India: Levy Of Service Tax On Activities Involved In Relation To Inward Remittances From Abroad To Beneficiaries In India

A Brief Scenario

Prior to July, 2012; Service Tax was applicable on a positive list approach which means earlier all services were exempted from payment of service tax except those specifically mentioned in the Act. However pursuant to July, 2012 a negative list approach is being applied.

As per the new charging Section 66 B of the Finance Act as amended in 2012 "there shall be levied a tax at the rate of 12% on the value of all services, other than those services specified in the negative list, provided or agreed to be provided in the taxable territory by one person to another and collected in such manner as may be prescribed." Meaning thereby, all the services provided or agreed to be provided within the taxable territory shall be taxable under Service Tax, until and unless they fall under the negative list.

Furthermore, under the earlier system of taxation of services, there were 88 exemption notifications. The need for exemption notification was not obviated with the introduction of taxation of services based on negative list of services. While some earlier exemptions have been built into the negative list, others, wherever necessary have been retained as exemptions in addition to few more which have been granted, the only difference is that for the ease of reference and convenience, all the exemption are now a part of one Mega Exemption Notification No. 25/ 2012.

In all the discussions above, the point which is pertinent to highlight is the meaning of the word "Taxable Territory" which according to Section 65B (52) means the territory to which the provisions of this chapter apply i.e to the whole of India except the state of Jammu & Kashmir. At this juncture, it shall also be worth mentioning that the taxing jurisdiction of any service is determined under the place of Provision of Services Rules, 2012.

Levy of Service Tax on the Foreign Exchange Remitted to India

On the issue of levy of Service Tax on the activities involved in the inward remittances, the Central Board of Excise and Customs [Board], immediately after the introduction of Mega Exemption notification clarified vide Circular No. 163/14/2012-ST dated 10th July, 2012 that there is no service tax per se on the foreign exchange remitted to India from outside for the reason that money does not constitute a service and that conversion charges or fee levied for sending such money would also not be liable to service tax as the person sending the money and the company conducting the remittance are both located outside India or the taxable territory.

It was also clarified that the Indian bank or financial institution that provides services to the foreign bank or any other entity is also not liable to Service Tax as the place of provision of Service shall be the location of recipient of service [as per the place of Provision Rules]. It has to be kept in mind that the said clarification covers the scenario where the Indian Bank provides services on principal to principal basis to the foreign bank or entity, on its account, and thus the service is covered by the Rule-3 of the Place of Provision of Service Rules, 2012 which provides that place of provision of service as the 'location of recipient of services.'

Levy of Service Tax on the Foreign Remittances in India through MT SOs

It has been observed by the Board that foreign Money Transfer Service Operators [MTSO],1 conducting remittances to the beneficiaries in India, are appointing Indian banks or entities as their Representatives/ Agents for providing services of remittances to beneficiaries in India and in return pay commission or fee to such representatives/agents.

The entire sequence of transaction through the MTSO route is as follows:

  • Remitter approaches a MTSO located outside India for remitting money to a beneficiary in India. The MTSO Charges fee from the Remitter.
  • The MTSO avails the services of an Indian agent for delivery of money to the ultimate recepient in India and a commission is paid to the agent.
  • The agent may avail further services from a sub agent and pay him commision therafter.
  • The money is delivered to the beneficiary and a fee may be charged to him by the agent or the sub agent.

Pursuant to the above sequence of transaction, the Board vide Circular No. 180/06/2014-ST dated 14th October, 2014 has provided the following clarifications in relation to the said activities related to inward remittances from abroad in India through these MTSOs:

1. Whether service tax is payable on remittance received in India from abroad?

No service tax is payable per se on the amount of foreign currency remitted to India from overseas. As the remittance comprises money, it does not in itself constitute any service in terms of the definition of 'service' as contained in clause (44) of section 65B of the Finance Act 1994.

2. Whether the service of an agent or the representation service provided by an Indian entity/ bank to a foreign money transfer service operator (MTSO) in relation to money transfer falls in the category of intermediary service?

Yes. The Indian bank or other entity acting as an agent to MTSO in relation to money transfer, facilitates in the delivery of the remittance to the beneficiary in India. In performing this service, the Indian Bank/entity facilitates the provision of Money transfer Service by the MTSO to a beneficiary in India. For their service, agent receives commission or fee. Hence, the agent falls in the category of intermediary as defined in rule 2(f ) of the Place of Provision of Service Rules, 2012.

3. Whether service tax is leviable on the service provided, as mentioned in point 2 above, by an intermediary/agent located in India (in taxable territory) to MTSOs located outside India?

Service provided by an intermediary is covered by rule 9 (c) of the Place of Provision of Service Rules, 2012. As per this rule, the place of provision of service is the location of service provider. Hence, service provided by an agent, located in India (in taxable territory), to MTSO is liable to service tax. The value of intermediary service provided by the agent to MTSO is the commission or fee or any similar amount, by whatever name called, received by it from MTSO and service tax is payable on such commission or fee.

4. Whether service tax would apply on the amount charged separately, if any, by the Indian bank/ entity/agent/sub-agent from the person who receives remittance in the taxable territory, for the service provided by such Indian bank/entity/ agent/sub-agent?

Yes. As the service is provided by Indian bank/ entity/agent/sub-agent to a person located in taxable territory, the Place of Provision is in the taxable territory. Therefore, service tax is payable on amount charged separately, if any.

5. Whether service tax would apply on the services provided by way of currency conversion by a bank /entity located in India (in the taxable territory) to the recipient of remittance in India?

Any activity of money changing comprises an independent taxable activity. Therefore, service tax applies on currency conversion in such cases in terms of the Service Tax (Determination of Value) Rules. Service provider has an option to pay service tax at prescribed rates in terms of Rule 6(7B) of the Service Tax Rules 1994.

6. Whether services provided by sub-agents to such Indian Bank/entity located in the taxable territory in relation to money transfer is leviable to service tax?

Sub-agents also fall in the category of intermediary. Therefore, service tax is payable on commission received by sub-agents from Indian bank/entity.

Effect of circular regarding levy of Service Tax on Foreign Remittances:

Since India has large number of persons who send foreign funds to their loved ones, it may be a boon for the Indian economy, the World Bank estimating India to likely to receive more than $71 billion through remittances this year from any service tax on the remittances of foreign Exchanges, however on the other hand, this circular has certainly not provided any benefit to common man i.e. service recipient but has only increases the burden on the pocket of the recipient.

Footnote

*Shefali Shukla is a CS Intern

1  Circular No. 180/06/2014/-ST dated 14/10/14

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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