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Budget may clear air on service tax on import of services

Budget may clear air on service tax on import of services
PTI
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First Published: Sun, Jun 28 2009. 10 34 AM IST
Updated: Sun, Jun 28 2009. 10 34 AM IST
New Delhi: The Finance Ministry is likely to clarify the issue of tax on importing services, where the question is whether the tax is applicable for a business transacted before 2006 or not.
With many cases of litigation going on in tribunals and courts, the government would surely like to resolve the issue in this budget, official sources said.
The date for implementing this provision has been a contentious issue for some time.
Clarification was given for the Service Tax Rules in 2006, by which a domestic firm is liable to pay tax if it receives service from a country where it does not have a permanent establishment.
However, the tax department is raising service tax demands from 2002, when the service tax rule was made, through show-cause notice to companies like Oracle, Ranbaxy and Jet.
If a company incorporated in India does not have a permanent establishment in the UK and receives services from a British firm for a project proposed to be established in the UK, the company is liable to pay service tax because it is the recipient of the services
But if a company incorporated in India has a permanent establishment in the UK, it will not be liable to pay service tax on services received by its UK arm.
However, some companies get into litigation in the tribunals/courts on the plea that the tax should be levied from 2006, when the government introduced this new provision to govern the taxation of imports of services.
Sources said the revenue implication in the case could be huge in case the department is directed to levy this tax from 2006.
However, if the reverse happens, the department has to levy taxes from 2002, there would be no problem as the department has raised demands keeping this in mind, sources said.
Sources said the tax officials had to raise the demand from 2002 as demand cannot be raised after five years.
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First Published: Sun, Jun 28 2009. 10 34 AM IST