Reverse charge for services held valid by high court

The Allahabad High Court, in Glyph International Ltd v Union of India and Ors, recently upheld the constitutional validity of the provisions dealing with the “reverse charge mechanism” for services, contained in the Indian service tax enactment. Under this mechanism, service recipients in India are required to pay service tax in respect of an “import” of taxable service from a service provider outside India.

Depending on the taxable service in question, “import” is determined by one of three criteria: (i) location of immovable property in relation to which the service is provided within India; (ii) place of physical performance (partial or whole) of the service within India; or (iii) location of the service recipient being India.

The petitioner in this case contended that the reverse charge mechanism created an “artificial” taxing event for services provided outside India, which exceeded the geographical boundary of the operation of the legislation. Such a levy could also give rise to double taxation of a single transaction by two countries.

Economic Laws Practice is a full-service law firm with headquarters in Mumbai and offices in New Delhi, Pune and Ahmedabad. Ranjeet Mahtani, a senior associate at the firm, and Divya Jeswant, an associate, can be reached at ranjeetmahtani@elp-in.com and divyajeswant@elp-in.com.