Tax (Service Tax) Implication of Freelance Work in India - Part 2

JAINENDRA JAIN , Last updated: 20 June 2014
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Before Continuing to the next part, I would like to thanks to readers for the positive response to my first article. Link to my first article: Tax Implication of Freelance Work in India - Part 1

INDIRECT TAX:

Indirect taxes have more impact on such type of work than direct tax. In India basically there are two types of indirect tax prevalent i.e. Service tax and vat. Others include excise and custom; however they hardly have any implication on freelancer work. Regarding VAT also it did not have much impact as VAT is on purchase and sale of goods and here involves payment for service .Therefore it must be clear that Service tax is important for freelance work.

Service tax is applicable when service is provided by one person to another for a consideration subject to exemption provided under negative list and declared services and other rules related to service tax.

Three important things are necessary to make service tax payable in India:

1. Service must be provided in taxable territory i.e. India or having an Indian jurisdiction and if the service provider is located in India providing services to a person located outside India than it is not a service provided in India and hence not taxable.(see below for this issue)

2. It must not be an exempted service under negative list or by any other notification i.e. it must be a taxable service and if it is not a service under normal service than it must be a Deemed service and should be declared under declared service.

3. There must be one person providing service and other person should be receiving such service and should pay consideration either in cash or in kind.

However there can be more situations which can prevail apart from the above i.e.

Since many of our Indian freelancer are working for entities located outside India there are under a great confusion to consider it as export of service to claim exemption from paying service tax or not to consider it as export and pay service tax.

Before considering a service as export of service there are six conditions under RULE 6A which must be satisfied to declare it as export of service for the purpose of service tax. They are:

(a) The provider of service should be located in the taxable territory,

(b) The recipient of service should be located outside India,

(d) The place of provision of the service should be outside India,

(e) The payment for such service should be 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 2 of clause (44) of section 65B of the Act.

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.”

Now let us consider each condition with respect to freelance work.

(a)The provider of service i.e. freelancer must be located in taxable territory i.e. India

(b)The service recipient must be located outside India i.e. not in taxable territory

(c)The service provided must not be an exempted service under any notification or rules.

(d) Now comes the determination of place of provision rules which is important for this aspect. Let us discuss each rule of place of provision rules under following table.

RULE NO.

PROVISIONS AND DISCUSSION

RULE 3

Generally the place of providing the service will be place of service receiver and where location of service receiver is not available than place of service provider.

Discussion – Going by this rule generally where other rule cannot be applied than place of service receiver should be considered and thereby leading to export of service as per this rule.

RULE 4

For performance based services

The location where services are actually performed

The location where goods are situated

Discussion – (a) Certain services like medical assistant, providing online coaching classes require physical presence of service receiver and in that case place of service receiver shall be considered as place of providing services (since services are actually performed where receiver is located).therefore these will be considered as export of services only if receiver is located in non taxable territory.

(b) Many services are provided which requires physical presence of goods.

E.g. If freelance work is for providing technical assistance for a product / goods/ implementation of software than place will be taken as place where goods are located and if goods are located in non taxable territory than it will considered as export of service otherwise it is taxable.

Rule 5

For immovable property

Where immovable property is actually situated.

Discussion – if freelancer is hired for providing architect or designing services over the internet for an immovable property which is located in taxable territory than service tax is leviable irrespective of position of either party.

However to consider it as export of service property must be located outside India subject to rule 8.

Rule 6

Services relating to events

Place where events are actually held.

Discussion – Suppose work of freelance is utilised as planning an event, estimating budgets for events, providing advice or assistance in activity of an event, than such services will be taxable if they are held in taxable territory.

E.g. of events – dance shows. Fashion shows, annual functions etc

Rule 7

Service provided at more than one location

Location of taxable territory where greatest proportion of service is rendered.

Discussion – by going through this principal if work of such person is utilised even in small proportion whole of the consideration shall be taxable. In other words if this rule became applicable than service tax has to be paid.

Rule 8

Where both service provider and service receiver are located in taxable territory

Location of service receiver.

Discussion – This rule shall be applied simultaneously with other rule and consideration shall be taxable if both the parties to service are located in taxable territory.

