The information provided here may be outdated or incorrect. The tax rules are revised every year in annual budgets. Please consult your CA for latest regulations and norms.
What is Service Tax
In India service tax is applicable on certain businesses/firm if its annual revenue exceeds 10 Lakh Rupees. Current rate is 10.30% (at the time of writing this article). Its not applicable where VAT is applied.
Service Tax is applicable in IT sector and on software firms and freelancers whose annual revenue exceeds the limit. The annual revenue includes both foreign and local income. So if the total of foreign revenue and local revenue exceeds the 10 Lakh limit then the firm is supposed to apply for a Service Tax number.
Service Tax only on INR revenue
However Service Tax or S.T. is to be paid only on local revenue. If a company's revenue is 5 Lakh in USD and 5 Lakh in INR then S.T. is to be paid on only the local 5 Lakh revenue. The 5 Lakh ruppe income in USD is free from S.T.
But this benefit is applicable only if the revenue was recorded as USD in the bank account. Its not applicable if some foreign individual/company send the money as INR. The best example of this would be Paypal. Paypal is used by most Indian freelancers to accept payment from foreign clients. But Paypal sends money via NEFT to bank account and the currency of deposit is INR. Hence this deposit becomes applicable for service tax. Another popular money transfer medium is Moneybookers. Moneybookers has the option to keep an account in currency USD , and if such an account requests withdrawal , the money is send via Wire Transfer in currency USD. This is shown as a USD deposit in the receiver's bank account and hence this is free from service tax.
1. Elance - Elance provides the option of wire transfer for money withdrawal. In Wire Transfer deposits are in USD and hence free from service tax. For paid membership 1 free wire transfer per month is available. Rest have charges applicable.
2. Odesk - Odesk provides Paypal , Moneybookers and NEFT transfer. NEFT transfers will be in INR hence are applicable for S.T. Depending on the annual revenue volume , its useful to choose moneybookers. So the transfer can be like this :
Odesk -> Moneybookers -> Bank Account
3. Freelancer - Freelancer.com provides Paypal , Moneybookers and Wire option. Whichever suitable should be used. Freelancer provides wire only for USD currency. It has other currency options like AUD , for which wire is not available. Wire transfer have charges.
4. Scriptlance - Provides moneybookers , neft , paypal.
So if your annual revenue is over 10 Lakh , then get your payments deposited to your bank account in USD or any foreign currency to make them service tax free. Once the deposit is made in rupee , service tax is applicable.