Madhukar
Hiregange, FCA, DISA(ICAI) & Rajesh
Kumar, T R ACA, LLB, DISA(ICAI)
The Business Process Outsourcing Industry in the
southern states of India especially in Bangalore is growing
at a phenomenal rate. The total business from India for
the year 2004-05 has been placed at 5.7 Billion US $ out
of the total IT/ITES business of 28 Billion USD. The growth
expected in the coming years is expected to be 28 % per
annum. There is no doubt that this industry has enabled
India of dreaming of being a superpower. The Government
of India has played a stellar role in helping the software
and ITES industry.
This services sector consumes
goods to a certain extent but the major costs for this
sector are services. As time goes on the increase in salaries
in this sector would enable other east European countries
and China to neutralize the competitive advantage that
India possesses.
All countries ensure that
the system of taxation is neutral for the exporter whether
of goods or services. In this paper we examine the impact
of service tax on service exporters as well as whether
there is any means of cost reduction, which is the essence
of any outsourcing contract.
Applicability of Service Tax
The applicability of Service
Tax on BPO activities would be largely under Business
Auxiliary Services (BAS) under Section 65 (19) clause
(vi). This sets out that any service in relation to provision
of services on behalf of the client would be liable but
does not include any information technology service. Information
technology service has been defined in the explanation
as any service in relation to designing, development or
maintenance of computer software or computerised data
processing or system networking or any other service in
relation to operation of computer network.
The Department has clarified
vide its circular 59/8/2003 dt 20.6.2003 that where the
computers are used to provide any service other than those
set out in the definition the same would not be IT services
and would not therefore be exempt.
Notification 8/2003 dt
20.6.2003 provides exemption to call centres and medical
transcription centres. This however is still a taxable
service and therefore the benefits of service exports
would accrue to them.
Some of the service providers to the IT/ITES sector
have been claiming that their services are secondary services
which are used in the export of services, which are consumed
outside India under CBEC Circular no 56/5/03 dt. 25.4.2003.
This circular has as on date not been withdrawn. Now that
Service Export Rules 2005 are in place reliance on the
Circular may lead to some demands on such service providers.
Legally however their position would be defendable as
the beneficial circulars would continue to have effect
unless they are withdrawn.
Therefore the BPO services,
which are essentially those, which are conducted on behalf
of the client would be taxable, though a presumption is
possible that where BPO services are rendered in the form
of computerized data processing, they would be considered
to be Information Technology Services. Further under BAS
the export of services in terms of Export of Service Rules
2005 sets out that where such services are provided to
a recipient outside India then the same is considered
as an export. In other cases the same would be liable
to Service Tax. That means that where any BPO assignment
which is received is further sub contracted by the Indian
entity then the said sub contractor would be liable to
charge the Service Tax to the exporter of the services.
One issue, which may require
to be further examined is whether the sub contractor would
be liable when the principal is liable to pay the Service
Tax. The old circulars issued in 1997 in the context of
consulting engineers set out that the sub contractor would
not be liable as long as the principal paid the service
tax. However since then the service tax credits have been
introduced and the Export of Services Rules have been
put in place. In the opinion of the paper writers though
the circular has not been withdrawn reliance on the same
may be risky. In this regard the nodal agencies like NASSCOM
may take up the matter for early resolution.
The second issue, which
requires to be examined is whether the exemption claimed
as secondary service provider under the circular whereby
the service provider to such industries was not liable
would continue to apply in the present circumstances.
The issue of export of
services is further confused where the recipient has a
place of business in India. In such a case certain conditions
have to be met. (please see last issue of KSCAA Journal
for article of export of services.)
It maybe advisable for
the BPO company to ensure that they are eligible for the
exemption under export of services as well as examine
the liability for sub contracted work within India.
Cost Reductions
The Export of Service
Rules coupled with the notification 11/2005 and 12/2005
both dt. 19.4.2005 have now made it possible for the taxable
service provider to claim the rebate of the service tax
paid on the output service or the tax paid on inputs and
input services.
Rebate on Service Tax
and Cess paid on Export Services
Under Notification 11/2005
the service provider would avail the credit of the excise
duty or the additional duty of customs (CVD) paid on the
capital goods and inputs used for providing the taxable
service and on the service tax credits on the input services
used for providing the same. This would be utilised for
payment of Service Tax on the taxable services exported.
The Service Tax paid would then be allowed as a rebate
in cash on an application for rebate being made. The condition
to be fulfilled is that the application is to be accompanied
by documentary evidence of receipt of payment in convertible
foreign currency and payment of the service tax. In this
case the exporter pays the tax and then claims the rebate.
In this method the issues, which maybe raised by the department
are limited.
Under Notification 12/2005
the service provider would not avail the central excise
duty credit for inputs or the credit for input services
but would list the usage for the export. The service tax
paid on such inputs, input services would be eligible
for the rebate. In this case the questioning of individual
credits whether used for export maybe an issue. The conditions
for rebate in this case are the same as above other than
the payment having been paid to the service provider.
This means that the entire
service tax paid on input services would be available
as a rebate from the department. This could reduce the
costs to a certain extent.
It
is to be noted that the rebate is only available where
there is an export of taxable services and therefore the
software exporters or exporters of services, which are
not presently taxable do not seem to be covered. Their
exclusion may have been intentional while drafting out
the Rules. However the industry may choose to represent
though their forums to allow this facility for ALL the
services instead of for some services as the export should
be tax neutral.