For e.g. (a) as per rule service would not be taxable if related service is provided for an immovable property located in non taxable territory. But going by this rule even if property is located outside India, if both service provider and receiver are located in taxable territory than service is taxable and can’t be considered as export of service.

(b) even if person providing service of event management to a person located in taxable territory over the Internet on different sites for an event to be held in Florida than rule 4 shall not be applicable rule 8 shall be applicable and service shall be taxable as both the parties are located in taxable territory.

Rule 9

Place of provision of specified services

Location of service provider

(for discussion see below this table )

Rule 10,11,12

Not relevant for this work of freelance.

Rule 9 specified services include –

(a) Service provided by banking or financial institution

(b) Online information and database access or retrieval services

(d) Service consisting of hiring of means of transport up to a period of one month

Discussion – (a) This clause generally shall not be applicable as this is exclusively applicable to a banking or financial institution and cannot be made applicable to a work of freelancer.

(b) “Online information and database access or retrieval services” means providing data or information, retrievable or otherwise, to any person, in electronic form through a computer network. Now this clause should be clearly analyzed.

The words “Data”, “information”, “electronic form” and “computer network” have the same meanings assigned to them in the Information Technology Act, 2000.

In the context of this service, it may be relevant to point out the manner in which on-line information and database access/retrieval is generally made available.

(a)Function of Internet service provider

This function is generally provided by large entity and organisation and freelancers do not have any activity in this function and hence this clause shall not be applicable to them

(b) The second element is on-line information

This function also can’t be provided by freelancer as in this case databases are allowed to be used by limited number of entities (generally these are larger commercially known entities and freelancers can’t provide these type of services and so this clause is also not applicable to them)

e.g. - Some of the well-known ISPs operating in India are VSNL, MTNL, Satyam online, Bharti, Tata, RPG, HCL, Wipro, BPL, Mantra online, and Dishnet. They normally charge the customers on the basis of usage of time (hours). They also provide dedicated lease lines on lump-sum payment basis. Clearly ISPs provide service in relation to on-line information and database access or retrieval. They are an integral part of the internet operations and without their service, the data or information can neither be accessed nor retrieved. They are, therefore, liable to pay Service Tax on the amount charged from the customers whether on usage time basis or on lease line basis.

(c)Information through websites

Limited number of entities as said above now provides the information to general public from the databases which can also be said as retrieval of information and charge fees from them. Now this service is liable to service tax but this service again can’t be provided by the freelancers and hence no service tax on them. Remember if these person retrieve information from websites than they need to pay service tax to service providers but they can’t charge them from clients over the internet.

e.g. - a few examples of Indian dot companies are, Indiainformer.com, CIIonline.com, who charges the customer for certain specific information contained in their website either in advance or credit basis. They shall be also liable to pay Service Tax on the paid services provided by them.

Basically online information and data retrieval services are such specific services which in general terms can’t be provided by a freelance and hence they cannot be made liable to service tax.

(c)“intermediary” means a broker, an agent or any other person, by whatever name called, who arranges or facilitates a provision of a service (hereinafter called the ‘main’ service) between two or more persons, but does not include a person who provides the main service on his account.;

Discussion – when a freelance hires another freelancer for providing services to his clients in order to expand his online business than such service shall be liable to service tax under intermediary services as the person only acts as intermediary and arranges or facilitates work for his client. Thus in this case only service tax is payable under clause 9 because freelancer is service provider and is located in taxable territory.

(d) Hiring of vehicle can’t be done through online freelance services and hence not taxable. (Please note that hiring of vehicles may be taxable under other rules of service tax but the service of freelance can’t be made taxable under this clause.)

To conclude, service tax shall only be considered as export of service when they are provided in non taxable territory as per the place of provision rules as discussed above.

Further to claim it as export consideration must be received in convertible foreign currency and there must be two distinct persons.

Threshold Exemption Limit– Service tax shall not be taxable up to turnover of Rs 1000000/-. That means if turnover of taxable service provided by a freelance over the all the sites exceeds Rs 1000000/- than only service tax is l after the threshold limit.

Registration under service tax – An application should be made within 30days from the date when the turnover of taxable services exceeds Rs 900000/-.

WILL BE THANKFUL TO EVERYONE FOR THEIR FEEDBACK AND SUGGESTION TO IMPROVE IN ANY MANNER.

Regards