MUMBAI: The tax department has raised service tax demand of about Rs 10,000 crore from information technology and IT-enabled services companies in the country, sending a shockwave through an industry already reeling under tighter US immigration laws and increasing automation. In its notices sent to about 200 companies so far, the service tax department has told them to return export benefits claimed in the last five years (2012-2016) on software provided to clients outside India, and has additionally sought 15% service tax along with fines, according to people in the know.Its contention: supplying software to clients outside India does not tantamount to exports for IT and ITES companies. Why? Because the client sends specific details of what it wants in the exported software to Indian IT firms through an email. Now, according to the department, the email containing specifications is nothing but goods made available to the Indian firm to provide IT/ITES service to the foreign buyer. Therefore, it is a service. Hence, all IT/ITES exporters are liable to return the export benefits claimed for the last five years and pay service tax (15%) with interest and penalty on last five years export turnover, the department has said in its notices. ET reviewed a copy of such a notice where a tax demand of about Rs 50 crore was raised from Indian subsidiary of a multinational.Industry trackers said the tax demand is a double blow for companies. “Even if the exporters want to appeal the case in the (tax appellate) tribunal they will have to deposit 10% of the tax demand confirmed and not to mention the provisions they have to make in their balance sheets,” said Sachin Menon, national head, indirect tax, at KPMG India. The development has clearly shaken the sector, with some companies already talking about moving out of the country. “We work on wafer thin margins, and (when) something like this comes out of nowhere, it’s a huge problem for us,” said India head of a multinational that has received a tax notice to pay Rs 175 crore. “We are exploring to move our base to the Philippines and this can happen within the next six months,” the person said. The Mumbai-based company had claimed tax exemptions on a software provided to a foreign bank based in the US.The client had sent an email with specifications on the software that would monitor its debtors and raise red flags when payments are not made within a month. Now, the tax department is seeking that the export exemptions be reversed, and service tax be paid on such transactions along with applicable fine. “The question is, can emails with specifications to the Indian exporter be treated as supply of goods? And can the revenue officer change status of the supply from export to local supply, deny export benefits, and demand tax on exports?” Menon of KPMG said. The tax department has made its demand based on ‘place of supply’. Under taxation laws, tax is paid at the place where the supply is made. While this is easy to determine in the case of goods, with services this is tough, experts said. For example, if a Mumbai-based architecture firm designs a building in Dubai, the place of supply is Dubai, and the revenue is exempted from service tax.Experts fear that the service tax notices could be tip of the iceberg, as the place of supply issue could continue under GST regime that has replaces most indirect taxes including service tax. “Since the place of supply rules in such cases are the same in GST regime, many IT/ITES companies may see the demands continue in GST regime as well,” Menon said. “No Indian IT/ITES company will be competitive in the international market, if they have to pay 18% GST on exports,” he said.Industry trackers now expect the tax department to serve several more notices to IT/ITES companies in the coming months, and it would lead to a long-drawn battle between companies and the department. “The place of supply rules to be applied to a given situation depends on specific facts, and clarity on specific matters can only come from the tribunal,” said MS Mani, partner at Deloitte India. “Depending on the bench, these matters could take a couple of years to be adjudicated in the absence of a specific time period within which pending service tax matters are to be disposed,” he said. The concept gets complicated while dealing with intangibles like software and other services. In the case of IT/ITES, the tax department is arguing that Indian companies “receive instructions, confidential information including ideas, concepts, (and) creations, in graphic, written, electronic or machine readable form of any media (basically information on emails)”.