ST Circular No. 56/5/2003
25th April, 2003

F.No.254/1/2003-CX-4
Government of India
Ministry of Finance
Department of Revenue
Central Board of Excise & Customs

Sub:-  Non levy of service tax  on export of services – Regarding

    The Central Government has issued Notification no.2/2003 dated 1.3.2003 in the current year’s Budget rescinding the earlier Notification no. 6/99 Service Tax dated 9.4.99 which exempted taxable services from payment of service tax so long as payment for services rendered is received in convertible foreign exchange which is not repatriated outside India.  Consequent to the issue of Notification no. 2/2003 cited above, service tax would be leviable on all taxable services consumed or rendered in India, irrespective of whether the payment thereof is received in foreign exchange or not.

2.    In this regard various representation have been received by the Board raising apprehension that because of the withdrawal  of the notification no. 6/99, export of service would be affected as it would be costlier in the international markets.

3.    The Board has examined the issue.  In this connection I am directed to clarify that the Service Tax is destination-based consumption tax and it is not applicable on export of services.  Export of services would continue to remain tax-free even after withdrawal of notification no. 6/99 dated 9.4.99.  Further it is clarified that service consumed/provided in India in the manufacture of goods which are ultimately exported, no credit of service tax  paid can be availed or reimbursed at present as inter-sectoral tax credit between services and goods are not allowed.

4.    Another question raised is about the taxability of secondary services which are used  by the primary service provider for the export of services, Since the secondary services ultimately gets consumed/merged with the services that are being exported no service tax  would be leviable on such secondary services.  However in case where the secondary service gets consumed in part or toto for providing service in India, the service tax would be leviable on the secondary service provider.  For this purpose both primary and secondary service providers would maintain the records deemed fit by them to identify the secondary services with services that are being exported.

5.    A further question raised is relating to payments receivable in foreign exchange for the services performed prior to March, 1, 2003 when the rate of service tax applicable was 5 % but payments are received after March 1, 2003.  The enhancement of the rate of service tax from 5% to 8% would be applicable only when the Finance Bill is passed.  If payments are received in the aforesaid case after the  Finance Bill is   passed,  the  rate of tax applicable would be 5% so long as the billing has been made prior to the date of passing of the Finance Bill.  If the billing is made subsequent to the date of the passing of the Finance Bill, the service tax would be applicable at the enhanced rate of 8%

6.   The field formations may suitably be informed.

7.   Trade Notice may be issued for the information of the trade.

8.   The receipt of this Circular may kindly be acknowledged.

9.   Hindi version will follow.

Manish Mohan
Under Secretary to the Govt. of India