No Service Tax Liability for Freelancers Even if Money Was Received in Indian Currency ?

There is a huge confusion among  thousands of freelancers in India , many of who are youngsters & earning income from blogging or programming  through various online platforms . They earn money from online advertising programs like -adsense or  online market place like- clickbank , jvzoo ,etc. These freelancers get money in their bank account , in most cases, through paypal which transfer money in Indian currency .

Now , I am aware that many online articles are written so callously that ordinary freelancers are completely confused about the liability of service tax on their earnings from export of services . I have already posted why freelancers earning from export of services are not taxable under Finance Act 1994. In this post , I am going to bust a myth  , perpetrated by half baked articles on many websites – including some of the professionals , why , even if money for exports are received in Indian currency , you still do not have to worry about the service tax. 

Indian or Foreign Currency -It Does Not Matter !

First of all , you should know that the Finance Act 1994 ( which is law for service tax) defines three terms :tax,taxable services,taxable territory . Read the definition below in Section 65B of Finance Act 1994 :

(50) “tax” means service tax leviable under the provisions of this Chapter;

(51) “taxable service” means any service on which service tax is leviable under section 66B;

(52) “taxable territory” means the territory to which the provisions of this Chapter apply;

The territory to which the service tax law applies  is provided in the very beginning of the Finance Act 1994 i.e sec. 64 . It says that the service tax law is applicable in India except the state of J & K.

Section 64 – Extent, commencement and application

(1) This Chapter extends to the whole of India except the State of Jammu and Kashmir.

In other words , what the aforesaid definitions clearly provide is that

• if your service is in the list of taxable services u/s 66B of Finance Act 1994 and
• is given within the Indian territory except state of J & K

, only then service tax can be levied on such taxable serice [section 65B(50)]

So Where is Your Place of Service ?

For determining the place of service, one has to see the place where Service Recipient uses your service. So , as a freelancers you might have given services to a German who is residing in USA and used your service in USA , the place of service would be USA . Hence , in that case of export of service to USA , Finance Act 1994 is not at all applicable by virtue of section 64 which says “This Chapter extends to the whole of India except the State of Jammu and Kashmir.”

But What About  Rule 6A of Service Tax Rules !

I know you were asking about the Rule 6A , because a number of website , you might have visited , which says Rule 6A provides that if the money is not brought in foreign currency , it will not be considered as “export of services” .

Yea, I know there is Rule 6A , but this rule is applicable for special types of service provider or service recipient who exports taxable service ! Let us first quote what is Rule 6A 

6A. Export of services.-

(1) The provision of any service provided or agreed to be provided shall be treated as export of service when,-

(a)  the provider of service is located in the taxable territory,

(b) the recipient of service is located outside India,

(c) the service is not a service specified in the section 66D of the Act,

(d)  the place of provision of the service is outside India,

(e) the payment for such service has been received by the provider of service in convertible foreign exchange, and

(f) the provider of service and  recipient of service  are not merely establishments of a distinct person in accordance with  item (b) of Explanation 3 of clause (44) of section 65B of the Act

(2) Where any service is exported, the Central Government may, by notification, grant rebate of service tax or duty paid on input services or inputs, as the case may be, used in providing such service and the rebate shall be allowed subject to such safeguards, conditions and limitations, as may be specified, by the Central Government, by notification.”

This rule , will have to be applied in all cases where a service tax payer ( assessee) desires REFUND or CREDIT of the service tax paid on any INPUTS  for manufacturing of goods which was ultimately exported . Similarly , if you are exporter of service and for export of service , you had to pay the service tax to utilise service of another service provider , you can claim credit for the service tax paid on exported services .

In fact , following three benefits are available to exporters of services under Service Tax  and other indirect laws

1. If service tax is already paid on service exported , such service tax shall be refunded by government. Refer Notification No.12/2005-ST, dated 19-04-2005
2. If service tax is paid on input services ( services you take locally for bigger services which you are exporting) are used for services which are exported , govt. allows refund or credit . Refer Notification No.11/2005-ST, dated 19-04-2005.
3. Where taxable services are exported without payment of service tax by using Cenvat Credit for input services , then the government returns the balance of the cenvat credit available as per Rule 5 Cenvat Credit Rules[/infobox]

If you are asking for any of the aforesaid benefit, Rule 6A of Service Tax Rule 1994 will be invoked and the tax authorities will see whether all the conditions given in Rule 6A is fulfilled.

If fulfilled , you will get benefit, if not you will be denied the benefits.

Conclusion

Simple rule of thumb ,therefore, is  that if you desire to get refund of service tax or credit of service tax , Rule 6A will be invoked to see of the claim of export of service is fulfilling all the conditions given in Rule 6A of Service Tax Rules.

But , this Rule 6A has no applicability when the main law that is Finance Act 1994 is itself not applicable on service exports .

So , if you do not fulfill the conditions given in Rule 6A – for example – bringing money in India in Indian Currency ,no worries .There can not be any service tax payability , but the worst thing which can happen is that you will not be eligible for claiming any benefit which government allows to exporters of services .[/infobox]