India’s Service Tax, Upcoming GST and Loss to Nepal

Nepal has always been a nation with limited technical man-power. You go to any major company, and most of the employees or the technical knowledge required is outsourced to mostly India or some foreign country. 

I have been into Business now for 6 years in Nepal, and know the problems to do business in and out. There are authorities in Nepal, but they don’t have intensions to help the business doing person. They would raid and extract money, they would ask us to follow rules, and regulations despite facing all the hardships of Doing Business in Nepal, but they would never seek our opinion to improve the business conditions, nor would they feel the pain of the business community. 

Anyways, the topic for the day is Service Tax on services availed by Nepalese in Nepal from an Indian company or person. In India, any service provider has to charge 15% service tax (in total) of the basic value. So, If he provides service of say Rs 100 to any person in India, he would be charging Rs 115 INR. 

Like Goods, whose taxes are exempted when exported to Nepal, we Nepalese are facing a huge loss in the economy due to the nature of Hiring service provider from Nepal. Indian Firms, who deal with Nepal, can’t bill for services provided in Nepal in US dollars, as RBI restricts Nepal and Bhutan to deal in US Dollars to Nepal. And Indian Service Tax act has made it mandatory to charge Service tax on all the services which they charge in Indian Currency. 

Service tax charged in India is exempted if all the 4 clauses are met:

-Service provider in India Service

- Recipient outside India

- Place of supply of service outside India

- Payment received by supplier of service in convertible foreign exchange

Since from Nepal, the payment that we send to India is in INR (Indian currency and not in Foreign currency) we are liable to pay the service tax of India.

We Nepalese face the dual taxes on services in Nepal, as the Laws of Value Added Tax of Nepal says that any services taken from anywhere would be taxed 13% VAT extra. 

So, we Nepalese are facing a case, when we are paying, Indian Service tax, and then Nepalese VAT on the services we take from India. This clearly means, that we are only paying Rs 129.95 INR or that is 30% in Taxes to Nepal and Indian Government for Rs 100’s service. 

Nepalese if at all should pay only 13% VAT on the services, and should argue with the Indian Government to remove the Service charges being charged to Nepal. 

I wonder that, why despite having FNCCI, and so many financial bodies, our Business community is not able to raise the issue and get it sorted. 

We have the case of Paying Service taxes on Indian Truck Freights, railway demurrage to Indian Railways, and many others in Taxes, which just go un-noticed, and are just paid, because there is no follow up, and there is no one from Nepal Government to bother about. Millions of Rupees of Nepalese businesses is just being lost just because the Government Officials don't have sharp ears to listen to the problem of the Business community, and neither do they have the will power to help the business people.

I was very optimistic that the Upcoming GST in India, which is scheduled to start from July 1^st, 2017 would take care of these issues.

GST is a same tax rate for Goods and Services (Goods and Service tax). Most of the developed and developing countries in the world have one common Tax rate for Goods and Services. India would too adopt this after a long political bargaining.

But for Nepal, the GST law draft for services export to Nepal has same clause, as it is in Service Taxes Export to Nepal. This clearly Implies that, After GST too, Nepalese service takers from India will have to pay 18% (currently 15%) tax for Service, just because, we need to pay the same in Indian Currency.

Recently we had a issue, when Indian Government implied a 4.5% Service tax on Containers being shipped to Nepal. When FNCCI lobbied with the Nepalese government, and then the Indian Government, the issue was resolved within no time.

The problem with no voice against Service tax issue or playing with the regulation, is the existing Informal monetary system. When you need to pay 30% tax (dual tax) on services acquired, then why should the payment be made through the legal channels? People rather choose methods such as Hawala which costs 2-3% only. Also, most of the service imports in Nepal is against some goods only, and cost of the service is included in the Goods itself.

With so many developments happening in Nepal, we need a lot of Good consultancy in Nepal. We surely lack expertise in a lot of issues, as we have never been a self-sufficient country in Education and technical know-how. Be it be on Good designing of Roads, Bridges, Hydro projects, etc or technical know-how in factory establishment, energy projects, etc., we need good technical expert advice from Good Developing country. If we compare foreign countries, the best and most cost-effective expertise, that we can avail is from India.

Nepal has already done a good work, of nullifying all the Goods taxes that are levied on the Goods manufactured in India, and imported to Nepal. We need to now raise strong voice to make the Service tax on exports of services to Nepal, and Now, GST on services export to Nepal to be Charged 0%.

Hope that the article raises the issue somehow in the Business Community, FNCCI, and our government economic corridors, and we are able to raise this issue to Indian Government.