Taxes applicable for testing services for Australia, VAT + CST

[Lavanya Chava]

Hi,

I am a client manager. My Australian company has given me a team and made a tie up with Indian company where we work, the Indian company has to raise the invoice every month which I have to pass then only the invoice will be paid.

I want to know whether the Service Tax, VAT and Education Cess are applicable for software testing services. They are leving the taxes as VAT :12.3% extra on basic value and @ 7% Education Cess on total invoice after VAT, VAT is 14%, can I know is this correct.

Thanks and Regards

Lavanya

Posts / Replies

[Akash Deep]

Hi lavanya,

Query is not clear. Indian Company is raising invoices for what services provided by it. Please explain the transaction in detail. this transactions is not as simple as it seems.

Regards

Akash deep

[Lavanya Chava]

Hi Akash,

I work for an Australian company, I provide testing services to the product they develop. I used to work from home previously, Australian company then thought to take more people for testing in India. For which reason they asked me to open on my own or use any other known IT office space and they will pay for everything.

The Australian company has took more 5 people than me and they are paying accordingly, salaries for the people who work for that company, Rent, Internet, General Expenses and the Electricity bill every month, to the company which is providing space and letting use their services.

So the Indian company had to raise an Invoice to Australian company every month and they pay.

We do only software testing in India, So when they raise invoice every month they impose the taxes @ 12 .3% extra on basic Value and @ 7% Education Cess on total invoice after VAT.
@ 14% Service Tax on Total Invoice.

The Indian company has TIN number but they never mention it on the invoice they raise. I want to know whether the taxes levied by Indian company are correct.

I known from other sources that if we have Import and Export license and Service Tax license then the taxes will not be applicable to Foreign clients.

If you can guide me in correct way I can take an action. Please help me

Thanks and Regards

Lavanya

[Akash Deep]

Dear Lavanya,

Now the query is clear to me. This whole transaction consists of two sub-transactions. First is between You and Australian company and other is between Indian Company and Australian Company.

With respect to the transaction between You and Australian Company, to me, it seems that you are working as an employee of the Australian company. If it is so, transaction between you and Australian company is out of the purview of definition of term “service” as provided under section 65B(44) of the Finance Act, 1994 as applicable w.e.f 1.7.2012. As the Query is with respect to the transaction between India Company and Australian Company, I will discuss that directly without discussing the situation if you are not working as an employee. In this case, I assume that Indian Company is testing the software the for Australian Company. You and other five people is doing the same for Australian company. You and other 5 people are the employee of Australian company and not of Indian Company.

As per the fact provided by you the India Company is providing “support services” to the Australian Company. Term Support Services as been defined under section 65B (49) of the Finance Act, 1994 as under:

“Support services means infrastructural, operational, administrative, logistic, marketing or any other support of any kind comprising functions that entities carry out in ordinary course of operations themselves but may obtain as services by outsourcing from others for any reason whatsoever and shall include advertisement and promotion, construction or works contracts, renting of immovable property, testing and analysis.”

From the definition it is very clear that, India Company is providing office space with all basis amenities like electivity, internet, house keeping, and other amenities essential to work therein. In nutshell, Indian Company is providing a ready to operate office space against consideration. In other works India Company is providing infrastructural support to Australian company. As infrastructural support is specifically included in the definition of support services, it remain do doubt that Indian Company is providing support services to the Australian Company. The place of provision of such support services shall be determined under Rule 3 (default Rule) of the Place of Provision of Service Rules, 2012. A per Rule 3 of Place of provision of Services, Rules, 2012 the location of the service recipient shall be the place of provision of service. And If, the location of service recipient is not available in ordinary course of business, Location of service provider shall be the place of provision of service. In the instant case the, location of service recipient i.e. Australian Company is available in ordinary course of business, hence, location of service recipient shall be the place of provision of service. The term location of services has been defined under Rule 2 of Place of Provision of Service Rule, 2012. As per Rule 2(i)(iv) read with explanation 1 thereto, in case of a body corporate which also includes a company location of the service receiver shall the place where it is incorporated or legally constituted. As the Australian Company is incorporated in Australia and who is also the service recipient herein, the location of service recipient is Australia.

Now, it can never be doubted that Australia is out side the taxable territory as defined under section 65B(52) read with Section 64(1) of the Finance Act, 1994.

As the place of provision of support services provided by the Indian Company to Australian Company is out side the taxable territory, charging section i.e. section 66B shall be applicable to this transaction. Being so, such transaction is out side the purview of service tax and no service tax is payable on such transaction and hence Indian Company should not collect any amount in the guise of service tax.

If the India company is receiving consideration for providing support services in convertible foreign exchange, this would amount to export of services and no service tax is payable. Ion additional India Company will be eligible for export benefit.

As my view, Indian Company is wrong in collecting services tax on the invoice value raised to the Australian Company.

Mention of TIN/STC code on the invoice raised is mandatory as per Rule 4A of the Service Tax Rules, 1994. Credit taken on the basis of such invoices may be disallowed by the department for sure.

I do not see any taxable event attracting applicability of VAT. This is a pure service transaction.

Currently the applicable rate of service tax is 12.36% inclusive of EC and SHEC and not 14%.

Hoping this will help you.

Akash Deep

9873463912

[Lavanya Chava]

Hi Akash,

I am very thank full to you for providing me the information. is there any possibility that I any personal ID either to chat or mailing you. I am always available on skype. If there is anu possibility and can provide me any ID I will add to discuss more please.

Thanks and Regards

Lavanya

[Akash Deep]

Dear lavanya

we can chat on g mail on akashlaw@gmail.com

[Lavanya Chava]

Hi Mr.Akash,

Thank you for the information you gave. I want to know whether the taxes are different for a Proprietor ship and a Pvt. Ltd company and that too a ISO certified company. If the taxes applicable are different for a Pvt. Ltd company can you please tell me what are the taxes applicable and the percentages please.

Thanks

Lavanya