JURISDICTION OF SERVICE TAX: TAXABLE & NON-TAXABLE TERRITORY

[Dr. Sanjiv Agarwal]

Amendment made by Finance Act, 2012

Finance Act, 2012 w.e.f. 1-7-2012 has inserted section 66C w.e.f. 1-7-2012 which provides for determination of place of provision of service having regard to the nature and description of various services. The Place of Provision of Service Rules, 2012 shall determine the place where such services are provided or deemed to have been provided or agreed to be provided or deemed to have been agreed to be provided. It may be noted that with the notification of Place of Provision of Service Rule, 2012, Export of Services Rules, 2005 and Taxation of Services (Provided from Outside India and Received in India) Rules, 2006 stand rescinded.

The Finance Act, 2012 defines what is 'taxable territory' and 'non-taxable territory'.

 Relevance of Location

The location of a service provider or receiver (as the case may be) is to be determined by applying the following steps sequentially —

(a)  where the service provider or receiver has obtained only one registration, whether centralized or otherwise, the premises for which such registration has been obtained;

(b)  where the service provider or receiver is not covered by (a) above:

(i)   the location of his business establishment; or

(ii)  where services are provided or received at a place other than the business establishment i.e. a fixed establishment elsewhere, the location of such establishment;

(iii) where services are provided or received at more than one establishment, whether business or fixed, the establishment most directly concerned with the provision or use of the service; and

(iv)  in the absence of such places, the usual place of residence of the service provider or receiver.

According to CBEC Letter F. No. 334/1/2012-TRU dated 16.03.2012 explaining the Finance Act, 2012 amendments, in order to determine whether the place of provision of service is in taxable territory, following questions/steps may be addressed by the assessee —

1. 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?
2. What is the place of provision in terms of the above rule?
3. Is the place of provision in taxable territory? If yes, tax will be payable. If not, tax will not be payable.
4. Are you 'located' in the taxable territory? If yes, you will pay the tax.
5. If not, is the service receiver located in taxable territory? If yes, he may be liable to pay tax on reverse charge basis.
6. 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.
7. If not, he is liable to pay tax.

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.

"India" is defined in sub-section 27 of section 65B, as follows:

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—

(a)  the territory of India as referred to in article 1 of the Constitution;

(b)  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(- of 1976);

(c)  the sea-bed and the subsoil underlying the territorial waters;

(d)  the air space above its territory and territorial waters; and

(e)  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;

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 & 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.

The territory to which provisions of this Chapter (Chapter V of Finance Act, 1994, as amended) apply has been stipulated in section 64 of the Finance Act, 1994 where in it has been provided that "this Chapter extends to whole of India except the state of Jammu & Kashmir".

Thus,—

• Taxable territory would means whole of India excluding the state of Jammu & Kashmir, and
• Non taxable territory would mean territory other than the taxable territory, i.e, State of Jammu & Kashmir and other than India.

Only services provided in taxable territory will be liable to tax. Thus any service provided in the State of J&K will not be liable to tax. The Place of Supply Rules, 2012 will determine whether a service is being provided in J&K. Moreover, wherever the service provider is located in J&K 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 summarized as follows:

S.No.	Conditions	Tax Liability
1.	Both service provider and service receiver are in taxable territory	Service provider
2.	Service provided from taxable territory in non taxable territory (except J & K as it is not export)	No tax (Export)
3.	Service provided from non-taxable territory (including J & K) in taxable territory	Service receiver (Import)
4.	Both service provider and service receiver are in non-taxable territory	No service / No tax