India Exempts Services Paid In Foreign Currency From Service Tax

by Lorys Charalambous, Tax-News.com, Cyprus

25 November 2003

The Indian government has made a U-turn on the service tax exemption issue, announcing that all sales of services to foreigners outside of India will now be exempt from the tax.

Previously, there had been confusion after the service tax was announced in the budget. Under the rules, firms are exempted from paying service tax if they can prove that the goods they have produced for export will be consumed abroad. However, it was by no means clear whether this exemption also extended to those who sold intangible services overseas, as they are unable to prove that they have physically exported their services.

These ambiguities led the Central Board of Excise and Customs to issue a series of clarifications in the wake of the budget, the first of which stated that service providers were exempt from the tax if income was earned in foreign exchange on services sold outside of Indian territory.

However, the latest clarification also exempts those who sell services to non-Indians on Indian soil whilst receiving payment in foreign currency.

The new regime is effective as of November 20, although it is not being applied retroactively. Therefore, those who have made service tax payments from March 1 and are now exempted will not be entitled to a refund.

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