Govt takes away service providers' forex cushion

NEW DELHI: The party has ended for scores of service providers enjoying a service tax exemption on payments received in foreign exchange. They will have to start paying service tax from March 15.

The finance ministry has finally defined what constitutes export of services. An exemption from service tax will be given only where services are actually exported. Broadly, export is defined based on the location of the buyer. The recipient has to be outside the country.

The move would impact the tourism industry. Service tax will have to be paid if, say, a foreign tourist rents a cab in India and pays in foreign exchange. An exemption will be given only if the recipient is outside India when such services are received, according to the rules notified today.

Four services — real estate consultancy, architecture, interior decoration and construction — relating to immovable property will be treated as export only if such property is located outside India.

This means services rendered by a real estate consultant for a property in, say, London will be treated as export. General insurance services will also be covered under this category if the property is located outside India.

Management consultants, telephone, banking and other financial service providers selling services to a local office of a foreign firm and receiving payments in forex will have to start paying tax.

There are some exceptions, though. An exemption will be available if the order for providing the service is made outside India, and services are delivered outside India and payment is made in forex.

Services that have to be physically performed — air transport of goods, commercial coaching, dry cleaning — will be treated as exports if such service is partly or wholly performed outside India.

The definition of services is based on best international practices, says the finance ministry. For the first time, service providers will be allowed a rebate on service tax paid on input services or excise duty paid on goods used as inputs.

An architect rendering services outside India can take credit on telephone services used here. A rebate will also be available if services are exported after payment of service tax.