In accordance with the provisions of section 67 of the Finance Act 1994 (the Act), services are valued by reference to the gross amount charged by the service provider. From an arbitration perspective, therefore, tax will be charged on the gross amount charged by arbitrators for providing their services. However, as the Act stands, services are taxed by "an arbitral tribunal" and not by an "arbitrator". There is, therefore, a potential issue whether the expenses of the arbitration tribunal, as opposed to the expenses of the arbitrator, are taxable.

The Taxation of Services (provided from outside India and received in India) Rules 2006 and the Export of Service Rules 2005, limit the applicability of the service tax insofar as it relates to the provision of arbitration services to Indian business entities, whether or not the seat of arbitration is in India. However, this would only be the case if the fees paid by the foreign party to the arbitral tribunal are paid in a foreign exchange currency which is able to be converted under Indian exchange control legislation.

Another important aspect arises out of section 66A of Chapter V of the Act, which provides that if the seat of arbitration is outside India and none of the arbitrators have an established business or a fixed establishment in India (from which arbitration services are provided), the tax will be paid by the Indian business entity to whom such services are provided and this entity shall be responsible for filing the returns. However, if the seat of arbitration is in India, then the arbitral tribunal will have to file returns and pay service tax, albeit only with regard to the services rendered to the Indian entity.

Although there are other countries which levy VAT and similar taxes on arbitration, it is quite disheartening to note that in a country where there is such a huge backlog of cases, an alternate dispute resolution mechanism such as arbitration is sought to be taxed. It is hoped that wisdom will prevail and that the arbitration process is not seen as an avenue for raising revenue, as it would directly impact those considering India as a favourable seat of arbitration.