Forget nukes, India-US resolve tax spat

JYOTI MALHOTRA & ANIL LULLA

New Delhi & Bangalore, May 2007 : Forget the differences, presumed or real, over the Indo-US nuclear deal, and whether or not both nations are going to soon ride off into the diplomatic sunset together.

In order to fix a tax spat that was threatening to snowball into an ugly little feud with Washington, New Delhi has issued a service tax exemption regime on May 23 that is bound to smoothen ruffled diplomatic feathers on both sides of the Atlantic.

To be sure, the service tax exemption notification by the Ministry of Finance’s department of Revenue – via the Protocol Division of the Ministry of External Affairs – is applicable across the board to all diplomatic missions and consular offices in India.

The notification says that all accredited diplomats will no longer pay tax on as many as 96 services, both of a personal and professional nature. The services range from airline tickets, credit cards, tourism-related taxes, promotional events, shopping, beauty parlours, etc.

This is the first time that the Finance ministry has issued such a wide-ranging service tax exemption regime -- and the truth is that Delhi’s enormous diplomatic corps must thank the US government for pushing India into issuing this measure.

Depends on the way you look at it, the Finance ministry’s latest exemption is the result of either plain bureaucratic haggling, or good old bilateral brotherhood-in-the-making.

A few months ago, MEA sources said, the Americans complained that the Indian government was levying a series of taxes on its diplomats, including service, luxury, VAT as well as excise on manufactured goods.

While the US diplomats in India were exempt from certain taxes, they had to still pay service tax across a variety of services.

On the other hand, Indian diplomats in the US did not even pay Sales Tax, an umbrella tax levied to its citizens. US officials argued that the Indian service tax levy was against the spirit of reciprocal concessions available to diplomats.

But when New Delhi still did not make amends, a few months ago, the US government went and withdrew the Sales Tax exemption for Indian diplomats in the US.

That meant that the Indian diplomats, accustomed to tax-free luxuries, had to start living like other, ordinary mortals. A diplomatic storm began to brew across the Atlantic.

Soon, the tax spat began to grow bigger and bigger. New Delhi retaliated by withdrawing all tax exemptions for US diplomats.

The Karnataka government was first off the mark, when on April 1, it amended the Karnataka Tax on Luxuries Act, 1979. State Commercial Taxes Commissioner B A Harish Gowda told `The Telegraph’ that the notification was in line with the Centre's direction and was applicable only to US diplomats.

Gowda said the US diplomats would now have to pay 12 per cent luxury tax on lodging, 20 per cent tax on luxury facilities in hotels, such as health club, spa, beauty parlour, business services as well as for using the swimming pool.

``Diplomats enjoy certain privileges like tax exemptions. In this case, the Centre advised all states to withdraw exemptions to American diplomats as their Indian counterparts did not enjoy reciprocal concessions in the US. I think, Karnataka was one of the first states to implement the Centre's direction,’’ Gowda said.

But when the taxes being paid by Indian diplomats began to hurt, the Indian bureaucracy did the next best thing. It amended the service tax regime, exempting 96 services from tax, across the entire diplomatic corps in India.

New Delhi will now look at which countries, apart from the US, give Indian diplomats service tax exemptions. The rule book will soon be strengthened, accordingly.

Whether or not India and the US finally wrap up their nuclear deal -- either during the visit this week of the high-ranking US diplomat Nicholas Burns, or during the meeting between PM Manmohan Singh and President Bush at the G-8 summit in Germany in early June – some other things, like service tax exemptions, will already have made the grade.

ENDS