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TERRITORY BASED TAXABILITY UNDER INDIAN SERVICE TAX
The provisions of registration under Service Tax law have been provided by Section 69 of the Finance Act, 1994. Every service provider providing taxable service is required to obtain registration from the Department of Central Excise having jurisdiction over the assessee.
Jurisdiction of Service Tax (Prior to 1 July, 2012)
Following is the summary of jurisdiction of service tax under various situations -
Taxable (subject to Export Rules)
*(If provided to person who has place of business/fixed establishment/permanent address/usual place of business in India)
In J and K State
J and K provider
Outside J and K state
J and K provider
In J and K State
Provider outside J and K State
*Clarified vide Trade Notice No. 13/2004, dated 28-4-2004 of Chennai III
Assessees residing in Jammu and Kashmir were not required to charge service tax for the services rendered by them. Services by and to people in the State of Jammu and Kashmir was, therefore, outside the scope of service tax (prior to 1-7-2012).
On a question of whether the service provided by a Delhi based company for conducting of topographical survey work of project area in Jammu and Kashmir will be chargeable to service tax, if the contract for the construction of project in JandK state was awarded to a Mumbai based company, the Department had clarified in consultation with Ministry of Law that even if the object of service is in the state of JandK but as the service provider and service receiver are outside the state of JandK, service tax shall be chargeable from the service provider (Source : http://servicetaxdelhi.gov. in dated 26.11.2007 reported in (2007) 8 STR-C 19)].
Which rule applies to my service specifically? In case more than one rules apply equally, which of these come later in the order given in the rules?
What is the place of provision in terms of the above rule?
Is the place of provision in taxable territory? If yes, tax will be payable. If not, tax will not be payable.
Are you 'located' in the taxable territory? If yes, you will pay the tax.
If not, is the service receiver located in taxable territory? If yes, he may be liable to pay tax on reverse charge basis.
Is the service receiver an individual or government receiving services for a non-business purpose, or a charity receiving services for a charitable activity? If yes, the same is exempted.
If not, he is liable to pay tax.
If both are out of India, no tax is payable.
Non-taxable Territory (Clause 35) and Taxable Territory (Clause 52)
According to clauses of section 65B of the Finance Act, 1994, following meanings have been given to non-taxable terrirtory and taxable territory:
A non-taxable territory means a territory which is outside the taxable territory and taxable territory means the territory to which provisions of Finance Act, 1994 apply.
Taxable territory has been defined in sub-section 52 of section 65B. It means the territory to which the provisions of Chapter V of the Finance Act, 1994 apply i.e. whole of India excluding the state of Jammu and Kashmir. "Non-taxable territory" is defined in sub-section 35 ibid accordingly as the territory other than the taxable territory.
For this purpose, 'India' would mean the territory of India as referred to in article 1 of the Constitution; its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976; the sea-bed and the subsoil underlying the territorial waters; the air space above its territory and territorial waters; and the installations structures and the vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof.
Thus, "India" means -
the territory of India as referred to in article 1 of the Constitution;
its territorial waters, continental shelf, exclusive economic zone or any other maritime zone as defined in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976;
the sea-bed and the subsoil underlying the territorial waters;
the air space above its territory and territorial waters; and
the installations structures and vessels located in the continental shelf of India and the exclusive economic zone of India, for the purposes of prospecting or extraction or production of mineral oil and natural gas and supply thereof;
'Territorial waters' means that portion of sea which is adjacent to the shores of a country. Section 3 of the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zone Act, 1976, specifies that territorial waters extend up to 12 nautical miles from the base line on the coast of India and include any bay, gulf, harbour, creek or tidal river (1.853 Kms = 1 nautical mile = 1.1515 miles). Control of India extends to territorial waters and sea-bed and sub-soil underlying and air space over the waters.
"Exclusive Economic Zone" extends to 200 nautical miles from the base line. In this zone, the coastal State has exclusive rights to exploit it for economic purposes like constructing artificial-island, fishing, mineral resources and scientific research. However, other countries have right of navigation and over-flights. Other countries can lay sub-marine cables and pipelines with consent of Indian Government and such consent may be declined for protecting the interest of India.
'High seas' is an area beyond 200 nautical miles, where all countries have equal rights. These high seas are reserved for peaceful purposes. Any country can use it for navigation, over-flight, laying sub-marine cables and pipes, fishing, construction of artificial islands permitted under international Law and for scientific research.
The new charging section, section 66B, enables taxation of only such services as are provided in taxable territory. Thus services that are provided in a non-taxable territory are not chargeable to service tax. Only services provided in taxable territory will be liable to tax. Thus any service provided in state of J and K will not be liable to tax.
Service tax is required to be paid by the provider of a service, except where he is located outside the taxable territory and the place of provision of service is in the taxable territory. Where the provider of a service is located outside the taxable territory, the person liable to pay service tax is the receiver of the service in the taxable territory, unless of course, the service is otherwise exempted.
Taxable territory would means whole of India excluding the state of Jammu and Kashmir, and
Non taxable territory would mean territory other than the taxable territory, i.e, State of Jammu and Kashmir and other than India.
Only services provided in taxable territory will be liable to tax. Thus any service provided in the State of JandK will not be liable to tax. The Place of Provisions of Services Rules, 2012 will determine whether a service is being provided in JandK. Moreover, wherever the service provider is located in JandK but the service is being provided in taxable territory, in terms of the stated rules, the tax will be collected from the service receiver.
Taxability of services based on territorial jurisdiction can be summarised as follows:
Both service provider and service receiver are in taxable territory
Service provided from taxable territory in non taxable territory (except J and K as it is not export)
No tax (Export)
Service provided from non-taxable territory
(including J and K) in taxable territory
Service receiver (Import)
Both service provider and service receiver are in non-taxable territory
No service / No tax
The above is our views as per our understanding of the relevant act/rules/provisions etc. Any contrary views are always welcomed.