Service Tax on providing Recruitment Services to Overseas Companies

I have been asked by some TPR associates as to what is the
correct position wrt Service Tax on Provision of Recruitment Services to companies abroad. 

In this connection I would like to, firstly, point out that Service Tax is a destination based consumption tax and it would, logically, be leviable only on services provided within the country and not be applicable on export of services.

However, as I had mentioned in one of my earlier posts, wef March 15, 2005 the Govt has introduced the Export of Services Rules, 2005 which have, subsequently, been amended from time to time. Hence, currently, the above query needs to be answered in the context of the said Rules and the amendments notified thereto.

As per Rule 3 all the taxable services have been divided into 3 parts, each part being represented by a sub-rule. Each part has a different set of criteria so as to treat the service provided therein as an “Export of Service” and hence become eligible for being treated as Exempt.

Suffice is to say that sub-rules (1) & (2) are not relevant to our query as they apply to

(1) Property based services i:e services which are related to immovable property and cover service providers such as Architects, Interior Designers, Real Estate Agents, Construction Services, Site Preparation Services, etc

(2) Performance based Services, i:e services which are performed by service providers either fully or partly outside India, the service is used in a business or for any other purpose outside India and payments are received by the service provider in convertible foreign exchange. Service providers covered under the said sub-rule are Stock Brokers, Practicing CA/CS/CWA, Security Agencies, Tour Operators, Event Managers, Travel Agents etc.

Manpower Recruitment or Supply Agency Services, along with many other services, are covered under the residual services category of sub-rule (3) of Rule 3 which is primarily for recipient based services and these services will be treated as Export of Services, if such services are used in or in relation to commerce or industry and the recipient is located outside India.

However, in case the recipient has any commercial or industrial establishment or office relating thereto in India, such services shall be treated as Export of Services only if the order for such service is made from outside India, the services are delivered outside India and used in the business of the recipient outside India as well as the payments are received, by the service provider, in convertible foreign exchange.

In case, the service provided is not used in or in relation to commerce and industry, the service provided will be treated as Export of Service only when the recipient of such service is located outside India at the time when such service is received. This would generally not be applicable to recruiters as their service would mostly be used in the business of the recipient outside India.

From the above the following situations emerge:

a) Where the Recruiter, in India, provides services to a Recipient (client) located outside India which does not have any commercial or industrial establishment or office relating thereto in India and such services are used in or in relation to commerce or industry by the recipient – then the said service is exempt and can be provided without payment of Service Tax.

b) Where the Recruiter, in India, provides services to a Recipient (client) located outside India which has an office or establishment in India but the order for commissioning such service is from outside India and such services are delivered outside India and also used in or in relation to commerce or industry by the recipient as well as the payments are received, by the service provider, in convertible foreign exchange – then the said service is exempt and can be provided without payment of Service Tax.

c) Where the Recruiter, in India, provides services to a Recipient (client) located outside India but such services are not used in or in relation to commerce or industry by the recipient – then the said service is exempt and can be provided without payment of Service Tax only in cases where the recipient is located outside India at the time when the service is received by it as well as the payments are received, by the service provider, in convertible foreign exchange.

In my opinion what is of great significance is that in the requirement of para (a) above there is no mention of monies being received in convertible foreign exchange and in para (b) there is an additional requirement of having to prove that the service was ‘delivered’ outside India.

As far as the para (a) requirement is concerned I am of the opinion that all Recruiters should play it safe and only treat those invoices as exempt from Service Tax where, even though they meet all the other conditions, the monies are actually going to be received in convertible foreign exchange.

As regards the requirement of proving ‘delivered’ under para (b) above, I guess, in case all the other requirements are met, then the Department needs to take a practical view in the matter and treat all such cases as exempt from Service Tax.

I look forward to all comments, queries and inputs.