Saturday, October 18, 2014

Clarification on levy of service tax on activities related to inward remittances to beneficiaries in India from abroad

Service Tax Department has issued Circular No. 180/06/2014-ST dated 14th October, 2014 in suppression of Circular No. 163/14/2012-ST dated 10th July, 2012.
As per Circular No. 163/14/2012–ST dated 10.07.12 - There is no service tax per se on the  foreign exchange remitted  to India from outside for the reason that money does not constitute a service and that conversion charges or fee levied for sending such money would also not be liable to service tax as the person sending money and the company conducting the remittance  are both located outside India.
The foreign money transfer service operator (MTSO), conducting remittances to beneficiaries in India, have appointed Indian Banks/financial entities as their agents in India who provide agency /representation service to such MTSO for furtherance of their service to a beneficiary in India. The agents are paid a commission or fee by the MTSO for their services.
The entire sequence of transactions in remittances of money from overseas through the MTSO route is as under:
Step 1: Remitter R ( outside India ) approaches a  B ( Bank- MTSO Transfer Service Operator (MTSO) located outside India ) for remitting the money to a beneficiary in India                                                                                         ‘R’ Pays to  B’.

Step 2 ‘B’ avails the services of an IE ( Indian Entity/ Agent) for delivery of money to the UR - ultimate recipient of money in India                                 B pays to IE  
Step 3: IE’ may avail service of  SA ( Indian sub-agent )             IE’ Pays to SA’.

Step 4: ‘IE  or ‘SA’, delivers the money to ‘UR’ 

Now Clarifications was sought
- Whether such agents (referred in Step 2 above) would fall in the category of intermediary, and if so, whether service tax would be leviable on the commission/fee amount charged by such agents.
- Whether the services provided by sub agent (referred in step 3 & 4 above) are leviable to service tax and on certain other related issues.
 Circular No. 180/06/2014-ST dated 14th October, 2014 now clarifies as follows,-

S. No.
Whether service tax is payable on remittance received in India from abroad?
No service tax is payable per se on the amount of foreign currency remitted to India from overseas. As the remittance comprises money, it does not in itself constitute any service as per clause (44) of section 65B.  define service of the Finance Act 1994.
Whether the service of an agent or the representation service provided by an Indian entity/ bank to a foreign money transfer service operator (MTSO) in relation to money transfer falls in the category of intermediary service?
Yes. The Indian bank or other entity acting as an agent to MTSO in relation to money transfer, facilitates in the delivery of the remittance to the beneficiary in India. In performing this service, the Indian Bank/entity facilitates the provision of Money transfer Service by the MTSO to a beneficiary in India.  For their service, agent receives commission or fee. Hence, the agent falls in the category of intermediary as defined in rule 2(f) of the Place of Provision of Service Rules, 2012.

Whether service tax is leviable on the service provided, as mentioned in point 2 above, by an intermediary/agent located in India (in taxable territory) to MTSOs located outside India?
Service provided by an intermediary is covered by rule 9 (c) of the Place of Provision of Service Rules, 2012. As per this rule, the place of provision of service is the location of service provider. Hence, service provided by an agent, located in India (in taxable territory), to MTSO is liable to service tax.
The value of intermediary service provided by the agent to MTSO is the commission or fee or any similar amount, by whatever name called, received by it from MTSO and service tax is payable on such commission or fee.
Whether service tax would apply on the amount charged separately, if any, by the Indian bank/entity/agent/sub-agent from the person who receives remittance in the taxable territory, for the service provided by such Indian bank/entity/agent/sub-agent
Yes. As the service is provided by Indian bank/entity/agent/sub-agent to a person located in taxable territory, the Place of Provision is in the taxable territory. Therefore, service tax is payable on amount charged separately, if any.
Whether service tax would apply on the services provided by way of currency conversion by a bank /entity located in India (in the taxable territory) to the recipient of remittance in India?

Any activity of money changing comprises an independent taxable activity. Therefore, service tax applies on currency conversion in such cases in terms of the Service Tax (Determination of Value) Rules. Service provider has an option to pay service tax at prescribed rates in terms of Rule 6(7B) of the Service Tax Rules 1994.

Whether services provided by sub-agents to such Indian Bank/entity located in the taxable territory in relation to money transfer is leviable to service tax?
Sub-agents also fall in the category of intermediary. Therefore, service tax is payable on commission received by sub-agents from Indian bank/entity.